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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT
TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-8207
THE HOME DEPOT, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE
(State or Other Jurisdiction of Incorporation or Organization)
IRS NO. 95-3261426
(I.R.S. Employer Identification No.)
2455 PACES FERRY ROAD, ATLANTA, GEORGIA
(Address of Principal Executive Offices)
30339-4024
(Zip Code)
Registrant's telephone number, including area code: (770) 433-8211
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
Common Stock, $.05 Par Value New York Stock Exchange
3 1/4% Convertible Subordinated Notes New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. X
-
The aggregate market value of the Common Stock of the Registrant held by
nonaffiliates of the Registrant on March 29, 1999, was $89,324,866,932. The
aggregate market value was computed by reference to the closing price of the
Common Stock on the New York Stock Exchange on such date. For the purposes of
this response, executive officers and directors are deemed to be the affiliates
of the Registrant and the holdings by nonaffiliates was computed at
1,392,980,381 shares.
The number of shares outstanding of the Registrant's Common Stock as of March
29, 1999 was 1,478,633,371 shares.
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INCORPORATION BY REFERENCE
Filings made by companies with the Securities and Exchange Commission sometimes
"incorporate information by reference." This means that the company is
referring you to information that was previously filed with the SEC, and this
information is considered to be part of the filing you are reading. The
following materials are incorporated by reference into this Form 10-K:
- Information contained in our Proxy Statement for the 1999
Annual Meeting of Stockholders is incorporated by reference
in response to Items 10 through 13 of Part III.
- Information contained on pages 22 through 35 of our 1998
Annual Report to Stockholders is incorporated by reference in
response to Items 6 and 8 of Part II.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
Certain statements we make in this report, and other written and oral
statements made by us or our authorized executive officers on our behalf may
constitute "forward-looking statements" within the meaning of the federal
securities laws. 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 the Company's historical experience and its present
expectations or projections. These risks and uncertainties include, but are not
limited to:
- - conditions affecting the availability, acquisition, development and
ownership of real estate;
- - unanticipated weather conditions;
- - stability of costs and availability of sourcing channels;
- - our ability to attract, train and retain highly-qualified associates;
- - year 2000 problems;
- - 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 they are made. Additional information
concerning the risks and uncertainties listed above and other factors you may
wish to consider are provided on page 24 under "Item 7. Management's Discussion
and Analysis of Results of Operations and Financial Condition - Forward-Looking
Statements May Prove Inaccurate."
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PART I
ITEM 1. BUSINESS
The Home Depot, Inc. is the leading retailer in the home improvement industry
and ranked among the ten largest retailers in the United States based on net
sales volume for fiscal 1998. At the end of our fiscal year, we were operating
761 retail stores, which includes 753 Home Depot(R) stores and eight EXPO
Design Center(SM) stores. A description of these two types of stores is as
follows:
- HOME DEPOT STORES: Home Depot stores sell a wide assortment
of building materials and home improvement and lawn and
garden products. Home Depot stores average approximately
107,000 square feet of enclosed space, with an additional
approximately 24,000 square feet in the outside garden area.
At fiscal year end, we had Home Depot stores located
throughout the United States and Canada, as well as in Puerto
Rico and Chile.
- EXPO DESIGN CENTER STORES: EXPO Design Center stores sell
products and services primarily for design and renovation
projects. Unlike Home Depot stores, EXPO Design Center stores
do not sell building materials and lumber. Rather, EXPO
Design Center stores offer high-end interior design products,
such as kitchen and bath cabinetry, tiles, flooring and
lighting fixtures. The prototypical EXPO Design Center is
approximately 92,000 square feet. At fiscal year end, EXPO
Design Center stores were operating in California, Florida,
Georgia, New York and Texas.
We also offer products through direct marketing. Our Maintenance Warehouse(R)
subsidiary is a leading direct mail marketer of maintenance, repair and
operations products serving primarily the multi-family housing and lodging
facilities management market. Our National Blinds & Wallpaper(SM) subsidiary is
a telephone mail order service for wallpaper and custom window treatments.
Our Store Support Center (corporate office) is located at 2455 Paces Ferry
Road, Atlanta, Georgia 30339-4024. The telephone number is (770) 433-8211.
