Certain written and oral statements made by us or our authorized executive officers on our behalf constitute “forward-looking statements” as defined under the Private Securities Litigation Reform Act of 1995. Words or phrases such as “should result,” “are expected to,” “we anticipate,” “we estimate,” “we project” or similar expressions are intended to identify forward-looking statements. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to, unanticipated weather conditions; stability of costs and commodity prices and availability of sourcing channels; the ability to attract, train and retain highly-qualified associates; conditions affecting the availability, acquisition, development and ownership of real estate; general economic conditions; the impact of competition; and regulatory and litigation matters. You should not place undue reliance on forward-looking statements, since such statements speak only as of the date of the making of such statements. Additional information concerning these risks and uncertainties is contained in our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended January 28, 2001.
Net sales for the second quarter of fiscal 2001 increased 15.5% to $14.6 billion from $12.6 billion for the second quarter of fiscal 2000. For the first six months of fiscal 2001, sales increased 12.8% to $26.8 billion from $23.7 billion for the comparable period in fiscal 2000. The sales increase for both periods was primarily attributable to new stores opened since the end of the second fiscal quarter of last year (1,249 stores open at the end of the second quarter of fiscal 2001 compared with 1,011 at the end of the second quarter of fiscal 2000). Comparable store-for-store sales increased 1% for the second quarter of fiscal 2001 but declined 1% for the first six months of fiscal 2001. The increase in comparable store-for-store sales for the second quarter of fiscal 2001 was attributable to strong sales in paint, appliances, certain energy efficient products and increases in certain commodity prices.
Gross profit as a percent of sales was 29.7% for the second quarter of fiscal 2001 compared with 29.6% for the second quarter of fiscal 2000. For the first six months of fiscal 2001, gross profit as a percent of sales was 29.8% compared with 29.6% for the comparable period of fiscal 2000. The gross profit rate increase for both periods was primarily attributable to lower costs of merchandise resulting from product line reviews and the addition of 184 tool rental centers. At the end of the second quarter of fiscal 2001, we were operating 419 tool rental centers compared to 235 at the end of the second quarter of fiscal 2000. The increase in gross profit was partially offset by increased sales penetration of appliances, which typically carry a lower margin rate.
Selling and store operating expenses as a percent of sales were 17.6% for the second quarter of fiscal 2001 compared to 16.9% for the same period in fiscal 2000. This increase was attributable to medical insurance costs, which were higher due to the expansion in the insured base of associates and rising healthcare costs. In addition, store occupancy costs increased as a percent of sales from the second quarter of fiscal 2000 due primarily to energy rate increases. Also, credit card discounts were higher than last year due to increased penetration of total credit sales. Finally, the addition of 184 tool rental centers increased payroll, depreciation and other costs, while increasing gross margin. These increased costs were partially offset by a decrease in store selling payroll expenses as a percent of sales due to an improvement in labor productivity as measured by sales per labor hour.
Selling and store operating expenses as a percent of sales were 18.6% for the first six months of fiscal 2001 compared to 17.6% for the first six months of fiscal 2000. This increase was primarily due to higher store selling payroll expenses resulting from wage rate inflation, medical insurance costs, energy costs and costs related to additional tool rental centers, which were partially offset by improvement in labor productivity.
Pre-opening expenses as a percent of sales were 0.2% for all comparable periods of fiscal 2001 and fiscal 2000. The Company opened 71 stores and relocated two stores during the second quarter of fiscal 2001 compared with 41 new stores and one store relocation during the second quarter of fiscal 2000. On a per store basis, pre-opening expense was reduced due to expense control efforts and timing of store openings in the third quarter.
General and administrative expenses as a percent of sales were 1.6% for the second quarter of fiscal 2001 compared to 1.7% for the second quarter of fiscal 2000. For the first six months of fiscal 2001, general and administrative expenses as a percent of sales were 1.6% compared to 1.8% for the comparable period of fiscal 2000. We continue to focus on expense control, while at the same time investing in long-term growth and strategic initiatives.
As a percent of sales, interest and investment income was 0.1% for all comparable periods of both fiscal 2001 and fiscal 2000. Interest expense as a percent of sales was 0.1% for the second quarters of both fiscal 2001 and fiscal 2000 and 0.0% for the first six months of both fiscal 2001 and 2000.
