UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,Washington, D.C. 20549
FORM 10-Q
(Mark One)
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 29, 2017November 3, 2019
-or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR -15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number File Number: 1-8207
THE HOME DEPOT, INC.
(Exact name of Registrantregistrant as specified in its charter) |
| | | | | |
Delaware | | | | 95-3261426 |
(State or other jurisdiction of incorporation or organization) | | | | (I.R.S. Employer Identification No.) |
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Delaware2455 Paces Ferry Road | | 95-3261426 |
(State or other jurisdiction of
incorporation or organization)
| | (I.R.S. Employer Identification Number) |
| | |
2455 Paces Ferry Road, Atlanta, | Georgia | | | | 30339 |
(Address of principal executive offices) | | | | (Zip Code) |
(770) (770) 433-8211
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report): N/A |
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Securities registered pursuant to Section 12(b) of the Act: |
Title of each class | | Trading Symbol | | Name of each exchange on which registered |
Common Stock, $0.05 Par Value Per Share | | HD | | New York Stock Exchange LLC |
Indicate by check mark whether the Registrantregistrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrantregistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx☒ No ¨☐
Indicate by check mark whether the Registrantregistrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrantregistrant was required to submit and post such files). Yesx☒ No ¨☐
Indicate by check mark whether the Registrantregistrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer☒ Accelerated filer ☐Non-accelerated filer ☐Smaller reporting company ☐Emerging growth company ☐ |
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Large accelerated filer x
| | Accelerated filer ¨
| | Non-accelerated filer ¨
(Do not check if a smaller reporting company)
| | Smaller reporting company ¨
|
Emerging growth company ¨
| | If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐Indicate by check mark whether the Registrantregistrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨☐No x☒
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
1,167,748,6191,090,831,020 shares of common stock, $0.05 par value, as of November 14, 2017
THE HOME DEPOT, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
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Item 1. | | |
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Item 2. | | |
Item 3. | | |
Item 4. | | |
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Item 1A. | | |
Item 2. | | |
Item 6. | | |
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COMMONLY USED OR DEFINED TERMS |
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Term | | Definition |
ASR | | Accelerated share repurchase |
ASU | | Accounting Standards Update |
Comparable sales | | |
Exchange Act | | Securities Exchange Act of 1934, as amended |
FASB | | Financial Accounting Standards Board |
fiscal 2018 | | Fiscal year ended February 3, 2019 (includes 53 weeks) |
fiscal 2019 | | Fiscal year ending February 2, 2020 (includes 52 weeks) |
GAAP | | U.S. generally accepted accounting principles |
Interline | | The legacy Interline Brands business, now operating as a part of The Home Depot Pro |
MD&A | | Management's Discussion and Analysis of Financial Condition and Results of Operations | |
NOPAT | | Net operating profit after tax |
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Restoration Plan | | Home Depot FutureBuilder Restoration Plan |
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ROIC | | Return on invested capital |
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SEC | | Securities and Exchange Commission |
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Securities Act | | Securities Act of 1933, as amended |
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SG&A | | Selling, general and administrative |
Tax Act | | 2017 tax reform, commonly referred to as the Tax Cuts and Jobs Act of 2017 |
2018 Form 10-K | |
| Annual Report on Form 10-K for fiscal 2018 as filed with the SEC on March 28, 2019 |
FORWARD-LOOKING STATEMENTS
Certain statements contained herein, as well as in other filings we make with the SEC and other written and oral information we release, regarding our future performance constitute "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements may relate to, among other things, the demand for our products and services; net sales growth; comparable sales; effects of competition; implementation of store, interconnected retail, supply chain and technology initiatives; inventory and in-stock positions; state of the economy; state of the housing and home improvement markets; state of the credit markets, including mortgages, home equity loans, and consumer credit; impact of tariffs; issues related to the payment methods we accept; demand for credit offerings; management of relationships with our associates, suppliers and vendors; continuation of share repurchase programs; net earnings performance; earnings per share; dividend targets; capital allocation and expenditures; liquidity; return on invested capital; expense leverage; stock-based compensation expense; commodity price inflation and deflation; the ability to issue debt on terms and at rates acceptable to us; the impact and expected outcome of investigations, inquiries, claims, and litigation; the effect of accounting charges; the effect of adopting certain accounting standards; the impact of the Tax Act and other regulatory changes; store openings and closures; financial outlook; and the integration of acquired companies into our organization and the ability to recognize the anticipated synergies and benefits of those acquisitions.
Forward-looking statements are based on currently available information and our current assumptions, expectations and projections about future events. You should not rely on our forward-looking statements. These statements are not guarantees of future performance and are subject to future events, risks and uncertainties – many of which are beyond our control, dependent on the actions of third parties, or currently unknown to us – as well as potentially inaccurate assumptions that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, those described in Part II, Item 1A, "Risk Factors" and elsewhere in this report and as also may be described from time to time in future reports we file with the SEC. You should read such information in conjunction with our consolidated financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this report. There also may be other factors that we cannot anticipate or that are not described in this report, generally because we do not currently perceive them to be material. Such factors could cause results to differ materially from our expectations.
Forward-looking statements speak only as of the date they are made, and we do not undertake to update these statements other than as required by law. You are advised, however, to review any further disclosures we make on related subjects in our periodic filings with the SEC.
PART I.I – FINANCIAL INFORMATION
Item 1.Financial Statements.
THE HOME DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
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| | | | | | | |
amounts in millions, except per share data | October 29, 2017 | | January 29, 2017 |
ASSETS | | | |
Current Assets: | | | |
Cash and Cash Equivalents | $ | 3,549 |
| | $ | 2,538 |
|
Receivables, net | 2,166 |
| | 2,029 |
|
Merchandise Inventories | 13,419 |
| | 12,549 |
|
Other Current Assets | 548 |
| | 608 |
|
Total Current Assets | 19,682 |
| | 17,724 |
|
Property and Equipment, at cost | 41,614 |
| | 40,426 |
|
Less Accumulated Depreciation and Amortization | 19,654 |
| | 18,512 |
|
Net Property and Equipment | 21,960 |
| | 21,914 |
|
Goodwill | 2,217 |
| | 2,093 |
|
Other Assets | 1,164 |
| | 1,235 |
|
Total Assets | $ | 45,023 |
| | $ | 42,966 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current Liabilities: | | | |
Short-Term Debt | $ | 125 |
| | $ | 710 |
|
Accounts Payable | 8,570 |
| | 7,000 |
|
Accrued Salaries and Related Expenses | 1,488 |
| | 1,484 |
|
Sales Taxes Payable | 629 |
| | 508 |
|
Deferred Revenue | 1,788 |
| | 1,669 |
|
Income Taxes Payable | 139 |
| | 25 |
|
Current Installments of Long-Term Debt | 1,198 |
| | 542 |
|
Other Accrued Expenses | 2,065 |
| | 2,195 |
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Total Current Liabilities | 16,002 |
| | 14,133 |
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Long-Term Debt, excluding current installments | 24,266 |
| | 22,349 |
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Other Long-Term Liabilities | 1,968 |
| | 1,855 |
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Deferred Income Taxes | 244 |
| | 296 |
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Total Liabilities | 42,480 |
| | 38,633 |
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Common Stock, par value $0.05; authorized: 10,000 shares; issued: 1,779 shares at October 29, 2017 and 1,776 shares at January 29, 2017; outstanding: 1,168 shares at October 29, 2017 and 1,203 shares at January 29, 2017 | 89 |
| | 88 |
|
Paid-In Capital | 9,883 |
| | 9,787 |
|
Retained Earnings | 39,193 |
| | 35,519 |
|
Accumulated Other Comprehensive Loss | (629 | ) | | (867 | ) |
Treasury Stock, at cost, 611 shares at October 29, 2017 and 573 shares at January 29, 2017 | (45,993 | ) | | (40,194 | ) |
Total Stockholders’ Equity | 2,543 |
| | 4,333 |
|
Total Liabilities and Stockholders’ Equity | $ | 45,023 |
| | $ | 42,966 |
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in millions, except per share data | November 3, 2019 | | February 3, 2019 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 2,193 |
| | $ | 1,778 |
|
Receivables, net | 2,231 |
| | 1,936 |
|
Merchandise inventories | 15,711 |
| | 13,925 |
|
Other current assets | 1,039 |
| | 890 |
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Total current assets | 21,174 |
| | 18,529 |
|
Net property and equipment | 22,472 |
| | 22,375 |
|
Operating lease right-of-use assets | 5,638 |
| | — |
|
Goodwill | 2,253 |
| | 2,252 |
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Other assets | 772 |
| | 847 |
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Total assets | $ | 52,309 |
| | $ | 44,003 |
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Liabilities and Stockholders' Equity | | | |
Current liabilities: | | | |
Short-term debt | $ | 695 |
| | $ | 1,339 |
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Accounts payable | 9,240 |
| | 7,755 |
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Accrued salaries and related expenses | 1,467 |
| | 1,506 |
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Sales taxes payable | 686 |
| | 656 |
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Deferred revenue | 2,121 |
| | 1,782 |
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Current installments of long-term debt | 1,818 |
| | 1,056 |
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Current operating lease liabilities | 828 |
| | — |
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Other accrued expenses | 2,710 |
| | 2,622 |
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Total current liabilities | 19,565 |
| | 16,716 |
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Long-term debt, excluding current installments | 26,597 |
| | 26,807 |
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Long-term operating lease liabilities | 5,113 |
| | — |
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Other long-term liabilities | 2,116 |
| | 2,358 |
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Total liabilities | 53,391 |
| | 45,881 |
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Common stock, par value $0.05; authorized: 10,000 shares; issued: 1,785 shares at November 3, 2019 and 1,782 shares at February 3, 2019; outstanding: 1,090 shares at November 3, 2019 and 1,105 shares at February 3, 2019 | 89 |
| | 89 |
|
Paid-in capital | 10,747 |
| | 10,578 |
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Retained earnings | 50,729 |
| | 46,423 |
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Accumulated other comprehensive loss | (801 | ) | | (772 | ) |
Treasury stock, at cost, 695 shares at November 3, 2019 and 677 shares at February 3, 2019 | (61,846 | ) | | (58,196 | ) |
Total stockholders’ (deficit) equity | (1,082 | ) | | (1,878 | ) |
Total liabilities and stockholders’ equity | $ | 52,309 |
| | $ | 44,003 |
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See accompanying Notesnotes to Consolidated Financial Statements.
consolidated financial statements.
