Add
HD to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| HD > SEC Filings for HD > Form 10-K on 2-Apr-2009 | All Recent SEC Filings |
2-Apr-2009
Annual Report
Executive Summary and Selected Consolidated Statements of Earnings Data
For fiscal year ended February 1, 2009 ("fiscal 2008"), we reported Net Earnings of $2.3 billion and Diluted Earnings per Share of $1.34 compared to Net Earnings of $4.4 billion and Diluted Earnings per Share of $2.37 for fiscal year ended February 3, 2008 ("fiscal 2007").
We took action on several strategic items in fiscal 2008 resulting in total pretax charges of $951 million ("Rationalization Charges"). These Rationalization Charges included the closing of 15 underperforming stores and the removal of approximately 50 stores from our new store opening pipeline, the planned exit of our EXPO, THD Design Center, Yardbirds and HD Bath businesses and strategic support staff reductions. Additionally, fiscal 2008 included a $163 million pretax write-down of our investment in HD Supply and a $52 million loss from discontinued operations, net of tax, for the settlement of working capital from the sale of HD Supply.
Fiscal 2008 consisted of 52 weeks compared with 53 weeks for fiscal 2007. The 53rd week added approximately $1.1 billion in Net Sales and increased Diluted Earnings per Share from Continuing Operations by approximately $0.04 for fiscal 2007.
We reported Earnings from Continuing Operations of $2.3 billion and Diluted Earnings per Share from Continuing Operations of $1.37 for fiscal 2008 compared to Earnings from Continuing Operations of $4.2 billion and Diluted Earnings per Share from Continuing Operations of $2.27 for fiscal 2007. Excluding the Rationalization Charges and the write-down of our investment in HD Supply, Earnings from Continuing Operations were $3.0 billion and Diluted Earnings per Share from Continuing Operations were $1.78 for fiscal 2008.
Net Sales decreased 7.8% to $71.3 billion for fiscal 2008 from $77.3 billion for fiscal 2007. Excluding the 53rd week of fiscal 2007, Net Sales decreased 6.5% for fiscal 2008. The slowdown in the global economy and weakness in the U.S. residential construction and home improvement markets negatively impacted our Net Sales for fiscal 2008. Our comparable store sales declined 8.7% in fiscal 2008 driven by a 5.5% decline in comparable store customer transactions, as well as a 3.3% decline in our average ticket.
In fiscal 2008, despite the continuing difficult economic environment, we continued to focus on our core retail business, investing in our associates and stores and improving our customer service. We have exited non-core businesses, restructured support staff and have stopped applying significant capital to building new square footage. We remain committed to the long-term health of our business through our strategy of investing in our retail business through the following five priorities:
Associate Engagement - We have taken a number of actions to improve associate engagement by changing the way our associates are compensated, recognized and rewarded, including enhancing our success sharing program, an incentive program for our hourly associates driven by individual store performance. Success sharing payouts will be received by 83% of our stores for the second half of fiscal 2008 compared to 44% of stores for the same period last year.
Product Excitement - We continue to work on our merchandising transformation by redefining how we run our business, implementing a focused bay portfolio approach to product assortment and creating new tools to support better merchandising decision making. As a result, we saw consumer unit share gains against the market in several key merchandising classes. For example, carpet, hand tools, power tools, blinds, bath fixtures, windows and doors all gained share in fiscal 2008. Our new lower price campaign is a major component of our portfolio strategy. An example is interior paint, where we have lowered prices on items such as Behr Flat Premium Plus. Unit sales are increasing, and at the same time, our attachment sales of related items are going up.
Shopping Environment - We continued our store reinvestment by completing an aggressive list of maintenance projects, including the completion of our lighting upgrade, as well as more complex repair and maintenance activities for hundreds of other stores. In addition to programmatic maintenance, our integrated field and support center teams have rolled out store standards to all stores. We developed and piloted common guidelines on store appearance and shopability, including standards for front apron merchandising, wingstack usage, signage presentation, fixturing and off-shelf product. This
initiative helps reduce the amount of time our store managers spend on these issues, removes unnecessary clutter from the aisles and implements a basic and consistent approach to store appearance.
Product Availability - We continued our supply chain transformation to improve product availability. We have five RDCs operating that now serve approximately 500 of our stores. We plan to open additional RDCs in fiscal 2009 and expect that they will serve approximately 1,000 of our stores by the end of fiscal 2009. We remain committed to our overall roll-out strategy for RDCs, supporting our goal of increasing our central distribution penetration.