Our combined federal and state effective income tax rate decreased to 38.6% for the second quarter and first six months of fiscal 2001 from 38.8% for the comparable periods of fiscal 2000. The decrease was attributable to higher projected tax credits during fiscal 2001 compared with fiscal 2000.
Net earnings as a percent of sales were 6.3% and 5.8% for the second quarter and first six months of fiscal 2001, respectively, compared with 6.6% and 6.2% for the second quarter and first six months of fiscal 2000, respectively. The decreases as a percent of sales were primarily attributable to higher selling and store operating expenses as a percent of sales, which was partially offset by a higher gross profit margin, as described above.
Diluted earnings per share were $0.39 and $0.66 for the second quarter and first six months of fiscal 2001, respectively, compared to $0.36 and $0.62 for the second quarter and first six months of fiscal 2000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow generated from store operations provides a significant source of liquidity. During the first six months of fiscal 2001, cash provided by operations increased to $3.1 billion compared to $2.3 billion in the same period of fiscal 2000. The increase was primarily due to increased net earnings, a decrease in average inventory per store of 7.4% and growth in accounts payable and accrued expenses.
Cash used in investing activities in the first six months of fiscal 2001 was $1.7 billion compared to $1.5 billion in the same period of the prior fiscal year. The increase was primarily due to an increase in capital expenditures related to new stores. We plan to add a total of 204 new stores and relocate 4 stores during fiscal 2001. It is anticipated that 93% of these locations will be owned, and the remainder will be leased.
We expect capital expenditures for the second half of fiscal 2001 to approximate $2.0 billion. The majority of these expenditures will be for new stores. The cost of new stores to be constructed and owned varies widely, principally due to land costs, and is expected to average approximately $14.9 million per location. The cost to remodel and/or fixture stores to be leased is expected to average approximately $5.9 million per store. In addition, each new store is projected to require approximately $3.4 million to finance inventories, net of vendor financing.
On June 29, 2001, we acquired Total HOME de Mexico, S.A. de C.V., a four-store chain of home improvement stores in Mexico.
During the first six months of fiscal 2001, cash used in financing activities was $193 million compared with $18 million provided in the same period of fiscal 2000. This increase was primarily due to the repayment of $754 million of commercial paper obligations outstanding as of January 28, 2001. This repayment was funded through cash provided by operations. In addition, we raised $500 million from the issuance of 5 3/8% Senior Notes on April 12, 2001. The Senior Notes are due on April 1, 2006 and pay interest semiannually on April 1 and October 1 of each year commencing October 1, 2001. The net proceeds from the Senior Notes are being used to finance a portion of our capital expenditure programs, for working capital needs and for general corporate purposes.
We have a commercial paper program that allows borrowings up to a maximum of $1 billion. As of July 29, 2001, there were no borrowings outstanding under the program.
As of July 29, 2001, we had $1.3 billion in cash and cash equivalents. Management believes that our current cash position, internally generated funds, funds available from the $1 billion commercial paper program and the ability to obtain alternate sources of financing should be sufficient to enable us to complete our capital expenditure programs through the next several fiscal years.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) 141, “Business Combinations” and SFAS 142, “Goodwill and Other Intangible Assets.” SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and establishes criteria for recognizing intangible assets separately from goodwill. The adoption of SFAS 141 will not have a material impact on our consolidated financial statements. Under SFAS 142, which will be adopted on February 4, 2002, goodwill will no longer be amortized and will instead be evaluated for impairment at least annually. Our initial evaluation of impairment of existing goodwill is required to be completed no later than July 28, 2002. We are evaluating the impact of the adoption of this standard and at this time it is not practicable to reasonably estimate the effect of the adoption on our financial position and results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We use derivative financial instruments at various times to manage the risk associated with foreign currency and interest rate fluctuations. These contracts are insignificant to our operations and financial position.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Company’s Annual Meeting of Stockholders held on May 30, 2001, the stockholders elected the following nominees to the Board of Directors to serve a one-year term with votes cast as follows:
| Gregory Brenneman | | Milledge Hart |
| FOR: 1,970,902,035 | | FOR: 1,939,755,018 |
| AGAINST: 32,113,740 | | AGAINST: 63,260,757 |
| | | |
| Richard Brown | | Bonnie Hill |
| FOR: 1,976,723,242 | | FOR: 1,976,880,810 |
| AGAINST: 26,292,534 | | AGAINST: 26,134,966 |
| | | |
| John Clendenin | | Kenneth Langone |
| FOR: 1,976,188,915 | | FOR: 1,973,881,342 |
| AGAINST: 26,826,860 | | AGAINST: 29,134,434 |
| | | |
| Berry Cox | | Bernard Marcus |
| FOR: 1,977,344,563 | | FOR: 1,978,129,486 |
| AGAINST: 25,671,212 | | AGAINST: 24,886,290 |
| | | |
| William Davila | | Robert Nardelli |
| FOR: 1,977,941,268 | | FOR: 1,977,664,820 |
| AGAINST: 25,074,508 | | AGAINST: 25,350,955 |
| | | |
| Claudio Gonzalez | | Roger Penske |
| FOR: 1,975,067,022 | | FOR: 1,975,785,403 |
| AGAINST: 27,948,753 | | AGAINST: 27,230,372 |
There were no abstentions or broker non-votes applicable to the election of directors. Arthur M. Blank and M. Faye Wilson resigned from the Board of Directors effective the day of the meeting and did not stand for reelection. Col. Frank Borman reached the Company’s mandatory retirement age and retired from the Board.
