THE HOME DEPOT, INC.
The following discussion provides an analysis of the Company's financial
condition and results of operations from management's perspective and should be
read in conjunction with the consolidated financial statements and related notes
included in this report. The discussion in this Form 10-K generally focuses on
fiscal 2022 compared to fiscal 2021. A discussion of our results of operations
and changes in financial condition for fiscal 2021 compared to fiscal 2020 has
been excluded from this report, but can be found in Part II, Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations of our Form 10-K for fiscal 2021.
TABLE OF CONTENTS
Executive Summary 26
Results of Operations 27
Liquidity and Capital Resources 29
Critical Accounting Estimates 32
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Table of Contents
EXECUTIVE SUMMARYThe following table presents highlights of our annual financial results:
Fiscal Fiscal Fiscal
dollars in millions, except per share data 2022 2021 2020 Net sales$ 157,403 $ 151,157 $ 132,110 Net earnings 17,105 16,433 12,866 Diluted earnings per share$ 16.69 $ 15.53 $ 11.94
Net cash provided by operating activities
$ 18,839 Payments for businesses acquired, net - 421
7,780
Proceeds from long-term debt, net of discounts 6,942 2,979
7,933
Repayments of long-term debt 2,491 1,532
2,872
We reported net sales of$157.4 billion in fiscal 2022. Net earnings were$17.1 billion , or$16.69 per diluted share. During fiscal 2022, we opened two new stores in theU.S. and four new stores inMexico , and we lost one store in theU.S. due to a fire, resulting in a total store count of 2,322 atJanuary 29, 2023 . At the end of fiscal 2022, a total of 315 of our stores, or 13.6% of our total store count, were located inCanada andMexico . Total sales per retail square foot were$627.17 in fiscal 2022. Our inventory turnover ratio was 4.2 times at the end of fiscal 2022, compared to 5.2 times at the end of fiscal 2021. The decrease in our inventory turnover ratio was driven by an increase in average inventory levels during fiscal 2022 resulting from strategic investments to promote higher in-stock levels and pull forward merchandise in response to ongoing global supply chain disruption, as well as continued investment in our new supply chain facilities and carryover of some spring seasonal inventory. We generated$14.6 billion of cash flow from operations and issued$6.9 billion of long-term debt, net of discounts, during fiscal 2022. This cash flow, together with cash on hand, was used to fund cash payments of$7.8 billion for dividends and$6.7 billion for share repurchases. In addition, we repaid$2.5 billion of long-term debt and$1.0 billion of net short-term debt and funded$3.1 billion in capital expenditures during fiscal 2022. InFebruary 2023 , we announced a 10% increase in our quarterly cash dividend to$2.09 per share. Our ROIC was 44.6% for fiscal 2022 and 44.7% for fiscal 2021. 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).
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Table of Contents
RESULTS OF OPERATIONSThe following table presents the percentage relationship between net sales and major categories in our consolidated statements of earnings:
Fiscal Fiscal Fiscal
2022 2021 2020
% of Net % of Net % of Net
dollars in millions $ Sales $ Sales $ Sales
Net sales $ 157,403 $ 151,157 $ 132,110
Gross profit 52,778 33.5 % 50,832 33.6 % 44,853 34.0 %
Operating expenses:
Selling, general and administrative 26,284 16.7 25,406 16.8 24,447 18.5
Depreciation and amortization 2,455 1.6 2,386 1.6 2,128 1.6
Total operating expenses 28,739 18.3 27,792 18.4 26,575 20.1
Operating income 24,039 15.3 23,040 15.2 18,278 13.8
Interest and other (income) expense:
Interest income and other, net (55) - (44) - (47) -
Interest expense 1,617 1.0 1,347 0.9 1,347 1.0
Interest and other, net 1,562 1.0 1,303 0.9 1,300 1.0
Earnings before provision for income taxes 22,477 14.3 21,737 14.4 16,978 12.9
Provision for income taxes 5,372 3.4 5,304 3.5 4,112 3.1
Net earnings $ 17,105 10.9 % $ 16,433 10.9 % $ 12,866 9.7 %
-----Note: Certain percentages may not sum to totals due to rounding.
