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HD > SEC Filings for HD > Form 10-K on 28-Mar-2013All Recent SEC Filings

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Form 10-K for HOME DEPOT INC


28-Mar-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Executive Summary and Selected Consolidated Statements of Earnings Data For the fiscal year ended February 3, 2013 ("fiscal 2012"), we reported Net Earnings of $4.5 billion and Diluted Earnings per Share of $3.00 compared to Net Earnings of $3.9 billion and Diluted Earnings per Share of $2.47 for the fiscal year ended January 29, 2012 ("fiscal 2011"). The results for fiscal 2012 included a total charge of $145 million, net of tax, related to the closing of our remaining seven big box stores in China ("China store closings") in fiscal 2012, which had a negative impact of $0.10 to Diluted Earnings per Share. Excluding the charges related to the China store closings, Net Earnings were $4.7 billion and Diluted Earnings per Share were $3.10 for fiscal 2012. Net Sales increased 6.2% to $74.8 billion for fiscal 2012 from $70.4 billion for fiscal 2011. Our comparable store sales increased 4.6% in fiscal 2012, driven by a 2.9% increase in our comparable store average ticket and an increase in our comparable store customer transactions. Comparable store sales for our U.S. stores increased 4.9% in fiscal 2012.
Fiscal 2012 consisted of 53 weeks compared with 52 weeks for fiscal 2011. The 53rd week added approximately $1.2 billion in Net Sales and increased Diluted Earnings per Share by approximately $0.07 for fiscal 2012.
In fiscal 2012, we continued to focus on the following four key initiatives:
Customer Service - Our focus on customer service is anchored on the principles of creating an emotional connection with customers, putting customers first and simplifying the business. In fiscal 2012, we opened new customer call centers in Utah and Georgia to support our interconnected business. In addition, as a result of initiatives such as our new scheduling system for our associates and a centralized return to vendor process initiated in fiscal 2011, we now have approximately 57% of our store labor hours dedicated to customer-facing activity and expect to achieve our goal of 60% in fiscal 2013. Through these and other efforts, we continue to see our customer satisfaction survey scores improve. Product Authority - Our focus on product authority is facilitated by our merchandising transformation and portfolio strategy, which is aimed at delivering product innovation, assortment and value. As part of this effort, we introduced innovative new products and great values for both our professional and D-I-Y customers in a variety of departments. Also in fiscal 2012, we expanded some of our appliance showrooms to include the Electrolux®, Whirlpool® and Frigidaire® brands. These brands were also added to our e-commerce platform in fiscal 2012.
Disciplined Capital Allocation, Productivity and Efficiency - Our approach to driving productivity and efficiency is advanced through continuous operational improvement, incremental supply chain benefits, disciplined capital allocation and expense control and building shareholder value through higher returns on invested capital and total value returned to shareholders in the form of dividends and share repurchases. In fiscal 2012, we completed the mechanization of all of our RDCs, which we expect to further improve the cost effectiveness of this platform. Our inventory turnover ratio was 4.5 times at the end of fiscal 2012 compared to 4.3 times at the end of fiscal 2011.
We repurchased a total of 74 million shares for $4.0 billion through ASR agreements and the open market during fiscal 2012. In addition, in February 2013, our Board of Directors authorized a new $17.0 billion share repurchase program that replaces the previous authorization, and announced a 34% increase in our quarterly cash dividend to $0.39 per share.
Interconnected Retail - Our focus on interconnected retail is based on building a competitive platform across all commerce channels. During fiscal 2012, we launched improvements to our website, including MyInstall, which is designed to improve transparency and communication in installation projects and to simplify the customer experience. We made several enhancements to our professional customer website, including adding an online bulk pricing program that mirrors our in-store bulk pricing program. We also introduced new programs, such as Buy Online, Return In Store ("BORIS") and Buy Online, Ship To Store ("BOSS") in fiscal 2012, to expand upon Buy Online, Pick-Up In Store ("BOPIS"), which we introduced in fiscal 2011.
In May 2012, we acquired MeasureComp L.L.C., a flooring measurement and quote building company. MeasureComp's business was largely dedicated to The Home Depot and by in-sourcing this service under Home Depot Measurement Services, we expect to build a seamless process for our flooring customers that is designed to provide a better experience for them and a better close rate for us. In October 2012, we completed the acquisition of U.S. Home Systems, Inc. ("USHS"). USHS was an exclusive provider of kitchen and bath refacing products and services as well as closet and garage organizational systems to The Home Depot. This acquisition will allow us to create more effective interconnection between our stores and the USHS in-home selling platform under Home Depot Interiors, similar to what we have done with our roofing, siding and windows businesses.