RETAIL BUSINESSES
HOME DEPOT STORES
OPERATING STRATEGY. The operating strategy for Home Depot stores is to offer a
broad assortment of high-quality merchandise at competitive prices using highly
knowledgeable, service-oriented personnel and aggressive advertising. We
believe that our associates' knowledge of products and home improvement
techniques and applications are very important in our marketing approach and
our ability to maintain customer satisfaction. We regularly check our
competitors' prices to ensure that our low "day-in day-out" warehouse prices
are competitive within each market.
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CUSTOMERS. Home Depot stores serve three primary customer groups:
- D-I-Y (DO-IT-YOURSELF) CUSTOMERS: These customers are
typically homeowners who purchase products and complete their
own projects and installations. To complement the in-store
expertise of our associates, Home Depot stores offer many
D-I-Y "how-to" clinics taught by associates and merchandise
vendors.
- B-I-Y (BUY-IT-YOURSELF) CUSTOMERS: These customers are
typically homeowners who purchase materials themselves and
hire third parties to complete the project and/or
installation. We offer B-I-Y customers installation services
for a variety of products through third party contractors.
- PROFESSIONAL CUSTOMERS: These customers are professional
remodelers and commercial users. To increase sales to
professional customers, we are testing a variety of programs,
including expanded commercial credit programs, delivery
services and incremental, dedicated staff.
PRODUCTS. A typical Home Depot store stocks approximately 40,000 to 50,000
product items, including variations in color and size. Each store carries a
wide selection of high-quality and nationally advertised brand name
merchandise. The following table shows the percentage of sales of each major
product group for each of the last three fiscal years:
Percentage of Sales for
Fiscal Year Ended
--------------------------------
Jan. 31, Feb. 1, Feb. 2,
1999 1998 1997
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Product Group
Building materials, lumber, floor and wall coverings.......... 34.1% 34.2% 34.0%
Plumbing, heating, lighting and electrical supplies........... 26.8 27.1 27.4
Seasonal and specialty items.................................. 15.0 14.8 14.7
Hardware and tools............................................ 13.6 13.5 13.4
Paint and other............................................... 10.5 10.4 10.5
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Total.................................................... 100.0% 100.0% 100.0%
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We buy our store merchandise from vendors located throughout the world. No
single vendor accounts for as much as five percent of our total purchases, and
we are not dependent on any single vendor. Most of our merchandise is purchased
directly from manufacturers, which eliminates "middleman" costs. We believe
that competitive sources of supply are readily available for substantially all
of the products we sell in Home Depot stores.
We maintain an import merchandise program to find high-quality products to
import from overseas to give our customers a broader selection of products and
better values and to enhance our sales margins. Our product development
managers travel internationally to identify
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opportunities to purchase items directly for our stores. This enables us to
import products not currently available to our customers, to offer at a lower
price products that would otherwise be purchased from third party importers and
to improve product quality.
To complement the full range of established national brand name products we
offer, we have formed strategic alliances with vendor partners to market
products under brand names that are only offered through The Home Depot. At the
end of fiscal year 1998, we offered products under more than 40 proprietary
brands, including RIDGID(R) power tools; Scotts(R) mowers; GE SmartWater(TM)
water heaters manufactured by Rheem(R); Husky(R) mechanics' tools; and Hampton
Bay(TM) fans, lighting and accessories. In the future, we may strategically
consider additional opportunities to align with other vendors to offer products
under proprietary brand names. Additionally, we will continue to assess
opportunities to expand the range of products available under existing
proprietary brands.
INSTALLED SALES SERVICES. Home Depot stores offer a variety of installed sales
programs. These programs include the installation of flooring, kitchen
cabinets, solid surface countertops, millwork, garage doors, window treatments
and water heaters. This service targets the B-I-Y customer who will select and
purchase materials for a project but lacks either the desire or the ability to
undertake the installation. We implement our installed sales programs through
approximately 4,500 independent licensed contractors in the U.S. and Canada.
IN-STORE INITIATIVES. We continually assess our business to find opportunities
to increase sales. Accordingly, we implemented or expanded a number of in-store
initiatives in Home Depot stores during fiscal 1998, including:
- Professional Business Customer Test. We are committed to having
Home Depot stores be the supplier of choice to a variety of
professional customers, including remodelers, carpenters,
plumbers, electricians, building maintenance professionals and
designers. During fiscal 1997 and 1998, in stores in the Austin,
Texas and Las Vegas, Nevada markets, we began testing the impact
of adding additional products and service-related programs
designed to increase sales to professional customers. These stores
added associates dedicated to providing more personalized service
to professional customers, including associates to manage accounts
and to take and fill orders for pick-up or same-day delivery.