THE HOME DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
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| Three Months Ended | | Nine Months Ended |
amounts in millions, except per share data | October 29, 2017 | | October 30, 2016 | | October 29, 2017 | | October 30, 2016 |
NET SALES | $ | 25,026 |
| | $ | 23,154 |
| | $ | 77,021 |
| | $ | 72,388 |
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Cost of Sales | 16,378 |
| | 15,112 |
| | 50,758 |
| | 47,628 |
|
GROSS PROFIT | 8,648 |
| | 8,042 |
| | 26,263 |
| | 24,760 |
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Operating Expenses: | | | | | | | |
Selling, General and Administrative | 4,514 |
| | 4,280 |
| | 13,424 |
| | 12,949 |
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Depreciation and Amortization | 454 |
| | 442 |
| | 1,347 |
| | 1,311 |
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Total Operating Expenses | 4,968 |
| | 4,722 |
| | 14,771 |
| | 14,260 |
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OPERATING INCOME | 3,680 |
| | 3,320 |
| | 11,492 |
| | 10,500 |
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Interest and Other (Income) Expense: | | | | | | | |
Interest and Investment Income | (22 | ) | | (10 | ) | | (51 | ) | | (25 | ) |
Interest Expense | 269 |
| | 246 |
| | 788 |
| | 726 |
|
Interest and Other, net | 247 |
| | 236 |
| | 737 |
| | 701 |
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EARNINGS BEFORE PROVISION FOR INCOME TAXES | 3,433 |
| | 3,084 |
| | 10,755 |
| | 9,799 |
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Provision for Income Taxes | 1,268 |
| | 1,115 |
| | 3,904 |
| | 3,586 |
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NET EARNINGS | $ | 2,165 |
| | $ | 1,969 |
| | $ | 6,851 |
| | $ | 6,213 |
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Basic Weighted Average Common Shares | 1,168 |
| | 1,224 |
| | 1,184 |
| | 1,236 |
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BASIC EARNINGS PER SHARE | $ | 1.85 |
| | $ | 1.61 |
| | $ | 5.79 |
| | $ | 5.03 |
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Diluted Weighted Average Common Shares | 1,174 |
| | 1,229 |
| | 1,190 |
| | 1,242 |
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DILUTED EARNINGS PER SHARE | $ | 1.84 |
| | $ | 1.60 |
| | $ | 5.76 |
| | $ | 5.00 |
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Dividends Declared per Share | $ | 0.89 |
| | $ | 0.69 |
| | $ | 2.67 |
| | $ | 2.07 |
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| Three Months Ended | | Nine Months Ended |
in millions, except per share data | November 3, 2019 | | October 28, 2018 | | November 3, 2019 | | October 28, 2018 |
Net sales | $ | 27,223 |
| | $ | 26,302 |
| | $ | 84,443 |
| | $ | 81,712 |
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Cost of sales | 17,836 |
| | 17,151 |
| | 55,607 |
| | 53,579 |
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Gross profit | 9,387 |
| | 9,151 |
| | 28,836 |
| | 28,133 |
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Operating expenses: | | | | | | | |
Selling, general and administrative | 4,942 |
| | 4,808 |
| | 14,926 |
| | 14,591 |
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Depreciation and amortization | 498 |
| | 473 |
| | 1,470 |
| | 1,390 |
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Total operating expenses | 5,440 |
| | 5,281 |
| | 16,396 |
| | 15,981 |
|
Operating income | 3,947 |
| | 3,870 |
| | 12,440 |
| | 12,152 |
|
Interest and other (income) expense: | | | | | | | |
Interest and investment income | (22 | ) | | (25 | ) | | (56 | ) | | (73 | ) |
Interest expense | 302 |
| | 249 |
| | 892 |
| | 782 |
|
Interest and other, net | 280 |
| | 224 |
| | 836 |
| | 709 |
|
Earnings before provision for income taxes | 3,667 |
| | 3,646 |
| | 11,604 |
| | 11,443 |
|
Provision for income taxes | 898 |
| | 779 |
| | 2,843 |
| | 2,666 |
|
Net earnings | $ | 2,769 |
| | $ | 2,867 |
| | $ | 8,761 |
| | $ | 8,777 |
|
| | | | | | | |
Basic weighted average common shares | 1,089 |
| | 1,135 |
| | 1,096 |
| | 1,144 |
|
Basic earnings per share | $ | 2.54 |
| | $ | 2.53 |
| | $ | 7.99 |
| | $ | 7.67 |
|
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Diluted weighted average common shares | 1,094 |
| | 1,141 |
| | 1,100 |
| | 1,150 |
|
Diluted earnings per share | $ | 2.53 |
| | $ | 2.51 |
| | $ | 7.96 |
| | $ | 7.63 |
|
See accompanying Notesnotes to Consolidated Financial Statements.consolidated financial statements.
THE HOME DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
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| Three Months Ended | | Nine Months Ended |
amounts in millions | October 29, 2017 | | October 30, 2016 | | October 29, 2017 | | October 30, 2016 |
NET EARNINGS | $ | 2,165 |
| | $ | 1,969 |
| | $ | 6,851 |
| | $ | 6,213 |
|
Other Comprehensive Income (Loss): | | | | | | | |
Foreign Currency Translation Adjustments | (145 | ) | | (125 | ) | | 244 |
| | (8 | ) |
Cash Flow Hedges, net of tax | (2 | ) | | 21 |
| | (5 | ) | | 23 |
|
Other | — |
| | (1 | ) | | (1 | ) | | — |
|
Total Other Comprehensive Income (Loss) | (147 | ) | | (105 | ) | | 238 |
| | 15 |
|
COMPREHENSIVE INCOME | $ | 2,018 |
| | $ | 1,864 |
| | $ | 7,089 |
| | $ | 6,228 |
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| Three Months Ended | | Nine Months Ended |
in millions | November 3, 2019 | | October 28, 2018 | | November 3, 2019 | | October 28, 2018 |
Net earnings | $ | 2,769 |
| | $ | 2,867 |
| | $ | 8,761 |
| | $ | 8,777 |
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Other comprehensive income (loss): | | | | | | | |
Foreign currency translation adjustments | (23 | ) | | 59 |
| | (7 | ) | | (204 | ) |
Cash flow hedges, net of tax | (2 | ) | | (2 | ) | | 4 |
| | 46 |
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Other | — |
| | — |
| | 5 |
| | 7 |
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Total other comprehensive income (loss) | (25 | ) | | 57 |
| | 2 |
| | (151 | ) |
Comprehensive income | $ | 2,744 |
| | $ | 2,924 |
| | $ | 8,763 |
| | $ | 8,626 |
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See accompanying Notesnotes to Consolidated Financial Statements.consolidated financial statements.
THE HOME DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
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| Three Months Ended | | Nine Months Ended |
in millions | November 3, 2019 | | October 28, 2018 | | November 3, 2019 | | October 28, 2018 |
Common Stock: | | | | | | | |
Balance at beginning of period | $ | 89 |
| | $ | 89 |
| | $ | 89 |
| | $ | 89 |
|
Shares issued under employee stock plans | — |
| | — |
| | — |
| | — |
|
Balance at end of period | 89 |
| | 89 |
| | 89 |
| | 89 |
|
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Paid-in Capital: | | | | | | | |
Balance at beginning of period | 10,777 |
| | 10,079 |
| | 10,578 |
| | 10,192 |
|
Shares issued under employee stock plans | 20 |
| | 10 |
| | 79 |
| | 21 |
|
Stock-based compensation expense | 50 |
| | 52 |
| | 190 |
| | 196 |
|
Repurchases of common stock | (100 | ) | | 268 |
| | (100 | ) | | — |
|
Balance at end of period | 10,747 |
| | 10,409 |
| | 10,747 |
| | 10,409 |
|
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Retained Earnings: | | | | | | | |
Balance at beginning of period | 49,446 |
| | 43,543 |
| | 46,423 |
| | 39,935 |
|
Cumulative effect of accounting changes | — |
| | — |
| | 26 |
| | 75 |
|
Net earnings | 2,769 |
| | 2,867 |
| | 8,761 |
| | 8,777 |
|
Cash dividends | (1,486 | ) | | (1,175 | ) | | (4,477 | ) | | (3,548 | ) |
Other | — |
| | — |
| | (4 | ) | | (4 | ) |
Balance at end of period | 50,729 |
| | 45,235 |
| | 50,729 |
| | 45,235 |
|
| | | | | | | |
Accumulated Other Comprehensive Income (Loss): | | | | | | | |
Balance at beginning of period | (776 | ) | | (774 | ) | | (772 | ) | | (566 | ) |
Cumulative effect of accounting change | — |
| | — |
| | (31 | ) | | — |
|
Foreign currency translation adjustments | (23 | ) | | 59 |
| | (7 | ) | | (204 | ) |
Cash flow hedges, net of tax | (2 | ) | | (2 | ) | | 4 |
| | 46 |
|
Other | — |
| | — |
| | 5 |
| | 7 |
|
Balance at end of period | (801 | ) | | (717 | ) | | (801 | ) | | (717 | ) |
| | | | | | | |
Treasury Stock: | | | | | | | |
Balance at beginning of period | (60,696 | ) | | (50,928 | ) | | (58,196 | ) | | (48,196 | ) |
Repurchases of common stock | (1,150 | ) | | (2,768 | ) | | (3,650 | ) | | (5,500 | ) |
Balance at end of period | (61,846 | ) | | (53,696 | ) | | (61,846 | ) | | (53,696 | ) |
Total stockholders' (deficit) equity | $ | (1,082 | ) | | $ | 1,320 |
| | $ | (1,082 | ) | | $ | 1,320 |
|
See accompanying notes to consolidated financial statements.
THE HOME DEPOT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
| | | | | | | |
| Nine Months Ended |
amounts in millions | October 29, 2017 | | October 30, 2016 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
Net Earnings | $ | 6,851 |
| | $ | 6,213 |
|
Reconciliation of Net Earnings to Net Cash Provided by Operating Activities: | | | |
Depreciation and Amortization | 1,533 |
| | 1,474 |
|
Stock-Based Compensation Expense | 214 |
| | 199 |
|
Changes in Assets and Liabilities, net of acquisition effects: | | | |
Receivables, net | (95 | ) | | (108 | ) |
Merchandise Inventories | (776 | ) | | (1,453 | ) |
Other Current Assets | 75 |
| | 36 |
|
Accounts Payable and Accrued Expenses | 1,597 |
| | 1,449 |
|
Deferred Revenue | 115 |
| | 64 |
|
Income Taxes Payable | 113 |
| | 184 |
|
Deferred Income Taxes | (76 | ) | | (131 | ) |
Other, net | 190 |
| | (8 | ) |
Net Cash Provided by Operating Activities | 9,741 |
| | 7,919 |
|
| | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
Capital Expenditures | (1,354 | ) | | (1,145 | ) |
Payments for Business Acquired, net | (260 | ) | | — |
|
Proceeds from Sales of Property and Equipment | 38 |
| | 30 |
|
Net Cash Used in Investing Activities | (1,576 | ) | | (1,115 | ) |
| | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
Repayments of Short-Term Debt, net | (585 | ) | | (350 | ) |
Proceeds from Long-Term Debt, net of discounts | 2,991 |
| | 4,959 |
|
Repayments of Long-Term Debt | (534 | ) | | (3,034 | ) |
Repurchases of Common Stock | (6,067 | ) | | (4,535 | ) |
Proceeds from Sales of Common Stock | 157 |
| | 136 |
|
Cash Dividends Paid to Stockholders | (3,174 | ) | | (2,567 | ) |
Other Financing Activities | (41 | ) | | (33 | ) |
Net Cash Used in Financing Activities | (7,253 | ) | | (5,424 | ) |
| | | |
Change in Cash and Cash Equivalents | 912 |
| | 1,380 |
|
Effect of Exchange Rate Changes on Cash and Cash Equivalents | 99 |
| | (7 | ) |
Cash and Cash Equivalents at Beginning of Period | 2,538 |
| | 2,216 |
|
Cash and Cash Equivalents at End of Period | $ | 3,549 |
| | $ | 3,589 |
|
|
| | | | | | | |
| Nine Months Ended |
in millions | November 3, 2019 | | October 28, 2018 |
Cash Flows from Operating Activities: | | | |
Net earnings | $ | 8,761 |
| | $ | 8,777 |
|
Reconciliation of net earnings to net cash provided by operating activities: | | | |
Depreciation and amortization | 1,701 |
| | 1,603 |
|
Stock-based compensation expense | 197 |
| | 204 |
|
Changes in receivables, net | (298 | ) | | (196 | ) |
Changes in merchandise inventories | (1,788 | ) | | (2,041 | ) |
Changes in other current assets | (152 | ) | | (480 | ) |
Changes in accounts payable and accrued expenses | 1,616 |
| | 2,134 |
|
Changes in deferred revenue | 340 |
| | 156 |
|
Changes in income taxes payable | 116 |
| | 61 |
|
Changes in deferred income taxes | 107 |
| | (64 | ) |
Other operating activities | 64 |
| | (118 | ) |
Net cash provided by operating activities | 10,664 |
| | 10,036 |
|
| | | |
Cash Flows from Investing Activities: | | | |
Capital expenditures, net of non-cash capital expenditures | (1,891 | ) | | (1,711 | ) |
Proceeds from sales of property and equipment | 21 |
| | 21 |
|
Other investing activities | (10 | ) | | (3 | ) |
Net cash used in investing activities | (1,880 | ) | | (1,693 | ) |
| | | |
Cash Flows from Financing Activities: | | | |
Repayments of short-term debt, net | (644 | ) | | (161 | ) |
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 | (3,909 | ) | | (5,518 | ) |
Proceeds from sales of common stock | 185 |
| | 140 |
|
Cash dividends | (4,477 | ) | | (3,548 | ) |
Other financing activities | 9 |
| | 99 |
|
Net cash used in financing activities | (8,478 | ) | | (10,180 | ) |
Change in cash and cash equivalents | 306 |
| | (1,837 | ) |
Effect of exchange rate changes on cash and cash equivalents | 109 |
| | 6 |
|
Cash and cash equivalents at beginning of period | 1,778 |
| | 3,595 |
|
Cash and cash equivalents at end of period | $ | 2,193 |
| | $ | 1,764 |
|
| | | |
Supplemental Disclosures: | | | |
Cash paid for interest, net of interest capitalized | $ | 910 |
| | $ | 855 |
|
Cash paid for income taxes | 2,660 |
| | 3,017 |
|
See accompanying Notesnotes to Consolidated Financial Statements.consolidated financial statements.
