Home Depot, Inc. — Form 10-Q Summary
Period: The filing covers the three months ended April 29, 2018, identified by the company as the first quarter of fiscal 2018. The request metadata labels the period “2017 Q1,” but the filing itself is for 2018 Q1. Fiscal 2018 includes 53 weeks.
Financial performance
- Sales: Net sales were $24.947 billion, up 4.4% from $23.887 billion. Comparable sales increased 4.2%; comparable average ticket rose 5.8%, while comparable transactions declined 1.5%. Online sales grew 20.2% and represented 7.6% of net sales.
- Profit and margins: Gross profit was $8.617 billion, up 5.7%; gross margin improved to 34.5% from 34.1%. Operating income was $3.381 billion, up 1.0%, while operating margin decreased to 13.6% from 14.0%. Net earnings rose to $2.404 billion from $2.014 billion; net margin was 9.6% versus 8.4%.
- Per-share results: Diluted EPS was $2.08, up 24.6% from $1.67. The company reported a $0.32-per-share benefit from the Tax Act. Weighted-average diluted shares declined to 1.158 billion from 1.204 billion. Dividends declared per share increased to $1.03 from $0.89.
- Cash flow: Operating cash flow was $3.981 billion, down from $4.564 billion. Capital expenditures were $556 million, versus $458 million. Cash and cash equivalents were $3.599 billion at quarter-end; $3.2 billion was held by foreign subsidiaries.
- Debt and liquidity: Quarter-end borrowings comprised $350 million of short-term debt, $1.199 billion of current long-term debt, and $24.244 billion of long-term debt. The company had a $3.0 billion commercial-paper capacity and $3.0 billion of backup credit facilities; $350 million was outstanding under commercial paper at quarter-end. Management said cash, operating cash flow, debt-market access, and other financing sources should cover operating needs and planned capital returns for the next several fiscal years.
Changes, outlook, and notable items
- Sales growth reflected positive comparable sales and higher average ticket, partly offset by fewer transactions. Gross-margin improvement reflected product mix, acquisitions, and the revenue-standard adoption, partly offset by higher shrink and transportation costs. SG&A rose 9.6%, including business investment and accounting-presentation effects; SG&A increased to 19.2% of sales from 18.3%.
- Operating cash flow declined primarily because of increased inventory purchases. Cash uses included $1.2 billion of dividends, $1.2 billion of short-term debt repayments, $1.1 billion of share repurchases, and $556 million of capital expenditures.
- The company expected approximately $2.5 billion of capital expenditures in fiscal 2018. It did not provide a new full-year sales or earnings forecast in the supplied filing text.
- The company adopted the new revenue standard in fiscal 2018. It increased opening retained earnings by $75 million; reported first-quarter sales were increased by $33 million and gross profit by $131 million, with SG&A also increased by $131 million. Prior-year comparisons remain under the prior accounting standard.
- The effective tax rate fell to 23.5% from 35.2%, primarily due to the Tax Act. Tax accounting remained incomplete for certain transition-tax and deferred-tax items; the company also said it could not yet reasonably estimate the long-term effects of GILTI rules.
- The company repurchased 4.7 million shares for approximately $1.0 billion and had a $15.0 billion repurchase authorization. It opened one U.S. store and reported 2,285 stores at quarter-end.
- Management said litigation in the ordinary course was not expected to have a material adverse effect. The filing reported no material changes to the risk factors or market-risk exposures described in the prior Form 10-K. The interim financial statements were reviewed by KPMG, not audited.
Investor verification points
- Confirm the intended reporting period: the filing is for fiscal 2018 Q1, notwithstanding the request metadata’s “2017 Q1” label.
- Assess how the Tax Act’s reported $0.32-per-share benefit and any later tax measurement-period adjustments affect earnings comparability.
- Review the revenue-standard effects when comparing reported margins and sales with prior periods, which use the previous accounting standard.
- Monitor inventory and working-capital trends, given the decline in operating cash flow and increased inventory purchases.
- Verify execution of the $2.5 billion capital-expenditure outlook, planned dividends and repurchases, and the company’s access to commercial paper and credit facilities.