Additionally, during the hours when professionals typically shop,
they added sales associates in certain departments to assist these
customers. We also added new product lines to our inventory and
increased quantities of existing products purchased by
professionals in bulk quantities to better serve our professional
customers. We anticipate that during fiscal 1999 the test will be
expanded into, and customized for, additional markets. Through
this test, we have identified best practices in serving our
professional customers that are being implemented in many of our
stores without material additional costs.
- Tool Rental. As part of our efforts to satisfy a broad range of
the needs of our professional customers, as well as our D-I-Y
customers, we have begun offering a
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tool rental service in some of our stores. Under this program, we
rent approximately 200 commercial-quality tools in ten categories,
including saws, floor sanders, generators, gas powered lawn
equipment and plumbing tools. Customers can lease the tools on an
hourly, daily, weekly or monthly basis. Our associates who work in
the tool rental area receive special training concerning the use
and maintenance of the tools. In fiscal 1998, we opened tool
rental facilities in selected major markets in each of our
divisions, and, as of our fiscal year end, we offered the service
in 46 stores. During fiscal 1999, we anticipate expanding tool
rental services into additional stores. We believe that offering
this service increases the sales of related merchandise without
reducing the sales of equipment similar to that available for
rental.
- Load 'N Go(R). The Load 'N Go program, which is known as Home
Express(R) in our Canadian stores, offers pickup truck rentals at
low hourly rates to those customers who are unable to transport
their purchases in their own vehicles and who choose to forego the
regular delivery service offered by the stores. The program gives
our customers the ability to buy and transport large items or
large quantities of items at the time of purchase. We believe that
this service increases our sales while reducing delivery expenses
and making our delivery trucks available for deliveries to our
professional customers. By the end of fiscal 1998, Load 'N Go was
available in approximately 560 Home Depot stores, an increase from
the approximately 300 stores in which the service was available at
the end of fiscal 1997. We anticipate expanding this service to
approximately 130 additional stores during fiscal 1999.
- Special Order Center Test. We are currently testing the special
order center, or SOC, in approximately 35 Home Depot stores in
Michigan and Minnesota. The SOC supports special order sales of
blinds and wallpaper, which are time intensive due to the precise
measurements that are required. Customers are initially helped in
selecting merchandise by in-store associates, but when they are
ready to place an order, they use telephones placed in the store
to speak to an associate at the SOC. The SOC associate can also
assist with scheduling the installation of the product. We believe
that because of the special expertise offered by the SOC, it
increases the accuracy of orders, while decreasing the time
required to place a special order and enabling in-store associates
to help more customers. We anticipate expanding the SOC test
during fiscal 1999 and researching how the SOC may support other
Home Depot special order processes.
- Customer Education Programs. We offer several programs to enhance
the skills and confidence of our D-I-Y customers. Our associates
and vendors teach "how-to" clinics, which focus on D-I-Y projects,
such as installing garbage disposals, laying patio pavers or
building a deck. In addition to the clinics, we have initiated
Home Depot University(SM), which was available in approximately 90
stores at the end of fiscal 1998. Home Depot University presents
four-week modules allowing our customers to learn about several
facets of a home improvement topic. For example, a
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room enhancement module may provide instruction on paint, wallpaper
and window treatments. We anticipate that Home Depot University will
be expanded to additional stores during fiscal year 1999. Through The
Home Depot Kids Workshop(SM) program, children are instructed in tool
safety and complete a small project, such as building a birdhouse or
tool box. We believe that these types of educational programs increase
our sales by encouraging our customers to undertake more projects,
differentiating us from our competition and reinforcing our position
as experts in home improvement.
U.S. STORE GROWTH. At the end of fiscal 1998, we were operating 707 Home Depot
stores in the United States. During fiscal 1998, in the United States we opened
121 new Home Depot stores, relocated four existing Home Depot stores and
closed one store, which will be reopened in the same location during fiscal
1999. Although these new store openings occurred primarily in existing markets,
we continued our geographic expansion by opening stores in a number of new
markets.