THE HOME DEPOT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| |
1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation
The accompanying Consolidated Financial Statementsconsolidated financial statements of The Home Depot, Inc. and Subsidiariesits subsidiaries (the "Company""Company," "Home Depot," "we," "our" or "us") have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by U.S. generally accepted accounting principles ("GAAP")GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Results of operations for interim periods are not necessarily indicative of results for the entire year. As a result, these consolidated financial statements should be read in conjunction with the Consolidated Financial Statementsconsolidated financial statements and notes thereto included in the Company's Annual Report onour 2018 Form 10-K for the year ended January 29, 2017, as filed with the Securities and Exchange Commission on March 23, 2017 (the "2016 Form 10-K").
Valuation Reserves
As of October 29, 2017 and January 29, 2017, the valuation allowances for Merchandise Inventories and uncollectible Receivables were not material.
Recent Accounting Pronouncements10-K.
There have beenwere no materialsignificant changes to the Company’s position regarding recentour significant accounting pronouncements pending adoptionpolicies as disclosed in the 20162018 Form 10-K, except as set forth below.
Leases
On February 4, 2019, we adopted the new leases standard using the modified retrospective transition method, which requires that we recognize leases differently pre- and post-adoption. See "Recently Adopted Accounting Pronouncements—ASU No. 2016-02" below for more information.
We categorize leases at their inception as either operating or finance leases. Lease agreements cover certain retail locations, office space, warehouse and distribution space, equipment, and vehicles. Most of these leases are operating leases; however, certain retail locations and equipment are leased under finance leases. Operating leases are included in operating lease right-of-use assets, current operating lease liabilities, and long-term operating lease liabilities in our consolidated balance sheets. Finance leases are included in net property and equipment, current installments of long-term debt, and long-term debt, excluding current installments in our consolidated balance sheets.
Leased assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. We use a secured incremental borrowing rate as the discount rate for present value of lease payments when the rate implicit in the contract is not readily determinable. We determine a secured rate on a quarterly basis and update the weighted average discount rate accordingly. For operating leases with variable payments dependent upon an index or rate that commenced subsequent to adoption of ASU No. 2016-02, we apply the active index or rate as of the lease commencement date. Variable lease payments not based on an index or rate are not included in the operating lease liability as they cannot be reasonably estimated and are recognized in the period in which the obligation for those payments is incurred. Leases that have a term of twelve months or less upon commencement date are considered short-term in nature. Accordingly, short-term leases are not included on the consolidated balance sheets and are expensed on a straight-line basis over the lease term, which commences on the date we have the right to control the property.
Recently Adopted Accounting Pronouncements
ASU No. 2018-02. In February 2018, the FASB issued ASU No. 2018-02, "Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," which allows for an optional reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects as a result of the Tax Act. On February 4, 2019, we adopted ASU No. 2018-02, resulting in an increase of $31 million to retained earnings and a decrease of $31 million to accumulated other comprehensive income.
ASU No. 2017-12. In August 2017, the Financial Accounting Standards Board ("FASB")FASB issued Accounting Standards Update ("ASU")ASU No. 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities"Activities," which amends the hedge accounting recognition and presentation requirements. ASU No. 2017-12 eliminates the concept of recognizing periodic hedge ineffectiveness for cash flow and net investment hedges and allows thean entity to apply the shortcut method to partial-term fair value hedges of interest rate risk. On February 4, 2019, we adopted ASU No. 2017-12 is effective for fiscal years beginning after December 15, 2018,with no impact to our consolidated financial statements. We expect the impact of the adoption to be immaterial to our financial position, results of operations, and interim periods within those fiscal years, with early adoption permitted in any interim period after issuance of this update. The Company is evaluating the effect that cash flows on an ongoing basis.
ASU No. 2017-12 will have on its Consolidated Financial Statements and related disclosures.
2016-02.In May 2014,February 2016, the FASB issued a new standard related to revenue recognition. Under ASU No. 2014-09, "Revenue2016-02, "Leases (Topic 842)," which establishes a right-of-use model and requires an entity that is a lessee to recognize the right-of-use assets and liabilities arising from Contracts with Customers (Topic 606)", revenue is recognized when a customer obtains control of promised goods or services in an amount that reflectsleases on the considerationbalance sheets. ASU No. 2016-02 also requires disclosures about the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contractsleases. Leases will be classified as finance or operating, with customers. Theclassification affecting both the pattern and classification of expense recognition in the statements of earnings. This guidance permits two methods of adoption: retrospectivelywas subsequently amended by ASU No. 2018-01, "Leases (Topic 842): Land Easement Practical Expedient for Transition to each prior reporting period presented (fullTopic 842;" ASU No. 2018-10, "Codification Improvements to Topic 842;" and ASU No. 2018-11, "Leases (Topic 842): Targeted Improvements." ASU No. 2016-02 and subsequent updates require a modified retrospective method), or retrospectivelytransition, with the cumulative effect of initiallytransition, including initial recognition of lease assets and liabilities for existing operating leases, as of (i) the effective date or (ii) the beginning of the earliest comparative period presented. These updates also provide a number of practical expedients for implementation which we are applying, the guidance recognized at the date of initial application (modified retrospective method).as discussed below.
On February 4, 2019 (the “effective date”), we adopted ASU No. 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual periods.
The Company continues2016-02 and subsequent updates, collectively referred to evaluate the effect that ASU No. 2014-09 will have on its Consolidated Financial Statements and related disclosures and controls. The Company has determined that the adoption of ASU No. 2014-09 will impact the Company’s method of recognizing gift card breakage income, which is currently recognized based upon historical redemption patterns. ASU No. 2014-09 requires gift card breakage income to be recognized in proportion to the pattern of rights exercised by the customer when the Company expects to be entitled to breakage. Other areas which could be impacted may be identified as the Company continues its evaluation of ASU No. 2014-09. The Company plans to adopt ASU No. 2014-09 on January 29, 2018Topic 842, using the modified retrospective transition method. In addition, we adopted the package of practical expedients in transition, which permits us to not reassess our prior conclusions pertaining to lease identification, lease classification, and initial direct costs on leases that commenced prior to our adoption of the new standard. We also elected the ongoing practical expedient to not recognize operating lease right-of-use assets and operating lease liabilities related to short-term leases. We did not elect the use-of-hindsight or land easements practical expedients. For leases beginning subsequent to the effective date, we elected to not separate lease and non-lease components for certain classes of assets including real estate and certain equipment. To determine the measurement of the lease liability for operating leases with variable payments based on an index or rate that commenced prior to the adoption of Topic 842, we elected to apply the active index or rate at the effective date.
As a result of adopting Topic 842, we recognized net operating lease right-of-use assets of $5.7 billion and operating lease liabilities of $6.0 billion on the effective date. Existing prepaid rent, accrued rent, and closed store reserves were recorded as an offset to our gross operating lease right-of-use assets. The cumulative effect of the adoption resulted in an immaterial adjustment to the opening balance of retained earnings as of February 4, 2019. The standard did not have a material impact on our results of operations or cash flows.
Recently Issued Accounting Pronouncements
Recent accounting pronouncements pending adoption not discussed above or in the 20162018 Form 10-K are either not applicable or will not have or are not expected to have a material impact on the Company.our consolidated financial condition, results of operations, or cash flows.
| |
2. | RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTSNET SALES |
On January 30, 2017,No sales to an individual customer accounted for more than 10% of net sales during the Company adopted ASU No. 2016-09, "Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting". Upon adoption of this update, all excess tax benefits or deficiencies related to share-based payment awards are recognized in the Provision for Income Taxes in the period in which they occur. Previously these amounts were reflected in Paid-In Capital. In addition, upon adoption these amounts arethree and nine months ended November 3, 2019 and October 28, 2018. Net sales, classified as an operating activity in the Consolidated Statements of Cash Flows in the period in which they occur. Previously, theseby geography, follow.
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
in millions | November 3, 2019 | | October 28, 2018 | | November 3, 2019 | | October 28, 2018 |
Net sales – in the U.S. | $ | 24,995 |
| | $ | 24,083 |
| | $ | 77,634 |
| | $ | 74,978 |
|
Net sales – outside the U.S. | 2,228 |
| | 2,219 |
| | 6,809 |
| | 6,734 |
|
Net sales | $ | 27,223 |
| | $ | 26,302 |
| | $ | 84,443 |
| | $ | 81,712 |
|
Net sales by products and services follow.
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
in millions | November 3, 2019 | | October 28, 2018 | | November 3, 2019 | | October 28, 2018 |
Net sales – products | $ | 25,887 |
| | $ | 24,922 |
| | $ | 80,599 |
| | $ | 77,733 |
|
Net sales – services | 1,336 |
| | 1,380 |
| | 3,844 |
| | 3,979 |
|
Net sales | $ | 27,223 |
| | $ | 26,302 |
| | $ | 84,443 |
| | $ | 81,712 |
|
7Major product lines, as well as the associated merchandising departments (and related services), follow.
Table |
| | |
Major Product Line | | Merchandising Departments |
Building Materials | | Building Materials, Electrical/Lighting, Lumber, Millwork, and Plumbing |
Décor | | Appliances, Décor/Storage, Flooring, Kitchen and Bath, and Paint |
Hardlines | | Hardware, Indoor Garden, Outdoor Garden, and Tools |
During the first quarter of Contentsfiscal 2019, we combined the Electrical and Lighting merchandising departments into one department, Electrical/Lighting, and we renamed the Décor merchandising department to Décor/Storage. These changes had no impact on our net sales presentations.
