Home Depot, Inc. — Form 10-Q Summary
Period clarification: The filing covers the fiscal quarter ended October 31, 2010 (fiscal 2010 Q3), with nine-month results through that date. This conflicts with the request metadata of “2009 Q3”; the filing compares results with the periods ended November 1, 2009. Financial statements are unaudited interim statements reviewed by KPMG.
Business context and performance
Home Depot operates warehouse-style home-improvement stores serving do-it-yourself, do-it-for-me, and professional customers. At quarter-end it operated 2,244 stores, including 268 in Canada, Mexico, and China. Management emphasized customer service, inventory management, and distribution improvements.
Third-quarter comparable-store sales rose 1.4%, compared with a 6.9% decline a year earlier; customer transactions increased 2.2%, while average ticket decreased 0.8%. Nine-month comparable-store sales rose 2.6%, versus an 8.5% decline in the prior-year period.
Key financial metrics
| Metric | Three months ended Oct. 31, 2010 | Nine months ended Oct. 31, 2010 | Prior-year comparable period |
|---|---|---|---|
| Net sales | $16.598 billion, up 1.4% | $52.871 billion, up 2.4% | $16.361 billion; $51.607 billion |
| Gross profit / margin | $5.685 billion / 34.3% | $18.061 billion / 34.2% | $5.561 billion / 34.0%; $17.399 billion / 33.7% |
| Operating income / margin | $1.448 billion / 8.7% | $4.802 billion / 9.1% | $1.263 billion / 7.7%; $4.076 billion / 7.9% |
| Net earnings | $834 million | $2.751 billion | $689 million; $2.319 billion |
| Diluted EPS | $0.51 | $1.65 | $0.41; $1.37 |
| Operating cash flow | Not separately provided for the quarter | $3.986 billion | $4.664 billion |
Nine-month diluted EPS was $1.67 excluding the $51 million pretax HD Supply guarantee-extension charge, versus $1.42 excluding prior-year rationalization charges and exited-business sales. The prior-year period also included an approximately $50 million tax benefit. These are company-presented non-GAAP comparisons.
At October 31, 2010, cash and cash equivalents were $1.425 billion; current assets were $15.076 billion and current liabilities $11.360 billion. Long-term debt was $8.752 billion, plus $1.023 billion of current debt installments. Long-term debt-to-equity was 45.8%, compared with 44.7% a year earlier. Return on invested capital was 12.0%, versus 9.5% reported (10.4% excluding prior-year rationalization charges).
Nine-month capital expenditures were $689 million; dividends paid were $1.184 billion and common-stock repurchases were $1.974 billion. The declared dividend per share increased to $0.23625 for the quarter from $0.225 a year earlier. Cash at period-end was nearly unchanged from fiscal year-end, at $1.425 billion versus $1.421 billion.
Changes, outlook, and risks
- Sales, comparable-store sales, earnings, and margins improved from the weak prior-year comparison. Management attributed margin gains to assortment and merchandising improvements, expense leverage, commodity-price inflation, lower deferred interest, and product mix.
- Operating cash flow fell to $3.986 billion from $4.664 billion, primarily due to inventory and other working-capital changes. Inventory increased $745 million in the cash-flow reconciliation.
- In September 2010, Home Depot issued $1 billion of senior notes—$500 million at 3.95% due 2020 and $500 million at 5.40% due 2040—to refinance $1 billion of notes that matured in August. The company also paid $193 million to settle related forward-starting interest-rate swaps; the amount is being amortized to interest expense over the new notes’ terms.
- Extending the guarantee of HD Supply’s $1 billion secured loan to April 1, 2014 increased its fair value to $67 million and generated a $51 million pretax charge. Home Depot is responsible for up to $1 billion plus unpaid interest if HD Supply fails to pay.
- Management said cash, operating cash flow, debt-market access, and financing alternatives should fund planned capital expenditures, dividends, repurchases, and debt payments for the next several fiscal years. No specific sales or earnings forecast is provided here. Management cautioned that economic conditions, housing and home-improvement markets, consumer spending and credit availability, and supplier conditions could affect results.
- California prosecutors and the Los Angeles City Attorney were discussing settlement of allegations concerning sales of products with VOC levels exceeding local rules. The company did not expect a material effect, but said the outcome could not be predicted.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting. The filing reported no material change in market-risk exposure.
Important facts for investors to verify
- Confirm the intended reporting period: the filing is fiscal 2010 Q3, not 2009 Q3.
- Assess whether improving comparable sales and margins are sustainable, particularly given weaker average ticket and ongoing housing and consumer-credit risks.
- Reconcile the decline in operating cash flow with higher inventory and working-capital needs, and monitor cash generation against repurchases, dividends, and capital spending.
- Review debt maturities, refinancing costs, the $193 million swap settlement’s future expense impact, and the continuing HD Supply guarantee exposure.
- Track the California VOC matter and the company’s expectation that it will not materially affect results.