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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended May 3, 1998
- OR -
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-8207
THE HOME DEPOT, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-3261426
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2455 Paces Ferry Road Atlanta, Georgia 30339
(Address of principal executive offices) (Zip Code)
(770) 433-8211
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
$.05 par value 734,780,313 Shares, as of May 27, 1998
THE HOME DEPOT, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
May 3, 1998
Page
Part I. Financial Information:
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF EARNINGS -
Three-Month Periods Ended May 3,1998 and May 4,1997.............3
CONSOLIDATED CONDENSED BALANCE SHEETS -
As of May 3,1998 and February 1,1998............................4
CONSOLIDATED STATEMENTS OF CASH FLOWS -
Three-Month Periods Ended May 3, 1998 and May 4,1997............5
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME-
Three-Month Periods Ended May 3, 1998 and May 4,1997............6
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS.............................................7
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition................... 8 - 12
Part II. Other Information:
Item 4. Submission of Matters to a Vote of Security Holders.......13
Item 6. Exhibits and Reports on Form 8-K..........................13
Signature Page.....................................................14
Index to Exhibits..................................................15
PART I. FINANCIAL INFORMATION
THE HOME DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In Millions, Except Per Share Data)
Three Months Ended
May 3, May 4,
1998 1997
Net Sales $ 7,123 $ 5,657
Cost of Merchandise Sold 5,155 4,105
Gross Profit 1,968 1,552
Operating Expenses:
Selling and Store Operating 1,268 1,017
Pre-Opening 19 13
General and Administrative 121 97
Total Operating Expenses 1,408 1,127
Operating Income 560 425
Interest Income (Expense):
Interest and Investment Income 7 10
Interest Expense (11) (11)
Interest, Net (4) (1)
Earnings Before Income Taxes 556 424
Income Taxes 219 165
Net Earnings $ 337 $ 259
Weighted Average Number of Common
Shares Outstanding 733 725
Basic Earnings Per Share $ 0.46 $ 0.36
Weighted Average Number of Common
Shares Outstanding Assuming Dilution 769 755
Diluted Earnings Per Share $ 0.45 $ 0.35
Dividends Per Share $ 0.05 $ 0.04
See accompanying notes to consolidated condensed financial statements.
THE HOME DEPOT INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(In Millions, Except Share Data)
May 3, February 1,
ASSETS 1998 1998
Current Assets:
Cash and Cash Equivalents $ 578 $ 172
Short-Term Investments 1 2
Receivables, Net 482 556
Merchandise Inventories 4,009 3,602
Other Current Assets 151 128
Total Current Assets 5,221 4,460
Property and Equipment, at cost 7,908 7,487
Less: Accumulated Depreciation
and Amortization (1,055) (978)
Net Property and Equipment 6,853 6,509
Long-Term Investments 15 15
Notes Receivable 25 27
Cost in Excess of the Fair Value
of Net Assets Acquired 281 140
Other 82 78
$ 12,477 $ 11,229
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 2,071 $ 1,358
Accrued Salaries and Related Expenses 335 312
Sales Taxes Payable 212 143
Other Accrued Expenses 517 530
Income Taxes Payable 253 105
Current Installments of Long-Term Debt 5 8
Total Current Liabilities 3,393 2,456
Long-Term Debt,excluding current
installments 1,313 1,303
Other Long-Term Liabilities 215 178
Deferred Income Taxes 79 78
Minority Interest 3 116
Stockholders' Equity:
Common Stock, par value $0.05.
Authorized: 1,000,000,000 shares;
issued and outstanding -
733,805,000 shares at 5/3/98
and 732,108,000 shares at 2/1/98 37 37
Paid-In Capital 2,732 2,662
Retained Earnings 4,732 4,430
Cumulative Translation Adjustments (24) (28)
7,477 7,101
Less Shares Purchased for Compensation
Plans 3 3
Total Stockholders' Equity 7,474 7,098
$ 12,477 $ 11,229
See accompanying notes to consolidated condensed financial statements.
