Summary of HOME DEPOT INC - Yahoo! Finance

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
Certain statements regarding our future performance constitute "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements may relate to, among other things, the demand for our products and services, net sales growth, comparable store sales, impact of cannibalization, store openings and closures, state of the economy, state of the residential construction, housing and home improvement markets, commodity price inflation and deflation, implementation of store initiatives, continuation of reinvestment plans, net earnings performance, earnings per share, stock-based compensation expense, capital allocation and expenditures, liquidity, the effect of adopting certain accounting standards, return on invested capital, management of our purchasing or customer credit policies, the effect of charges, the planned recapitalization of the Company, timing of the completion of such recapitalization and the ability to issue debt securities on terms and at rates acceptable to us.
Forward-looking statements are based on currently available information and our current assumptions, expectations and projections about future events. You are cautioned not to place undue reliance on our forward-looking statements. Such statements are not guarantees of future performance and are subject to future events, risks and uncertainties - many of which are beyond our control or are currently unknown to us - as well as potentially inaccurate assumptions that could cause actual results to differ materially from our expectations and projections. Such risks and uncertainties include, but are not limited to, those described in Item 1A, "Risk Factors" and elsewhere in our Annual Report on Form 10-K for the fiscal year ended February 1, 2009 as filed with the Securities and Exchange Commission ("SEC") on April 2, 2009 ("Form 10-K"). The risks and uncertainties described in the Form 10-K include the considerable risks associated with the current economic environment and the possible adverse effects on the Company's results of operations and financial condition. You should read such information in conjunction with our Financial Statements and related notes in Item 1 and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 2 of this report. There also may be other factors that we cannot anticipate or that are not described in this report, generally because we do not currently perceive them to be material. Such factors could cause results to differ materially from our expectations. Forward-looking statements speak only as of the date they are made, and we do not undertake to update such statements other than as required by law. You are advised, however, to review any further disclosures we make on related subjects in our periodic filings with the SEC.
EXECUTIVE SUMMARY AND SELECTED CONSOLIDATED STATEMENTS OF EARNINGS DATA For the first quarter of fiscal 2009, we reported Net Earnings of $514 million and Diluted Earnings per Share of $0.30 compared to Net Earnings of $356 million and Diluted Earnings per Share of $0.21 for the first quarter of fiscal 2008. Our gross profit margin was 33.7% and our operating margin was 6.1% for the first quarter of fiscal 2009 compared to gross profit margin of 33.9% and operating margin of 4.1% for the first quarter of fiscal 2008.
The results for the first quarter of fiscal 2009 and 2008 reflect the impact of several strategic actions initiated in fiscal 2008. These strategic actions include store rationalization charges related to the closing of 15 underperforming stores and the removal of approximately 50 stores from our new store opening pipeline, business rationalization charges related to the exit of our EXPO, THD Design Center, Yardbirds and HD Bath businesses (the "Exited Businesses") and charges related to the restructuring of support functions (collectively, the "Rationalization Charges"). These actions resulted in pretax Rationalization Charges of $117 million in the first quarter of fiscal 2009 and $543 million in the first quarter of fiscal 2008. Excluding these Rationalization Charges, Net Earnings were $587 million and Diluted Earnings per Share were $0.35 for the first quarter of fiscal 2009 compared to Net Earnings of $697 million and Diluted Earnings per Share of $0.41 for the first quarter of fiscal 2008. Also excluding the Rationalization Charges, our gross profit margin was 34.0% for both the first quarter of fiscal 2009 and 2008 and our operating margin was 6.9% for the first quarter of fiscal 2009 compared to 7.1% for the first quarter of fiscal 2008.
Net Sales decreased 9.7% to $16.2 billion for the first quarter of fiscal 2009 from $17.9 billion for the first quarter of 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 the first quarter of fiscal 2009. Our comparable store sales declined 10.2% in the first quarter of fiscal 2009 driven primarily by a 2.6% decline in comparable store customer transactions, as well as an 8.2% decline in our average ticket to $52.67. Comparable store sales for our U.S. stores declined 8.6% in the first quarter of fiscal 2009.

