THE HOME DEPOT, INC.
• Results of Operations and Non-GAAP Financial Measures
• Liquidity and Capital Resources
• Critical Accounting Policies
Executive SummaryQuarter to date and year to date highlights of our financial performance follow.
Three Months Ended Nine Months Ended
dollars in millions, except per share November 3, October 28, November 3, October 28,
data 2019 2018 2019 2018
Net sales $ 27,223 $ 26,302 $ 84,443 $ 81,712
Net earnings $ 2,769 $ 2,867 $ 8,761 $ 8,777
Effective tax rate 24.5 % 21.4 % 24.5 % 23.3 %
Diluted earnings per share $ 2.53 $ 2.51 Net cash provided by operating activities$ 10,664 $ 10,036 Proceeds from long-term debt, net of discounts and premiums$ 1,404 $ - Repayments of long-term debt$ 1,046 $ 1,192 Repurchases of common stock
We reported net sales of$27.2 billion in the third quarter of fiscal 2019. Net earnings were$2.8 billion , or$2.53 per diluted share. For the first nine months of fiscal 2019, net sales were$84.4 billion and net earnings were$8.8 billion , or$7.96 per diluted share. We closed one store in theU.S. during the third quarter of fiscal 2019 due to a natural disaster, resulting in a total store count of 2,290 at the end of the quarter. As ofNovember 3, 2019 , a total of 306 of our stores, or 13.4%, were located inCanada andMexico . For the third quarter of fiscal 2019, total sales per square foot were$449.17 and our inventory turnover ratio was 5.0 times. During the third quarter of fiscal 2019, we repurchased a total of 5.2 million shares of our common stock for$1.3 billion through an ASR agreement and open market transactions. We generated$10.7 billion of cash flow from operations and issued$1.4 billion of long-term debt, net of discounts and premiums, during the first nine months of fiscal 2019. These funds, together with cash on hand, were used to pay$4.5 billion of dividends, fund cash payments of$3.9 billion for share repurchases, repay$644 million of net short-term borrowings, fund$1.9 billion in capital expenditures, and repay$1.0 billion of senior notes that matured inJune 2019 . InFebruary 2019 , we announced a 32.0% increase in our quarterly cash dividend to$1.36 per share. Our ROIC for the trailing twelve-month period was 45.1% at the end of the third quarter of fiscal 2019. See the " Non-GAAP Financial Measures " section below for our definition and calculation of ROIC, as well as a reconciliation of NOPAT, a non-GAAP financial measure, to net earnings (the most comparable GAAP financial measure). Results of Operations and Non-GAAP Financial Measures The tables and discussion below should be read in conjunction with our consolidated financial statements and related notes included in this report and in the 2018 Form 10-K and with our MD&A included in the 2018 Form 10-K. We believe the percentage relationship between net sales and major categories in our consolidated statements of earnings, as well as the percentage change in the associated dollar amounts, are relevant to an evaluation of our business. 15
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Fiscal 2019 and Fiscal 2018 Three Month Comparisons
Three Months Ended
November 3, October 28,
2019 2018
% of % of
dollars in millions $ Net Sales $ Net Sales
Net sales $ 27,223 $ 26,302
Gross profit 9,387 34.5 % 9,151 34.8 %
Operating expenses:
Selling, general and administrative 4,942 18.2 4,808 18.3
Depreciation and amortization 498 1.8 473 1.8
Total operating expenses 5,440 20.0 5,281 20.1
Operating income 3,947 14.5 3,870 14.7
Interest and other (income) expense:
Interest and investment income (22 ) (0.1 ) (25 ) (0.1 )
Interest expense 302 1.1 249 0.9
Interest and other, net 280 1.0 224 0.9
Earnings before provision for income taxes 3,667 13.5 3,646 13.9
Provision for income taxes 898 3.3 779 3.0
Net earnings $ 2,769 10.2 % $ 2,867 10.9 %
-----Note: Certain percentages may not sum to totals due to rounding.
