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HD > SEC Filings for HD > Form 10-K on 27-Mar-2014All Recent SEC Filings

Show all filings for HOME DEPOT INC

Form 10-K for HOME DEPOT INC


27-Mar-2014

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 2, 2014 ("fiscal 2013"), we reported Net Earnings of $5.4 billion and Diluted Earnings per Share of $3.76 compared to Net Earnings of $4.5 billion and Diluted Earnings per Share of $3.00 for the fiscal year ended February 3, 2013 ("fiscal 2012"). 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 charge 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 5.4% to $78.8 billion for fiscal 2013 from $74.8 billion for fiscal 2012. Our comparable store sales increased 6.8% in fiscal 2013, driven by increased comparable store customer transactions and comparable store average ticket. Comparable store sales for our U.S. stores increased 7.5% in fiscal 2013.
Fiscal 2013 consisted of 52 weeks compared with 53 weeks for fiscal 2012. 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 2013, we continued to focus on the following key initiatives:
Customer Service - Our focus on customer service is anchored on the principles of creating an emotional connection with customers, putting customers first, taking care of our associates and simplifying the business. In fiscal 2013, we met our goal of dedicating 60% of store labor hours to customer-facing activity, and we enhanced our Customer FIRST training for associates to incorporate the interconnected retail experience. We also expanded our FIRST phones' functionality to process Buy Online, Pick-up In Store ("BOPIS") and Buy Online, Ship to Store ("BOSS") orders, allowing our associates to close these types of transactions immediately from wherever they are in the store. Also in fiscal 2013, we introduced Pro Xtra, a new loyalty program that provides our professional customers with discounts on useful business services, exclusive product offers and streamlined payment and receipt tracking tools. 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 our professional, do-it-for-me and do-it-yourself customers in a variety of departments. Also in fiscal 2013, we continued our appliance showroom resets and expanded our assortment of appliances available online, resulting in double digit growth for appliances for fiscal 2013.
Disciplined Capital Allocation, Productivity and Efficiency - Our approach to driving productivity and efficiency is advanced through continuous operational improvement in the stores and our supply chain, disciplined capital allocation 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 2013, we continued to make improvements to our forecasting and replenishment systems, helping our business to react to and recover from sales spikes while keeping inventory under control. Our inventory turnover ratio was 4.6 times at the end of fiscal 2013 compared to 4.5 times at the end of fiscal 2012.
We repurchased a total of 111 million shares for $8.5 billion through Accelerated Share Repurchase agreements and the open market during fiscal 2013. In addition, in February 2014, we announced a 21% increase in our quarterly cash dividend to $0.47 per share.
Interconnected Retail - Our focus on interconnected retail, which connects our other three key initiatives, is based on building a competitive and seamless platform across all commerce channels. In fiscal 2013, we continued to enhance our website and mobile experience resulting in improved customer satisfaction scores and online sales conversion rates. Sales from our online channels increased over 50% for fiscal 2013 compared to fiscal 2012 and now represent approximately 3.5% of our total Net Sales. We have also begun the development of three new direct fulfillment centers, the first of which opened in February 2014. Each facility will have the capacity to hold approximately 100,000 product offerings available to be shipped directly to customers, along with the capability to ship most orders the same day they are received.
In January 2014, we acquired Blinds.com, an online seller of window coverings. We believe that this acquisition will allow us to offer customers a compelling shopping, sales and service experience for online window coverings purchases and help us to develop best-in-class capabilities for selling customizable and configurable products online.
In fiscal 2013, we opened eight new stores, including six new stores in Mexico and two new stores in the U.S., and closed one store in the U.S., for a total store count of 2,263 at the end of fiscal 2013. As of the end of fiscal 2013, a total of 286 of our stores, or 12.6%, were located in Canada and Mexico.


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We generated $7.6 billion of cash flow from operations in fiscal 2013. This cash flow, along with $4.0 billion of incremental long-term debt issued in fiscal 2013 and cash on hand, was used to fund $8.5 billion of share repurchases, pay $2.2 billion of dividends and fund $1.4 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 20.9% for fiscal 2013 compared to 17.0% for fiscal 2012.