% Change
Fiscal Fiscal Fiscal Fiscal Fiscal
Selected financial and sales data: 2022 2021 2020 2022 vs. 2021 2021 vs. 2020
Comparable sales (% change) 3.1 % 11.4 % 19.7 % N/A N/A
Comparable customer transactions (%
change) (1) (5.4) % (0.1) % 8.6 % N/A N/A
Comparable average ticket (% change) (1) 8.8 % 11.7 % 10.5 % N/A N/A
Customer transactions (in millions) (1) 1,666.4 1,759.7 1,756.3 (5.3) % 0.2 %
Average ticket (1) (2) $90.36 $83.04 $74.32 8.8 % 11.7 %
Sales per retail square foot (1) (3) $627.17 $604.74 $543.74 3.7 % 11.2 %
Diluted earnings per share $16.69 $15.53 $11.94 7.5 % 30.1 %
-----(1)Does not include results for HD Supply, including the legacy Interline Brands business, which was integrated into HD Supply during the fourth quarter of fiscal 2021.
(2)Average ticket represents the average price paid per transaction and is used by management to monitor the performance of the Company, as it represents a primary driver in measuring sales performance.
(3)Sales per retail square foot represents sales divided by retail store square footage. Sales per retail square foot is a measure of the efficiency of sales based on the total square footage of our stores and is used by management to monitor the performance of the Company's retail operations as an indicator of the productivity of owned and leased square footage for these retail operations.
FISCAL 2022 COMPARED TO FISCAL 2021
Sales
We assess our sales performance by evaluating both net sales and comparable sales.
Net Sales . Net sales for fiscal 2022 increased$6.2 billion , or 4.1%, to$157.4 billion . The increase in net sales for fiscal 2022 primarily reflected the impact of positive comparable sales driven by an increase in comparable average ticket, partially offset by a decrease in comparable customer transactions. A strongerU.S. dollar negatively impacted net sales by$339 million in fiscal 2022.
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Table of Contents Online sales, which consist of sales generated online through our websites and mobile applications for products picked up at our stores or delivered to customer locations, represented 14.2% of net sales and grew by 7.4% during fiscal 2022 compared to fiscal 2021. The increase in online sales in fiscal 2022 was a result of customers continuing to leverage our digital platforms and reflects our ongoing investments to enhance these platforms and related fulfillment capabilities, which support our interconnected retail strategy. 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 excludes closed stores. Retail stores become comparable on the Monday following their 52nd week of operation. Acquisitions are typically included in comparable sales after they have been owned for more than 52 weeks. 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 3.1% in fiscal 2022, reflecting an 8.8% increase in comparable average ticket, partially offset by a 5.4% decrease in comparable customer transactions compared to fiscal 2021. The increase in comparable average ticket was primarily driven by inflation, as well as demand for new and innovative products. The decrease in comparable customer transactions reflects the impact of macroeconomic factors during fiscal 2022, including indications of price sensitivity to the broader inflationary environment and a gradual shift in consumer spending from goods back to services, resulting in transactions trending towards fiscal 2019, pre-COVID-19 pandemic levels. For fiscal 2022, 10 of our 14 merchandising departments posted positive comparable sales, led byBuilding Materials , Plumbing, Millwork, Paint, Hardware, and Kitchen and Bath, which posted comparable sales above the Company average. Our Indoor Garden, Outdoor Garden, Appliances, and Flooring departments posted negative comparable sales.
Gross Profit
Gross profit increased$1.9 billion , or 3.8%, to$52.8 billion in fiscal 2022. Gross profit as a percent of net sales, or gross profit margin, was 33.5% in fiscal 2022 compared to 33.6% in fiscal 2021. The decrease in gross profit margin was primarily driven by higher product and transportation costs, pressure from shrink during the second half of the year, and investments in our supply chain network, offset by the benefit from higher retail prices, along with favorable product mix.