Own the Pro - We have made significant improvements in the services we provide our pro customers, particularly through our pro bid room. The pro bid room, which is available in all of our stores, allows us to leverage the buying power of The Home Depot for the benefit of our pro customers. Our direct ship program allows us to have large orders delivered from our vendors to the customer's job site directly, reducing handling, lead-time and cost while building loyalty with the pro customer.
We opened 62 new stores in fiscal 2008, including 6 relocations, closed 15 stores as part of our store rationalization actions and closed one store in Mexico due to a fire, bringing our total store count at the end of fiscal 2008 to 2,274. As of the end of fiscal 2008, 262, or approximately 12%, of our stores were located in Canada, Mexico and China compared to 243 as of fiscal 2007.
We generated $5.5 billion of cash flow from operations in fiscal 2008. We used this cash flow to repay $2.0 billion of short-term debt and other debt obligations, fund $1.8 billion in capital expenditures and pay $1.5 billion of dividends.
At the end of fiscal 2008, our long-term debt-to-equity ratio was 54.4% compared to 64.3% at the end of fiscal 2007. Our return on invested capital for continuing operations (computed on the average of beginning and ending long-term debt and equity for the trailing twelve months) was 9.5% at the end of fiscal 2008 compared to 13.9% for fiscal 2007. This decrease reflects the decline in our operating profit, which includes the impact of the Rationalization Charges. Excluding Rationalization Charges, our return on invested capital for continuing operations was 11.4%.
We believe the selected sales data, the percentage relationship between Net Sales and major categories in the Consolidated Statements of Earnings and the percentage change in the dollar amounts of each of the items presented below are important in evaluating the performance of our business operations. We believe the information presented in our Management's Discussion and Analysis of Financial Condition and Results of Operations provides an understanding of our business, our operations and our financial condition.
% Increase
(Decrease)
% of Net Sales In Dollar Amounts
Fiscal Year(1)
2008 2007
2008 2007 2006 vs. 2007 vs. 2006
NET SALES 100.0 % 100.0 % 100.0 % (7.8 )% (2.1 )%
Gross Profit 33.7 33.6 33.6 (7.7 ) (2.1 )
Operating Expenses:
Selling, General and Administrative 25.0 22.1 20.4 4.7 5.9
Depreciation and Amortization 2.5 2.2 2.0 4.9 8.1
Total Operating Expenses 27.5 24.3 22.4 4.7 6.1
OPERATING INCOME 6.1 9.4 11.2 (39.8 ) (18.3 )
Interest and Other (Income) Expense:
Interest and Investment Income - (0.1 ) - (75.7 ) 174.1
Interest Expense 0.9 0.9 0.5 (10.3 ) 78.0
Other 0.2 - - 0.0 0.0
Interest and Other, net 1.1 0.8 0.5 23.6 70.9
EARNINGS FROM CONTINUING OPERATIONS BEFORE
PROVISION FOR INCOME TAXES 5.0 8.6 10.8 (45.8 ) (22.1 )
Provision for Income Taxes 1.8 3.1 4.1 (47.0 ) (25.5 )
EARNINGS FROM CONTINUING OPERATIONS 3.2 % 5.4 % 6.7 % (45.1 )% (20.1 )%
SELECTED SALES DATA
Number of Customer Transactions (in millions)(2) 1,272 1,336 1,330 (4.8 )% 0.5 %
Average Ticket(2) $ 55.61 $ 57.48 $ 58.90 (3.3 ) (2.4 )
Weighted Average Weekly Sales per Operating Store
(in thousands)(2) $ 601 $ 658 $ 723 (8.7 ) (9.0 )
Weighted Average Sales per Square Foot(2) $ 298.19 $ 331.86 $ 357.83 (10.1 ) (7.3 )
Comparable Store Sales Decrease (%)(3) (8.7 )% (6.7 )% (2.8 )% N/A N/A
|
Note: Certain percentages may not sum to totals due to rounding.
(1) Fiscal years 2008, 2007 and 2006 refer to the fiscal years ended February 1, 2009, February 3, 2008 and January 28, 2007, respectively. Fiscal years 2008 and 2006 include 52 weeks; fiscal year 2007 includes 53 weeks.
(2) The 53rd week of fiscal 2007 increased customer transactions by 20 million, negatively impacted average ticket by $0.05, negatively impacted weighted average weekly sales per operating store by $3 thousand and increased weighted average sales per square foot by $4.77.