THE HOME DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Millions)
Three Months Ended
May 3, 1998 May 4, 1997
Cash Provided From Operations:
Net Earnings $ 337 $ 259
Reconciliation of Net Earnings to Net Cash
Provided by Operations:
Depreciation and Amortization 87 67
Decrease in Receivables, Net 74 28
Increase in Merchandise Inventories (404) (524)
Increase in Accounts Payable and Accrued
Expenses 818 765
Increase in Income Taxes Payable 171 141
Other (23) (16)
Net Cash Provided by Operations 1,060 720
Cash Flows From Investing Activities:
Capital Expenditures (424) (266)
Proceeds from Sales of Property and Equipment 12 10
Payment for Purchase of Minority Partnership
Interest (261) ---
Purchases of Investments (1) (23)
Proceeds from Maturities of Investments 2 16
Repayments of Advances Secured by Real Estate,
Net 3 28
Net Cash Used in Investing Activities (669) (235)
Cash Flows From Financing Activities:
Principal Repayments of Long-Term Debt (4) (36)
Proceeds from Sale of Common Stock, Net 47 46
Cash Dividends Paid to Stockholders (36) (29)
Minority Interest Contributions to Partnership 8 2
Net Cash Provided by (Used in)
Financing Activities 15 (17)
Increase in Cash and Cash Equivalents 406 468
Cash and Cash Equivalents at Beginning of Period 172 146
Cash and Cash Equivalents at End of Period $ 578 $ 614
See accompanying notes to consolidated condensed financial statements.
THE HOME DEPOT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In Millions)
Three Months Ended
May 3, May 4,
1998 1997
Net Earnings $ 337 $ 259
Other Comprehensive Income,
net of tax:Foreign Currency
Translation Adjustments 4 (9)
Unrealized Loss on Investments --- (1)
Other Comprehensive Income 4 (10)
Comprehensive Income $ 341 $ 249
THE HOME DEPOT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Summary of Significant Accounting Policies:
Basis of Presentation - The accompanying consolidated condensed
financial statements have been prepared in accordance with the
instructions to Form 10-Q and do not include all of the information
and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. These
statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended February 1, 1998, as
filed with the Securities and Exchange Commission (File No. 1-8207).
2. Purchase of Minority Interest in Canadian Partnership
During the first quarter of fiscal 1998, the Company purchased, for
$261 million, the remaining 25% partnership interest in The Home
Depot Canada that was held by The Molson Companies. As a result of
this transaction, the Company and its subsidiaries now own all of
The Home Depot's Canadian operations. The Home Depot Canada
partnership was formed in February, 1994, when the Company acquired
75% of Aikenhead's Home Improvement Warehouse, which was then
operating seven home improvement stores in Canada. Since the
original acquisition, The Home Depot Canada has opened 30 additional
stores through quarter-end. The terms of the original partnership
agreement provided for a put/call option, which would result in the
Company purchasing the remaining 25% of The Home Depot Canada at any
time after the sixth anniversary of the original agreement. The
companies reached a mutual agreement, however, to complete the
purchase transaction at an earlier date.
THE HOME DEPOT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The data below reflects selected sales data, the percentage relationship
between sales and major categories in the Consolidated Statements of
Earnings, and the percentage change in the dollar amounts of each of the
items.
Three Months Ended
Percentage
Increase
May 3, May 4, (Decrease)in
1998 1997 Dollar Amounts
Selected Consolidated
Statements of Earnings Data
Net Sales 100.0% 100.0% 25.9%
Gross Profit 27.6 27.4 26.8
Operating Expenses:
Selling and Store Operating 17.8 18.0 24.7
Pre-Opening 0.2 0.2 46.2
General and Administrative 1.7 1.7 24.7
Total Operating Expenses 19.7 19.9 24.9
Operating Income 7.9 7.5 31.8
Interest Income (Expense):
Interest and Investment Income 0.1 0.2 (30.0)
Interest Expense (0.2) (0.2) 0.0
Interest, Net (0.1) 0.0 300.0
Earnings Before Income Taxes 7.8 7.5 31.1
Income Taxes 3.1 2.9 32.7
Net Earnings 4.7% 4.6% 30.1%
Selected Consolidated Sales Data
Number of Transactions (000's) 156,209 129,744 20.4%
Average Amount of Sale Per
Transaction $ 45.19 $ 43.45 4.0
Weighted Average Weekly Sales
Per Operating Store (000's) $ 854 $ 834 2.4
Weighted Average Sales Per
Square Foot $ 417 $ 410 1.7%
THE HOME DEPOT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
RESULTS OF OPERATIONS
Sales for the first quarter of fiscal 1998 increased 25.9% to $7.123
billion compared to sales of $5.657 billion for the first quarter of fiscal
1997. The sales increase for the quarter was primarily attributable to new
stores (656 at the end of the first quarter of fiscal 1998 compared to 536
at the end of the first quarter of fiscal 1997) and a comparable store-for-
store sales increase of 7%.