THE HOME DEPOT, INC. AND SUBSIDIARIESNet sales by major product lines (and related services) follow.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
in millions | November 3, 2019 | | October 28, 2018 | | November 3, 2019 | | October 28, 2018 |
Building Materials | $ | 10,299 |
| | $ | 10,243 |
| | $ | 30,198 |
| | $ | 30,224 |
|
Décor | 9,383 |
| | 8,919 |
| | 28,178 |
| | 26,985 |
|
Hardlines | 7,541 |
| | 7,140 |
| | 26,067 |
| | 24,503 |
|
Net sales | $ | 27,223 |
| | $ | 26,302 |
| | $ | 84,443 |
| | $ | 81,712 |
|
amounts—————
Note: Net sales for certain merchandising departments were reflected as a financing activity. Cash paid by the Company to tax authorities when directly withholding shares for tax withholding purposes will continue to be classified as a financing activityreclassified in the Consolidated Statementsfirst quarter of Cash Flows. Stock-Based Compensation Expense will continue to reflect estimated forfeitures of share-based awards. The Company has adopted the applicable provisions of ASU No. 2016-09 prospectively.
fiscal 2019. As a result, ofprior-period amounts have been reclassified to conform with the adoption of ASU No. 2016-09, the Company recognized $7 million and $92 million of excess tax benefits related to share-based payment awards in its Provision for Income Taxes during the third quarter and first nine months of fiscal 2017, respectively. The recognition of these benefits contributed $0.01 and $0.08 to Diluted Earnings per Share for the third quarter and first nine months of fiscal 2017, respectively.current-period presentation.
| |
3. | LONG-TERM DEBTPROPERTY AND LEASES |
Net Property and Equipment
Net property and equipment includes accumulated depreciation and amortization of $21.7 billion as ofNovember 3, 2019 and $20.6 billion as of February 3, 2019.
Leases
We lease certain retail locations, office space, warehouse and distribution space, equipment, and vehicles. While most of these leases are operating leases, certain retail locations and equipment are leased under finance leases. We consider various factors such as market conditions and the terms of any renewal options that may exist to determine whether we will renew or replace the lease. A substantial majority of our leases have remaining lease terms of one to 20 years, typically with the option to extend the leases for up to five years. Some of our leases may include the option to terminate in less than five years. In September 2017, the Companyevent we are reasonably certain to exercise the option to extend a lease, we will include the extended terms in the related lease assets and liabilities. Real estate taxes, insurance, maintenance, and operating expenses applicable to the leased property are generally our obligations under the lease agreements.
Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. Further, certain lease agreements include rental payments based on an index or rate and others include rental payments based on a percentage of sales.
The consolidated balance sheet location of assets and liabilities related to operating and finance leases follow.
|
| | | | |
in millions | Consolidated Balance Sheet Caption | November 3, 2019 |
Assets: | | |
Operating lease assets | Operating lease right-of-use assets | $ | 5,638 |
|
Finance lease assets | Net property and equipment | 876 |
|
Total lease assets | | $ | 6,514 |
|
| | |
Liabilities: | | |
Current: | | |
Operating lease liabilities | Current operating lease liabilities | $ | 828 |
|
Finance lease liabilities | Current installments of long-term debt | 69 |
|
Long-term: | | |
Operating lease liabilities | Long-term operating lease liabilities | 5,113 |
|
Finance lease liabilities | Long-term debt, excluding current installments | 1,035 |
|
Total lease liabilities | | $ | 7,045 |
|
The components of lease cost follow.
|
| | | | | | | | |
in millions | Consolidated Statement of Earnings Caption | Three Months Ended November 3, 2019 | | Nine Months Ended November 3, 2019 |
Operating lease cost | Selling, general and administrative | $ | 211 |
| | $ | 626 |
|
Finance lease cost: | | | | |
Amortization of leased assets | Depreciation and amortization | 21 |
| | 64 |
|
Interest on lease liabilities | Interest expense | 23 |
| | 69 |
|
Short-term lease cost | Selling, general and administrative | 30 |
| | 73 |
|
Variable lease cost | Selling, general and administrative | 53 |
| | 175 |
|
Sublease income | Selling, general and administrative | (3 | ) | | (10 | ) |
Net lease cost | | $ | 335 |
| | $ | 997 |
|
ASU 2016-02 requires that public companies use a secured incremental borrowing rate as the discount rate for the present value of lease payments when the rate implicit in the contract is not readily determinable. We determine a secured rate on a quarterly basis and update the weighted average discount rate accordingly. Lease terms and discount rates follow.
|
| | |
| November 3, 2019 |
Weighted Average Remaining Lease Term (Years): | |
Operating leases | 10 |
|
Finance leases | 13 |
|
| |
Weighted Average Discount Rate: | |
Operating leases | 3.1 | % |
Finance leases | 10.9 | % |
The approximate future minimum lease payments under operating and finance leases at November 3, 2019 follow.
|
| | | | | | | |
in millions | Operating Leases | | Finance Leases |
Fiscal 2019 | $ | 239 |
| | $ | 40 |
|
Fiscal 2020 | 953 |
| | 156 |
|
Fiscal 2021 | 845 |
| | 154 |
|
Fiscal 2022 | 745 |
| | 153 |
|
Fiscal 2023 | 650 |
| | 147 |
|
Thereafter | 3,274 |
| | 1,074 |
|
Total lease payments | 6,706 |
| | 1,724 |
|
Less imputed interest | 765 |
| | 620 |
|
Present value of lease liabilities | $ | 5,941 |
| | $ | 1,104 |
|
—————
Note: Amounts presented do not include payments relating to immaterial leases excluded from the consolidated balance sheets as part of transition elections adopted upon implementation of Topic 842. Additionally, we have excluded approximately $1.6 billion of leases (undiscounted basis) that have not yet commenced. These leases will commence between 2019 and 2020 with lease terms of one to 20 years.
The approximate future minimum lease payments under capital and operating leases at February 3, 2019 and accounted for under previous lease guidance follow.
|
| | | | | | | |
in millions | Operating Leases | | Capital Leases |
Fiscal 2019 | $ | 976 |
| | $ | 150 |
|
Fiscal 2020 | 912 |
| | 167 |
|
Fiscal 2021 | 792 |
| | 143 |
|
Fiscal 2022 | 682 |
| | 142 |
|
Fiscal 2023 | 584 |
| | 137 |
|
Thereafter | 3,090 |
| | 970 |
|
| $ | 7,036 |
| | 1,709 |
|
Less imputed interest | | | 660 |
|
Net present value of capital lease obligations | | | 1,049 |
|
Less current installments | | | 57 |
|
Long-term capital lease obligations, excluding current installments | | | $ | 992 |
|
Other lease information follows. |
| | | |
in millions | Nine Months Ended November 3, 2019 |
Cash paid for amounts included in the measurement of lease liabilities: | |
Operating cash flows – operating leases | $ | 750 |
|
Operating cash flows – finance leases | 69 |
|
Financing cash flows – finance leases | 46 |
|
Leased assets obtained in exchange for new operating lease liabilities | 589 |
|
Leased assets obtained in exchange for new finance lease liabilities | 101 |
|
| |
4. | DEBT AND DERIVATIVE INSTRUMENTS |
June 2019 Issuance. In June 2019, we issued two tranches of senior notes.
The first tranche consisted of $1.0 billion of 2.80%2.95% senior notes due September 14, 2027June 15, 2029 (the "2027 notes"“2029 notes”) at a discount of $3$6 million. Interest on the 20272029 notes is due semi-annually on March 14June 15 and September 14December 15 of each year, beginning March 14, 2018. December 15, 2019.
The $3 million discount associated with the 2027 notes is being amortized over the termsecond tranche consisted of the notes using the effective interest rate method. Issuance costs of $6 million associated with the 2027 notes were recorded as a direct deduction to the carrying value of the senior notes and are being amortized over the term of the notes. The net proceeds of the 2027 notes were used to repay the Company's floating rate notes due September 15, 2017 and for general corporate purposes, including repurchases of the Company's common stock.
In June 2017, the Company issued $500 million of floating rate senior notes due June 5, 2020 (the "2020 floating rate notes"); $750 million of 1.80% senior notes due June 5, 2020 (the "2020 notes") at a discount of $1 million; and $750$400 million of 3.90% senior notes due June 15, 2047 (the "2047 notes"“2047 notes”) at a discountpremium of $5$10 million. The 2047 notes form a single series with the Company’s $750 million (together,3.90% senior notes due June 15, 2047 that were issued in June 2017 and have the "June 2017 issuance").same terms. The 2020 floating rateaggregate principal amount outstanding of the Company’s senior notes bear interest at a variable rate determined quarterly equal to the three-month London Interbank Offered Rate ("LIBOR") plusdue June 15, basis points. Interest on the 2020 floating rate notes2047 is due quarterly on March 5, June 5, September 5, and December 5 of each year, beginning September 5, 2017. Interest on the 2020 notes is due semi-annually on June 5 and December 5 of each year, beginning December 5, 2017.$1.2 billion. Interest on the 2047 notes is due semi-annually on June 15 and December 15 of each year, beginning December 15, 2017. Interest payments for the 2020 notes and 2047 notes will include accrued2019, with interest accruing from and including June 5, 2017. The $6 million discount associated with the 2020 notes and the 2047 notes is being amortized over the term of the notes using the effective interest rate method. 15, 2019.
Issuance costs of $12 million associated with the June 2017 issuance were recorded as a direct deduction to the carrying value of the senior notes and are being amortized over the term of the notes.totaled $9.9 million. The net proceeds of the June 20172019 issuance were used to repay the Company's 2.00% senior notes that matured on June 15, 2019 and for general corporate purposes, including repurchases of the Company's common stock.
All of the Company's seniorThe 2029 notes other than its outstanding floating rateand 2047 notes may be redeemed by the Companyus at any time, in whole or in part, at the redemption price plus accrued interest up to the redemption date. The redemption price is equal to the greater of (1) 100% of the principal amount of the notes to be redeemed, or (2) the sum of the present values of the remaining scheduled payments of principal and interest to the Par Call Date, as defined in the respective notes. Additionally, if a Change in Control Triggering Event, occurs, as defined in the notes, occurs, holders of all notes have the right to require the Companyus to redeem those notes at 101% of the aggregate principal amount of the notes plus accrued interest up to the redemption date. The Company isWe are generally not limited under the indentures governing the notes in itsour ability to incur additional indebtedness or required 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 the Company'sour liquidity or capital resources.
