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, store openings and closures, state of the economy, state of the residential construction, housing and home improvement markets, state of the credit markets, including mortgages, home equity loans and consumer credit, 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 accounting charges, the planned recapitalization of the Company, timing of the completion of the recapitalization, the ability to issue debt securities on terms and at rates acceptable to us and financial outlook.
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. These 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. These 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") and in Item 1A of Part II and elsewhere in this report. The risks and uncertainties described in the Form 10-K and in this report 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. Those 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 these 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 second quarter of fiscal 2009, we reported Net Earnings of $1.1 billion and Diluted Earnings per Share of $0.66 compared to Net Earnings of $1.2 billion and Diluted Earnings per Share of $0.71 for the second quarter of fiscal 2008. For the first six months of fiscal 2009, we reported Net Earnings of $1.6 billion and Diluted Earnings per Share of $0.96 compared to Net Earnings of $1.6 billion and Diluted Earnings per Share of $0.93 for the first six months of fiscal 2008. Our gross profit margin was 33.5% and our operating margin was 9.6% for the second quarter of fiscal 2009. For the first six months of fiscal 2009, our gross profit margin was 33.6% and our operating margin was 8.0%. The results for the second quarter and first six months 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 $20 million and $18 million for the second quarter of fiscal 2009 and 2008, respectively, and $137 million and $561 million for the first six months of fiscal 2009 and 2008, respectively. Excluding these Rationalization Charges, Diluted Earnings per Share were $0.67 for the second quarter of fiscal 2009 compared to $0.72 for the second quarter of fiscal 2008 and were $1.01 for the first six months of fiscal 2009 compared to $1.13 for the first six months of fiscal 2008.
The results for the second quarter and first six months of fiscal 2009 also reflect a tax benefit of approximately $50 million to Net Earnings arising from a favorable foreign tax settlement. This tax benefit positively impacted Diluted Earnings per Share by approximately $0.03 for the second quarter and first six months of fiscal 2009.

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Net Sales decreased 9.1% to $19.1 billion for the second quarter of fiscal 2009 from $21.0 billion for the second quarter of fiscal 2008. For the first six months of fiscal 2009, Net Sales decreased 9.4% to $35.2 billion from $38.9 billion for the first six months 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 second quarter and first six months of fiscal 2009. Our comparable store sales declined 8.5% in the second quarter of fiscal 2009 driven by an 8.5% decline in our comparable store average ticket to $52.23. For our U.S. stores, comparable store sales declined 6.9% and comparable store customer transactions increased by 0.4% in the second quarter of fiscal 2009.
In the first six months of fiscal 2009, we continued to focus on our core retail business, investing in our associates and stores and improving our customer service. The roll-out of our Customer FIRST training to all store associates and support staff in the first quarter of fiscal 2009 has brought simplification and focus across the business, and we are seeing the benefit of this in improved customer service ratings for the first six months of fiscal 2009. We also made significant progress on our merchandising tools in the U.S. that helped us to better manage markdown and clearance activity and to better control inventory. At the end of the second quarter of fiscal 2009, our inventory had decreased by $1.1 billion from the second quarter of fiscal 2008. Additionally, our average inventory per store decreased by 8.3% at the end of the second quarter of fiscal 2009 compared to the second quarter of last year. We continued our supply chain transformation to improve product availability. As of August 18, 2009, we had eight Rapid Deployment Centers ("RDCs") operating that serve approximately 800 of our U.S. stores. We plan to open additional RDCs in fiscal 2009 and expect that they will serve approximately 1,000 of our U.S. stores by the end of fiscal 2009. We remain committed to our overall RDC roll-out strategy, supporting our goal of increasing our central distribution penetration.
We opened three new stores during the second quarter of fiscal 2009 and closed one store in China, bringing our total store count to 2,240. As of the end of the second quarter of fiscal 2009, a total of 266 stores, or approximately 12%, were located in Canada, Mexico and China compared to 251 as of the end of the second quarter of fiscal 2008.
We generated $3.3 billion of cash flow from operations in the first six months of fiscal 2009. We used a portion of this cash flow to pay $762 million of dividends and fund $353 million in capital expenditures.
At the end of the second quarter of fiscal 2009, our long-term debt-to-equity ratio was 50.4% compared to 60.9% at the end of the second quarter of fiscal 2008. Our return on invested capital (computed on the average of beginning and ending long-term debt, equity and net operating profit after tax for the trailing twelve months) was 9.3% for the second quarter of fiscal 2009 compared to 10.7% for the second quarter of fiscal 2008. This decrease reflects the decline in our operating profit and the impact of the Rationalization Charges. Excluding Rationalization Charges, our return on invested capital was 10.3% for the second quarter of fiscal 2009 compared to 11.6% for the second 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 Amounts
                                          Three Months Ended                   Six Months Ended