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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)
                                                                                   2013            2012
                                        2013          2012          2011         vs. 2012        vs. 2011
NET SALES                               100.0  %      100.0  %      100.0  %         5.4  %         6.2  %
GROSS PROFIT                             34.8          34.6          34.5            6.0            6.5
Operating Expenses:
Selling, General and Administrative      21.1          22.1          22.8            0.5            3.0
Depreciation and Amortization             2.1           2.1           2.2            3.8           (0.3 )
Total Operating Expenses                 23.1          24.2          25.0            0.8            2.7
OPERATING INCOME                         11.6          10.4           9.5           18.0           16.6
Interest and Other (Income) Expense:
Interest and Investment Income              -             -             -          (40.0 )         53.8
Interest Expense                          0.9           0.8           0.9           12.5            4.3
Other                                       -          (0.1 )           -         (100.0 )          N/A
Interest and Other, net                   0.9           0.7           0.8           28.3           (8.1 )
EARNINGS BEFORE PROVISION
FOR INCOME TAXES                         10.7           9.7           8.6           17.3           19.0
Provision for Income Taxes                3.9           3.6           3.1           14.7           22.9
NET EARNINGS                              6.8  %        6.1  %        5.5  %        18.7  %        16.8  %
SELECTED SALES DATA
Number of Customer Transactions (in
millions)(2)                          1,390.6       1,364.0       1,317.5            1.9  %         3.5  %
Average Ticket(2)                    $  56.78      $  54.89      $  53.28            3.4  %         3.0  %
Sales per Square Foot(2)             $ 334.35      $ 318.63      $ 299.00            4.9  %         6.6  %
Comparable Store Sales Increase
(%)(3)                                    6.8  %        4.6  %        3.4  %         N/A            N/A
Online Sales (% of Net Sales)(4)          3.5  %        2.4  %        1.8  %        52.6  %        39.3  %

Note: Certain percentages may not sum to totals due to rounding.
(1) Fiscal years 2013, 2012 and 2011 refer to the fiscal years ended February 2, 2014, February 3, 2013 and January 29, 2012, respectively. Fiscal years 2013 and 2011 include 52 weeks; fiscal year 2012 includes 53 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 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 online sales, 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.

(4) Consists of Net Sales generated online through the Home Depot and Home Decorators Collection websites for products delivered to customer locations or picked up in stores through our BOPIS and BOSS programs.

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 2013 Compared to Fiscal 2012
Net Sales
Fiscal 2013 consisted of 52 weeks compared to 53 weeks in fiscal 2012. Net Sales for fiscal 2013 increased 5.4% to $78.8 billion from $74.8 billion for fiscal 2012. The increase in Net Sales for fiscal 2013 reflects the impact of positive comparable store sales for fiscal 2013, partially offset by $1.2 billion of Net Sales attributable to the additional week in fiscal 2012. Total comparable store sales increased 6.8% for fiscal 2013 compared to an increase of 4.6% for fiscal 2012.
The positive comparable store sales for fiscal 2013 reflect a number of factors, including the execution of our key initiatives, continued strength in our core categories and an improved U.S. housing market. All of our departments posted positive comparable store sales for fiscal 2013. Comparable store sales for our Kitchen, Electrical, Lumber, Plumbing, Lighting, Bath and Indoor Garden product categories were above or at the Company average for fiscal 2013. Comparable store sales for our Tools, Paint, Flooring, Décor, Hardware, Outdoor Garden, Millwork and Building Materials product categories were positive for fiscal 2013. Further, our comparable store customer transactions increased approximately 3.4% for fiscal 2013 and comparable store average ticket increased approximately 3.3% for fiscal 2013 due in part to strong sales in our appliance business and continued recovery in sales to our professional customers. Gross Profit
Gross Profit increased 6.0% to $27.4 billion for fiscal 2013 from $25.8 billion for fiscal 2012. 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 34.8% for fiscal 2013 compared to 34.6% for fiscal 2012, an increase of 18 basis points. The increase in gross profit margin in fiscal 2013 was driven primarily by businesses we acquired in fiscal 2012, which are gross margin accretive, higher productivity in our supply chain and improved shrink performance, partially offset by a change in the mix of products sold. Operating Expenses
Selling, General and Administrative expenses ("SG&A") increased 0.5% to $16.6 billion for fiscal 2013 from $16.5 billion for fiscal 2012. 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 21.1% for fiscal 2013 compared to 22.1% for fiscal 2012. The decrease in SG&A as a percent of Net Sales for fiscal 2013 reflects expense leverage resulting from the positive comparable store sales environment and strong expense controls.
Depreciation and Amortization was $1.6 billion for both fiscal 2013 and 2012. Depreciation and Amortization as a percent of Net Sales was 2.1% for both fiscal 2013 and 2012.
Operating Income
Operating Income increased 18.0% to $9.2 billion for fiscal 2013 from $7.8 billion for fiscal 2012. Operating Income as a percent of Net Sales was 11.6% for fiscal 2013 compared to 10.4% for fiscal 2012. Interest and Other, net
In fiscal 2013, we recognized $699 million of Interest and Other, net, compared to $545 million for fiscal 2012. Interest and Other, net, as a percent of Net Sales was 0.9% for fiscal 2013 compared to 0.7% for fiscal 2012. The increase in Interest and Other, net, as a percent of Net Sales for fiscal 2013 reflects increased interest expense associated with the issuance of $4.0 billion of incremental long-term debt in fiscal 2013. 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. Provision for Income Taxes
Our combined effective income tax rate was 36.4% for fiscal 2013 compared to 37.2% for fiscal 2012. The effective income tax rate for fiscal 2012 was higher than fiscal 2013 as we were unable to realize any tax benefit from the $145 million charge related to the China store closings for fiscal 2012. Excluding the charge related to the China store closings, our combined effective income tax rate was 36.5% for fiscal 2012.