Three Months Ended
November 3, October 28,
Selected financial and sales data: 2019 2018 % Change
Comparable sales (% change) 3.6% 4.8% N/A
Comparable customer transactions (%
change) (1) 1.8% 1.2% N/A
Comparable average ticket (% change)
(1) 1.8% 3.5% N/A
Customer transactions (in millions)
(1) 400.9 394.8 1.5%
Average ticket (1) $ 66.36 $ 65.11 1.9%
Sales per square foot (1) $ 449.17 $ 433.99 3.5%
Diluted earnings per share $ 2.53 $ 2.51 0.8%
-----(1) Does not include results for Interline.
Sales. We assess our sales performance by evaluating both net sales and comparable sales.Net Sales . Net sales for the third quarter of fiscal 2019 increased 3.5% to$27.2 billion from$26.3 billion in the third quarter of fiscal 2018. The increase in net sales in the third quarter of fiscal 2019 primarily reflected the impact of positive comparable sales driven by an increase in comparable average ticket and comparable customer transactions. Online sales, which consist of sales generated online through our websites for products picked up in our stores or delivered to customer locations, represented 8.9% of net sales and grew 21.9% during the third quarter of fiscal 2019. A strongerU.S. dollar negatively impacted sales growth by$41 million in the third quarter of fiscal 2019. Comparable Sales. Comparable sales is a measure that highlights the performance of our existing locations and websites by measuring the change in net sales for a period over the comparable prior-period of equivalent length. Comparable sales includes sales at all locations, physical and online, open greater than 52 weeks (including remodels and relocations) and excluding closed stores. Retail stores become comparable on the Monday following their 365th day of operation. Acquisitions, digital or otherwise, are included in comparable sales after we own the acquired assets for more than 52 weeks. Comparable sales includes new product and service offering sales that have been offered for more than 52 weeks. Comparable sales excludes prior-year sales of product and service offerings that we have exited in the current period. Fiscal 2019 includes 52 weeks and fiscal 2018 included 53 16
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weeks. For our calculation of comparable sales in fiscal 2019, we will compare weeks 1 through 52 in fiscal 2019 against weeks 2 through 53 in fiscal 2018. Comparable sales is intended only as supplemental information and is not a substitute for net sales presented in accordance with GAAP. Total comparable sales increased 3.6% in the third quarter of fiscal 2019, consisting of a 1.8% increase in comparable average ticket and a 1.8% increase in comparable customer transactions. The increase in comparable sales reflected a number of factors, including traffic growth across a number of our core categories and the execution of our strategic efforts to drive an enhanced interconnected experience in both the physical and digital worlds. All of our departments posted positive comparable sales in the third quarter of fiscal 2019 except for Electrical/Lighting and Lumber. Comparable sales for our Appliances, Indoor Garden, Décor/Storage, Hardware, Tools, Outdoor Garden, Paint, and Plumbing merchandising departments were above the Company average in the third quarter of fiscal 2019. Comparable sales for Electrical/Lighting were slightly negative due to the lengthening replacement cycle of light bulbs and copper price deflation. Comparable sales for Lumber were negatively impacted by commodity price deflation. The difference between our comparable sales growth and total sales growth in the third quarter of fiscal 2019 was due to the shift in our fiscal calendar as a result of the 53rd week in fiscal 2018. Gross Profit. Gross profit for the third quarter of fiscal 2019 increased 2.6% to$9.4 billion from$9.2 billion in the third quarter of fiscal 2018. Gross profit as a percent of net sales, or gross profit margin, was 34.5% in the third quarter of fiscal 2019 compared to 34.8% for the third quarter of fiscal 2018. The decrease in gross profit margin was primarily driven by higher shrink and a change in product mix. Operating Expenses. Our operating expenses are composed of SG&A and depreciation and amortization. Selling, General & Administrative. SG&A for the third quarter of fiscal 2019 increased 2.8% to$4.9 billion from$4.8 billion in the third quarter of fiscal 2018. As a percent of net sales, SG&A was 18.2% in the third quarter of fiscal 2019 compared to 18.3% for the third quarter of fiscal 2018, driven by expense leverage resulting from positive comparable sales and continued expense control, partially