Business context and reporting period
Home Depot, Inc. operates home-improvement stores and online channels serving do-it-yourself, do-it-for-me and professional customers. The filing covers the quarter and six months ended August 3, 2014, comparing with periods ended August 4, 2013. The request metadata says “2013 Q2,” but the filing itself is for fiscal 2014 Q2.
Financial performance
| Metric | Quarter ended Aug. 3, 2014 | Year-over-year change | Six months ended Aug. 3, 2014 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $23.811 billion | +5.7% | $43.498 billion | +4.4% |
| Gross profit / margin | $8.161 billion / 34.3% | +5.7%; margin unchanged | $15.046 billion / 34.6% | +4.5%; margin unchanged |
| Operating income / margin | $3.448 billion / 14.5% | +14.2% | $5.725 billion / 13.2% | +12.0% |
| Net earnings | $2.050 billion | +14.2% | $3.429 billion | +13.5% |
| Diluted EPS | $1.52 | Prior year: $1.24 | $2.51 | Prior year: $2.07 |
Quarterly comparable-store sales rose 5.8% (U.S. stores: 6.4%), comprising 4.1% growth in comparable transactions and 1.7% growth in average ticket. Six-month comparable-store sales increased 4.3%. Online sales grew 38.5% in the quarter and were 4.2% of sales. Gross margin was supported by higher co-op allowances and rebates and favorable mix, offset by higher shrink and transportation-related supply-chain deleverage. SG&A as a share of sales declined to 18.1% from 19.1% in the quarter and to 19.5% from 20.4% for six months, reflecting sales leverage, cost controls and lower management bonuses and workers’ compensation expenses.
Cash flow, debt and liquidity
For the first six months, operating cash flow was $5.285 billion versus $4.718 billion a year earlier; capital expenditures were $631 million. Investing activities used $503 million and financing activities used $2.496 billion. The company repurchased $3.5 billion of shares and paid $1.285 billion in dividends. Cash and equivalents were $4.216 billion at August 3, 2014, compared with $1.929 billion at February 2, 2014.
Long-term debt, excluding current installments, was $16.702 billion, with $34 million of current installments. In June, the company issued $1 billion of 2.00% notes due 2019 and $1 billion of 4.40% notes due 2045; proceeds were used for general corporate purposes, including share repurchases. No commercial-paper or related credit-facility borrowings were outstanding. Management said cash, operating cash generation and debt-market access should cover operating needs, capital expenditures, dividends, repurchases and debt payments for the next several fiscal years.
Material changes, outlook and risks
- Six-month earnings included a $112 million pretax gain from selling part of the company’s HD Supply investment; the gain contributed $0.05 to diluted EPS ($0.01 in Q2). Results should be considered with this unusual item.
- Share repurchases totaled 38.9 million shares for $3.5 billion in the first half. The company also entered a $1.75 billion accelerated repurchase agreement; final share delivery was to be determined in Q3.
- Management cited strength in maintenance and repair categories and an improved U.S. and Canadian home-improvement market. Initiatives included customer-service technology, assortment and pricing tools, order-management improvements, and online and mobile enhancements. No specific financial guidance is provided in the filing.
- Forward-looking results remain exposed to demand, competition, economic and housing conditions, consumer credit, execution of store and supply-chain initiatives, and financing-market conditions. The company reported no material change to the risk factors in its prior annual report and no material change in market-risk exposure.
- A New York environmental matter concerning an improperly registered mildew-treatment product was resolved by a consent order and a $100,000 fine. Management reported effective disclosure controls and no material change in internal control over financial reporting.
- The interim financial statements were reviewed by KPMG, not audited; the review report states it was not aware of material modifications needed for GAAP conformity.
Important facts for investors to verify
- Confirm the intended reporting period: this filing is fiscal 2014 Q2, despite the “2013 Q2” request metadata.
- Assess earnings excluding the $112 million HD Supply gain and the effect of lower share count from buybacks.
- Monitor whether comparable-sales momentum, online growth and expense leverage persist, and whether supply-chain costs or shrink pressure gross margin.
- Review the effect of the additional $2 billion debt issuance and continued dividends and repurchases on leverage and capital allocation.
- Check subsequent filings for final settlement of the $1.75 billion accelerated share repurchase and any updated outlook or risk disclosures.