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We also completed the acquisition of BlackLocus, Inc. in December 2012. BlackLocus is a data analytics and pricing company, which will bring additional tools and capabilities to support our merchandising team.
We opened twelve new stores, including nine new stores in Mexico, two new stores in the U.S. and one relocation in the U.S., and closed seven stores in China in fiscal 2012, for a total store count of 2,256 at the end of fiscal 2012. As of the end of fiscal 2012, a total of 280 of our stores, or 12.4%, were located in Canada and Mexico.
We generated $7.0 billion of cash flow from operations in fiscal 2012. We used this cash flow to fund $4.0 billion of share repurchases, pay $1.7 billion of dividends and fund $1.3 billion in capital expenditures.
Our return on invested capital (computed on net operating profit after tax for the trailing twelve months and the average of beginning and ending long-term debt and equity) was 17.0% for fiscal 2012 compared to 14.9% for fiscal 2011.


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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.

                                                                                  % Increase (Decrease)
                                                 % of Net Sales                     In Dollar Amounts
                                                                Fiscal Year(1)
                                                                                  2012            2011
                                        2012          2011          2010        vs. 2011        vs. 2010
NET SALES                               100.0  %      100.0  %      100.0  %       6.2  %           3.5  %
GROSS PROFIT                             34.6          34.5          34.3          6.5              4.1
Operating Expenses:
Selling, General and Administrative      22.1          22.8          23.3          3.0              1.1
Depreciation and Amortization             2.1           2.2           2.4         (0.3 )           (2.7 )
Total Operating Expenses                 24.2          25.0          25.7          2.7              0.8
OPERATING INCOME                         10.4           9.5           8.6         16.6             14.1
Interest and Other (Income) Expense:
Interest and Investment Income              -             -             -          N/M              N/M
Interest Expense                          0.8           0.9           0.8          4.3             14.3
Other                                    (0.1 )           -           0.1          N/M           (100.0 )
Interest and Other, net                   0.7           0.8           0.8         (8.1 )            4.8
EARNINGS BEFORE PROVISION
FOR INCOME TAXES                          9.7           8.6           7.8         19.0             15.1
Provision for Income Taxes                3.6           3.1           2.8         22.9             12.9
NET EARNINGS                              6.1  %        5.5  %        4.9  %      16.8  %          16.3  %
SELECTED SALES DATA
Number of Customer Transactions (in
millions)(2)                          1,364.0       1,317.5       1,305.7          3.5  %           0.9  %
Average Ticket(2)                    $  54.89      $  53.28      $  51.93          3.0  %           2.6  %
Weighted Average Weekly Sales per
Operating Store (in thousands)       $    627      $    601      $    581          4.3  %           3.4  %
Weighted Average Sales per Square
Foot(2)                              $ 318.63      $ 299.00      $ 288.64          6.6  %           3.6  %
Comparable Store Sales Increase
(%)(3)                                    4.6  %        3.4  %        2.9  %       N/A              N/A

Note: Certain percentages may not sum to totals due to rounding.
(1) Fiscal years 2012, 2011 and 2010 refer to the fiscal years ended February 3, 2013, January 29, 2012 and January 30, 2011, respectively. Fiscal year 2012 includes 53 weeks; fiscal years 2011 and 2010 include 52 weeks.