(3) Includes Net Sales at locations open greater than 12 months, including relocated and remodeled stores. Retail stores become comparable on the Monday following their 365th day of operation. Comparable store sales is intended only as supplemental information and is not a substitute for Net Sales or Net Earnings presented in accordance with generally accepted accounting principles.
Results of Operations
For an understanding of the significant factors that influenced our performance during the past three fiscal years, the following discussion should be read in conjunction with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements presented in this report.
Fiscal 2008 Compared to Fiscal 2007
Net Sales
Fiscal 2008 consisted of 52 weeks compared to 53 weeks in fiscal 2007. Net Sales for fiscal 2008 decreased 7.8% to $71.3 billion from $77.3 billion for fiscal 2007. The decrease in Net Sales for fiscal 2008 reflects the impact of negative comparable store sales and $1.1 billion of Net Sales attributable to the additional week in fiscal 2007, partially offset by Net Sales of $1.8 billion from new stores in fiscal 2008. Comparable store sales decreased 8.7% for fiscal 2008 compared to a decrease of 6.7% for fiscal 2007.
There were a number of factors that contributed to our comparable store sales decline. The U.S. residential construction and home improvement markets continued to be soft and consumers were challenged due to higher unemployment and an across-the-board tightening of consumer credit availability. We saw relative strength in Building Materials, Plumbing, Garden/Seasonal and Hardware as comparable store sales in these areas were above or at the Company average for fiscal 2008. Comparable store sales for Lumber, Flooring, Paint, Electrical, Kitchen/Bath and Millwork were below the Company average for fiscal 2008. Softness in our big ticket categories negatively impacted average ticket, which decreased 3.3% to $55.61 for fiscal 2008.
In order to meet our customer service objectives, we strategically open stores near market areas served by existing stores ("cannibalize") to enhance service levels, gain incremental sales and increase market penetration. Our new stores cannibalized approximately 5% of our existing stores as of the end of fiscal 2008, which had a negative impact to comparable store sales of approximately 1%.
We believe that our sales performance has been, and could continue to be, negatively impacted by the level of competition that we encounter in various markets. Due to the highly-fragmented U.S. home improvement industry, in which we estimate our market share is approximately 20%, measuring the impact on our sales by our competitors is difficult.
Gross Profit
Gross Profit decreased 7.7% to $24.0 billion for fiscal 2008 from $26.0 billion for fiscal 2007. Gross Profit as a percent of Net Sales was 33.7% for fiscal 2008 compared to 33.6% for fiscal 2007, an increase of four basis points. This gross margin expansion included $30 million in markdowns taken in connection with our Rationalization Charges. Excluding these markdowns, our Gross Profit as a percent of Net Sales increased eight basis points for fiscal 2008, reflecting our focused bay portfolio approach to product assortment.
Operating Expenses
Selling, General and Administrative expenses ("SG&A") increased 4.7% to $17.8 billion for fiscal 2008 from $17.1 billion for fiscal 2007. As a percent of Net Sales, SG&A was 25.0% for fiscal 2008 compared to 22.1% for fiscal 2007. Excluding the Rationalization Charges, SG&A as a percent of Net Sales for fiscal 2008 was 23.7%, an increase of approximately 170 basis points over the prior year. The increase in SG&A as a percent of Net Sales for fiscal 2008 was primarily the result of expense deleverage in the negative comparable store sales environment, as well as an increase of approximately 70 basis points due to a higher cost of credit associated with the private label credit card program. For fiscal 2008, the penetration of the private label credit card sales was 28.1% compared to 29.4% for fiscal 2007.
Depreciation and Amortization increased 4.9% to $1.8 billion for fiscal 2008 from $1.7 billion for fiscal 2007. Depreciation and Amortization as a percent of Net Sales was 2.5% for fiscal 2008 and 2.2% for fiscal 2007. The increase as a percent of Net Sales was primarily due to sales deleverage and the depreciation of our investments in shorter lived assets such as store resets and technology.
Operating Income
Operating Income decreased 39.8% to $4.4 billion for fiscal 2008 from $7.2 billion for fiscal 2007. Operating Income as a percent of Net Sales was 6.1% for fiscal 2008 compared to 9.4% for fiscal 2007. Excluding the Rationalization Charges, Operating Income as a percent of Net Sales was 7.4% for fiscal 2008.