                                     August 2,         August 3,         August 2,         August 3,         Three            Six
                                        2009              2008              2009              2008           Months         Months
NET SALES                               100.0 %           100.0 %           100.0 %           100.0 %          (9.1 )%        (9.4 )%

GROSS PROFIT                             33.5              33.2              33.6              33.5            (8.3 )         (9.2 )

Operating Expenses:
Selling, General and
Administrative                           21.6              21.3              23.2              24.1            (7.8 )        (12.9 )
Depreciation and Amortization             2.3               2.2               2.4               2.3            (4.0 )         (3.8 )

Total Operating Expenses                 23.9              23.4              25.6              26.4            (7.5 )        (12.1 )


OPERATING INCOME                          9.6               9.7               8.0               7.1           (10.2 )          1.6

Interest (Income) Expense:
Interest and Investment Income              -                 -                 -                 -            50.0           57.1
Interest Expense                          0.9               0.8               1.0               0.8             3.7            5.8

Interest, net                             0.8               0.7               1.0               0.8             2.5            4.7


EARNINGS BEFORE PROVISION FOR
INCOME TAXES                              8.8               9.0               7.0               6.3           (11.3 )          1.1
Provision for Income Taxes                2.9               3.3               2.4               2.3           (18.6 )         (4.9 )

NET EARNINGS                              5.9 %             5.7 %             4.6 %             4.0 %          (7.2 )          4.6

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

SELECTED SALES DATA
Number of Customer Transactions
(in millions)                             362               361               672               675             0.3 %         (0.4 )%
Average Ticket                       $  52.25          $  57.58          $  52.45          $  57.48            (9.3 )%        (8.8 )%
Weighted Average Weekly Sales Per
Operating Store (in thousands)       $    650          $    707          $    600          $    662            (8.1 )%        (9.4 )%
Weighted Average Sales per Square
Foot                                 $ 321.91          $ 350.21          $ 297.15          $ 327.92            (8.1 )%        (9.4 )%
Comparable Store Sales Decrease
(%)(1)                                   (8.5 )%           (7.9 )%           (9.3 )%           (7.2 )%          N/A            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 second quarter of fiscal 2009 decreased 9.1%, or $1.9 billion, to $19.1 billion from $21.0 billion for the second quarter of fiscal 2008. For the first six months of fiscal 2009, Net Sales decreased 9.4%, or $3.7 billion, to $35.2 billion from $38.9 billion for the comparable period in fiscal 2008. The decrease in Net Sales for the second quarter and first six months of fiscal 2009 reflects the impact of negative comparable store sales as well as the net impact of fewer open stores in fiscal 2009 versus the comparable periods of fiscal 2008. Total comparable store sales decreased 8.5% for the second quarter of fiscal 2009 compared to a decrease of 7.9% for the second quarter of fiscal 2008. For the first six months of fiscal 2009, total comparable store sales decreased 9.3% compared to a decrease of 7.2% for the same period of fiscal 2008.
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 a number of factors including higher unemployment. 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 second quarter and first six months of fiscal 2009, with Paint experiencing positive comparable store sales in the second quarter of fiscal 2009. Comparable store sales for Lumber, Hardware, Electrical, Kitchen/Bath and Millwork were below the Company average for the second quarter and first six months of fiscal 2009. In the first six months of fiscal 2009, we also saw significant strengthening of the U.S. dollar against all currencies. Fluctuating exchange rates negatively impacted our total Company comparable store sales by approximately 160 basis points for the first six months of fiscal 2009 compared to the first six months of last year. Gross Profit decreased 8.3% to $6.4 billion for the second quarter of fiscal 2009 from $7.0 billion for the second quarter of fiscal 2008. Gross Profit decreased 9.2% to $11.8 billion for the first six months of fiscal 2009 from $13.0 billion for the first six months of fiscal 2008. Gross Profit as a percent of Net Sales increased 32 basis points to 33.5% for the second quarter of fiscal 2009 compared to 33.2% for the second quarter of fiscal 2008. For the first six months of fiscal 2009, Gross Profit as a percent of Net Sales was 33.6% compared with 33.5% for the comparable period of fiscal 2008, an increase of 8 basis points. Our U.S. stores experienced gross margin expansion in the second quarter and first six months of fiscal 2009 driven by mix of products sold, lower markdowns than last year as we anniversaried certain promotions and clearance that we did not repeat 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 margin expansion was partially offset by gross margin contraction arising from our non-U.S. businesses, principally Canada.
Selling, General and Administrative Expense ("SG&A") decreased 7.8% to $4.1 billion for the second quarter of fiscal 2009 from $4.5 billion for the second quarter of fiscal 2008. For the first six months of fiscal 2009, SG&A decreased 12.9% to
$8.2 billion from $9.4 billion for the first six months of fiscal 2008. As a percent of Net Sales, SG&A was 21.6% for the second quarter of fiscal 2009 compared to 21.3% for the second quarter of fiscal 2008. For the first six months of fiscal 2009, SG&A as a percent of Net Sales was 23.2% compared to 24.1% for the same period last year. Excluding the Rationalization Charges, SG&A as a percent of Net Sales was 22.8% and 22.7% for the first six months of fiscal 2009 and 2008, respectively. For the second quarter and first six months of fiscal 2009, our deleverage in SG&A reflects the impact of a 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 4.0% to $434 million for the second quarter of fiscal 2009 from $452 million for the second quarter of fiscal 2008. For the first six months of fiscal 2009, Depreciation and Amortization decreased 3.8% to $862 million from $896 million for the same period of fiscal 2008. Depreciation and Amortization as a percent of Net Sales was 2.3% for the second quarter of fiscal 2009 compared to 2.2% for the second quarter of fiscal 2008, and was 2.4% for the first six months of fiscal 2009 compared to 2.3% for the same period in fiscal 2008. The increase in Depreciation and Amortization as a percent of Net Sales for both periods was primarily due to sales deleverage. Operating Income decreased 10.2% to $1.8 billion for the second quarter of fiscal 2009 from $2.0 billion for the second quarter of fiscal 2008. Operating Income was $2.8 billion for the first six months of fiscal 2009 and 2008. Operating Income as a percent of Net Sales was 9.6% for the second quarter of fiscal 2009 compared to 9.7% for the second quarter of fiscal