Also, in September 2017,June 2019, we entered into an interest rate swap agreement with a notional amount of $250$350 million, accounted for as a fair value hedge, to hedge against changes in the fair value of the 20272029 notes attributable to changes in the designated benchmark interest rate.
| |
4.5. | ACCELERATED SHARE REPURCHASE AGREEMENTSSTOCKHOLDERS' EQUITY |
The Company enters into Stock Rollforward
A reconciliation of the number of shares of our common stock and dividends per share follows. |
| | | | | | | | | | | | | | | |
shares in millions | Three Months Ended | | Nine Months Ended |
November 3, 2019 | | October 28, 2018 | | November 3, 2019 | | October 28, 2018 |
Common stock: | | | | | | | |
Balance at beginning of period | 1,785 |
| | 1,782 |
| | 1,782 |
| | 1,780 |
|
Shares issued under employee stock plans | — |
| | — |
| | 3 |
| | 2 |
|
Balance at end of period | 1,785 |
| | 1,782 |
| | 1,785 |
| | 1,782 |
|
Treasury stock: | | | | | | | |
Balance at beginning of period | (689 | ) | | (637 | ) | | (677 | ) | | (622 | ) |
Repurchases of common stock | (6 | ) | | (14 | ) | | (18 | ) | | (29 | ) |
Balance at end of period | (695 | ) | | (651 | ) | | (695 | ) | | (651 | ) |
Shares outstanding at end of period | 1,090 |
| | 1,131 |
| | 1,090 |
| | 1,131 |
|
| | | | | | | |
Cash dividends per share | $ | 1.36 |
| | $ | 1.03 |
| | $ | 4.08 |
| | $ | 3.09 |
|
Accelerated Share Repurchase ("ASR")Agreements
We enter into ASR agreements from time to time with third-party financial institutions to repurchase shares of the Company’sour common stock. Under an ASR agreement, the Company pays a specified amount to the financial institution and receives an initial delivery of shares. This initial delivery of shares represents the minimum number of shares that the Company may receive under the agreement. Upon settlement of the ASR agreement, the financial institution delivers additional shares, with the final number of shares delivered determined with reference to the volume weighted average price per share of the Company’s common stock over the term of the ASR agreement, less a negotiated discount. The transactionsThese agreements are accounted forstructured as equity transactions and are included in Treasury Stock when the
THE HOME DEPOT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
shares are received, at which time there is an immediate reductionoutlined in the weighted average common shares calculation for Basic and Diluted Earnings per Share.
2018 Form 10-K. The following table provides the terms for each of the ASR agreements the Company entered into during the first nine months of fiscal 2017. Each of these agreements followed the structure outlined above (amounts inended November 3, 2019 follow (in millions):.
|
| | | | | | | | | | | | |
Agreement Date | | Settlement Date | | Agreement Amount | | Initial Shares Delivered | | Additional Shares Delivered | | Total Shares Delivered |
Q2 2017 | | Q2 2017 | | $ | 1,650 |
| | 9.7 | | 1.1 | | 10.8 |
Q3 2017(1) | | Q4 2017 | | $ | 1,200 |
| | 6.7 | | 0.7 | | 7.4 |
|
| | | | | | | | | | | | | | | |
Agreement Date | | Settlement Date | | Agreement Amount | | Initial Shares Delivered | | Additional Shares Delivered | | Total Shares Delivered |
Q3 2019 (1) | | Q4 2019 (2) | | $ | 820 |
| | 3.2 |
| | 0.4 |
| | 3.6 |
|
—————
| |
(1) | The fair market value of the initial 6.73.2 million shares on the date of delivery was $1,053$720 million and is included in Treasury Stock in the accompanying Consolidated Balance Sheetstreasury stock as of October 29, 2017. TheNovember 3, 2019, with the remaining $147$100 million is included in Paid-In Capital in the accompanying Consolidated Balance Sheets as of October 29, 2017. The ASR agreement terminated on November 17, 2017, at which time the Company became contractually entitled to receivepaid-in capital. |
| |
(2) | We received an additional 0.70.4 million shares upon settlement.termination of the ASR agreement in November 2019. |
See Note 6 to the consolidated financial statements in the 2018 Form 10-K for further discussion.
| |
5.6. | FAIR VALUE MEASUREMENTS |
The carrying amount of Cash and Cash Equivalents, Receivables and Accounts Payable as reported in the Company's Consolidated Balance Sheets approximates fair value dueof an asset is considered to their short-term maturities.be the price at which the asset could be sold in an orderly transaction between unrelated knowledgeable and willing parties. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor, rather than the amount that would be paid to settle the liability with the creditor. Assets and liabilities recorded at fair value are measured using a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the assetsAssets and liabilities if any, of the Company that are measured at fair value on a recurring basis:basis follow.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value at November 3, 2019 Using | | Fair Value at February 3, 2019 Using |
in millions | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Derivative agreements – assets | $ | — |
| | $ | 92 |
| | $ | — |
| | $ | — |
| | $ | 138 |
| | $ | — |
|
Derivative agreements – liabilities | — |
| | — |
| | — |
| | — |
| | (11 | ) | | — |
|
Total | $ | — |
| | $ | 92 |
| | $ | — |
| | $ | — |
| | $ | 127 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value at October 29, 2017 Using | | Fair Value at January 29, 2017 Using |
amounts in millions | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Derivative agreements - assets | $ | — |
| | $ | 189 |
| | $ | — |
| | $ | — |
| | $ | 271 |
| | $ | — |
|
Derivative agreements - liabilities | — |
| | (9 | ) | | — |
| | — |
| | — |
| | — |
|
Total | $ | — |
| | $ | 180 |
| | $ | — |
| | $ | — |
| | $ | 271 |
| | $ | — |
|
The Company usesWe use derivative financial instruments from time to time in the management of itsour interest rate exposure on certain Long-Term Debtlong-term debt and itsour exposure toon foreign currency fluctuations. The fair value of our derivative financial instruments was measured using observable market information (level 2).
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The carrying amounts of cash and cash equivalents, receivables, short-term debt, and accounts payable approximate fair value due to the short-term maturities of these financial instruments.
Long-lived assets were analyzed for impairment on aand other intangible assets are subject to nonrecurring basis using fair value measurements with unobservable inputs (level 3). Impairment charges related to long-lived assets inmeasurement for the first nine monthsassessment of fiscal 2017 and 2016 were not material.
impairment or as the result of business acquisitions. During the third quarter of fiscal 2017, the Company2019, we completed itsour annual assessment of the recoverability of Goodwillgoodwill for itsour U.S., Canada and Mexico reporting units. The Company performed qualitative assessments, concluding thatfair values of these reporting units were estimated using the present value of expected future discounted cash flows through unobservable inputs (level 3), and the fair value of the reporting units was not more likely than not less thanexceeded the carrying value.value for each respective reporting unit. Accordingly, no Goodwill impairments0 impairment charges related to goodwill were recorded for these reporting units.
Including goodwill as described above, we did not have any material assets or liabilities that were measured at fair value on a nonrecurring basis as of November 3, 2019 or February 3, 2019, respectively.
The aggregate fair values and carrying values of
the Company'sour senior notes
were as follows: |
| | | | | | | | | | | | | | | |
| October 29, 2017 | | January 29, 2017 |
amounts in millions | Fair Value (Level 1) | | Carrying Value | | Fair Value (Level 1) | | Carrying Value |
Senior notes | $ | 26,650 |
| | $ | 24,482 |
| | $ | 23,620 |
| | $ | 22,013 |
|
follow.
9 |
| | | | | | | | | | | | | | | |
| November 3, 2019 | | February 3, 2019 |
in millions | Fair Value (Level 1) | | Carrying Value | | Fair Value (Level 1) | | Carrying Value |
Senior notes | $ | 31,545 |
| | $ | 27,311 |
| | $ | 28,348 |
| | $ | 26,814 |
|
THE HOME DEPOT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| |
6. | BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES |
The following table presents the reconciliation of basic to diluted weighted average common shares as well as the effect of anti-dilutive securities excluded from diluted weighted average common shares:
|
| | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
amounts in millions | October 29, 2017 | | October 30, 2016 | | October 29, 2017 | | October 30, 2016 |
Basic Weighted Average Common Shares | 1,168 |
| | 1,224 |
| | 1,184 |
| | 1,236 |
|
Effect of potentially dilutive securities | 6 |
| | 5 |
| | 6 |
| | 6 |
|
Diluted Weighted Average Common Shares | 1,174 |
| | 1,229 |
| | 1,190 |
| | 1,242 |
|
| | | | | | | |
Effect of anti-dilutive securities excluded from Diluted Weighted Average Common Shares | — |
| | 1 |
| | 1 |
| | 1 |
|
| |
7. | WEIGHTED AVERAGE COMMON SHARES |
The reconciliation of our basic to diluted weighted average common shares follows.
|
| | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
in millions | November 3, 2019 | | October 28, 2018 | | November 3, 2019 | | October 28, 2018 |
Basic weighted average common shares | 1,089 |
| | 1,135 |
| | 1,096 |
| | 1,144 |
|
Effect of potentially dilutive securities | 5 |
| | 6 |
| | 4 |
| | 6 |
|
Diluted weighted average common shares | 1,094 |
| | 1,141 |
| | 1,100 |
| | 1,150 |
|
| | | | | | | |
Anti-dilutive securities excluded from diluted weighted average common shares | — |
| | — |
| | — |
| | — |
|
| |
8. | COMMITMENTS AND CONTINGENCIES |
Data Breach
As previously reported,We are involved in litigation arising in the third quarternormal course of fiscal 2014, the Company confirmed that its payment data systems were breached, which potentially impacted customers who used payment cards at self-checkout systems in the Company’s U.S. and Canadian stores (the "Data Breach"). Since the end of fiscal 2016, there have been no material changes with respectbusiness. In management’s opinion, any such litigation is not expected to the Data Breach, except as discussed below.
As reported in the 2016 Form 10-K, in the first quarter of fiscal 2017, the Company agreed to settlement terms that, upon approval of the court, will resolve and dismiss the claims asserted in the financial institutions class actions. In addition, in the first quarter of fiscal 2017, the parties to the purported shareholder derivative actions agreed to settlement terms that, upon approval of the court, will resolve and dismiss the claims asserted in those actions. In the third quarter of fiscal 2017, both of these settlement agreements were approved by the court.
As of the end of the first quarter of fiscal 2017, the Company has resolved the most significant claims relating to the Data Breach, and there were no material changes during the first nine months of fiscal 2017 to the Company’s loss contingency assessment relating to any remaining matters. The Company does not believe that the ultimate amounts paid with respect to any remaining matters will have a material adverse effect on the Company’sour consolidated financial condition, results of operations, or cash flows in future periods.flows.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TheTo the Stockholders and Board of Directors and Stockholders
The Home Depot, Inc.:
Results of Review of Interim Financial Information
We have reviewed the Consolidated Balance Sheet of The Home Depot, Inc. and Subsidiariesits subsidiaries (the “Company”) as of October 29, 2017,November 3, 2019, the related Consolidated Statements of Earnings, and Comprehensive Income, and Stockholders’ Equity for the three-month and nine-month periods ended October 29, 2017November 3, 2019 and October 30, 2016, and28, 2018, the related Consolidated Statements of Cash Flows for the nine-month periods ended October 29, 2017November 3, 2019 and October 30, 2016. These28, 2018, and the related notes (collectively, the “Consolidated Interim Financial Information”). Based on our reviews, we are not aware of any material modifications that should be made to the Consolidated Interim Financial Statements are the responsibility of the Company's management.Information for it to be in conformity with U.S. generally accepted accounting principles.
We conducted our reviewshave previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States). (“PCAOB”), the Consolidated Balance Sheet of the Company as of February 3, 2019, and the related Consolidated Statements of Earnings, Comprehensive Income, Stockholders’ Equity, and Cash Flows for the year then ended (not presented herein); and in our report dated March 28, 2019, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying Consolidated Balance Sheet as of February 3, 2019, is fairly stated, in all material respects, in relation to the Consolidated Balance Sheet from which it has been derived.
Basis for Review Results
This Consolidated Interim Financial Information is the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with the standards of the PCAOB. A review of consolidated interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States),PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the Consolidated Financial Statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the Consolidated Balance Sheet of The Home Depot, Inc. and Subsidiaries as of January 29, 2017, and the related Consolidated Statements of Earnings, Comprehensive Income, Stockholders' Equity, and Cash Flows for the year then ended (not presented herein); and in our report dated March 23, 2017, we expressed an unqualified opinion on those Consolidated Financial Statements. In our opinion, the information set forth in the accompanying Consolidated Balance Sheet as of January 29, 2017, is fairly stated, in all material respects, in relation to the Consolidated Balance Sheet from which it has been derived.