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Diluted Earnings per Share
Diluted Earnings per Share were $3.76 for fiscal 2013 compared to $3.00 for fiscal 2012. Excluding the charge 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. Non-GAAP Measures
To provide clarity, internally and externally, about our operating performance, we supplement our reporting to exclude from some GAAP measures certain items that we do not consider to be representative of our actual operating performance. These financial calculations are "non-GAAP financial measures" as defined in SEC rules. 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 results for fiscal 2012 included a $145 million charge, net of tax, related to the China store closings as described more fully in Note 8 to the Consolidated Financial Statements. There were no adjustments for fiscal 2013 or 2011 for events of unusual nature or frequency. 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 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
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


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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 charge 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. 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 charge related to the China store closings. Excluding the charge 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 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 charge 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.

Liquidity and Capital Resources
Cash flow generated from operations provides us with a significant source of liquidity. For fiscal 2013, Net Cash Provided by Operating Activities was $7.6 billion compared to $7.0 billion for fiscal 2012. This increase is primarily due to an $850 million increase in Net Earnings resulting from higher comparable store sales and expense controls.
Net Cash Used in Investing Activities for fiscal 2013 was $1.5 billion compared to $1.4 billion for fiscal 2012. This change was primarily due to a $77 million increase in Capital Expenditures in fiscal 2013 compared to fiscal 2012. Net Cash Used in Financing Activities for fiscal 2013 was $6.7 billion compared to $5.0 billion for fiscal 2012. The year-over-year increase of approximately $1.7 billion reflects a $4.6 billion increase in share repurchases, a $500 million increase in dividends paid to shareholders and $543 million less in proceeds from the sale of common stock, offset for the most part by $4.0 billion, net of repayments, of proceeds from long-term borrowings in fiscal 2013.
In February 2013, our Board of Directors authorized a new $17.0 billion share repurchase program, under which we have repurchased 111 million shares of our common stock for a total of $8.5 billion as of the end of fiscal 2013. We entered into ASR agreements with third-party financial institutions to repurchase $6.2 billion of our common stock in fiscal 2013. Under the agreements, we paid $6.2 billion to the financial institutions and received a total of 81 million shares. Also in fiscal 2013, we repurchased 30 million additional shares of our common stock for $2.3 billion through the open market. In September 2013, we issued $1.15 billion of 2.25% senior notes due September 10, 2018 (the "2018 notes") at a discount of $1 million, $1.1 billion of 3.75% senior notes due February 15, 2024 (the "2024 notes") at a discount of $6 million and $1.0 billion of 4.875% senior notes due February 15, 2044 (the "2044 notes") at a discount of $15 million (together, the "September 2013 issuance"). Interest on the 2018 notes is due semi-annually on March 10 and September 10 of each year, beginning March 10, 2014. Interest on the 2024 notes and the 2044 notes is due semi-annually on February 15 and August 15 of each year, beginning February 15, 2014. The net proceeds of the September 2013 issuance were used for general corporate


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purposes, including repayment of our $1.25 billion 5.25% senior notes that matured December 16, 2013 and repurchases of shares of our common stock. In April 2013, we issued $1.0 billion of 2.70% senior notes due April 1, 2023 at a discount of $2 million and $1.0 billion of 4.20% senior notes due April 1, 2043 at a discount of $4 million (together, the "April 2013 issuance"). Interest on these senior notes is due semi-annually on April 1 and October 1 of each year, beginning October 1, 2013. The net proceeds of the April 2013 issuance were used for general corporate purposes, including repurchases of shares of our common stock.
In November 2013, we entered into an interest rate swap that expires on September 10, 2018, with a notional amount of $500 million, accounted for as a fair value hedge, that swaps fixed rate interest on the 2018 notes for variable interest equal to LIBOR plus 88 basis points. At February 2, 2014, the approximate fair value of this agreement was a liability of $1 million, which is the estimated amount we would have paid to settle the agreement. Also in November 2013, we entered into an interest rate swap that expires on September 15, 2020, with a notional amount of $500 million, accounted for as a fair value hedge, that swaps fixed rate interest on our 3.95% senior notes due September 15, 2020 for variable interest equal to LIBOR plus 183 basis points. At February 2, 2014, the approximate fair value of this agreement was an asset of $2 million, which is the estimated amount we would have received to settle the agreement.
At February 2, 2014, we had an outstanding 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 2, 2014, the approximate fair value of this agreement was an asset of $28 million, which is the estimated amount we would have received to settle the agreement.
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. The credit facility expires in July 2017 and contains various restrictive covenants. At February 2, 2014, we were in compliance with all of the covenants, and they are not expected to impact our liquidity or capital resources. As of February 2, 2014, there were no borrowings outstanding under the commercial paper programs or the related credit facility. See Note 3 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 in Other Long-Term Liabilities. The extension of the guarantee increased the fair value of the guarantee to $67 million, resulting in a $51 million charge to . . .

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