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2008, and was 8.0% for the first six months of fiscal 2009 compared to 7.1% for the first six months of fiscal 2008. Excluding the Rationalization Charges, our Operating Income as a percent of Net Sales was 8.4% for the first six months of fiscal 2009 compared to 8.6% for the first six months of fiscal 2008. In the second quarter of fiscal 2009, we recognized $161 million of net Interest Expense compared to $157 million in the second quarter of fiscal 2008. We recognized $336 million of net Interest Expense in the first six months of fiscal 2009 compared to $321 million for the same period last year. Net Interest Expense as a percentage of Net Sales was 0.8% for the second quarter of fiscal 2009 compared to 0.7% for the second quarter of fiscal 2008. For the first six months of fiscal 2009, net Interest Expense as a percent of Net Sales was 1.0% compared to 0.8% for the same period last year. The increase in net Interest Expense as a percent of Net Sales for the first six months of fiscal 2009 was primarily due to sales deleverage.
Our combined effective income tax rate decreased to 34.2% for the first six months of fiscal 2009 from 36.4% for the comparable period of fiscal 2008, reflecting a favorable foreign tax settlement. This settlement reduced tax expense by approximately $50 million and provided an approximately $0.03 benefit to Diluted Earnings per Share.
Diluted Earnings per Share were $0.66 and $0.96 for the second quarter and first six months of fiscal 2009 compared to $0.71 and $0.93 for the second quarter and first six months of fiscal 2008, respectively. Excluding the Rationalization Charges, Diluted Earnings per Share for the second quarter of fiscal 2009 were $0.67, a decrease of 6.9% from the second quarter of fiscal 2008. Excluding the Rationalization Charges, Diluted Earnings per Share for the first six months of fiscal 2009 were $1.01, a decrease of 10.6% from the first six months of fiscal 2008.
To provide clarity, internally and externally, about our operating performance for the second quarter and first six months of fiscal 2009 and 2008, we supplemented our reporting with non-GAAP financial measures 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. We believe that these non-GAAP financial measures better enable management and investors to understand and analyze our performance by providing them with meaningful information relevant to events of unusual nature or frequency. However, this supplemental information should not be considered in isolation or as a substitute for the related GAAP measures. The following reconciles the non-GAAP financial measures to the corresponding GAAP measures for the second quarter and first six months of fiscal 2009 and 2008:

                                                       Three Months Ended August 2, 2009                          Six Months Ended August 2, 2009
amounts in millions, except per share data      As                         Non-GAAP       % of Net       As                         Non-GAAP          % of
                                             Reported       Adjustments    Measures        Sales      Reported       Adjustments    Measures       Net Sales
Net Sales                                     $ 19,071      $        -      $ 19,071        100.0 %    $ 35,246      $      221      $ 35,025          100.0 %
Cost of Sales                                   12,683               1        12,682         66.5        23,408             193        23,215           66.3

Gross Profit                                     6,388              (1 )       6,389         33.5        11,838              28        11,810           33.7
Operating Expenses:
Selling, General and Administrative              4,121              18         4,103         21.5         8,163             161         8,002           22.8
Depreciation and Amortization                      434               1           433          2.3           862               4           858            2.4

Total Operating Expenses                         4,555              19         4,536         23.8         9,025             165         8,860           25.3

Operating Income                                 1,833             (20 )       1,853          9.7         2,813            (137 )       2,950            8.4
Interest, net                                      161               -           161          0.8           336               -           336            1.0

Earnings Before Provision for Income Taxes       1,672             (20 )       1,692          8.9         2,477            (137 )       2,614            7.5
Provision for Income Taxes                         556              (9 )         565          3.0           847             (53 )         900            2.6


Net Earnings                                  $  1,116      $      (11 )    $  1,127          5.9 %    $  1,630      $      (84 )    $  1,714            4.9 %


Diluted Earnings per Share                    $   0.66      $    (0.01 )    $   0.67        N/A        $   0.96      $    (0.05 )    $   1.01         N/A

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                                                    Three Months Ended August 3, 2008                                  Six Months Ended August 3, 2008
                                          As                             Non-GAAP         % of Net         As                             Non-GAAP            % of
                                       Reported         Adjustments      Measures          Sales        Reported         Adjustments      Measures         Net Sales
Net Sales                                $ 20,990        $        -        $ 20,990          100.0 %      $ 38,897        $        -        $ 38,897            100.0 %
Cost of Sales                              14,026                 -          14,026           66.8          25,861                10          25,851             66.5

Gross Profit                                6,964                 -           6,964           33.2          13,036               (10 )        13,046             33.5
Operating Expenses:
Selling, General and Administrative         4,470                17           4,453           21.2           9,370               550           8,820             22.7
Depreciation and Amortization                 452                 1             451            2.1             896                 1             895              2.3

Total Operating Expenses                    4,922                18           4,904           23.4          10,266               551           9,715             25.0

Operating Income                            2,042               (18 )         2,060            9.8           2,770              (561 )         3,331              8.6
Interest, net                                 157                 -             157            0.7             321                 -             321              0.8

Earnings Before Provision for
Income Taxes                                1,885               (18 )         1,903            9.1           2,449              (561 )         3,010              7.7
Provision for Income Taxes                    683                (8 )           691            3.3             891              (210 )         1,101              2.8


Net Earnings                             $  1,202        $      (10 )      $  1,212            5.8 %      $  1,558        $     (351 )      $  1,909              4.9 %


Diluted Earnings per Share               $   0.71        $    (0.01 )      $   0.72            N/A        $   0.93        $    (0.21 )      $   1.13              N/A

Note: Diluted Earnings per Share may not foot due to rounding.

LIQUIDITY AND CAPITAL RESOURCES
Cash flow generated from operations provides us with a significant source of liquidity. During the first six months of fiscal 2009, Net Cash Provided by Operating Activities was $3.3 billion compared to $3.7 billion for the same period of fiscal 2008. This change was primarily a result of lower earnings excluding noncash impairment charges incurred during the first six months of fiscal 2008.
Net Cash Used in Investing Activities for the first six months of fiscal 2009 was $214 million compared to $860 million for the same period of fiscal 2008. The decrease was primarily the result of $607 million less in capital expenditures in the first six months of fiscal 2009 compared to the same period last year.
During the first six months of fiscal 2009, Net Cash Used in Financing Activities was $529 million compared with $2.2 billion for the same period of fiscal 2008. This change was the result of $1.7 billion in Repayments of Short-Term Borrowings in the first half 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 August 2, 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. In August 2009, we filed a shelf registration statement with the SEC for the potential future issuance of debt securities, replacing a shelf registration statement that had expired.
As of August 2, 2009, we had $3.1 billion in Cash and Short-Term Investments. We . . .