Interest and Other, net
In fiscal 2008, we recognized $769 million of Interest and Other, net, compared to $622 million in fiscal 2007. Interest and Other, net, as a percent of Net Sales was 1.1% for fiscal 2008 compared to 0.8% for fiscal 2007. Interest and Other, net, reflects a $163 million charge to write-down our investment in HD Supply. Excluding this charge, Interest and Other, net, as a percent of Net Sales was 0.9% for fiscal 2008.
Provision for Income Taxes
Our combined effective income tax rate for continuing operations decreased to 35.6% for fiscal 2008 from 36.4% for fiscal 2007. The decrease in our effective income tax rate for fiscal 2008 reflects lower state and foreign effective tax rates.
Diluted Earnings per Share from Continuing Operations
Diluted Earnings per Share from Continuing Operations were $1.37 for fiscal 2008 and $2.27 for fiscal 2007. Excluding the Rationalization Charges and the write-down of our investment in HD Supply, Diluted Earnings per Share from Continuing Operations for fiscal 2008 were $1.78, a decrease of 21.6% from fiscal 2007. The 53rd week in fiscal 2007 increased Diluted Earnings per Share from Continuing Operations by approximately $0.04 for fiscal 2007.
Diluted Earnings per Share from Continuing Operations were favorably impacted by the repurchase of shares of our common stock. We repurchased 2.4 million shares for $70 million in fiscal 2008 and 293 million shares for $10.8 billion in fiscal 2007. Since the inception of the repurchase program in 2002, we have repurchased 746 million shares of our common stock for a total of $27.3 billion.
Discontinued Operations
On August 30, 2007, the Company closed the sale of HD Supply. Discontinued operations for fiscal 2008 consist of a loss of $52 million, net of tax, or $0.03 per diluted share, recorded to settle net working capital matters arising from the sale of HD Supply. Discontinued operations for fiscal 2007 consist of the results of operations for HD Supply through August 30, 2007 and a $4 million loss on the sale of HD Supply. Net Sales from discontinued operations were $7.4 billion for fiscal 2007 and Earnings from Discontinued Operations, net of tax, were $185 million for fiscal 2007.
Non-GAAP Measurements
To provide clarity, internally and externally, about our operating performance for fiscal 2008, we supplemented our reporting with non-GAAP measurements to reflect the Rationalization Charges as described more fully in Note 2 to the Consolidated Financial Statements and the charge to write-down our investment in HD Supply as described in Note 4 to the Consolidated Financial Statements. This supplemental information should not be considered in isolation or as a substitute for the related GAAP measurements. We believe these non-GAAP measurements provide management and investors with meaningful information to understand and analyze our performance. The following reconciles the non-GAAP measurements reflecting the Rationalization Charges and investment write-down to the reported GAAP information for fiscal 2008:
As Non-GAAP % of
amounts in millions, except per share data Reported Charges Measurement Net Sales
Net Sales $ 71,288 $ - $ 71,288 100.0 %
Cost of Sales 47,298 30 47,268 66.3
Gross Profit 23,990 (30 ) 24,020 33.7
Operating Expenses 19,631 921 18,710 26.2
Operating Income 4,359 (951 ) 5,310 7.4
Interest and Other, net 769 163 606 0.9
Earnings From Continuing Operations Before Provision
for Income Taxes 3,590 (1,114 ) 4,704 6.6
Provision for Income Taxes 1,278 (430 ) 1,708 2.4
Earnings from Continuing Operations $ 2,312 $ (684 ) $ 2,996 4.2 %
Diluted Earnings per Share from Continuing Operations $ 1.37 $ (0.41 ) $ 1.78 N/A
|
Fiscal 2007 Compared to Fiscal Year Ended January 28, 2007 ("fiscal 2006")
Net Sales
Fiscal 2007 consisted of 53 weeks compared to 52 weeks in fiscal 2006. Net Sales for fiscal 2007 decreased 2.1%, or $1.7 billion, to $77.3 billion from $79.0 billion for fiscal 2006. The decrease in Net Sales for fiscal 2007 reflects the impact of negative comparable store sales, partially offset by Net Sales of $3.7 billion for fiscal 2007 from new stores and $1.1 billion of Net Sales attributable to the additional week in fiscal 2007. Comparable store sales decreased 6.7% for fiscal 2007 compared to a decrease of 2.8% for fiscal 2006.