The stockholders approved an amendment to the Company’s Employee Stock Purchase Plan to increase the number of shares available for purchase under the plan with votes cast as follows:
| FOR: | 1,957,772,685 | |
| AGAINST: | 33,325,276 | |
| ABSTAIN: | 11,917,815 | |
Broker non-votes were not applicable to this proposal and abstentions had the effect of votes “against” this proposal.
The stockholders rejected a proposal regarding global human rights standards with votes cast as follows:
| FOR: | 136,700,466 | |
| AGAINST: | 1,181,953,572 | |
| ABSTAIN: | 133,444,958 | |
| BROKER NON-VOTE: | 550,916,780 | |
Abstentions had the effect of votes “against” this proposal. Broker non-votes were not counted as votes “for” or “against” this proposal and therefore had no impact on the outcome.
The stockholders approved a proposal relating to simple-majority voting with votes cast as follows:
| FOR: | 799,604,613 | |
| AGAINST: | 603,538,611 | |
| ABSTAIN: | 48,955,771 | |
| BROKER NON-VOTE: | 550,916,780 | |
Abstentions had the effect of votes “against” this proposal. Broker non-votes were not counted as votes “for” or “against” this proposal and therefore had no impact on the outcome.
A stockholder proposal relating to employment discrimination was withdrawn from consideration prior to the meeting.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
| (a) | Exhibits |
| | |
| 10.1 | Termination Agreement & Release, dated June 13, 2001, by and between The Home Depot U.S.A., Inc. and Mark R. Baker |
| | |
| *10.2 | Employment Agreement between Dennis M. Donovan and The Home Depot, Inc., dated March 16, 2001 [Form S-4 (File No. 333-61548) filed March 24, 2001, Exhibit 10.1] |
| | |
| *10.3 | Employment Agreement between Frank L. Fernandez and The Home Depot, Inc., dated April 2, 2001 [Form S-4 (File No. 333-61548) filed March 24, 2001, Exhibit 10.2] |
| | |
| *10.4 | Deferred Stock Units Plan and Agreement between Frank L. Fernandez and The Home Depot, Inc., dated April 2, 2001 [Form S-4 (File No. 333-61548) filed March 24, 2001, Exhibit 10.3] |
| | |
| 11.1 | Computation of Basic and Diluted Earnings Per Share |
| | |
| (b) | Reports on 8-K |
| | |
| | No reports on Form 8-K were filed during the quarter ended July 29, 2001 |
| | |
|
| * | Incorporated by reference to exhibits previously filed with the Commission, as indicated by the references in brackets. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | THE HOME DEPOT, INC. |
| | |
|
| | | (Registrant) |
| | | |
| | By: | /s/ Robert L. Nardelli |
| | |
|
| | | Robert L. Nardelli |
| | | President & CEO |
| | | |
| | | /s/ Carol B. Tomé |
| | |
|
| | | Carol B. Tomé |
| | | Executive Vice President and |
| | | Chief Financial Officer |
| | | |
| August 27, 2001 | | |
| | |
| (Date) | | |
THE HOME DEPOT, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
| Exhibit | | Description |
| |
|
| 10.1 | | Termination Agreement & Release, dated June 13, 2001, by and between The Home Depot U.S.A., Inc. and Mark R. Baker |
| 11.1 | | Computation of Basic and Diluted Earnings Per Share |
