10-QPeriod: Q2 FY2011

HOME DEPOT, INC. Quarterly Report for Q2 Ended Aug 1, 2010

Filed September 2, 2010For Securities:HD

Summary

The Home Depot, Inc. reported improved financial results for the second quarter and first six months of fiscal year 2010 compared to the prior year, reflecting a recovery from prior year charges and modest sales growth. Net sales increased by 1.8% in the second quarter and 2.9% for the first six months, driven by a 1.7% and 3.2% comparable store sales increase, respectively. This top-line growth, combined with improved gross margins due to vendor rebates and lower markdowns, led to a significant increase in operating income. Profitability also benefited from expense management, with Selling, General, and Administrative (SG&A) expenses as a percentage of net sales decreasing. Diluted Earnings Per Share (EPS) rose to $0.72 for the quarter and $1.14 for the six-month period. The company also demonstrated strong cash flow from operations, which was used to fund share repurchases, dividend payments, and capital expenditures, while also reducing its long-term debt-to-equity ratio.

Financial Highlights

48 data points
Beta

Revenue

$19.41B

33.9% Gross Margin

Net Income

$1.19B

6.1% Net Margin

EPS (Diluted)

$0.72

Total Assets

$42.53B

Cash & Equivalents

$2.40B

Free Cash Flow

$1.32B

Financial Statements
Beta
Revenue$19.41B
Cost of Revenue$12.83B
Gross Profit$6.58B
SG&A Expenses$4.13B
Operating Expenses$4.53B
Operating Income$2.05B
Interest Expense$151.00M
Net Income$1.19B
EPS (Basic)$0.72
EPS (Diluted)$0.72
Shares Outstanding (Basic)1.65B
Shares Outstanding (Diluted)1.66B

Key Highlights

  • 1Net Sales increased by 1.8% in Q2 FY2010 and 2.9% in the first six months of FY2010 year-over-year.
  • 2Comparable store sales showed positive momentum, increasing by 1.7% in Q2 FY2010 and 3.2% in the first six months.
  • 3Gross Profit margin improved by 41 basis points in Q2 FY2010 to 33.9% due to higher vendor rebates and reduced markdowns.
  • 4Operating Income saw substantial growth, increasing by 11.8% in Q2 FY2010 and 19.2% in the first six months.
  • 5Diluted Earnings Per Share (EPS) improved to $0.72 for Q2 FY2010 and $1.14 for the first six months, up from $0.66 and $0.96 in the prior year periods, respectively.
  • 6The company generated $3.4 billion in cash flow from operations in the first six months of FY2010, using it for share repurchases ($1.2 billion) and dividends ($793 million).
  • 7Long-term debt-to-equity ratio improved to 39.7% from 50.4% year-over-year, indicating a stronger balance sheet.

Frequently Asked Questions

The sales increase was driven by positive comparable store sales growth of 1.7%, primarily due to an increase in customer transactions. Favorable weather in the first quarter may have also pulled some sales forward, and certain product categories like Lumber, Plumbing, and Electrical performed well. Additionally, lumber and copper price inflation positively impacted comparable store sales by approximately 100 basis points.

The company effectively managed its expenses. Selling, General, and Administrative (SG&A) expenses as a percentage of net sales decreased in both the second quarter (21.3% vs. 21.6%) and the first six months (22.6% vs. 23.2%). This was attributed to expense leverage from positive sales trends and lower payroll and incentive compensation expenses, partially offset by increased credit costs.

The financial results for the first six months of fiscal 2010 included a $51 million pretax charge related to the extension of the HD Supply loan guarantee. In contrast, the prior year's results (Q2 and first six months of fiscal 2009) were impacted by 'Rationalization Charges' related to store closures, business exits, and restructuring, totaling $137 million for the six-month period. Excluding these specific charges, the company's performance shows even stronger underlying improvement.

The Home Depot generated substantial cash flow from operations, which was used for significant share repurchases ($1.2 billion in H1 FY2010) and dividend payments ($793 million). The company maintained a strong cash position of $2.4 billion and has access to credit facilities. Management believes its current liquidity, debt capital markets access, and operating cash flow are sufficient to fund capital expenditures, dividends, share repurchases, and debt obligations for the foreseeable future.