There were a number of factors that contributed to our comparable store sales decline. The residential construction and home improvement markets continued to be soft, especially in some of our traditionally strong markets such as Florida, California and the Northeast. The combination of softness in our big ticket categories and commodity price deflation negatively impacted average ticket, which decreased 2.4% to $57.48 for fiscal 2007. Our international business performed well in fiscal 2007. Our Mexican stores posted a double digit comparable store sales increase for fiscal 2007, and Canada's comparable store sales were also positive. Our new stores cannibalized approximately 10% of our existing stores as of the end of fiscal 2007, which had a negative impact to comparable store sales of approximately 1%.
Gross Profit
Gross Profit decreased 2.1% to $26.0 billion for fiscal 2007 from $26.5 billion for fiscal 2006. Gross Profit as a percent of Net Sales was 33.6% for fiscal 2007, flat compared to fiscal 2006. Lower deferred interest costs associated with our private label credit card financing programs provided a benefit of 39 basis points to Gross Profit as a percent of Net Sales for fiscal 2007. The deferred interest benefit was mostly offset by a higher penetration of lower margin products such as appliances and markdowns taken to clear through some seasonal items, such as outdoor power equipment and grills, and to allow us to transition into new products, such as assembled cabinets and kitchen accessories.
Operating Expenses
SG&A increased 5.9% to $17.1 billion for fiscal 2007 from $16.1 billion for fiscal 2006. As a percent of Net Sales, SG&A was 22.1% for fiscal 2007 compared to 20.4% for fiscal 2006. In fiscal 2007, our profit sharing with the third-party administrator of the private label credit card portfolio was $275 million less than what we received in fiscal 2006. We also recognized $88 million of write-offs associated with certain future store locations that we determined we will not open and $34 million of expense associated with closing our 11 Home Depot Landscape Supply stores and our Tampa Call Center in fiscal 2007. SG&A also reflects investments we are making in support of our five key priorities. As a percentage of Net Sales, total payroll increased by 76 basis points for fiscal 2007 over fiscal 2006. This reflects investments in store labor and our Master Trade Specialists program, the impact of our success sharing bonus plans, as well as the negative sales environment. The increase in SG&A for fiscal 2007 over fiscal 2006 was partially offset by $129 million of executive severance recorded in fiscal 2006.
Depreciation and Amortization increased 8.1% to $1.7 billion for fiscal 2007 from $1.6 billion for fiscal 2006. Depreciation and Amortization as a percent of Net Sales was 2.2% for fiscal 2007 and 2.0% for fiscal 2006. The increase as a percent of Net Sales was primarily due to the depreciation of our investments in store modernization and technology.
Operating Income
Operating Income decreased 18.3% to $7.2 billion for fiscal 2007 from $8.9 billion for fiscal 2006. Operating Income as a percent of Net Sales was 9.4% for fiscal 2007 compared to 11.2% for fiscal 2006.
Interest and Other, net
In fiscal 2007, we recognized $622 million of net Interest Expense compared to $364 million in fiscal 2006. Net Interest Expense as a percent of Net Sales was 0.8% for fiscal 2007 compared to 0.5% for fiscal 2006. The increase was primarily due to additional interest incurred related to the December 2006 issuance of $750 million of Floating Rate Senior Notes, $1.25 billion of 5.25% Senior Notes and $3.0 billion of 5.875% Senior Notes.
Provision for Income Taxes
Our combined effective income tax rate for continuing operations decreased to 36.4% for fiscal 2007 from 38.1% for fiscal 2006. The decrease in our effective income tax rate for fiscal 2007 reflects the impact of a one-time retroactive tax assessment received from the Canadian province of Quebec in the second quarter of fiscal 2006 and tax benefits recognized upon settlement of several state audits and completion of the fiscal 2003 and 2004 federal tax audits in fiscal 2007.
Diluted Earnings per Share from Continuing Operations
Diluted Earnings per Share from Continuing Operations were $2.27 for fiscal 2007 and $2.55 for fiscal 2006. The 53rd week increased Diluted Earnings per Share from Continuing Operations by approximately $0.04 for fiscal 2007. Diluted Earnings per Share from Continuing Operations were favorably impacted in both fiscal 2007 and 2006 by the repurchase of shares of our common stock.
Discontinued Operations
Discontinued operations consist of the results of operations for HD Supply through August 30, 2007 and a loss on the sale of HD Supply. Net Sales from discontinued operations were $7.4 billion for fiscal 2007 compared to $11.8 billion for fiscal 2006. Earnings from Discontinued Operations, net of tax, were $185 million for fiscal 2007, compared to $495 million for fiscal 2006. Earnings from Discontinued Operations for fiscal 2007 include a $4 million loss, net of tax, recognized on the sale of the business.
|
|