/s/ KPMG LLP
Atlanta, Georgia
November 20, 201725, 2019
| |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
FORWARD-LOOKING STATEMENTS
Certain statements contained herein regarding our future performance constitute "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements may relate to, among other things, the demand for our products and services; net sales growth; comparable store sales; effects of competition; state of the economy; state of the residential construction, housing and home improvement markets; state of the credit markets, including mortgages, home equity loans and consumer credit; demand for credit offerings; inventory and in-stock positions; implementation of store, interconnected retail, supply chain and technology initiatives; management of relationships with our suppliers and vendors; the impact and expected outcome of investigations, inquiries, claims and litigation, including those related to the Data Breach we discovered in the third quarter of fiscal 2014; issues related to the payment methods we accept; continuation of share repurchase programs; net earnings performance; earnings per share; dividend targets; capital allocation and expenditures; liquidity; return on invested capital; expense leverage; stock-based compensation expense; commodity price inflation and deflation; the ability to issue debt on terms and at rates acceptable to us; the effect of accounting charges; the effect of adopting certain accounting standards; store openings and closures; financial outlook; and the integration of acquired companies into our organization and the ability to recognize the anticipated synergies and benefits of those acquisitions.
Forward-looking statements are based on currently available information and our current assumptions, expectations and projections about future events. You should not rely on our forward-looking statements. These statements are not guarantees of future performance and are subject to future events, risks and uncertainties – many of which are beyond our control or are currently unknown to us – as well as potentially inaccurate assumptions that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, those described in Part II, Item 1A, "Risk Factors" and elsewhere in this report. You should read such information in conjunction with our Consolidated Financial Statements and related notes and "Management's2. Management's Discussion and Analysis of Financial Condition and Results of Operations" in this report. There also may be other factors that we cannot anticipate or that are not described in this report, generally because we do not currently perceive them to be material. Such factors could cause results to differ materially from our expectations.Operations.
Forward-looking statements speak only as ofOur MD&A includes the date they are made, and we do not undertake to update these statements other than as required by law. You are advised, however, to review any further disclosures we make on related subjects in our periodic filings with the Securities and Exchange Commission ("SEC").following sections:
Executive Summary
Quarter to date and year to date highlights of our financial performance follow. EXECUTIVE SUMMARY AND SELECTED FINANCIAL AND OPERATING DATANet Sales increased 8.1% to $25.0 |
| | | | | | | | | | | | | | | |
dollars in millions, except per share data | Three Months Ended | | Nine Months Ended |
November 3, 2019 | | October 28, 2018 | | November 3, 2019 | | October 28, 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 |
| | $ | 7.96 |
| | $ | 7.63 |
|
| | | | | | | |
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 | | | | | $ | 3,909 |
| | $ | 5,518 |
|
We reported net sales of $27.2 billion forin the third quarter of fiscal 2017 from $23.22019. Net earnings were $2.8 billion, for the third quarter of fiscal 2016.or $2.53 per diluted share. For the first nine months of fiscal 2017, Net Sales increased 6.4% to $77.0 billion from $72.4 billion for the first nine months of fiscal 2016. Our total comparable store2019, net sales increased 7.9% for the third quarter of fiscal 2017, driven by a 5.1% increase in our comparable store average ticket and a 2.7% increase in our comparable store customer transactions. Comparable store sales for our U.S. stores increased 7.7% for the third quarter of fiscal 2017. For the first nine months of fiscal 2017, our total comparable store sales increased 6.6% and comparable store sales for our U.S. stores increased 6.8%.
For the third quarter of fiscal 2017, we reported Net Earnings of $2.2were $84.4 billion and Diluted Earningsnet earnings were $8.8 billion, or $7.96 per Share of $1.84 compared to Net Earnings of $2.0 billion and Diluted Earnings per Share of $1.60 for the third quarter of fiscal 2016. For the first nine months of fiscal 2017, we reported Net Earnings of $6.9 billion and Diluted Earnings per Share of $5.76 compared to Net Earnings of $6.2 billion and Diluted Earnings per Share of $5.00 for the first nine months of fiscal 2016.diluted share.
In the third quarter of fiscal 2017, three hurricanes impacted our operationsWe closed one store in the continental U.S., Puerto Rico and the U.S. Virgin Islands. Hurricane-related sales positively impacted total sales growth by approximately $282 million in the third quarter of fiscal 2017. The gross margin on these hurricane-related sales was considerably less than the Company average. We also incurred approximately $104 million of hurricane-related expense in the third quarter of fiscal 2017. As a result of the hurricanes, operating profit was negatively impacted by approximately $51 million in the third quarter of fiscal 2017.
We opened one new store in Mexico during the third quarter of fiscal 2017, for2019 due to a natural disaster, resulting in a total store count of 2,2832,290 at the end of the quarter. As of the end of the third quarter of fiscal 2017,November 3, 2019, a total of 303306 of our stores, or 13.3%13.4%, were located in Canada and Mexico. Total sales per square foot forFor the third quarter of fiscal 2017 were $412.49, up 7.9% from last year. For the first nine months of 2017,2019, total sales per square foot were $423.60, up 6.1% from last year. Our$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 timesmillion 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 in June 2019. In February 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 2017 compared to 5.0 times at2019. See the end"Non-GAAP Financial Measures" section below for our definition and calculation of the third quarter of fiscal 2016.
In the third quarter and first nine months of fiscal 2017, we continued to focus on the following:
Customer Experience – Customer experience is anchored on the principles of putting customers first and taking care of our associates, and our commitment to customer service remains strong. In the first nine months of fiscal 2017, we continued to invest in our digital platforms, including content, website improvements, and the mobile experience, to provide a frictionless interconnected experience online, while also remaining focused on improving the interconnected experience in the store. Sales from our online channels increased 18.6% for the third quarter of fiscal 2017 compared to the same period last year, and represented 6.2% of our total Net Sales. For the first nine months of fiscal 2017, sales from our online channels increased 21.6% compared to the same period last year, and represented 6.4% of our total Net Sales. We also continued to focus on being a valued partner to our professional customers by offering solutions in the store and at the jobsite that help them effectively manage their businesses.
Product Authority – Product authority is facilitated by our merchandising transformation and portfolio strategy, which is focused on delivering product innovation, assortment and value. We strive to be the leader in product authority, connecting products and services to the needs of our customers. In the first nine months of fiscal 2017, our merchants continued to collaborate with our suppliers to introduce a wide range of innovative new products to our do-it-yourself, do-it-for-me and professional customers, while remaining focused on offering everyday values in our stores and online.
Productivity and Efficiency Driven by Capital Allocation – We drive productivity and efficiency through continuous operational improvement in our stores and supply chain. Further, our disciplined capital allocation builds shareholder value through higher returns on invested capital and total value returned to shareholders in the form of dividends and share repurchases. We plan to continue to innovate our business model and value chain to support our productivity cycle and enhance overall value for customers throughout the year.
In February 2017, our Board of Directors increased our targeted dividend payout ratio to 55% of Diluted Earnings per Share. Also in February 2017, our Board of Directors authorized a new $15.0 billion share repurchase program that replaced the previous authorization. Under the program, we repurchased a total of 12.3 million shares of our common stock for $2.1 billion through an ASR agreement and the open market during the third quarter of fiscal 2017. During the first nine months of fiscal 2017, we repurchased 38.0 million shares of our common stock for $5.9 billion through ASR agreements and the open market.
We generated $9.7 billion of cash flow from operations in the first nine months of fiscal 2017. This cash flow, along with $3.0 billion of long-term debt issued in the first nine months of fiscal 2017, was used to fund cash payments of $6.1 billion for share repurchases, pay $3.2 billion of dividends, fund $1.4 billion in capital expenditures, repay $585 million of short-term debt, and repay $500 million of floating rate senior notes that matured on September 15, 2017.
Our return on invested capital ("ROIC") was 32.5% for the third quarter of fiscal 2017 compared to 29.1% for the third quarter of fiscal 2016. We define ROIC, as net operating profit after tax ("NOPAT"),well as a reconciliation of NOPAT, a non-GAAP financial measure, for the most recent twelve-month period, divided by the average of beginning and ending long-term debt, including current installments, and equity for the most recent twelve-month period. For a reconciliation of NOPAT to Net Earnings, thenet earnings (the most comparable GAAP financial measure,measure).
Results of Operations and Non-GAAP Financial Measures
The tables and discussion below should be read in conjunction with our calculation of ROIC, see "Non-GAAP Financial Measures" below.
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 Salesnet sales and the major categories in the Consolidated Statementsour consolidated statements of Earnings andearnings, as well as the percentage change in the associated dollar amounts, of each of these items as well as the selected sales data presented below are important in evaluating the performancerelevant to an evaluation of our business operations.business.
Fiscal 2019 and Fiscal 2018 Three Month Comparisons
|
| | | | | | | | | | | | | | | | | | | | | |
| % of Net Sales | | % Increase (Decrease) in Dollar Amounts |
| Three Months Ended | | Nine Months Ended | |
| October 29, 2017 | | October 30, 2016 | | October 29, 2017 | | October 30, 2016 | | Three Months | | Nine Months |
NET SALES | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 8.1 | % | | 6.4 | % |
GROSS PROFIT | 34.6 |
| | 34.7 |
| | 34.1 |
| | 34.2 |
| | 7.5 |
| | 6.1 |
|
Operating Expenses: | | | | |
|
| |
|
| | | | |
Selling, General and Administrative | 18.0 |
| | 18.5 |
| | 17.4 |
| | 17.9 |
| | 5.5 |
| | 3.7 |
|
Depreciation and Amortization | 1.8 |
| | 1.9 |
| | 1.7 |
| | 1.8 |
| | 2.7 |
| | 2.7 |
|
Total Operating Expenses | 19.9 |
| | 20.4 |
| | 19.2 |
| | 19.7 |
| | 5.2 |
| | 3.6 |
|
| | | | | | | | | | | |
OPERATING INCOME | 14.7 |
| | 14.3 |
| | 14.9 |
| | 14.5 |
| | 10.8 |
| | 9.4 |
|
Interest and Other (Income) Expense: | | | | | | | | | | | |
Interest and Investment Income | (0.1 | ) | | — |
| | (0.1 | ) | | — |
| | N/M |
| | N/M |
|
Interest Expense | 1.1 |
| | 1.1 |
| | 1.0 |
| | 1.0 |
| | 9.3 |
| | 8.5 |
|
Interest and Other, net | 1.0 |
| | 1.0 |
| | 1.0 |
| | 1.0 |
| | 4.7 |
| | 5.1 |
|
| | | | | | | | | | | |
EARNINGS BEFORE PROVISION FOR INCOME TAXES | 13.7 |
| | 13.3 |
| | 14.0 |
| | 13.5 |
| | 11.3 |
| | 9.8 |
|
Provision for Income Taxes | 5.1 |
| | 4.8 |
| | 5.1 |
| | 5.0 |
| | 13.7 |
| | 8.9 |
|
NET EARNINGS | 8.7 | % | | 8.5 | % | | 8.9 | % | | 8.6 | % | | 10.0 | % | | 10.3 | % |
| | | | | | | | | | | |
SELECTED SALES DATA (1) | | | | | | | | | | | |
Number of Customer Transactions (millions) | 389.5 |
| | 380.0 |
| | 1,212.0 |
| | 1,184.8 |
| | 2.5 | % | | 2.3 | % |
Average Ticket (actual) | $ | 62.84 |
| | $ | 59.78 |
| | $ | 62.78 |
| | $ | 60.26 |
| | 5.1 | % | | 4.2 | % |
Sales per Square Foot (actual) | $ | 412.49 |
| | $ | 382.18 |
| | $ | 423.60 |
| | $ | 399.12 |
| | 7.9 | % | | 6.1 | % |
Comparable Store Sales Increase (%) (2) | 7.9 | % | | 5.5 | % | | 6.6 | % | | 5.5 | % | | N/A |
| | N/A |
|
Online Sales (% of Net Sales) (3) | 6.2 | % | | 5.6 | % | | 6.4 | % | | 5.6 | % | | 18.6 | % | | 21.6 | % |
|
| | | | | | | | | | | | | |
| Three Months Ended |
| November 3, 2019 | | October 28, 2018 |
dollars in millions | $ | | % of Net Sales | | $ | | % of 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 | | |
Selected financial and sales data: | | | November 3, 2019 | | October 28, 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) | Selected Sales Data doesDoes not include results for Interline Brands, Inc., which was acquired in the third quarter of fiscal 2015. |
| |
(2) | Includes 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 GAAP.
|
| |
(3) | Consists of sales generated online through our websites for products picked up in stores or delivered to customer locations.Interline. |
N/M – Not MeaningfulSales. We assess our sales performance by evaluating both net sales and comparable sales.