Gross profit as a percent of sales was 27.6% for the first quarter of
fiscal 1998 compared to 27.4% for the comparable period of fiscal 1997.
The gross profit rate increase was primarily attributable to product line
reviews and other merchandising initiatives which have resulted in lower
costs of merchandise. Sales mix changes also contributed to the rate
increase.
Operating expenses as a percent of sales decreased to 19.7% for the first
quarter of fiscal 1998 from 19.9% for the first quarter of fiscal 1997,
primarily due to lower selling and store operating expenses as a percent of
sales.
Selling and store operating expenses as a percent of sales were 17.8% for
the first quarter of fiscal 1998 compared to 18.0% for the comparable
period of fiscal 1997. During the first quarter of 1998, the Company
purchased the remaining 25% of The Home Depot Canada partnership from The
Molson Companies. As a result, expense for minority interest, which
represents the Molson Companies' share of earnings in the partnership, was
lower as a percent of sales in the first quarter of fiscal 1998 compared to
the first quarter of fiscal 1997. In addition, net advertising expenses
decreased as a percent of sales due to increased national advertising,
higher cooperative advertising participation from vendors, and cost
leverage attained from opening new stores in existing markets. Partially
offsetting these decreases were higher store selling payroll expenses, as a
percent of sales, for the first quarter of fiscal 1998 compared to the
first quarter of fiscal 1997. Several of the Company's focus areas,
including flooring and other decor areas, require labor skills which tend
to carry higher than average pay rates.
Pre-opening expenses as a percent of sales were 0.2% for the first quarter
of both fiscal 1998 and fiscal 1997. Pre-opening expenses were for 32
stores opened in the first quarter of fiscal 1998 compared to 24 new stores
and one store relocation during the first quarter of fiscal 1997. General
& administrative expenses as a percent of sales were 1.7% for both the
first quarter of fiscal 1998 and fiscal 1997.
Net interest expense as a percent of sales increased to 0.1% for the first
quarter of fiscal 1998 compared to 0.0% for the first quarter of fiscal
1997. As a percent of sales, interest and investment income decreased to
0.1% in fiscal 1998 from 0.2% in the first quarter of fiscal 1997 primarily
due to lower investment balances resulting from funds used to open stores
and the acquisition of the remaining 25% of the Canadian partnership.
THE HOME DEPOT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
RESULTS OF OPERATIONS - (Continued)
The Company's combined federal and state effective income tax rate
increased to 39.3% for the first quarter of fiscal 1998 compared to 38.9%
for the comparable period last year. The increase was due to higher
effective state tax rates and a reduction in tax-exempt interest income.
Net earnings as a percent of sales increased to 4.7% for the first quarter
of fiscal 1998 from 4.6% for the first quarter of fiscal 1997, reflecting
higher gross margin and lower selling and store operating expenses,
partially offset by higher net interest expense and income taxes as
described above.
Diluted earnings per share increased 29% to $0.45 for the first quarter of
fiscal 1998 from $0.35 for the first quarter of fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow generated from store operations provides the Company with a
significant source of liquidity. Additionally, a significant portion of
the Company's inventory is financed under vendor credit terms.
The Company opened 32 stores during the first quarter of fiscal 1998.
During the remainder of fiscal 1998, the Company plans to open
approximately 105 new stores and relocate 4 existing stores. It is
anticipated that approximately 78% of these locations will be owned, and
the remainder will be leased. The Company also plans to open approximately
170 stores, including relocations, in fiscal 1999. In June 1996, the
Company entered into a $300 million operating lease agreement for the
purpose of financing construction costs of certain new stores. In May
1997, the Company increased its available funding under the operating lease
agreement to $600 million. Under the agreement, the lessor purchases the
properties, pays for the construction costs and subsequently leases the
facilities to the Company. The lease provides for substantial residual
value guarantees and includes purchase options at original cost on each
property. The Company financed a portion of new stores opened in fiscal
1997 under the agreement and anticipates utilizing this facility to finance
selected new stores in fiscal 1998 and an office building in fiscal 1999.