Operating Expenses
Our operating expenses are composed of SG&A and depreciation and amortization.
Selling, General & Administrative. SG&A increased$878 million , or 3.5%, to$26.3 billion in fiscal 2022. As a percent of net sales, SG&A was 16.7% in fiscal 2022 compared to 16.8% in fiscal 2021, primarily reflecting leverage from a positive comparable sales environment and lower incentive compensation, partially offset by wage investments for hourly associates and increased operational costs, including planned investments designed to drive efficiencies in our stores.
Depreciation and Amortization. Depreciation and amortization increased
Interest and Other, net
Interest and other, net increased$259 million , or 19.9%, to$1.6 billion in fiscal 2022. As a percent of net sales, interest and other, net, was 1.0% in fiscal 2022 compared to 0.9% in fiscal 2021, primarily reflecting higher interest expense due to higher debt balances and increased variable rate interest on floating rate debt resulting from interest rate swaps, partially offset by leverage from a positive comparable sales environment.
Provision for Income Taxes
Our combined effective income tax rate was 23.9% in fiscal 2022 compared to 24.4% in fiscal 2021. The decrease in our effective income tax rate in fiscal 2022 was driven by certain discrete tax benefits recognized in fiscal 2022.
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Table of Contents Diluted Earnings per Share
Diluted earnings per share were
NON-GAAP FINANCIAL MEASURES
To provide clarity on 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 on
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.
The following table presents the calculation of ROIC, together with a reconciliation of NOPAT to net earnings (the most comparable GAAP measure):
Fiscal Fiscal Fiscal
dollars in millions 2022 2021 2020
Net earnings $ 17,105 $ 16,433 $ 12,866
Interest and other, net 1,562 1,303 1,300
Provision for income taxes 5,372 5,304 4,112
Operating income 24,039 23,040 18,278
Income tax adjustment (1) (5,745) (5,622) (4,423)
NOPAT $ 18,294 $ 17,418 $ 13,855
Average debt and equity $ 41,055 $ 38,946 $ 33,964
ROIC 44.6 % 44.7 % 40.8 %
-----(1)Income tax adjustment is defined as operating income multiplied by our effective tax rate for the trailing twelve months.
LIQUIDITY AND CAPITAL RESOURCES
At January 29, 2023 , we had $2.8 billion in cash and cash equivalents, of which
$825 million was held by our foreign subsidiaries. We believe that our current
cash position, cash flow generated from operations, funds available from our
commercial paper program, and access to the long-term debt capital markets
should be sufficient not only for our operating requirements, any required debt
payments, and satisfaction of other contractual obligations, but also to enable
us to invest in the business, fund dividend payments, and fund any share
repurchases through the next several fiscal years. In addition, we believe we
have the ability to obtain alternative sources of financing, if necessary.
Our material cash requirements include contractual and other obligations arising
in the normal course of business. These obligations primarily include long-term
debt and related interest payments, operating and finance lease obligations, and
purchase obligations. In addition to our cash requirements, we follow a
disciplined approach to capital allocation. This approach first prioritizes
investing in the business, followed by paying dividends, with the intent of then
returning excess cash to shareholders in the form of share repurchases. For
fiscal 2023, we plan to invest approximately $3 billion back into our business
in the form of capital expenditures, in line with our expectation of
approximately two percent of net sales on an annual basis. However, we may
adjust our capital expenditures to support the operations of the business, to
enhance long-term strategic positioning, or in response to the economic
environment, as necessary or appropriate. Capital expenditures were $3.1 billion
in fiscal 2022.