offset by expenses related to strategic investments in the business. Depreciation and Amortization. Depreciation and amortization increased$25 million to$498 million in the third quarter of fiscal 2019 from$473 million in the third quarter of fiscal 2018. As a percent of net sales, depreciation and amortization was 1.8% in the third quarter of both fiscal 2019 and fiscal 2018, reflecting strategic investments in the business, leverage resulting from positive comparable sales, and timing of asset additions. Interest and Other, net. Interest and other, net, was$280 million in the third quarter of fiscal 2019 compared to$224 million in the third quarter of fiscal 2018. Interest and other, net, as a percent of net sales was 1.0% in the third quarter of fiscal 2019 and 0.9% in the third quarter of fiscal 2018, with the increase due primarily to higher interest expense resulting from higher debt balances. Provision for Income Taxes. Our combined effective income tax rate was 24.5% for the third quarter of fiscal 2019 compared to 21.4% for the third quarter of fiscal 2018. The increase in the provision for income taxes in the third quarter of fiscal 2019 was primarily due to the nonrecurring tax benefits relating to the Tax Act and the settlement of uncertain tax positions in the prior year. Diluted Earnings per Share. Diluted earnings per share were$2.53 for the third quarter of fiscal 2019 compared to$2.51 for the third quarter of fiscal 2018. 17
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Fiscal 2019 and Fiscal 2018 Nine Month Comparisons
Nine Months Ended
November 3, October 28,
2019 2018
% of % of
dollars in millions $ Net Sales $ Net Sales
Net sales $ 84,443 $ 81,712
Gross profit 28,836 34.1 % 28,133 34.4 %
Operating expenses:
Selling, general and administrative 14,926 17.7 14,591 17.9
Depreciation and amortization 1,470 1.7 1,390 1.7
Total operating expenses 16,396 19.4 15,981 19.6
Operating income 12,440 14.7 12,152 14.9
Interest and other (income) expense:
Interest and investment income (56 ) (0.1 ) (73 ) (0.1 )
Interest expense 892 1.1 782 1.0
Interest and other, net 836 1.0 709 0.9
Earnings before provision for income taxes 11,604 13.7 11,443 14.0
Provision for income taxes 2,843 3.4 2,666 3.3
Net earnings $ 8,761 10.4 % $ 8,777 10.7 %
-----Note: Certain percentages may not sum to totals due to rounding.
Nine Months Ended
Selected financial and sales data: November 3, 2019 October 28, 2018 % Change Comparable sales (% change) 3.0% 5.8% N/A Comparable customer transactions (% change) (1) 1.1% 1.0% N/A Comparable average ticket (% change) (1) 1.9% 4.7% N/A Customer transactions (in millions) (1) 1,246.4 1,226.0 1.7% Average ticket (1) $ 67.00 $ 65.79 1.8% Sales per square foot (1) $ 464.68 $ 449.94 3.3% Diluted earnings per share $ 7.96 $ 7.63 4.3%
-----
(1) Does not include results for Interline.
Sales. We assess our sales performance by evaluating both net sales and comparable sales.Net Sales . For the first nine months of fiscal 2019, net sales increased 3.3% to$84.4 billion from$81.7 billion in the first nine months of fiscal 2018. The increase in net sales for the first nine months of fiscal 2019 primarily reflected the impact of positive comparable sales driven by an increase in comparable average ticket growth and comparable customer transactions. Online sales, which consist of sales generated online through our websites for products picked up in our stores or delivered to customer locations, represented 8.9% of net sales and grew 21.6% during the first nine months of fiscal 2019. A strongerU.S. dollar negatively impacted sales growth by$146 million in the first nine months of fiscal 2019. Comparable Sales. For the first nine months of fiscal 2019, total comparable sales increased 3.0%, consisting of a 1.9% increase in comparable average ticket and a 1.1% increase in comparable customer transactions.This increase reflected a number of factors, including traffic growth across a number of our core categories and the execution of our strategic efforts to drive an enhanced interconnected experience in both the physical and digital worlds. Our comparable average ticket increased 1.9% for the first nine months of fiscal 2019, due in part to big ticket purchases. During the first nine months of fiscal 2019, all of our departments except for Lumber and Electrical/Lighting posted positive comparable sales. Comparable sales for our Appliances, Indoor Garden, Décor/Storage, Tools, Hardware, 18