In addition, some planned locations for fiscal 1998 and fiscal 1999 will be
leased individually, and it is expected that many locations may be obtained
through the acquisition of land parcels and construction or purchase of
buildings. While the cost of new stores to be constructed and owned by the
Company varies widely, principally due to land costs, new store costs are
currently estimated to average approximately $13.3 million per location.
The cost to remodel and fixture stores to be leased is expected to average
approximately $2.4 million per store. In addition, each new store will
require approximately $3.6 million to finance inventories, net of vendor
financing.
THE HOME DEPOT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES - (Continued)
During fiscal 1996, the Company issued, through a public offering, $1.1
billion of 3.25% Convertible Subordinated Notes due October 1,2001("3.25%
Notes"). The 3.25% Notes were issued at par and are convertible into shares
of the Company's common stock at any time prior to maturity, unless
previously redeemed by the Company, at a conversion price of $46.0833 per
share, subject to adjustment under certain conditions. The 3.25% Notes may
be redeemed, at the option of the Company, at any time on or after October
2, 1999, in whole or in part, at a redemption price of 100.813% of the
principal amount and after October 1, 2000, at 100% of the principal
amount. The Company used the net proceeds from the offering to repay
outstanding commercial paper obligations, to finance a portion of the
Company's capital expenditure program, including planned store expansions
and renovations, and for general corporate purposes.
The Company has a commercial paper program that allows borrowings up to a
maximum of $800 million. As of May 3, 1998, there were no borrowings
outstanding under the program. In connection with the program, the Company
has a back-up credit facility with a consortium of banks for up to $800
million. The credit facility, which expires in December 2000, contains
various restrictive covenants, none of which is expected to materially
impact the Company's liquidity or capital resources.
As of May 3, 1998, the Company had $579 million in cash and cash
equivalents and short-term investments, as well as $15 million in long-term
investments. Management believes that its current cash position, the
proceeds from short-term and long-term investments, internally generated
funds, funds available from its $800 million commercial paper program,
funds available from the $600 million operating lease agreement, and/or the
ability to obtain alternate sources of financing should enable the Company
to complete its capital expenditure programs, including store expansions
and renovations, through the next several fiscal years.
YEAR 2000
The Company is currently addressing a universal situation commonly referred
to as the "Year 2000 Problem." The Year 2000 Problem relates to the
inability of certain computer software programs to properly recognize and
process date-sensitive information relative to the year 2000 and beyond.
During fiscal 1997, the Company developed a plan to devote the necessary
resources to identify and modify systems impacted by the Year 2000 Problem,
or implement new systems to become year 2000 compliant in a timely manner.
The cost of executing this plan is not expected to have a material impact
on the Company's results of operations or financial condition. In
addition, the Company has contacted its major suppliers and vendors to
ensure their awareness of the Year 2000 Problem. If the Company, its
suppliers or vendors are unable to resolve issues related to the year 2000
on a timely basis, it could result in a material financial risk.
THE HOME DEPOT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
IMPACT OF INFLATION AND CHANGING PRICES
Although the Company cannot accurately determine the precise effect of
inflation on its operations, it does not believe inflation has had a
material effect on sales or results of operations.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
During the first quarter of fiscal 1998, no matters were submitted
to a vote of security holders.
Item 6. Exhibits
11.1 Computation of Basic and Diluted Earnings Per Share
27. Financial Data Schedule (only submitted to SEC in
electronic format)
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/ Arthur M. Blank
Arthur M. Blank
President & CEO
/s/ Marshall L. Day
Marshall L. Day
Senior Vice President Finance &
Accounting
June 1, 1998
(Date)
THE HOME DEPOT, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
Exhibit Description
11.1 Computation of Basic and Diluted Earnings per Share
27. Financial Data Schedule (only submitted to SEC in electronic
format)