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Table of Contents During fiscal 2022, we paid cash dividends of$7.8 billion to shareholders. InFebruary 2023 , we announced a 10% increase in our quarterly cash dividend from$1.90 to$2.09 per share. We intend to pay a dividend in the future; however, any future dividend is subject to declaration by the Board of Directors based on our earnings, capital requirements, financial condition, and other factors considered relevant by our Board of Directors. InAugust 2022 , our Board of Directors approved a$15.0 billion share repurchase authorization that replaced the previous authorization of$20.0 billion , which was approved inMay 2021 . This new authorization does not have a prescribed expiration date. As ofJanuary 29, 2023 , approximately$12.5 billion of the$15.0 billion share repurchase authorization remained available. During fiscal 2022, we had cash payments of$6.7 billion for repurchases of our common stock through open market purchases.
DEBT
InJuly 2022 , we expanded our commercial paper program from$3.0 billion to$5.0 billion to further enhance our financial flexibility. All of our short-term borrowings in fiscal 2022 were under our commercial paper program, and the maximum amount outstanding at any time was$2.7 billion . In connection with our program, we have back-up credit facilities with a consortium of banks. InJuly 2022 , we also expanded the borrowing capacity under these back-up facilities from$3.0 billion to$5.0 billion by entering into a five-year$3.5 billion credit facility scheduled to expire inJuly 2027 and a 364-day$1.5 billion credit facility scheduled to expire inJuly 2023 . These facilities replaced our previously existing five-year$2.0 billion credit facility, which was scheduled to expire inDecember 2023 , and our 364-day$1.0 billion credit facility, which was scheduled to expire inDecember 2022 . AtJanuary 29, 2023 , there were no borrowings outstanding under our commercial paper program, and we were in compliance with all of the covenants contained in our credit facilities, none of which are expected to impact our liquidity or capital resources. We also issue senior notes from time to time as part of our capital management strategy. InMarch 2022 , we issued$4.0 billion of senior notes. The net proceeds from this issuance were used for general corporate purposes, including repayment of outstanding indebtedness and repurchases of shares of our common stock. InSeptember 2022 , we issued an additional$3.0 billion of senior notes. The net proceeds from this issuance were used for general corporate purposes, including repurchases of shares of our common stock. During fiscal 2022, we repaid$2.25 billion of senior notes. AtJanuary 29, 2023 , we had an aggregate principal amount of senior notes outstanding of$41.2 billion , with$1.0 billion payable within 12 months. Future interest payments associated with these senior notes total$24.9 billion , with$1.7 billion payable within 12 months, based on current interest rates, which include the impact of our active interest rate swap agreements. The indentures governing our senior notes do not generally limit our ability to incur additional indebtedness or require us to maintain financial ratios or specified levels of net worth or liquidity. The indentures governing the notes contain various customary covenants; however, none are expected to impact our liquidity or capital resources. See Note 4 to our consolidated financial statements for further discussion of our debt arrangements.
LEASES
We use operating and finance leases largely to fund a portion of our real estate, including our stores, distribution centers, and store support centers. AtJanuary 29, 2023 , we had aggregate lease obligations of$14.7 billion , with$1.5 billion payable within 12 months. Aggregate lease obligations include$2.1 billion of obligations related to leases not yet commenced. See Note 3 to our consolidated financial statements for further discussion of our operating and finance leases.
PURCHASE OBLIGATIONS AND OTHER
Purchase obligations include all legally binding contracts such as firm commitments for inventory purchases, media and sponsorship spend, software and license commitments, and legally binding service contracts. We issue inventory purchase orders in the ordinary course of business, which are typically cancellable by their terms, therefore we do not consider purchase orders that are cancellable to be firm inventory commitments. AtJanuary 29, 2023 , we had aggregate purchase obligations of$1.8 billion , with$947 million payable within 12 months. AtJanuary 29, 2023 , we had aggregate liabilities for unrecognized tax benefits totaling$643 million , none of which are expected to be paid in the next 12 months. The timing of payment, if any, associated with our long-term unrecognized tax benefit liabilities is unknown. See Note 5 to our consolidated financial statements for further discussion of our unrecognized tax benefits.