In existing markets, we believe a number of Home Depot stores are operating at
or above their optimum capacity. To enhance long-term market penetration, we
often open new stores near the edge of the market areas served by existing
stores. While these openings may initially have a negative impact on comparable
store-for-store sales, we believe this "cannibalization" strategy increases
customer satisfaction and overall market share by reducing delays in shopping,
increasing utilization by existing customers and attracting new customers to
more convenient locations.
We currently anticipate opening approximately 167 new stores in fiscal 1999.
This plan is consistent with our policy of opening stores at a consistent rate
of 21-22% per year for the forseeable future. Overall, our current plan
anticipates having over 1,600 stores by the end of fiscal 2002, the substantial
majority of which will be Home Depot stores located in the United States.
INTERNATIONAL MARKETS. At the end of fiscal 1998, Home Depot stores were
operating in the following international markets:
Canada. At the end of fiscal 1998, we were operating 43 Home Depot stores in
five Canadian provinces. Of these stores, eleven were opened during fiscal
1998. We currently anticipate opening eleven new Home Depot stores in Canada in
fiscal 1999.
During the first quarter of fiscal 1998, we purchased for $261 million the
remaining 25% partnership interest in The Home Depot Canada partnership
previously owned by The Molson Companies. Our Canadian stores are now operated
through Home Depot of Canada, Inc., a wholly owned subsidiary of The Home
Depot.
Latin America. During fiscal 1998, we opened our first two Home Depot stores in
Latin America in Santiago, Chile. We expect to open two additional Home Depot
stores in Chile during fiscal 1999. We operate our Chilean Home Depot stores
through a joint venture with S.A.C.I. Falabella, a leading department store
retailer in Chile. Our controlling share of the
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joint venture is 66.67%. We believe our alliance with Falabella enhances our
presence in the Chilean market by offering attractive real estate opportunities
and providing assistance with, among other things, information systems, credit
marketing and distribution logistics. We have offices in Chile from which the
day-to-day management of the operation is handled by a management team
comprised of both Chilean nationals and seasoned Home Depot managers.
We expect to open our first Home Depot store in Buenos Aires, Argentina during
fiscal 2000. We anticipate opening offices in Argentina to manage the operation
of the business.
Puerto Rico. We opened our first Home Depot store in San Juan, Puerto Rico in
September 1998. We expect to open an additional store in Puerto Rico in fiscal
1999.
EXPO DESIGN CENTER STORES
OPERATING STRATEGY. The operating strategy for our EXPO Design Center stores is
to offer complete interior design services and high-quality, competitively
priced products to assist our customers in their home decor and remodeling
projects. Each EXPO Design Center store features up to eight different
showrooms, each with complete, full-size displays to help customers visualize
the end result of possible projects. To assist our customers, we employ
associates who have expertise in planning and completing projects and who
provide exceptional customer service.
CUSTOMERS. Typically, customers at EXPO Design Center stores are middle to
upper income B-I-Y customers, who purchase merchandise for installation by
others. Accordingly, we offer installation services for most of the products we
sell.
PRODUCTS. EXPO Design Center stores offer interior design products and
installation services in the following core product categories:
- Kitchens
- Baths
- Decor
- Lighting
- Flooring
- Appliances
- Patio
EXPO Design Center stores offer a broad range of merchandise in an effort to
meet all the needs of shoppers whose interior design preferences may go beyond
the items available in a Home Depot store. While there is some overlap between
the products offered in Home Depot stores and EXPO Design Center stores, those
available at EXPO Design Center stores are typically higher-end or more unusual
items. In addition to nationally advertised brand name products, we also offer
items that must be special ordered or that are typically offered through
showrooms open only to design professionals.
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STORE GROWTH. At the end of fiscal 1998, we were operating eight EXPO Design
Center stores in San Diego, California; Boynton Beach, Davie and Miami,
Florida; Atlanta, Georgia; Westbury, New York; and Dallas (two stores), Texas.
We opened three of these stores during fiscal 1998. We currently anticipate
opening seven additional stores in fiscal 1999, including stores in Houston,
Texas, Fairfax, Virginia and Huntington Beach, California, and we expect to be
operating approximately 200 stores in the next five to seven years. These new
stores are expected to average approximately 92,000 square feet and will
incorporate lowered ceilings and muted lighting, rather than a warehouse
environment.
