How strong was Home Depot's growth in fiscal 1996?

Net sales grew 26.3% to $19.54 billion, helped by 89 new stores, a 7% comparable store sales gain and an extra week. Net earnings grew 28.2% to $937.7 million, and EPS rose 26% to $1.94. Part of the sales increase came from the 53rd week, so underlying growth was somewhat lower.

How is Home Depot funding its expansion?

Growth is funded mainly by operating cash flow ($1.10 billion in fiscal 1996), the $1.104 billion convertible note offering, a $800 million commercial paper program backed by an $800 million credit facility (none outstanding at year end), and a $300 million operating lease facility for new store construction. The company had $558 million in cash and short-term investments at year end.

What are the main risks to investors?

Key risks include the pace of store growth, since the company says some existing stores already run at or above optimal capacity and new stores may cannibalize sales; the rising debt load and the dilution potential of the convertible notes at $69.125 per share; and gender discrimination class actions in the Western Division, with trial expected in fiscal 1997. Management does not expect these lawsuits to have a material adverse effect on financial results.

What growth plans does Home Depot have for the future?

The company plans about 111 new stores in fiscal 1997 and roughly 140 in fiscal 1998, with a stated maximum store growth rate of about 22% a year. It is entering Chile through a joint venture with S.A.C.I. Falabella, with the first store expected in the first half of fiscal 1998. It also completed the Maintenance Warehouse acquisition to expand its commercial and professional customer base, and it is building an import distribution center in Savannah, Georgia, that is expected to start shipments in May 1997.

How much of Home Depot's store base does it own?

About 75% of its 512 stores are owned (including those on ground leases), totaling roughly 40.2 million square feet, and about 25% are leased (13.8 million square feet). The company prefers ownership for operating control and lower occupancy costs, and about 71% of planned fiscal 1997 locations are expected to be owned.

HD 10-K FY1997 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed April 22, 1997. Cited figures are marked; the original filing is the authoritative source.

The Home Depot's fiscal 1996 10-K (fiscal year ended February 2, 1997, a 53-week year) shows a company still in rapid expansion.

Net sales rose 26.3% to $19.54 billion^a from $15.47 billion, driven by 89 new store openings, a 7% comparable store sales increase and the extra week. Net earnings grew 28.2% to $937.7 million, or $1.94 per share, and net margin edged up to 4.8% from 4.7%. Gross margin improved to 27.8% on better buying practices, while operating expenses fell slightly to 20.0% of sales.

The company ended the year with 512 stores, 38 U.S. states and 3 Canadian provinces, and an estimated 14% share of the U.S. home improvement industry. The balance sheet expanded materially. Total assets reached $9.34 billion^b and stockholders' equity $5.96 billion, but long-term debt more than doubled to $1.25 billion after the October 1996 issuance of $1.104 billion of 3-1/4% convertible subordinated notes due 2001, with a conversion price of $69.125 per share.

Capital expenditures were about $1.19 billion^c in cash terms, and the company plans roughly 111 new stores in fiscal 1997 and about 140 in fiscal 1998. Management says cash flow from operations ($1.10 billion), its $800 million commercial paper program and a $300 million operating lease facility should fund this growth. Inventory rose 24% to $2.71 billion, though inventory turnover was steady at 5.6x.

Key forward-looking items include the pending Maintenance Warehouse acquisition (completed March 14, 1997, all-stock, pooling of interests), the planned Chilean joint venture with S.A.C.I. Falabella (66.67%^d stake), and the new Southwest Division. The company also faces gender discrimination class action litigation in its Western Division, with trial expected in fiscal 1997; management does not expect a material adverse effect.

02—Key points

Key Highlights

Net sales up 26.3% to $19.54 billion (53-week year), with a 7% comparable store sales increase
Net earnings up 28.2% to $937.7 million; EPS of $1.94 versus $1.54, and net margin of 4.8%
Gross margin improved to 27.8% from 27.7%, while operating expenses held near 20% of sales
Store base grew to 512 (483 Home Depot stores, 5 EXPO, 24 in Canada), with 89 openings in fiscal 1996 and about 111 planned for fiscal 1997
Long-term debt rose to $1.25 billion after $1.104 billion of 3-1/4% convertible notes issued in October 1996
Total assets of $9.34 billion and stockholders' equity of $5.96 billion; book value of $12.39 per share
Pending all-stock acquisition of Maintenance Warehouse/America (about $130 million in sales) closed March 14, 1997, plus a planned Chilean joint venture

03—Questions

Frequently Asked Questions

How strong was Home Depot's growth in fiscal 1996?
Net sales grew 26.3% to $19.54 billion, helped by 89 new stores, a 7% comparable store sales gain and an extra week. Net earnings grew 28.2% to $937.7 million, and EPS rose 26% to $1.94. Part of the sales increase came from the 53rd week, so underlying growth was somewhat lower.
How is Home Depot funding its expansion?
Growth is funded mainly by operating cash flow ($1.10 billion in fiscal 1996), the $1.104 billion convertible note offering, a $800 million commercial paper program backed by an $800 million credit facility (none outstanding at year end), and a $300 million operating lease facility for new store construction. The company had $558 million in cash and short-term investments at year end.
What are the main risks to investors?
Key risks include the pace of store growth, since the company says some existing stores already run at or above optimal capacity and new stores may cannibalize sales; the rising debt load and the dilution potential of the convertible notes at $69.125 per share; and gender discrimination class actions in the Western Division, with trial expected in fiscal 1997. Management does not expect these lawsuits to have a material adverse effect on financial results.
What growth plans does Home Depot have for the future?
The company plans about 111 new stores in fiscal 1997 and roughly 140 in fiscal 1998, with a stated maximum store growth rate of about 22% a year. It is entering Chile through a joint venture with S.A.C.I. Falabella, with the first store expected in the first half of fiscal 1998. It also completed the Maintenance Warehouse acquisition to expand its commercial and professional customer base, and it is building an import distribution center in Savannah, Georgia, that is expected to start shipments in May 1997.
How much of Home Depot's store base does it own?
About 75% of its 512 stores are owned (including those on ground leases), totaling roughly 40.2 million square feet, and about 25% are leased (13.8 million square feet). The company prefers ownership for operating control and lower occupancy costs, and about 71% of planned fiscal 1997 locations are expected to be owned.

04—Continue

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