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Despite the continuing difficult economic environment in the first quarter of fiscal 2009, we continued to focus on our core retail business, investing in our associates and stores and improving our customer service. We continued to improve our customer service by rolling out our new Customer FIRST training to all store associates and support staff in the first quarter of fiscal 2009. This training has brought simplification and focus across the business, and we are seeing the benefit of this in improved customer service ratings.
We also made significant progress on our merchandising tools in the U.S. that helped us manage markdown and clearance activity and better control inventory. At the end of the first quarter of fiscal 2009, our inventory had decreased by $1.2 billion from the first quarter of fiscal 2008. Additionally, our average inventory per store decreased by 8.8% at the end of the first quarter of fiscal 2009 compared to the first quarter of last year. We continued our supply chain transformation to improve product availability. We opened our sixth Rapid Deployment Center ("RDC") in the first quarter of fiscal 2009, and our RDCs now serve approximately 600 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. We opened five new stores during the first quarter of fiscal 2009 and closed 41 stores related to our Exited Businesses, bringing our total store count to 2,238. As of the end of the first quarter of fiscal 2009, 265, or approximately 12%, of our stores were located in Canada, Mexico or China compared to 247, or approximately 11%, as of the end of the first quarter of fiscal 2008. We generated $1.7 billion of cash flow from operations in the first quarter of fiscal 2009. We used cash flow to pay $381 million of dividends and fund $172 million in capital expenditures.
At the end of the first quarter of fiscal 2009, our long-term debt-to-equity ratio was 53.7% compared to 64.0% at the end of the first quarter of fiscal 2008. Our return on invested capital (computed on the average of beginning and ending long-term debt and equity for the trailing twelve months) was 10.0% for the first quarter of fiscal 2009 compared to 12.0% for the first quarter of fiscal 2008. 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 was 11.1% for the first quarter of fiscal 2009 compared to 13.0% for the first quarter of fiscal 2008.

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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.

                                                              % of Net Sales
                                                                                            % Increase
                                                                                            (Decrease)
                                                                                             in Dollar
                                                            Three Months Ended                Amounts

                                                         May 3,            May 4,                2009
                                                          2009              2008             vs. 2008
NET SALES                                                 100.0 %           100.0 %              (9.7 )%

GROSS PROFIT                                               33.7              33.9               (10.2 )

Operating Expenses:
Selling, General and Administrative                        25.0              27.4               (17.5 )
Depreciation and Amortization                               2.6               2.5                (3.6 )

Total Operating Expenses                                   27.6              29.8               (16.4 )


OPERATING INCOME                                            6.1               4.1                34.6

Interest (Income) Expense:
Interest and Investment Income                                -                 -                66.7
Interest Expense                                            1.1               0.9                 7.8

Interest, net                                               1.1               0.9                 6.7


EARNINGS BEFORE PROVISION FOR INCOME TAXES                  5.0               3.2                42.7
Provision for Income Taxes                                  1.8               1.2                39.9

NET EARNINGS                                                3.2 %             2.0 %              44.4 %


Note: Certain percentages may not sum to totals
due to rounding.

SELECTED SALES DATA
Number of Customer Transactions (in millions)               310               314                (1.3 )%
Average Ticket                                          $ 52.67           $ 57.36                (8.2 )
Weighted Average Weekly Sales Per Operating Store
(in thousands)                                          $   552           $   616               (10.4 )
Weighted Average Sales per Square Foot                  $   273           $   305               (10.5 )%
Comparable Store Sales Decrease (%)(1)                    (10.2 )%           (6.5 )%              N/A

(1) 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.