IN-STORE SERVICES. We have associates at our EXPO Design Center stores to
assist with every phase of a project. Certified kitchen and bath designers are
on staff. We also have design professionals to help our customers design
lighting, tile and flooring, custom upholstery and bedding, and custom closets
and window treatments. Installation services are available for most products at
EXPO Design Center stores, including kitchens, baths, flooring, wallpaper,
tile, lighting fixtures and window treatments. Our project managers ensure that
the products are available and then schedule licensed third party contractors
to complete the work. We warrant the workmanship of each installation for as
long as the customer owns the home.
VILLAGER'S HARDWARE(SM) STORES
During fiscal 1999, we plan to test and develop the Villager's Hardware store
concept by opening the first of four stores in New Jersey. These stores will
stock approximately 35,000 to 40,000 items, including variations in color and
size, including hardware, fasteners, tools, plumbing, electrical and seasonal,
as well as a broad selection of home enhancement products, including paint and
wallpaper, window treatments, lighting, storage, housewares and giftware. We
believe that the primary focus for these stores will be home enhancement and
small projects. Each Villager's Hardware store is expected to have
approximately 30,000 to 40,000 square feet of selling space in a retail
environment, emphasizing customer service and education.
DIRECT MARKETING SALES
We have two subsidiaries that sell merchandise through direct marketing:
- MAINTENANCE WAREHOUSE. Our Maintenance Warehouse subsidiary
is a leading provider of maintenance, repair and operations
products to the multi-family housing and lodging facilities
management market. Through its catalog, which is published
semi-annually, Maintenance Warehouse offers approximately
11,750 items, including variations in color and size.
Maintenance Warehouse emphasizes accurate order taking and
delivery and personalized service, and the company employs
approximately 600 people. Orders are typically placed over
the telephone, filled through one of Maintenance Warehouses'
13 distribution centers and shipped for next-day delivery.
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- NATIONAL BLINDS & WALLPAPER, INC. National Blinds and
Wallpaper, Inc. sells decor products through telephone sales.
The company, which is one of the leaders in its industry,
markets primarily through magazine advertising aimed at
customers seeking the lowest prices. The company maintains no
inventory, but rather acts as a broker to fill special order
sales.
STORE SUPPORT SERVICES
INFORMATION SYSTEMS. Each Home Depot and EXPO Design Center store is equipped
with a computerized point of sale system, electronic bar code scanning system
and a UNIX server. Store information is communicated to the Store Support
Center's computers via a land-based frame relay network. These computers
provide corporate, financial, merchandising and other back office function
support. We believe our systems provide efficient customer check-out (with a
greater than 90% rate of scannable products), store-based inventory management,
rapid order replenishment, labor planning support and item movement
information. Fast registers, credit authorizations and check approvals expedite
transactions in our stores at a pace that we believe sets the standard for our
industry. For example, to better serve the increasing number of customers
applying for credit, the charge card approval process time has been reduced to
less than 30 seconds.
We have implemented a mobile ordering system in our Home Depot stores using
portable carts with computers to assist our associates in placing accurate
orders for inventory. Through the system, an associate on the sales floor can
see the supply the store has for a given item, review the suggested re-order
quantities based on the store's historical experience and place an order with
the vendor. We believe the system increases the efficiency and productivity of
our associates because it requires less time and fewer people to assess and
order inventory.
We are continuously assessing and upgrading our information systems to support
growth, reduce and control costs and enable our associates to make better
decisions. We continue to realize greater efficiency as a result of our
electronic data interchange program. Currently, most of our high volume vendors
are participating in the EDI program, which represents more than 75% of our
total volume. EDI is a paperless system, which processes orders from buying
offices to vendors, alerts the stores when the merchandise is to arrive and
transmits invoice data from the vendors and freight carriers to the Store
Support Center.
ASSOCIATE DEVELOPMENT. As of January 31, 1999, we employed approximately
157,000 associates, of whom approximately 9,420 were salaried, with the
remainder compensated on an hourly basis. Approximately 75% of our associates
are employed on a full-time basis. To attract and retain qualified personnel,
we seek to maintain salary and wage levels above those of our competitors in
each market area. Store managers have access to information regarding
competitive salary rates in their respective markets.
In fiscal 1998, we enhanced our training programs in a continuing effort to
service the needs of our associates. These programs are designed to increase
associates' knowledge of merchandising departments and products, including
mandatory product knowledge training classes, and to educate,
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develop and test the skills of those associates who are interested in being
promoted. Because our policy is to promote or relocate current associates to
serve as store managers and assistant managers for new stores, training and
assessment of our associates is essential to our growth. Our district managers
and store managers typically meet with our human resource associates concerning
their assistant managers and certain department heads to discuss their
development and consider possible candidates for promotion.