(2) The 53rd week of fiscal 2012 increased customer transactions by approximately 21 million, positively impacted average ticket by approximately $0.06 and positively impacted weighted average sales per square foot by approximately $5.51.

(3) Includes Net Sales at locations open greater than 12 months, including relocated and remodeled stores and excluding closed 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. Net Sales for the 53rd week of fiscal 2012 are not included in comparable store sales results for fiscal 2012.

N/M - Not Meaningful
N/A - Not Applicable


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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 2012 Compared to Fiscal 2011
Net Sales
Fiscal 2012 consisted of 53 weeks compared to 52 weeks in fiscal 2011. Net Sales for fiscal 2012 increased 6.2% to $74.8 billion from $70.4 billion for fiscal 2011. The increase in Net Sales for fiscal 2012 reflects the impact of positive comparable store sales and $1.2 billion of Net Sales attributable to the additional week in fiscal 2012. Total comparable store sales increased 4.6% for fiscal 2012 compared to an increase of 3.4% for fiscal 2011.
The positive comparable store sales for fiscal 2012 reflect a number of factors including the execution of our key initiatives and an improved U.S. housing market. All of our departments except for one posted positive comparable store sales for fiscal 2012, and comparable store average ticket increased 2.9% for fiscal 2012. Comparable store sales for our Lumber, Flooring, Paint, Tools, Bath, Electrical, Lighting, Indoor Garden and Décor product categories were above or at the Company average for fiscal 2012. Comparable store sales for our Hardware, Plumbing, Outdoor Garden, Kitchen and Millwork product categories were positive for fiscal 2012. Comparable store sales for our Building Materials product category were negative for fiscal 2012, reflecting the impact of weather and difficult year-over-year comparisons in roofing due to storm and repair activity that drove sales in fiscal 2011. Gross Profit
Gross Profit increased 6.5% to $25.8 billion for fiscal 2012 from $24.3 billion for fiscal 2011. Gross Profit for fiscal 2012 included a $10 million charge related to the China store closings. Gross Profit as a percent of Net Sales was 34.6% for fiscal 2012 compared to 34.5% for fiscal 2011, an increase of 10 basis points. The increase in gross profit margin in fiscal 2012 was driven primarily by a change in mix of products sold and benefits from our supply chain transformation in the U.S.
Operating Expenses
Selling, General and Administrative expenses ("SG&A") increased 3.0% to $16.5 billion for fiscal 2012 from $16.0 billion for fiscal 2011. SG&A for fiscal 2012 included a $135 million charge related to the China store closings. As a percent of Net Sales, SG&A was 22.1% for fiscal 2012 compared to 22.8% for fiscal 2011. Excluding the charge related to the China store closings, SG&A as a percent of Net Sales was 21.9% for fiscal 2012. The decrease in SG&A as a percent of Net Sales for fiscal 2012 reflects expense leverage resulting from the positive comparable store sales environment, strong expense controls, and lower credit card expense and casualty reserves, offset by the charge related to the China store closings.
Depreciation and Amortization was $1.6 billion for both fiscal 2012 and 2011. Depreciation and Amortization as a percent of Net Sales was 2.1% for fiscal 2012 compared to 2.2% for fiscal 2011. The decrease in Depreciation and Amortization as a percent of Net Sales reflects expense leverage in the positive comparable store sales environment.
Operating Income
Operating Income increased 16.6% to $7.8 billion for fiscal 2012 from $6.7 billion for fiscal 2011. Operating Income as a percent of Net Sales was 10.4% for fiscal 2012 compared to 9.5% for fiscal 2011. Excluding the charges related to the China store closings, Operating Income increased 18.8% to $7.9 billion for fiscal 2012.
Interest and Other, net
In fiscal 2012, we recognized $545 million of Interest and Other, net, compared to $593 million for fiscal 2011. Interest and Other, net, as a percent of Net Sales was 0.7% for fiscal 2012 compared to 0.8% for fiscal 2011. Interest and Other, net, for fiscal 2012 included a $67 million pretax benefit related to the termination of our guarantee of a senior secured loan of HD Supply, Inc. ("HD Supply Guarantee").
Provision for Income Taxes
Our combined effective income tax rate was 37.2% for fiscal 2012 compared to 36.0% for fiscal 2011. The effective income tax rate for fiscal 2012 was higher than fiscal 2011 as we were unable to realize any tax benefit from the $145 million of charges related to the China store closings. Excluding the charges related to the China store closings, our combined effective income tax rate was 36.5% for fiscal 2012. Additionally, the effective income tax rate for fiscal 2011 reflects a benefit from