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Outdoor Garden, Plumbing,Building Materials , and Paint merchandising departments were above the Company average for the first nine months of fiscal 2019. Comparable sales for Electrical/Lighting were slightly negative due to the lengthening replacement cycle and price deflation in light bulbs. Comparable sales for Lumber were negatively impacted by commodity price deflation. Gross Profit. For the first nine months of fiscal 2019, gross profit increased$703 million to$28.8 billion from$28.1 billion in the first nine months of fiscal 2018. Gross profit as a percent of net sales, or gross profit margin, was 34.1% in the first nine months of fiscal 2019 compared to 34.4% for the first nine months of fiscal 2018. The decrease in gross profit margin was primarily driven by higher shrink and a change in product mix. Operating Expenses. Our operating expenses are composed of SG&A and depreciation and amortization. Selling, General & Administrative. SG&A increased$335 million to$14.9 billion for the first nine months of fiscal 2019 from$14.6 billion in the first nine months of fiscal 2018. As a percent of net sales, SG&A was 17.7% in the first nine months of fiscal 2019 compared to 17.9% for the first nine months of fiscal 2018. The decrease in SG&A as a percent of net sales for the first nine months of fiscal 2019 was primarily driven by expense leverage resulting from positive comparable sales and continued expense control, partially offset by expenses related to strategic investments in the business. Depreciation and Amortization. Depreciation and amortization increased$80 million to$1.5 billion in the first nine months of fiscal 2019 from$1.4 billion in the first nine months of fiscal 2018. As a percent of net sales, depreciation and amortization was unchanged at 1.7% for the first nine months of both fiscal 2019 and fiscal 2018, reflecting strategic investments in the business, leverage resulting from positive comparable sales, and timing of asset additions. Interest and Other, net. Interest and other, net was$836 million in the first nine months of fiscal 2019, compared to$709 million for the first nine months of fiscal 2018. As a percent of net sales, it was 1.0% for the first nine months of fiscal 2019 compared to 0.9% for the first nine months of fiscal 2018. The increase in interest and other, net as a percent of sales was due primarily to higher interest expense resulting from higher debt balances. Provision for Income Taxes. Our combined effective income tax rate was 24.5% for the first nine months of fiscal 2019 compared to 23.3% for the first nine months of fiscal 2018. The increase in the provision for income taxes in the first nine months of fiscal 2019 was primarily due to nonrecurring tax benefits relating to the Tax Act and the settlement of uncertain tax positions in the prior year. Diluted Earnings per Share. Diluted earnings per share were$7.96 for the first nine months of fiscal 2019, compared to$7.63 for the first nine months of fiscal 2018. Non-GAAP Financial Measures To provide clarity, internally and externally, about our operating performance, we supplement our reporting with certain non-GAAP financial measures. However, this supplemental information should not be considered in isolation or as a substitute for the related GAAP measures. Non-GAAP financial measures presented herein may differ from similar measures used by other companies. Return onInvested Capital . We believe ROIC is meaningful for investors and management because it measures how effectively we deploy our capital base. We define ROIC as NOPAT, a non-GAAP financial measure, for the most recent twelve-month period, divided by average debt and equity. We define average debt and equity as the average of beginning and ending long-term debt (including current installments) and equity for the most recent twelve-month period. 19
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The calculation of ROIC, together with a reconciliation of NOPAT to net earnings (the most comparable GAAP measure), follows.
Twelve Months Ended
November 3, October 28,
dollars in millions 2019 2018
Net earnings $ 11,105 $ 10,556
Interest and other, net 1,101 955
Provision for income taxes 3,612 3,830
Operating income 15,818 15,341
Income tax adjustment (1) (3,845 ) (4,012 )
NOPAT $ 11,973 $ 11,329
Average debt and equity $ 26,520 $ 26,857
ROIC 45.1 % 42.2 %
-----(1) Income tax adjustment is defined as operating income multiplied by our
effective tax rate for the trailing twelve months.
Additional Information
For information on accounting pronouncements that have impacted or are expected
to materially impact our consolidated financial condition, results of
operations, or cash flows, see Note 1 to our consolidated financial
statements.