Also during fiscal 1998, we implemented programs to ensure that we hire and
promote the best qualified associates in a non-discriminatory way. These
programs integrate validated computerized tests for all applicants, as well as
specialized tests for certain positions. If an applicant passes the computer
test, he or she may be selected for a structured interview in which questions
selected by the computer as a result of the answers given on the test will be
asked. We also maintain a list of qualified associates who are interested in a
new assignment and applicants that can be reviewed when positions become
available.
We have never experienced a strike or any work stoppage, and we believe that
our employee relations are good. There are no collective bargaining agreements
covering any of our associates.
MARKETING. We are one of the nation's largest retail advertisers utilizing all
forms of mass media and selected forms of highly targeted media. We also
incorporate major sponsorships into our marketing plan, such as NASCAR(R), the
Olympics, home and garden shows and sports teams. We extend our reach and
educate our customers through proprietary publications, such as Home
Improvement 1-2-3(TM), of which over one million copies have been sold. These
books are sold not only in our stores, but also through traditional and
Internet book sellers.
We execute our marketing campaigns on both a national and regional basis.
Because our stores are located throughout the United States and Canada, we can
achieve greater efficiencies than smaller retailers by using national
advertising. At the same time, we tailor a significant portion of our
advertising regionally to respond to market differences, both in terms of
products and the competitive environment.
INTELLECTUAL PROPERTY. Through our subsidiary, Homer TLC, Inc., we have
registered or applied for registration of a variety of trade names, service
marks or trademarks for use in our business, including The Home Depot(R), the
"Homer"(R) character, Villager's Hardware(SM) and EXPO Design Center(SM) stores.
We regard our intellectual property as having significant value and as being an
important factor in the marketing of the Company and our stores and direct
marketing efforts. We are not aware of any facts that could be expected to
negatively impact our continuing use of any of our intellectual property.
QUALITY ASSURANCE PROGRAM. As part of our import merchandise program, we have
implemented a quality assurance program. Through this program, we develop and
document specifications for the products we import. Additionally, before we
begin importing goods from a vendor, we typically retain independent certified
assessors to conduct an inspection of the vendor's factory, based on standards
that we have developed. Through these inspections,
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we ensure that the factories can manufacture the products to our specifications
and also try to ensure that they are not using forced or child labor. After a
vendor's factory passes this initial inspection, our independent certified
assessors typically inspect every shipment for product quality.
LOGISTICS. We use several mechanisms to lower distribution costs and increase
our efficiencies. The vast majority of our products are shipped from the
manufacturer directly to the stores. Certain import products require the use of
distribution centers. Accordingly, we have four distribution centers, located
in Savannah, Georgia (approximately 1.4 million square feet); Cranbury, New
Jersey (approximately 812,000 square feet); Ontario, California (approximately
317,000 square feet); and Ontario, Canada (approximately 135,000 square feet).
Additionally, at the end of fiscal 1998, we had 23 lumber distribution
facilities located throughout the United States and Canada to support the
lumber demands of our stores. We also opened a transit facility in Philadelphia
during fiscal 1998. At this facility, we receive merchandise from manufacturers
and immediately load it onto trucks for delivery to our stores.
COMPETITION. Our business is highly competitive, based in part on price, store
location, customer service and depth of merchandise. In each of the markets we
serve, there are a number of other chains of electrical, plumbing and building
materials supply houses, lumber yards and home improvement stores. With respect
to some products, we also compete with discount stores, local, regional and
national hardware stores, mail order firms, warehouse clubs, independent
building supply stores and, to a lesser extent, other retailers. In addition to
these entities, our EXPO Design Center stores also compete with specialty
design stores or showrooms, some of which are only open to interior design
professionals.
Due to the variety of competition we face, we are unable to precisely measure
our market share in existing market areas. We believe that we are an effective
and significant competitor in our markets. Based on U.S. Census data estimates,
internal estimates and data provided by the Home Improvement Research
Institute, we believe that our market share in the U.S. and Canada, currently
defined as including the Do-It-Yourself/Buy-It-Yourself, Tradesmen,
Builders/General Contractors, Heavy Industrial, Repair and Remodeling and
Property Maintenance markets, is approximately 8%.