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the reversal of a valuation allowance related to the utilization of capital loss carryforwards as well as certain favorable state and local tax settlements. Diluted Earnings per Share
Diluted Earnings per Share were $3.00 for fiscal 2012 compared to $2.47 for fiscal 2011. Excluding the charges related to the China store closings, Diluted Earnings per Share were $3.10 for fiscal 2012. The 53rd week increased Diluted Earnings per Share by approximately $0.07 for fiscal 2012. Diluted Earnings per Share for fiscal 2012 also reflect $0.11 of benefit from repurchases of our common stock in the twelve months ended February 3, 2013. Non-GAAP Measures
To provide clarity, internally and externally, about our operating performance, we supplement our reporting with non-GAAP financial measures to reflect certain adjustments. The results for fiscal 2012 included a $145 million charge, net of tax, related to the China store closings as described more fully in Note 2 to the Consolidated Financial Statements. There were no adjustments for fiscal 2011 or 2010 for events of unusual nature or frequency. We believe 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 that impact the comparability of underlying business results from period to period. 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 fiscal 2012 (amounts in millions, except per share data):

                                                      Fiscal Year Ended February 3, 2013
                                                As                             Non-GAAP        % of
                                             Reported         Adjustments      Measures     Net Sales
Gross Profit                             $    25,842         $       (10 )   $   25,852         34.6 %
Selling, General and Administrative           16,508                 135         16,373         21.9
Operating Income                               7,766                (145 )        7,911         10.6
Net Earnings                                   4,535                (145 )        4,680          6.3 %
Diluted Earnings per Share               $      3.00         $     (0.10 )   $     3.10          N/A


Fiscal 2011 Compared to Fiscal 2010
Net Sales

Net Sales for fiscal 2011 increased 3.5% to $70.4 billion from $68.0 billion for fiscal 2010. The increase in Net Sales for fiscal 2011 reflects the impact of positive comparable store sales. Total comparable store sales increased 3.4% for fiscal 2011 compared to an increase of 2.9% for fiscal 2010.
The positive comparable store sales for fiscal 2011 reflect a number of factors including the execution of our key initiatives, economic growth and favorable weather conditions. We experienced positive comparable store sales in 13 of our 15 departments for fiscal 2011. Comparable store sales for our Building Materials, Paint, Hardware, Tools, Plumbing, Electrical, Kitchen and Décor product categories were above the Company average for fiscal 2011. Comparable store sales for our Flooring, Bath, Lighting, Outdoor Garden and Indoor Garden product categories were positive for fiscal 2011. Comparable store sales for our Lumber and Millwork product categories were negative for fiscal 2011. The increase in comparable store sales also reflects a 2.6% increase in our comparable store average ticket and an 0.8% increase in our comparable store customer transactions.
Gross Profit
Gross Profit increased 4.1% to $24.3 billion for fiscal 2011 from $23.3 billion for fiscal 2010. Gross Profit as a percent of Net Sales was 34.5% for fiscal 2011 compared to 34.3% for fiscal 2010, an increase of 20 basis points. The increase in gross profit margin in fiscal 2011 was driven primarily by benefits arising from our supply chain transformation in the U.S., which was partially offset by higher shrink compared to fiscal 2010. Operating Expenses
SG&A increased 1.1% to $16.0 billion for fiscal 2011 from $15.8 billion for fiscal 2010. As a percent of Net Sales, SG&A was 22.8% for fiscal 2011 compared to 23.3% for fiscal 2010. The decrease in SG&A as a percent of Net Sales for fiscal 2011 reflects expense leverage in the positive comparable store sales environment partially offset by a $32 million impairment charge for a non-core carpet cleaning and cabinet refinishing business that was sold in fiscal 2011 and $26