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RESULTS OF OPERATIONS
Net Sales for the first quarter of fiscal 2009 decreased 9.7%, or $1.7 billion, to $16.2 billion from $17.9 billion for the first quarter of fiscal 2008. The decrease in Net Sales for the first quarter of fiscal 2009 reflects the impact of negative comparable store sales, partially offset by Net Sales of $220 million from new stores. Total comparable store sales decreased 10.2% for the first quarter of fiscal 2009 compared to a decrease of 6.5% for the first quarter of fiscal 2008. Due to the 53rd week in fiscal 2007, the first quarter of fiscal 2008 benefited from a seasonal timing change that added approximately $536 million to Net Sales and approximately 270 basis points to our comparable store sales in the first quarter of fiscal 2008.
There were a number of factors that contributed to our comparable store sales decline. In the first quarter of fiscal 2009, we saw significant strengthening of the U.S. dollar against all currencies. Fluctuating exchange rates negatively impacted our total Company comparable store sales by approximately 190 basis points compared to last year, partially offset by a 30 basis point benefit arising from comparable store sales growth outside of the U.S. 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, Flooring, Paint, Plumbing and Garden/Seasonal as comparable store sales in these areas were above the Company average for the first quarter of fiscal 2009. Comparable store sales for Lumber, Hardware, Electrical, Kitchen/Bath and Millwork were below the Company average for the first quarter of fiscal 2009. Softness in construction and discretionary categories as well as the stronger U.S. dollar negatively impacted average ticket, which decreased 8.2% to $52.67 for the first quarter of fiscal 2009.
Gross Profit decreased 10.2% to $5.5 billion for the first quarter of fiscal 2009 from $6.1 billion for the first quarter of fiscal 2008. Gross Profit as a percent of Net Sales decreased 22 basis points to 33.7% for the first quarter of fiscal 2009 compared to 33.9% for the first quarter of fiscal 2008. Our U.S. stores reported 29 basis points of gross margin expansion in the first quarter of fiscal 2009 driven by gross margin improvements in certain commodity classes, some shift in sales penetration and improved shrink performance. Through our focused bay portfolio approach, our U.S. merchants continued to introduce new lower prices while growing overall gross margin. The U.S. gross profit margin expansion was offset by markdowns taken in connection with closing our Exited Businesses, which negatively impacted Gross Profit as a percent of Net Sales by 24 basis points. Additionally, we realized 27 basis points of gross margin contraction arising from our non-U.S. businesses, principally Canada. Selling, General and Administrative Expense ("SG&A") decreased 17.5% to $4.0 billion for the first quarter of fiscal 2009 from $4.9 billion for the first quarter of fiscal 2008. As a percent of Net Sales, SG&A was 25.0% for the first quarter of fiscal 2009 compared to 27.4% for the first quarter of fiscal 2008. Excluding the Rationalization Charges, SG&A as a percent of Net Sales was 24.4%, an increase of five basis points over the adjusted prior year period. This increase reflects expense deleverage in the negative comparable store sales environment, offset by a lower cost of credit associated with the private label credit card program and solid expense control.
Depreciation and Amortization decreased 3.6% to $428 million for the first quarter of fiscal 2009 from $444 million for the first quarter of fiscal 2008. Depreciation and Amortization as a percent of Net Sales was 2.6% for the first quarter of fiscal 2009 and 2.5% for the first quarter of fiscal 2008. Excluding the Rationalization Charges, Depreciation and Amortization as a percent of Net Sales increased by 18 basis points from last year, primarily due to sales deleverage.
Operating Income increased 34.6% to $980 million for the first quarter of fiscal 2009 from $728 million for the first quarter of fiscal 2008. Operating Income as a percent of Net Sales was 6.1% for the first quarter of fiscal 2009 compared to 4.1% for the first quarter of fiscal 2008. Excluding the Rationalization Charges, our Operating Income as a percent of Net Sales was 6.9% for the first quarter of fiscal 2009 compared to 7.1% for the first quarter of fiscal 2008. In the first quarter of fiscal 2009, we recognized $175 million of net Interest Expense compared to $164 million in the first quarter of fiscal 2008. Net Interest Expense as a percent of Net Sales was 1.1% for the first quarter of fiscal 2009 and 0.9% for the first quarter of fiscal 2008. The increase in Net Interest Expense as a percent of Net Sales was primarily due to sales deleverage.
Our combined effective income tax rate decreased to 36.1% for the first quarter of fiscal 2009 from 36.9% for the comparable period of fiscal 2008, reflecting lower foreign effective tax rates.