Liquidity and Capital Resources
Cash and Cash Equivalents
At November 3, 2019 , we had $2.2 billion in cash and cash equivalents, of which
$1.8 billion was held by our foreign subsidiaries. We believe that our current
cash position, access to the long-term debt capital markets, cash flow generated
from operations, and funds available under our commercial paper programs should
be sufficient not only for our operating requirements but also to enable us to
complete our capital expenditure programs and fund dividend payments, share
repurchases, and any required long-term debt payments through the next several
fiscal years. In addition, we believe that we have the ability to obtain
alternative sources of financing.
As we continue our investments in the business, we expect capital expenditures
of approximately $2.7 billion in fiscal 2019.
Debt and Derivatives
We have commercial paper programs that allow for borrowings of up to $3.0
billion . All of our short-term borrowings in the first nine months of fiscal
2019 were under these commercial paper programs, and the maximum amount
outstanding at any time was $2.1 billion . In connection with these programs, we
have back-up credit facilities with a consortium of banks for borrowings up to
$3.0 billion , which consist of a five-year $2.0 billion credit facility
scheduled to expire in December 2022 and a 364-day $1.0 billion credit facility
scheduled to expire in December 2019 . At November 3, 2019 , we were in compliance
with all of the covenants contained in the credit facilities, and none are
expected to impact our liquidity or capital resources. At November 3, 2019 , $695
million was outstanding under the commercial paper programs. We also issue
senior notes from time to time as part of our capital management strategy.
We use derivative financial instruments in the management of our exposure to
fluctuations in foreign currency exchange rates and interest rates on certain
long-term debt. See Note 4 to our consolidated financial statements for
further discussion of our senior notes issuances and our derivative financial
instruments.
Share Repurchases
In February 2019 , our Board of Directors authorized a new $15.0 billion share
repurchase program that replaced the previous authorization. In the first nine
months of fiscal 2019, we had cash payments of $3.9 billion for repurchases of
our common stock through ASR agreements and open market purchases.
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Cash Flows Summary Operating Activities. Cash flow generated from operations provides us with a significant source of liquidity. Our operating cash flows result primarily from cash received from our customers, offset by cash payments we make for products and services, employee compensation, operations, and occupancy costs. Cash provided by or used in operating activities is also subject to changes in working capital. Working capital at any point in time is subject to many variables, including seasonality, inventory management and category expansion, the timing of cash receipts and payments, vendor payment terms, and fluctuations in foreign exchange rates. Net cash provided by operating activities increased$628 million in the first nine months of fiscal 2019 compared to the first nine months of fiscal 2018 and was primarily driven by changes in working capital and deferred income taxes. Investing Activities. Cash used in investing activities primarily reflected capital expenditures from the continuation of our strategic investments in our business of$1.9 billion during the first nine months of fiscal 2019 compared to$1.7 billion of capital expenditures in the first nine months of fiscal 2018. Financing Activities. Cash used in financing activities primarily reflected: •$4.5 billion of cash dividends paid,$3.9 billion of share repurchases,
repayments of short-term debt, partially offset by
proceeds from long-term debt in the first nine months of fiscal 2019, and
•
and
months of fiscal 2018.
Critical Accounting Policies
There were no changes during fiscal 2019 to our critical accounting policies as
disclosed in the 2018 Form 10-K. Our significant accounting policies are
disclosed in Note 1 to our consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Our exposure to market risks results primarily from fluctuations in interest
rates. We are also exposed to risks from foreign currency exchange rate
fluctuations on the translation of our foreign operations into U.S. dollars and
on the purchase of goods by these foreign operations that are not denominated in
their local currencies. Additionally, we experience inflation and deflation
related to our purchase of certain commodity products. There have been no
material changes to our exposure to market risks from those disclosed in the
2018 Form 10-K.
Item 4. Controls and Procedures.
Under the direction and with the participation of our Chief Executive Officer
and Chief Financial Officer, we evaluated our disclosure controls and procedures
(as defined in Rule 13a-15(e) under the Exchange Act) and concluded that our
disclosure controls and procedures were effective as of November 3, 2019 . There
has been no change in our internal control over financial reporting during the
fiscal quarter ended November 3, 2019 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
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