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million of expenses related to natural disasters. Additionally, we experienced an expense benefit of $44 million in fiscal 2010 related to our private label credit card that did not repeat in fiscal 2011.
Depreciation and Amortization was $1.6 billion for both fiscal 2011 and 2010. Depreciation and Amortization as a percent of Net Sales was 2.2% for fiscal 2011 compared to 2.4% for fiscal 2010. The decrease in Depreciation and Amortization as a percent of Net Sales reflects expense leverage in the positive comparable store sales environment and an increase in fully depreciated assets. Operating Income
Operating Income increased 14.1% to $6.7 billion for fiscal 2011 from $5.8 billion for fiscal 2010. Operating Income as a percent of Net Sales was 9.5% for fiscal 2011 compared to 8.6% for fiscal 2010. Interest and Other, net
In fiscal 2011, we recognized $593 million of Interest and Other, net, compared to $566 million for fiscal 2010. Interest and Other, net, as a percent of Net Sales was 0.8% for both fiscal 2011 and 2010. Interest and Other, net, for fiscal 2010 reflects a $51 million pretax charge related to the extension of our HD Supply Guarantee. Additionally, we experienced a $44 million benefit in fiscal 2010 that arose from favorable Internal Revenue Service guidance and a resulting reversal of an interest accrual. Provision for Income Taxes
Our combined effective income tax rate decreased to 36.0% for fiscal 2011 from 36.7% for fiscal 2010. The effective income tax rate for fiscal 2011 reflects a benefit from the reversal of a valuation allowance related to the utilization of capital loss carryforwards as well as certain favorable state and local tax settlements.
Diluted Earnings per Share
Diluted Earnings per Share were $2.47 for fiscal 2011 compared to $2.01 for fiscal 2010. Diluted Earnings per Share for fiscal 2011 reflect $0.13 of benefit from repurchases of our common stock in the twelve months ended January 29, 2012.

Liquidity and Capital Resources
Cash flow generated from operations provides us with a significant source of liquidity. For fiscal 2012, Net Cash Provided by Operating Activities was $7.0 billion compared to $6.7 billion for fiscal 2011. This increase reflects a $652 million increase in Net Earnings resulting from higher comparable store sales and expense controls. In support of sales growth, we grew merchandise inventory. The increase in inventory, net of the corresponding increase in accounts payable and accrued expenses, partially offsets the increase in operating cash flows generated by Net Earnings by $330 million.
Net Cash Used in Investing Activities for fiscal 2012 was $1.4 billion compared to $1.1 billion for fiscal 2011. This change was primarily due to a $105 million increase in Payments for Businesses Acquired, net, in fiscal 2012 compared to fiscal 2011, no Proceeds from Sale of Business, net, in fiscal 2012 compared to $101 million in fiscal 2011 related to the sale of a non-core carpet cleaning and cabinet refinishing business, and a $91 million increase in Capital Expenditures in fiscal 2012 compared to fiscal 2011.
Net Cash Used in Financing Activities for fiscal 2012 was $5.0 billion compared to $4.0 billion for fiscal 2011. This change was primarily the result of how we funded our share repurchase program. In fiscal 2012, we repurchased $4.0 billion of our outstanding shares of common stock using cash flow generated from operations. In fiscal 2011, we repurchased $3.5 billion of our outstanding shares, and funded $1.0 billion of those repurchases with proceeds from long-term borrowings. We did not issue any long-term borrowings in fiscal 2012. The repurchases of common stock in fiscal 2012 were partially offset by $478 million more in proceeds from sales of common stock due to increased stock option exercises in fiscal 2012 compared to fiscal 2011.
In fiscal 2012, we entered into ASR agreements with third-party financial institutions to repurchase $3.05 billion of our common stock. Under the agreements, we paid $3.05 billion to the financial institutions, using cash on hand, and received a total of 58 million shares in fiscal 2012. Also in fiscal 2012, we repurchased 16 million additional shares of our common stock for $950 million through the open market. Since the inception of our share repurchase program in fiscal 2002, we have repurchased 1.0 billion shares of our common stock for a total of $37.6 billion. In February 2013, our Board of Directors authorized a new $17.0 billion share repurchase program that replaces the previous authorization.