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Diluted Earnings per Share were $0.30 for the first quarter of fiscal 2009 compared to Diluted Earnings per Share of $0.21 for the first quarter of fiscal 2008. Excluding the Rationalization Charges, Diluted Earnings per Share for the first quarter of fiscal 2009 were $0.35, a decrease of 14.6% from the first quarter of fiscal 2008.
To provide clarity, internally and externally, about our operating performance in the first quarters of fiscal 2009 and 2008, we supplemented our reporting with non-GAAP measurements to reflect adjustments for the Rationalization Charges as described more fully in Note 2 to the Consolidated Financial Statements, as well as the Net Sales from Exited Businesses during the period from closing announcement to actual closing. 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 to the reported GAAP information for the first quarters of fiscal 2009 and 2008:

                                                           Three Months Ended May 3, 2009
amounts in millions, except per share data       As                          Non-GAAP          % of
                                              Reported     Adjustments     Measurements     Net Sales
Net Sales                                    $ 16,175      $      221      $    15,954          100.0 %
Cost of Sales                                  10,725             192           10,533           66.0

Gross Profit                                    5,450              29            5,421           34.0
Operating Expenses:
Selling, General and Administrative             4,042             143            3,899           24.4
Depreciation and Amortization                     428               3              425            2.7

Total Operating Expenses                        4,470             146            4,324           27.1

Operating Income                                  980            (117 )          1,097            6.9
Interest, net                                     175               -              175            1.1

Earnings Before Provision for Income Taxes        805            (117 )            922            5.8
Provision for Income Taxes                        291             (44 )            335            2.1

Net Earnings                                 $    514      $      (73 )    $       587            3.7 %

Diluted Earnings per Share                   $   0.30      $    (0.04 )    $      0.35            N/A


                                                           Three Months Ended May 4, 2008
                                                 As                          Non-GAAP          % of
                                              Reported     Adjustments     Measurements     Net Sales
Net Sales                                    $ 17,907      $        -      $    17,907          100.0 %
Cost of Sales                                  11,835              10           11,825           66.0

Gross Profit                                    6,072             (10 )          6,082           34.0
Operating Expenses:
Selling, General and Administrative             4,900             533            4,367           24.4
Depreciation and Amortization                     444               -              444            2.5

Total Operating Expenses                        5,344             533            4,811           26.9

Operating Income                                  728            (543 )          1,271            7.1
Interest, net                                     164               -              164            0.9

Earnings Before Provision for Income Taxes        564            (543 )          1,107            6.2
Provision for Income Taxes                        208            (202 )            410            2.3

Net Earnings                                 $    356      $     (341 )    $       697            3.9 %

Diluted Earnings per Share                   $   0.21      $    (0.20 )    $      0.41            N/A

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LIQUIDITY AND CAPITAL RESOURCES
Cash flow generated from operations provides a significant source of liquidity. During the first quarter of fiscal 2009, Net Cash Provided by Operating Activities was $1.7 billion compared to $2.1 billion for the same period of fiscal 2008. This change was primarily a result of changes in net working capital.
Net Cash Used in Investing Activities for the first quarter of fiscal 2009 was $83 million compared to $438 million for the same period of fiscal 2008. The decrease was primarily the result of $277 million less in capital expenditures in the first quarter of fiscal 2009 compared to the same period last year. Net Cash Provided by Financing Activities for the first quarter of fiscal 2009 was $43 million compared to Net Cash Used in Financing Activities of $1.4 billion for the same period of fiscal 2008. This change was the result of $1.2 billion in Repayments of Short-Term Borrowings in the first quarter of fiscal 2008.
We have commercial paper programs that allow for borrowings up to $3.25 billion. In connection with the programs, we have a back-up credit facility with a consortium of banks for borrowings up to $3.25 billion. As of May 3, 2009, there were no borrowings outstanding under the commercial paper programs or the related credit facility. The credit facility, which expires in December 2010, contains various restrictive covenants, with all of which we are in compliance. None of the covenants are expected to impact our liquidity or capital resources. As of May 3, 2009, we had $2.2 billion in Cash and Short-Term Investments. We believe that our current cash position, access to the debt capital markets and cash flow generated from operations should be sufficient to enable us to complete our capital expenditure programs and required long-term debt payments through the next several fiscal years. In addition, we have funds available from our commercial paper programs and the ability to obtain alternative sources of financing for other requirements. We intend to use cash flow generated by operations to repay the $1.8 billion in debt coming due in fiscal 2009.

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