01—Abstract
Summary
Summary of the 10-K filed April 21, 2000. Cited figures are marked; the original filing is the authoritative source.
The Home Depot's fiscal 1999 (year ended January 30, 2000) was a record year of growth and profitability.
Net sales rose 27.2% to $38.4 billiona from $30.2 billion, driven by a 10% comparable-store sales increase and a full year of sales from 138 stores opened in fiscal 1998, plus 169 new openings in fiscal 1999. Net earnings grew 43.7% to $2.32 billion, and diluted EPS rose to $1.00 from $0.71 (both adjusted for the December 1999 three-for-two stock split). Net margin expanded to 6.0% from 5.3%, reflecting a gross margin improvement to 29.7% from 28.5% on lower merchandise costs, more imports, and better shrink results, partly offset by higher selling and store operating expenses (17.8% of sales, up from 17.7%).
The balance sheet strengthened considerably. Stockholders' equity rose to $12.3 billionb from $8.7 billion, largely because $1.1 billion of 3 1/4% convertible notes converted into 72 million shares. Long-term debt fell to $750 million from $1.57 billion, and cash rose to $168 million.
Operating cash flow was $2.45 billionc, which funded $2.58 billion of capital expenditures. Management says it can fund its capital program through the next several fiscal years using cash flow, a $800 million commercial paper program (currently unused), and operating lease facilities. The main forward-looking points are continued aggressive expansion: about 200 new stores in fiscal 2000 (roughly 89% owned), about 240 in fiscal 2001, and over 1,900 stores by fiscal 2003.
Key risks flagged include weather, sourcing costs, labor retention, real estate availability, economic conditions, competition, and regulation. The company also reported that Year 2000 issues produced no material problems and that it does not use derivatives. Investors should weigh the strong growth and returns against the heavy reliance on continued store expansion and the rising cost pressures in store labor and benefits.
02—Key points
Key Highlights
- Net sales grew 27.2% to $38.4 billion, with comparable-store sales up 10%
- Net earnings rose 43.7% to $2.32 billion; net margin improved to 6.0% from 5.3%
- Diluted EPS of $1.00 versus $0.71 in fiscal 1998 (adjusted for the December 1999 three-for-two split)
- Gross margin expanded to 29.7% from 28.5% on lower merchandise costs, increased imports, and better shrink
- Long-term debt fell to $750 million from $1.57 billion after $1.1 billion of convertible notes converted to equity; stockholders' equity rose to $12.3 billion
- Opened 169 new stores in fiscal 1999 and plans about 200 in fiscal 2000 and about 240 in fiscal 2001, targeting over 1,900 stores by fiscal 2003
- Operating cash flow of $2.45 billion covered $2.58 billion in capital expenditures, with liquidity supported by an $800 million commercial paper program that was unused at year end
03—Questions
Frequently Asked Questions
What drove the strong revenue and earnings growth in fiscal 1999?
Sales growth came from a 10% comparable-store sales increase, a full year of sales from 138 stores opened in fiscal 1998, and 169 new stores opened in fiscal 1999. Earnings grew faster than sales because gross margin rose 120 basis points, driven by lower merchandise costs, more directly imported products, and better inventory shrink, while operating expenses rose only slightly as a percentage of sales.
How healthy is the company's balance sheet?
It improved significantly. Long-term debt dropped to $750 million from $1.57 billion, largely because $1.1 billion of 3 1/4% convertible notes converted into 72 million shares. Stockholders' equity increased to $12.3 billion, and cash rose to $168 million. The company also issued $500 million of 6 1/2% Senior Notes due 2004 during the year.
What are the main risks to the investment case?
The filing cites weather, the cost and availability of merchandise, the ability to hire and retain staff, real estate availability and zoning, general economic conditions affecting consumer spending and housing, competition from other retailers, and regulatory or litigation exposure. Rising store labor, medical, and bonus costs were already pressuring selling and store operating expenses in fiscal 1999. Because growth depends on continued store openings, slowing new-store productivity or cannibalization of existing stores could also weigh on results.
How is the company funding its expansion?
Primarily through internally generated cash flow, which was $2.45 billion in fiscal 1999, along with vendor credit that finances a large share of inventory, an $800 million commercial paper program backed by an $800 million bank credit facility, and operating lease facilities totaling $882 million. About 77% of stores are owned, and the company plans to own roughly 89% of the stores it opens in fiscal 2000.
Did the company face any significant legal or Year 2000 issues?
The gender discrimination class actions were settled in fiscal 1997 with a $104 million charge, and only $5 million of remaining training spending is expected. Management says ongoing litigation is not expected to have a material effect. The company reported no material Year 2000 problems and does not expect any future material impact.
04—Continue