01—Abstract
Summary
Summary of the 10-K filed April 19, 2002. Cited figures are marked; the original filing is the authoritative source.
The Home Depot's fiscal 2001 10-K (fiscal year ended February 3, 2002, a 53-week year) shows a company still growing rapidly but with flat comparable-store sales.
Net sales rose 17.1% to $53.6 billiona, driven by 204 new stores and the extra week (about $880 million of the increase). Comparable-store sales were flat, which management attributed to weak consumer confidence and high unemployment. Net earnings grew 17.9% to $3.04 billion, and diluted EPS rose to $1.29 from $1.10.
Operating margin held at 9.3% of sales, with gross margin improving to 30.2% from 29.9%, helped by lower merchandise costs, centralized purchasing, and tool rental expansion, partly offset by higher store occupancy, energy, and credit card fees. Cash generation improved sharply. Operating cash flow nearly doubled to $6.0 billionb from $2.8 billion, mainly because days payable outstanding rose from 23 to 34 and average inventory per store fell 12.7%.
Capital spending was about $3.4 billionc, and the company ended the year with $2.5 billion in cash, against $1.25 billion of long-term debt. The debt-to-equity ratio was 6.9%, though it would rise to roughly 30% if off-balance-sheet operating leases were capitalized. Management plans to open 200 stores in fiscal 2002 with roughly $3.6 billion of capital expenditures.
Investors should weigh the strong earnings and cash flow against several items: the flat comparable sales, a $799 milliond residual value guarantee on off-balance-sheet leases, the $45 million Argentina impairment, and a $1.8 billion-plus gap between the debt-to-equity headline and lease-adjusted leverage. The filing also reflects a leadership transition, with Robert Nardelli as CEO and Chairman and CFO Dennis Carey departing in March 2002.
02—Key points
Key Highlights
- Net sales up 17.1% to $53.6 billion; comparable-store sales flat, with about $880 million of the increase from the 53rd week
- Net earnings up 17.9% to $3.04 billion; diluted EPS $1.29 vs. $1.10 in fiscal 2000
- Gross margin improved to 30.2% of sales (from 29.9%) on lower merchandise costs, centralized purchasing, and tool rental expansion to 466 stores
- Operating cash flow more than doubled to $6.0 billion, driven by a 34-day payables position (up from 23) and a 12.7% reduction in average inventory per store
- Strong balance sheet: $2.5 billion cash, $1.25 billion long-term debt, 6.9% debt-to-equity; lease-adjusted leverage approximately 30%
- Expansion plans: 200 new stores in fiscal 2002 with about $3.6 billion of planned capital expenditures; international growth in Mexico, Canada, and Argentina (Argentina sold in February 2002)
- Contingent exposures include $799 million in residual value guarantees on off-balance-sheet leases and $557 million in letters of credit
03—Questions
Frequently Asked Questions
Why did sales grow 17% if comparable-store sales were flat?
Most of the growth came from new stores: 204 opened in fiscal 2001, plus full-year sales from the 204 stores opened in fiscal 2000. The 53-week fiscal year added about $880 million. Comparable-store sales were flat, reflecting weak consumer confidence and high unemployment.
Is the improvement in cash flow sustainable?
Part of it is structural and part is one-time. Operating cash flow rose to $6.0 billion mainly because the company extended supplier payment terms (days payable rose from 23 to 34) and cut inventory per store by 12.7%. Those working-capital gains may not repeat at the same scale, so investors should look at underlying operating earnings growth as well.
How leveraged is Home Depot?
On the balance sheet, leverage is low: long-term debt is $1.25 billion and the debt-to-equity ratio is 6.9%. Including the present value of operating and off-balance-sheet leases, which the company uses to finance about 20% of its real estate, the ratio would be roughly 30%. The company also carries $799 million in residual value guarantees on those leases.
What risks does management highlight?
The filing lists weather, sourcing cost and availability, retention of qualified associates, real estate availability, general economic conditions (interest rates, consumer credit, unemployment), competition, and changes in laws and regulations. Specific items include the $45 million impairment on the Argentina business, rising energy and occupancy costs, and higher credit card fees from greater use of the proprietary card.
What changed in management during the year?
Robert L. Nardelli became President and CEO in December 2000 and Chairman on January 1, 2002. Carol B. Tome became CFO in May 2001. In March 2002, Executive Vice President Dennis J. Carey, who had moved from CFO to business development in 2001, resigned from the company.
04—Continue