N/A – Not Applicable
RESULTS OF OPERATIONS
Net Sales. Net sales for the third quarter of fiscal 20172019 increased 8.1%3.5% to $25.0$27.2 billion from $23.2$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 stronger U.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
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 2016.2019 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.
Fiscal 2019 and Fiscal 2018 Nine Month Comparisons
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| | | | | | | | | | | | | |
| Nine Months Ended |
| November 3, 2019 | | October 28, 2018 |
dollars in millions | $ | | % of Net Sales | | $ | | % of 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 | % |
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Note: Certain percentages may not sum to totals due to rounding.
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| | | | | | | | | | | |
| | | 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% |
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(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 2017, Net Sales2019, net sales increased 6.4%3.3% to $77.0$84.4 billion from $72.4$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 stronger U.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,
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 2016. The increase2019 from $14.6 billion in Net Sales for the third quarter and first nine months of fiscal 2017 primarily reflects the impact of positive comparable store sales driven by increased customer transactions and average ticket growth. Hurricane-related sales positively impacted total sales growth by approximately $282 million in the third quarter of fiscal 2017. We expect continued hurricane recovery-related sales in the fourth quarter of fiscal 2017.
Total comparable store sales increased 7.9% and 6.6% for the third quarter and first nine months of fiscal 2017, respectively, which reflects a number of factors, including the execution of our strategy and broad-based growth across our stores. All of our departments except one posted positive comparable store sales for the third quarter of fiscal 2017. During the first nine months of fiscal 2017, all2018. As a percent of our departments posted positive comparable storenet sales, except for one, whichSG&A was flat. Comparable store sales for our Lumber, Appliances, Electrical, Indoor Garden, Tools, Building Materials and Flooring product categories were above the Company average for the third quarter of fiscal 2017. Further, our comparable store average ticket increased 5.1% and 4.2% for the third quarter and first nine months of fiscal 2017, respectively, due17.7% in part to strong sales in big ticket purchases such as appliances and flooring. Our comparable store customer transactions increased 2.7% and 2.3% for the third quarter and first nine months of fiscal 2017, respectively.
Gross Profit increased 7.5% to $8.6 billion for the third quarter of fiscal 2017 from $8.0 billion for the third quarter of fiscal 2016. For the first nine months of fiscal 2017, Gross Profit increased 6.1% to $26.3 billion from $24.8 billion for the first nine months of fiscal 2016. Gross Profit as a percent of Net Sales, or gross profit margin, was 34.6% for the third quarter of fiscal 2017 compared to 34.7% for the third quarter of fiscal 2016. For the first nine months of fiscal 2017, gross profit margin was 34.1% compared to 34.2% for the first nine months of fiscal 2016. Gross profit margin for the third quarter of fiscal 2017 reflects pressure from product mix changes and higher supply chain expense driven by hurricane-related sales. Gross profit margin for the first nine months of fiscal 2017 reflects the impact of product mix changes and higher shrink, partially offset by benefits from our supply chain.
Selling, General and Administrative ("SG&A") increased 5.5% to $4.5 billion for the third quarter of fiscal 2017 from $4.3 billion for the third quarter of fiscal 2016. For the first nine months of fiscal 2017, SG&A increased 3.7% to $13.4 billion from $12.9 billion for the first nine months of fiscal 2016. SG&A includes approximately $104 million of hurricane-related expenses in the third quarter and first nine months of fiscal 2017. As a percent of Net Sales, SG&A was 18.0% for the third quarter of fiscal 2017 compared to 18.5% for the third quarter of fiscal 2016. For the first nine months of fiscal 2017, SG&A as a percent of Net Sales was 17.4%2019 compared to 17.9% for the first nine months of fiscal 2016.2018. The decrease in SG&A as a percent of Net Salesnet sales for the third quarter and first nine months of fiscal 2017 reflects2019 was primarily driven by expense leverage resulting from the positive comparable store sales environment and continued expense control.control, partially offset by expenses related to strategic investments in the business.
Depreciation and Amortization. Depreciation and amortization increased 2.7%$80 million to $454 million for$1.5 billion in the third quarterfirst nine months of fiscal 20172019 from $442 million for$1.4 billion in the third quarterfirst nine months of fiscal 2016. Depreciation2018. As a percent of net sales, depreciation and Amortizationamortization was $1.3 billionunchanged at 1.7% for the first nine months of both fiscal 20172019 and 2016. Depreciationfiscal 2018, reflecting strategic investments in the business, leverage resulting from positive comparable sales, and Amortization as a percenttiming of Net Salesasset additions.
Interest and Other, net. Interest and other, net was 1.8% for the third quarter of fiscal 2017 compared to 1.9% for the third quarter of fiscal 2016. For$836 million in the first nine months of fiscal 2017, Depreciation and Amortization as a percent of Net Sales was 1.7%2019, compared to 1.8% for the first nine months of fiscal 2016. Depreciation and Amortization as a percent of Net Sales for the third quarter and first nine months of fiscal 2017 reflects expense leverage resulting from the positive comparable store sales environment.
Operating Income increased 10.8% to $3.7 billion for the third quarter of fiscal 2017 from $3.3 billion for the third quarter of fiscal 2016. For the first nine months of fiscal 2017, Operating Income increased 9.4% to $11.5 billion from $10.5 billion for the first nine months of fiscal 2016. As a result of the hurricanes, Operating Income was negatively impacted by approximately $51 million in the third quarter and first nine months of fiscal 2017. Operating Income as a percent of Net Sales was 14.7% for the third quarter of fiscal 2017 compared to 14.3% for the third quarter of fiscal 2016. For the first nine months of fiscal 2017, Operating Income as a percent of Net Sales was 14.9% compared to 14.5% for the first nine months of fiscal 2016.
Interest and Other, net, was $247 million for the third quarter of fiscal 2017 compared to $236 million for the third quarter of fiscal 2016. For the first nine months of fiscal 2017, Interest and Other, net, was $737 million compared to $701$709 million for the first nine months of fiscal 2016. Interest2018. 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,other, net as a percent of Net Salessales was 1.0%due primarily to higher interest expense resulting from higher debt balances.
Provision for the third quarter and first nine months of both fiscal 2017 and 2016.
Income Taxes.Our combined effective income tax rate was 36.3%24.5% for the first nine months of fiscal 20172019 compared to 36.6%23.3% for the first nine months of fiscal 2016.2018. The effectiveincrease in the provision for income taxes in the first nine months of fiscal 2019 was primarily due to nonrecurring tax ratebenefits 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 2017 reflects a $92 million benefit to our Provision for Income Taxes for share-based payment awards as a result of the adoption of ASU No. 2016-09.
Diluted Earnings per Share were $1.84 for the third quarter of fiscal 20172019, compared to $1.60 for the third quarter of fiscal 2016. For the first nine months of fiscal 2017, Diluted Earnings per Share were $5.76 compared to $5.00$7.63 for the first nine months of fiscal 2016. Diluted Earnings per Share for the third quarter and first nine months of fiscal 2017 included benefits of $0.01 and $0.08, respectively, as a result of the adoption of ASU No. 2016-09.
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 on Invested Capital
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.
The following table provides ourcalculation of ROIC, calculation and reconcilestogether with a reconciliation of NOPAT to Net Earnings:net earnings (the most comparable GAAP measure), follows.
|
| | | | | | | | |
| | Twelve Months Ended |
dollars in millions | | November 3, 2019 | | October 28, 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 | % |
|
| | | | | | | | |
| | For the Twelve Months Ended |
dollar amounts in millions | | October 29, 2017 | | October 30, 2016 |
Net Earnings | | $ | 8,595 |
| | $ | 7,684 |
|
Add: | | | | |
Interest and Other, net | | 972 |
| | 937 |
|
Provision for Income Taxes | | 4,852 |
| | 4,428 |
|
Operating Income | | 14,419 |
| | 13,049 |
|
Subtract: | | | | |
Income Tax Adjustment (1) | | 5,234 |
| | 4,771 |
|
Net Operating Profit After Tax | | $ | 9,185 |
| | $ | 8,278 |
|
| | | | |
Average Debt and Equity (2) | | $ | 28,255 |
| | $ | 28,441 |
|
| | | | |
Return on Invested Capital (3) | | 32.5 | % | | 29.1 | % |
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(1) | Income Tax Adjustmenttax adjustment is defined as Operating Incomeoperating income multiplied by the Company'sour effective tax rate. |
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(2) | Average Debt and Equity is defined as the average of beginning and ending long-term debt, including current installments, and equityrate for the most recent twelve-month period. |
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(3) | ROIC is calculated as NOPAT divided by Average Debt and Equity.trailing twelve months. |
LIQUIDITY AND CAPITAL RESOURCES
Cash flow generated from operations provides us with a significant source of liquidity. For the first nine months of fiscal 2017, Net Cash Provided by Operating Activities was $9.7 billion compared to $7.9 billion for the same period of fiscal 2016. This increase primarily reflects a $677 million increase in operating cash flows from the effective management and procurement of Merchandise Inventories and a $638 million increase in Net Earnings resulting from higher sales and expense leverage.
Net Cash Used in Investing Activities for the first nine months of fiscal 2017 was $1.6 billion compared to $1.1 billion for the same period of fiscal 2016. This change was primarily due to $260 million in Payments for Business Acquired, net, related to the acquisition of Compact Power Equipment, Inc. and a $209 million increase in Capital Expenditures.
Net Cash Used in Financing Activities for the first nine months of fiscal 2017 was $7.3 billion compared to $5.4 billion for the same period of fiscal 2016. This change was primarily due to $1.5 billion more in Repurchases of Common Stock, $607 million more in Cash Dividends Paid to Stockholders and $235 million more in Repayments of Short-Term Debt, partially offset by $532 million more in net incremental long-term debt issued in the first nine months of fiscal 2017 compared to the same period of fiscal 2016.
In September 2017, we issued the 2027 notes at a discount of $3 million. The net proceeds of the 2027 notes were used to repay our floating rate notes due September 15, 2017 and for general corporate purposes, including repurchases of shares of our common stock. See Note 3 to the Consolidated Financial Statements included in this report.
