01—Abstract
Summary
Summary of the 10-K filed April 23, 1998. Cited figures are marked; the original filing is the authoritative source.
The Home Depot's fiscal 1997 (year ended February 1, 1998) was a year of strong top-line growth, with net sales rising 23.7% to $24.2 billiona from $19.5 billion, driven by 112 new store openings, 5 relocations, and a 7% comparable store sales increase.
Gross margin improved to 28.1% of sales from 27.8%, reflecting lower merchandise costs, more stable lumber prices, and better shrink results. The company ended the year with 624 stores, 587 Home Depot stores and 5 EXPO Design Centers in the U.S. plus 32 in Canada, and 124,400 associates. Reported diluted EPS was $1.55b (net earnings of $1.16 billion), but this includes a one-time pre-tax charge of $104 million to settle gender discrimination lawsuits, including the Butler class action.
Excluding that charge, diluted EPS would have been $1.64c, up 27% from $1.29 in fiscal 1996. Operating income rose 24.7% to $1.9 billion, and return on beginning equity was 19.5%. Management plans roughly 137 new stores in fiscal 1998 and about 170 in fiscal 1999, with a stated growth cap of about 22% per year.
Balance sheet items to watch include inventories up 33% to $3.6 billiond, long-term debt of $1.3 billion (mostly the $1.1 billion 3-1/4% convertible notes due 2001), and cash of only $172 million. Capital expenditures were $1.5 billion, and the company financed some store growth through a $600 million operating lease facility. Investors should weigh the aggressive expansion strategy and the lawsuit charge against the strong sales momentum and margin gains.
02—Key points
Key Highlights
- Net sales increased 23.7% to $24.2 billion, with a 7% comparable store sales increase and 624 stores at year-end
- Diluted EPS of $1.55 includes a $104 million non-recurring gender discrimination settlement charge; excluding it, EPS was $1.64 versus $1.29 in fiscal 1996
- Gross margin expanded to 28.1% of sales from 27.8%, driven by lower merchandise costs and product line reviews
- Net earnings rose 23.7% to $1.16 billion; return on beginning equity was 19.5%
- Aggressive expansion plan: about 137 new stores planned for fiscal 1998 and about 170 for fiscal 1999, with a maximum growth rate of about 22% per year
- Merchandise inventories grew 33% to $3.6 billion and capital expenditures reached $1.5 billion, with store-level funding supported by a $600 million operating lease facility
- Balance sheet is moderately levered: long-term debt of $1.3 billion, stockholders' equity of $7.1 billion, and long-term debt to equity of 18.4%
03—Questions
Frequently Asked Questions
How did The Home Depot perform in fiscal 1997 compared to fiscal 1996?
Net sales grew 23.7% to $24.2 billion, net earnings grew 23.7% to $1.16 billion, and diluted EPS was $1.55 versus $1.29. Excluding a one-time $104 million legal settlement charge, diluted EPS would have been $1.64, a 27% increase. Gross margin improved to 28.1% from 27.8%.
What was the $104 million non-recurring charge?
The company recorded this pre-tax charge after settling the Butler class action and three other individual lawsuits alleging gender discrimination. It includes $65 million for class member payments, $22.5 million for plaintiffs' attorneys, and about $17 million for related internal costs such as human resources program enhancements.
How aggressive is the company's store growth plan?
The company opened 112 new stores in fiscal 1997 and plans about 137 openings in fiscal 1998 and about 170 in fiscal 1999, including relocations. Management caps its growth at roughly 22% per year in store count. It also plans its first Latin American store in Santiago, Chile, and two stores in Puerto Rico.
What are the main debt and liquidity considerations for investors?
Long-term debt was $1.3 billion, mostly the $1.1 billion 3-1/4% convertible subordinated notes due 2001, convertible at $46.0833 per share. The company had $800 million in commercial paper capacity with no borrowings outstanding and an $800 million back-up credit facility. Cash and equivalents were $172 million, and a $600 million operating lease facility helps finance new stores.
Does the company use derivatives or face significant market risk?
No. The company states it has not entered into any derivative financial instruments or derivative commodity instruments, and it considers its exposure to market risk on other financial instruments, such as investments, to be immaterial. Its investments were reduced to $17 million at year-end from $421 million a year earlier.
04—Continue