Business Context and Reporting Period
This Form 10-Q covers The Home Depot, Inc. for the quarterly period ended July 29, 2001, and the six-month period ended on the same date. The company operates as a home improvement retailer with 1,249 stores open as of the end of the second quarter of fiscal 2001, compared to 1,011 in the prior year. The reporting period includes the adoption of SFAS 133 regarding derivative instruments and the acquisition of Total HOME de Mexico, S.A. de C.V.
Key Financial Metrics
| Metric | Three Months Ended July 29, 2001 | Six Months Ended July 29, 2001 |
|---|---|---|
| Net Sales | $14,576 million | $26,776 million |
| Gross Profit | $4,326 million (29.7% margin) | $7,981 million (29.8% margin) |
| Operating Income | $1,496 million | $2,523 million |
| Net Earnings | $924 million | $1,556 million |
| Diluted EPS | $0.39 | $0.66 |
| Cash Provided by Operations | N/A | $3,057 million |
| Cash and Cash Equivalents | $1,287 million (Balance Sheet) | $1,287 million (Balance Sheet) |
| Long-Term Debt | $1,271 million (excluding current) | $1,271 million (excluding current) |
Material Changes Versus Prior Period
- Revenue Growth: Net sales increased 15.5% for the quarter and 12.8% for the six-month period compared to the prior year, driven primarily by the opening of 238 new stores since the second quarter of 2000.
- Comparable Store Sales: Comparable store sales increased 1% for the quarter but declined 1% for the six-month period.
- Profitability: Gross profit margins improved slightly to 29.7% (quarter) and 29.8% (six months) due to product line reviews and the addition of 184 tool rental centers. However, net earnings as a percent of sales decreased to 6.3% (quarter) and 5.8% (six months) due to higher operating expenses.
- Operating Expenses: Selling and store operating expenses increased as a percentage of sales (17.6% vs 16.9% for the quarter) due to rising medical insurance costs, energy rates, and costs associated with new tool rental centers.
- Liquidity: Cash and cash equivalents increased significantly from $167 million to $1,287 million, driven by strong operating cash flow and the repayment of $754 million in commercial paper obligations.
Guidance, Outlook, and Risks
- Capital Expenditures: The company plans to add 204 new stores and relocate 4 stores during fiscal 2001. Capital expenditures for the second half of fiscal 2001 are expected to approximate $2.0 billion. The average cost for a new owned store is projected at $14.9 million.
- Debt Financing: On April 12, 2001, the company issued $500 million of 5 3/8% Senior Notes due in 2006. Proceeds are used for capital expenditures and working capital. The commercial paper program allows borrowings up to $1 billion, with no outstanding balance as of July 29, 2001.
- Accounting Changes: The company adopted SFAS 133 (Derivatives) with no material impact. It is evaluating the impact of SFAS 141 (Business Combinations) and SFAS 142 (Goodwill), which will require annual impairment testing of goodwill starting in 2002.
- Risks: Forward-looking statements are subject to risks including unanticipated weather, commodity price stability, labor retention, real estate availability, general economic conditions, and competition.
Investor Verification Checklist
- Verify the sustainability of the 1% comparable store sales increase in the second quarter versus the 1% decline in the first six months.
- Monitor the impact of rising healthcare and energy costs on future operating margins.
- Confirm the execution of the $2.0 billion capital expenditure plan for the second half of the fiscal year.
- Review the integration and performance of the newly acquired Total HOME de Mexico chain.
- Assess the impact of the new SFAS 142 standard on future goodwill impairment charges.