Also in September 2017, we entered into an interest rate swap agreement with a notional amount of $250 million, accounted for as a fair value hedge, to hedge against changes in the fair value of the 2027 notes attributable to changes in the designated benchmark interest rate.
In June 2017, we issued the 2020 floating rate notes; the 2020 notes at a discount of $1 million; and the 2047 notes at a discount of $5 million. The net proceeds of the June 2017 issuance were used for general corporate purposes, including repurchases of shares of our common stock. See Note 3 to the Consolidated Financial Statements included in this report.
In the second quarter of fiscal 2017, we entered into an ASR agreement under which we paid $1.65 billion to a third party financial institution and received a total of 10.8 million shares. In the third quarter of fiscal 2017, we entered into an ASR agreement under which we paid $1.2 billion to a third party financial institution and received an initial delivery of 6.7 million shares. The ASR agreement terminatedinformation on November 17, 2017, at which time the Company became contractually entitled to receive an additional 0.7 million shares upon settlement. See Note 4 to the Consolidated Financial Statements included in this report.
Weaccounting pronouncements that have commercial paper programs that allow for borrowings up to $2.0 billion. In connection with these 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 December 2019 and contains various customary covenants. At October 29, 2017, we were in compliance with all of the covenants, and noneimpacted or are expected to materially impact our liquidityconsolidated financial condition, results of operations, or capital resources. During the first nine months of fiscal 2017, all ofcash flows, see Note 1 to our short-term borrowings were under these commercial paper programs,consolidated financial statements.Liquidity and the maximum amount outstanding at any time during the first nine months of fiscal 2017 was $1.0 billion. As of October 29, 2017, there were $125 million of borrowings outstanding under the commercial paper programs.Capital Resources
As of October 29, 2017, we had $3.5 billion in Cash and Cash Equivalents.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, and 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 funds available from our commercial paper programs and the ability to obtain alternative sources of financing.
RECENT ACCOUNTING PRONOUNCEMENTSAs we continue our investments in the business, we expect capital expenditures of approximately $2.7 billion in fiscal 2019.
ForDebt 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 summaryconsortium of recently issued accounting pronouncementsbanks for borrowings up to $3.0 billion, which may be applicableconsist 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.
Cash Flows Summary
Operating Activities. Cash flow generated from operations provides us see Note 1with 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 Consolidated Financial Statements includedfirst nine months of fiscal 2018 and was primarily driven by changes in this report.working capital and deferred income taxes.
For a summaryInvesting Activities. Cash used in investing activities primarily reflected capital expenditures from the continuation of recently adopted accounting pronouncements, see Note 2our 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 Consolidated Financial Statements includedfirst nine months of fiscal 2018.
Financing Activities. Cash used in this report.financing activities primarily reflected:
$4.5 billion of cash dividends paid, $3.9 billion of share repurchases, $1.0 billion of net repayments of long-term debt, and $644 million of net repayments of short-term debt, partially offset by $1.4 billion of net proceeds from long-term debt in the first nine months of fiscal 2019, and
$5.5 billion of share repurchases, $3.5 billion of cash dividends paid, and $1.2 billion of net repayments of long-term debt in the first nine 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. |
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 our 2016the 2018 Form 10-K.
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Item 4. | Controls and Procedures. |
Item 4. Controls and Procedures.
Under the direction and with the participation of the Company'sour Chief Executive Officer and Chief Financial Officer, the Companywe evaluated itsour disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended)Act) and concluded that itsour disclosure controls and procedures were effective as of October 29, 2017.November 3, 2019. There has been no change in the Company'sour internal control over financial reporting during the fiscal quarter ended October 29, 2017,November 3, 2019 that has materially affected, or is reasonably likely to materially affect, the Company'sour internal control over financial reporting.
PART II.II – OTHER INFORMATION
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Item 1. | Legal Proceedings. |
Except as set forth below, there were no material changes during the third quarter of fiscal 2017 to our disclosure in Item 3 of our 2016 Form 10-K.
For a description of the matters related to the Data Breach, see Note 7 to the Consolidated Financial Statements included in Part I, Item 1, "Financial Statements", which description is incorporated herein by reference.
Item 1A. Risk Factors.
In addition to the other information set forth in this Form 10-Q,report, you should carefully consider the factors discussed under Item 1A, "Risk Factors" and elsewhere in our 2016the 2018 Form 10-K. These risks and uncertainties could materially and adversely affect our business, consolidated financial condition, results of operations, or cash flows. Our operations could also be affected by additional factors that are not presently known to us or by factors that we currently do not consider immaterialmaterial to our business. There have been no material changes in the risk factors discussed in our 2016the 2018 Form 10-K.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
(a) Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
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1. | During the third quarter of fiscal 2017, the Company issued 535 deferred stock units under The Home Depot, Inc. Non-Employee Directors' Deferred Stock Compensation Plan pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended (the "Securities Act") and Rule 506 of the SEC's Regulation D thereunder. The deferred stock units were credited to the accounts of those non-employee directors who elected to receive all or a portion of board retainers in the form of deferred stock units instead of cash during the third quarter of fiscal 2017. The deferred stock units convert to shares of common stock on a one-for-one basis following a termination of service as described in this plan.
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2. | During the third quarter of fiscal 2017, the Company credited 1,188 deferred stock units to participant accounts under The Home Depot FutureBuilder Restoration Plan pursuant to an exemption from the registration requirements of the Securities Act for involuntary, non-contributory plans. The deferred stock units convert to shares of common stock on a one-for-one basis following the termination of service as described in this plan.
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(b) Issuer Purchases of Equity Securities
In the first quarter of fiscal 2017, the Board of Directors authorized a $15.0 billion share repurchase program. Through the end of the third quarter of fiscal 2017, the Company has repurchased shares of its common stock having a value of approximately $5.9 billion under this program. The number and average price of shares purchased in each fiscal month of the third quarter of fiscal 2017 are set forth in the table below:2019 follow. |
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Period | | | Total Number of Shares Purchased(1) | | Average Price Paid Per Share(1) | | Total Number of Shares Purchased as Part of Publicly Announced Program(2) | | Dollar Value of Shares that May Yet Be Purchased Under the Program(2) |
August 5, 2019 – September 1, 2019 | | | 1,846,988 |
| | $ | 212.68 |
| | 1,842,151 |
| | $ | 12,385,451,643 |
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September 2, 2019 – September 29, 2019 | (3) | | 3,336,987 |
| | 227.92 |
| | 3,324,530 |
| | 11,527,253,300 |
|
September 30, 2019 – November 3, 2019 | | | 1,347 |
| | 232.23 |
| | — |
| | 11,527,253,300 |
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Total | | | 5,185,322 |
| | 222.49 |
| | 5,166,681 |
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Period | | Total Number of Shares Purchased(1) | | Average Price Paid Per Share(1) | | Total Number of Shares Purchased as Part of Publicly Announced Program(2) | | Dollar Value of Shares that May Yet Be Purchased Under the Program(2) |
July 31, 2017 – August 27, 2017 | | 4,007,643 |
| | $ | 151.26 |
| | 3,975,984 |
| | $ | 10,507,805,292 |
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August 28, 2017 – September 24, 2017(3) | | 8,368,921 |
| | $ | 156.65 |
| | 8,349,174 |
| | $ | 9,052,805,480 |
|
September 25, 2017 – October 29, 2017 | | 3,214 |
| | $ | 163.99 |
| | — |
| | $ | 9,052,805,480 |
|
| | 12,379,778 |
| | $ | 154.91 |
| | 12,325,158 |
| | |
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(1) These amounts include repurchases pursuant to the Company's 1997 andour Amended and Restated 2005 Omnibus Stock Incentive Plans (thePlan and our 1997 Omnibus Stock Incentive Plan (collectively, the "Plans"). Under the Plans, participants may surrender shares as payment of applicable tax withholding on the vesting of restricted stock and deferred share awards. Participants in the Plans may also exercise stock options by surrendering shares of common stock that the participants already own as payment of the exercise price. Shares so surrendered by participants in the Plans are repurchased pursuant to the terms of the Plans and applicable award agreement and not pursuant to publicly announced share repurchase programs.
(2) In the first quarter of fiscal 2017, theFebruary 2019, our Board of Directors authorized a $15.0 billion share repurchase program that replaced the previous authorization. The program does not have a prescribed expiration date.
(3) In the third quarter of fiscal 2017, the Company2019, we paid $1.2 billion$820 million under an ASR agreement and received an initial delivery of 6.73.2 million shares. See Note 5 to our consolidated financial statements for further discussion. Sales of Unregistered Securities
During the third quarter of fiscal 2019, we issued 446 deferred stock units under the Home Depot, Inc. Nonemployee Directors’ Deferred Stock Compensation Plan pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Act and Rule 506 of the SEC’s Regulation D thereunder. The ASR agreement terminateddeferred stock units were credited to the accounts of those non-employee directors who elected to receive all or a portion of board retainers in the form of deferred stock units instead of cash during the third quarter of fiscal 2019. The deferred stock units convert to shares of common stock on November 17, 2017, at which timea one-for-one basis following a termination of service as described in this plan.
During the Company becamethird quarter of fiscal 2019, we credited 1,143 deferred stock units to participant accounts under the Restoration Plan pursuant to an exemption from the registration requirements of the Securities Act for involuntary, non-contributory plans. The deferred stock units convert to shares of common stock on a one-for-one basis following a termination of service as described in this plan.
contractually entitledItem 6. Exhibits.
Exhibits marked with an asterisk (*) are incorporated by reference to receive an additional 0.7 million shares upon settlement. See Note 4 toexhibits or appendices previously filed with the Consolidated Financial Statements includedSEC, as indicated by the references in this report.brackets. All other exhibits are filed or furnished herewith.
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Exhibits marked with an asterisk (*) are incorporated by reference to exhibits or appendices previously filed with the SEC, as indicated by the references in brackets. All other exhibits are filed or furnished herewith.Exhibit | | Description |
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*3.1 |
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[Form 10-Q filed on September 1, 2011, Exhibit 3.1] |
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*3.2 |
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[Form 8-K filed on March 8, 2016,4, 2019, Exhibit 3.2] |
| † | |
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12.1 |
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15.1 |
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31.1 |
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31.2 |
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32.1 |
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32.2 |
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101.INS | | XBRL Instance Document - the instance document does not appear in the Interactive Data file because its XBRL tags are embedded within the Inline XBRL document |
101101.SCH |
| The following financial information from the Quarterly Report on Form 10-Q for the fiscal quarter ended October 29, 2017, formattedInline XBRL Taxonomy Extension Schema Document |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in XBRL (Extensible Business Reporting Language) and filed electronically herewith: (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Earnings; (iii) the Consolidated Statements of Comprehensive Income; (iv) the Consolidated Statements of Cash Flows; and (v) the Notes to the Consolidated Financial Statements.Exhibit 101) |
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† | Management contract or compensatory plan or arrangement |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrantregistrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| THE HOME DEPOT, INC. | (Registrant) |
| (Registrant) | |
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By: | /s/ CRAIGCRAIG A. MENEAR | MENEAR |
| Craig A. Menear, | |
| Chairman, Chief Executive Officer and President |
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| President/s/ RICHARD V. MCPHAIL
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| Richard V. McPhail, Executive Vice President and Chief Financial Officer
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Date: | /s/ CAROL B. TOMÉ | |
| Carol B. Tomé | |
| Chief Financial Officer and | |
| Executive Vice President – Corporate Services | November 25, 2019 |