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In March 2011, we issued $1.0 billion of 4.40% Senior Notes due April 1, 2021 at a discount of $2 million and $1.0 billion of 5.95% Senior Notes due April 1, 2041 at a discount of $4 million (together, the "March 2011 issuance"). Interest on these Senior Notes is due semi-annually on April 1 and October 1 of each year, beginning October 1, 2011. The net proceeds of the March 2011 issuance were used to repurchase $1.0 billion of our common stock, and the balance of the net proceeds was used to repay our 5.20% Senior Notes that matured March 1, 2011 in the aggregate principal amount of $1.0 billion.
In connection with the March 2011 issuance, we entered into an ASR agreement with a third-party financial institution to repurchase $1.0 billion of our common stock. Under the agreement, we paid $1.0 billion to the financial institution and received a total of 27 million shares in fiscal 2011. In March 2011, we entered into an interest rate swap that expires on March 1, 2016, with a notional amount of $500 million, accounted for as a fair value hedge, that swaps fixed rate interest on our 5.40% Senior Notes due March 1, 2016 for variable interest equal to LIBOR plus 300 basis points. At February 3, 2013, the approximate fair value of this agreement was an asset of $36 million, which is the estimated amount we would have received to settle the agreement. Also at February 3, 2013, we had outstanding interest rate swaps, accounted for as fair value hedges, that expire on December 16, 2013 with a notional amount of $1.25 billion that swap fixed rate interest on our $1.25 billion 5.25% Senior Notes due December 16, 2013 for variable interest equal to LIBOR plus 259 basis points. At February 3, 2013, the approximate fair value of these agreements was an asset of $28 million, which is the estimated amount we would have received to settle the agreements.
We have commercial paper programs that allow for borrowings up to $2.0 billion. In connection with the programs, we have a back-up credit facility with a consortium of banks for borrowings up to $2.0 billion. As of February 3, 2013, there were no borrowings outstanding under the commercial paper programs or the related credit facility. The credit facility expires in July 2017 and contains various restrictive covenants. As of February 3, 2013, we were in compliance with all of the covenants, and they are not expected to impact our liquidity or capital resources. See Note 5 to our Consolidated Financial Statements for further discussion of our commercial paper programs and related credit facility. We use capital and operating leases to finance a portion of our real estate, including our stores, distribution centers and store support centers. The net present value of capital lease obligations is reflected in our Consolidated Balance Sheets in Long-Term Debt and Current Installments of Long-Term Debt. In accordance with generally accepted accounting principles, the operating leases are not reflected in our Consolidated Balance Sheets.
In connection with the sale of HD Supply on August 30, 2007, we guaranteed a $1.0 billion senior secured amortizing term loan of HD Supply. The original expiration date of the guarantee was August 30, 2012. In March 2010, we amended the guarantee to extend the expiration date to April 1, 2014. The fair value of the guarantee at August 30, 2007 was $16 million and was recorded as a liability . . .

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