The Home Depot, Inc. — Fiscal 2009 Form 10-K
Reporting period: Fiscal year ended January 31, 2010 (52 weeks). The filing also reports fourth-quarter results; it is not a 2008 Q4 filing. Unless noted, amounts are U.S. dollars.
Business context
Home Depot operated 2,244 home-improvement stores in the U.S., Canada, Mexico and China. Management emphasized its core retail business, customer service, expense control, inventory productivity and supply-chain improvements amid weak housing and home-improvement markets. The company opened 13 stores and closed two stores in China and 41 stores associated with exited businesses.
Key financial metrics
| Metric | Fiscal 2009 | Fiscal 2008 |
|---|---|---|
| Net sales | $66.176 billion | $71.288 billion |
| Gross profit / gross margin | $22.412 billion / 33.9% | $23.990 billion / 33.7% |
| Operating income / operating margin | $4.803 billion / 7.3% | $4.359 billion / 6.1% |
| Continuing-operations earnings | $2.620 billion | $2.312 billion |
| Net earnings, including discontinued operations | $2.661 billion | $2.260 billion |
| Diluted EPS | $1.57 | $1.34 |
| Cash flow from operations | $5.125 billion | $5.528 billion |
| Capital expenditures | $966 million | $1.847 billion |
| Cash and short-term investments at year-end | $1.427 billion | $525 million |
| Total debt at year-end | $9.682 billion | $11.434 billion |
Year-end current assets were $13.900 billion and current liabilities $10.363 billion; working capital was $3.537 billion and the current ratio was 1.34. Long-term debt-to-equity was 44.7%, down from 54.4%. The company paid $1.525 billion in dividends, repaid $1.774 billion of long-term debt and repurchased $213 million of shares.
Fourth-quarter fiscal 2009 sales were $14.569 billion and earnings from continuing operations were $301 million, compared with $14.607 billion and a $2 million loss, respectively, in the prior-year quarter.
Changes versus the prior year
- Sales fell 7.2%; comparable-store sales declined 6.6%, an improvement from the 8.7% decline in fiscal 2008. The comparable-store decline reflected a 6.3% drop in average ticket and a 0.3% drop in customer transactions. Currency movements reduced sales by approximately $565 million year over year.
- Gross margin increased 22 basis points to 33.9%, helped by lower markdowns. Operating income rose 10.2%, and reported operating margin increased to 7.3%.
- Reported earnings improved partly because rationalization charges fell to $146 million from $951 million. Each year also included a $163 million write-down of the HD Supply investment. Excluding these items, continuing-operations earnings fell to $2.811 billion from $2.996 billion, and diluted continuing-operations EPS declined to $1.66 from $1.78.
- Operating cash flow declined by $403 million. Capital expenditures were reduced by $881 million, while year-end cash increased and debt declined.
Outlook, commentary and risks
- The filing provides no specific fiscal 2010 sales or earnings guidance. Management planned to continue rolling out Rapid Deployment Centers, with 12 operating at year-end and serving about 65% of U.S. stores; further openings were planned for fiscal 2010.
- Management described ongoing weakness in residential construction, housing and home improvement, with unemployment and consumer confidence affecting demand. It cited competition, changing customer preferences, commodity-price volatility, supplier and supply-chain risks, labor costs, information-security and technology risks, and international-market exposure.
- Liquidity resources included $1.427 billion of cash and short-term investments, operating cash flow, and commercial-paper and bank-credit capacity of $3.25 billion. No commercial paper or related facility borrowings were outstanding at year-end; the backup facility was due to expire in December 2010.
- Fiscal 2010 included $1.0 billion of scheduled debt maturities. Contractual obligations totaled $30.369 billion, including debt, capital and operating leases, and purchase obligations.
- The company guaranteed up to $1.0 billion plus unpaid interest on an HD Supply loan. The guarantee’s expiration was extended after year-end, on March 19, 2010, from August 2012 to April 1, 2014.
- Legal matters included a hazardous-waste inquiry, an SEC informal inquiry into return-to-vendor policies, and ERISA litigation; management did not expect these matters to materially affect consolidated results. A meal-break settlement was approved in January 2010, with a reserve established in fiscal 2008.
Most important facts for investors to verify
- Whether sales and comparable-store trends stabilized after the 6.6% fiscal-year decline, and whether customer ticket or transaction trends improved.
- How much of earnings and margin performance depended on lower rationalization charges, tax benefits and other nonrecurring items; compare GAAP results with management’s adjusted measures.
- Cash-flow durability and the ability to fund scheduled debt maturities, dividends, capital spending and lease commitments under continued market weakness.
- Terms, collateral and potential exposure under the HD Supply loan guarantee, including the subsequent extension of its expiration date.
- Progress and costs of the Rapid Deployment Center rollout and whether it delivers the expected inventory, service and supply-chain benefits.