We have no material off-balance sheet arrangements.
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Table of Contents
CASH FLOWS SUMMARY
[[Image Removed: hd-20230129_g5.jpg]]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, associate compensation, operations, occupancy costs, and income taxes. 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 decreased by$2.0 billion in fiscal 2022 compared to fiscal 2021, primarily driven by changes in working capital, slightly offset by an increase in net earnings. Changes in working capital were driven by inventory management actions and the related timing of vendor payments. These inventory management actions, which began in fiscal 2021 and moderated during the second half of fiscal 2022, reflect strategic investments in inventory to support the demand environment, promote higher in-stock levels, and pull forward merchandise for seasonal events in response to global supply chain disruption, as well as investments in our new supply chain facilities.
Investing Activities
Cash used in investing activities increased by
Financing Activities
Cash used in financing activities in fiscal 2022 primarily reflected$7.8 billion of cash dividends paid,$6.7 billion of share repurchases,$2.5 billion of repayments of long-term debt, and$1.0 billion of net repayments of short-term debt, partially offset by$6.9 billion of net proceeds from long-term debt. Cash used in financing activities in fiscal 2021 primarily reflected$14.8 billion of share repurchases,$7.0 billion of cash dividends paid, and$1.5 billion of repayments of long-term debt, partially offset by$3.0 billion of net proceeds from long-term debt and$1.0 billion of net proceeds from short-term debt. Fiscal 2021 reflected elevated share repurchase activity following the temporary suspension of repurchases during fiscal 2020 in order to enhance our liquidity position at the onset of the COVID-19 pandemic.
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Table of Contents
CRITICAL ACCOUNTING ESTIMATES
The preparation of our consolidated financial statements in accordance with GAAP
requires that we make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and liabilities,
and the reported amounts of revenues and expenses. Actual results could differ
from those estimates.
Our significant accounting policies are disclosed in Note 1 to our
consolidated financial statements. The following discussion addresses our most
critical accounting estimates, which are those that are both important to the
representation of our financial condition and results of operations, and that
require significant judgment or use of significant assumptions or complex
estimates.
MERCHANDISE INVENTORIES
We value the majority of our inventory under the retail inventory method, using the first-in, first-out method, with the remainder of our inventories valued under a cost method. Under the retail inventory method, inventories are stated at cost, which is determined by applying a cost-to-retail ratio to the retail value of inventories. The retail value of our inventory is adjusted as needed to reflect current market conditions. Because these adjustments are based on current prevailing market conditions, the value of our inventory approximates the lower of cost or market. The valuation under the retail inventory method is based on a number of factors such as markups, markdowns, and inventory losses (or shrink). As such, there exists an inherent uncertainty in the final determination of inventory cost and gross profit. We determine markups and markdowns based on the consideration of a variety of factors such as current and anticipated demand, customer preferences and buying trends, age of the merchandise, and weather conditions. We calculate shrink based on actual inventory losses identified as a result of physical inventory counts during each fiscal period and estimated inventory losses between physical inventory counts. The estimate for shrink occurring in the interim period between physical inventory counts is calculated on a store-specific basis and is primarily based on recent shrink results. A 10% increase in the shrink rate used to estimate our inventory shrink reserve would have increased cost of sales by approximately$113 million for fiscal 2022. Historically, the difference between estimated shrink and actual inventory losses has not been material to our annual financial results. We do not believe there is a reasonable likelihood for a material change in the estimates or assumptions we use to value our inventory under the retail inventory method. We believe that the retail inventory method provides an inventory valuation which approximates cost and results in valuing our inventory at the lower of cost or market.
ADDITIONAL INFORMATION
For information on our accounting policies and on accounting pronouncements that have impacted or are expected to materially impact our financial condition, results of operations, or cash flows, see Note 1 to our consolidated financial statements.
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