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EXECUTIVE OFFICERS
The following provides information as of January 31, 1999 concerning our
executive officers:
BERNARD MARCUS, age 69, is a co-founder of The Home Depot and serves
as Chairman of the Board. From inception of the Company in 1978 until 1997, he
served as Chairman of the Board and Chief Executive Officer, at which time the
title of CEO was passed on to Mr. Arthur M. Blank. Mr. Marcus serves as a
director on the boards of National Service Industries, Inc., The New York Stock
Exchange, Inc., Westfield Corporation, Inc. and DBT Online, Inc.
ARTHUR M. BLANK, age 56, has been the President, Chief Operating
Officer and a director of The Home Depot since its inception in 1978 and was
named CEO in 1997. He is, together with Mr. Bernard Marcus and Mr. Kenneth G.
Langone, a co-founder of the Company. Mr. Blank is a member of the Board of
Directors of Cox Enterprises, Inc. and Post Properties, Inc.
RONALD M. BRILL, age 55, has been Executive Vice President and Chief
Administrative Officer of the Company since 1995. Mr. Brill joined The Home
Depot as Controller in 1978, was elected Treasurer in 1980, Vice
President-Finance in 1981, Senior Vice President and Chief Financial Officer in
1984, Executive Vice President and CFO in 1993 and was elected as a director in
1987.
MARK R. BAKER, age 41, has been President of the Midwest Division since
1997. Mr. Baker joined the Company in 1996 as Vice President-Merchandising for
the Midwest Division. Prior to joining The Home Depot, from 1992 until 1996, Mr.
Baker was an Executive Vice President - Merchandising for HomeBase in Fullerton,
California.
BRUCE W. BERG, age 50, had been President of the Southeast Division
since 1991. Mr. Berg joined the Company in 1984 as Vice President-Merchandising
(East Coast) and was promoted to Senior Vice President (East Coast) in 1988.
Mr. Berg retired from the Company in February 1999.
DENNIS J. CAREY, age 52, has been Executive Vice President and Chief
Financial Officer since May 1998. From 1994 to 1998, Mr. Carey was employed by
AT&T Corp., most recently as Vice President and General Manager - Corporate
Productivity and Mergers and Acquisitions. Prior to joining AT&T, Mr. Carey
held a number of positions during his 25 year tenure with General Electric
Company, including Vice President and General Manager of International
Operations.
JEFFREY W. COHEN, age 40, has been Group President - Direct Marketing
Businesses since May 1998. From January 1997 until he joined The Home Depot,
Mr. Cohen was President of Cohen & Associates Management Consultants. From 1995
through 1997, he was Executive Vice President of Harte-Hanks Direct Marketing
and prior thereto he was a Senior Vice President - General Manager at GE
Capital Corp.
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MARSHALL L. DAY, age 55, has been Senior Vice President-Finance and
Accounting since 1998. Mr. Day previously served as Senior Vice President -
Chief Financial Officer from 1995 to 1998 and as Senior Vice President -
Finance from 1993 to 1995.
BILL HAMLIN, age 46, has been Group President since 1998 and has been
Executive Vice President - Merchandising since 1994. Mr. Hamlin served as
President of the Western Division from 1990 until 1994.
VERNON JOSLYN, age 47, has been President of the Northeast Division
since 1996. Mr. Joslyn previously served as Vice President-Operations for the
Northeast Division from 1993 until his promotion to his current position.
LYNN MARTINEAU, age 42, has been President of the Western Division
since 1996. Mr. Martineau most recently served as Vice President-Merchandising
for the Southeast Division from 1989 until his promotion to his current
position.
W. ANDREW McKENNA, age 53, has been Senior Vice President-Strategic
Business Development since December 1997. Mr. McKenna joined The Home Depot as
Senior Vice President-Corporate Information Systems in 1990. In 1994, he was
named President of the Midwest Division, a position he held until he assumed the
duties of his current position.
LARRY M. MERCER, age 52, has been Group President since 1998 and has
been Executive Vice President-Operations since 1996. Mr. Mercer previously
served as President of the Northeast Division from 1991 until his promotion in
1996.
STEPHEN R. MESSANA, age 54, has been Senior Vice President - Human
Resources since 1993.
BARRY L. SILVERMAN, age 40, has been President of the Southwest
Division since July 1997. Mr. Silverman previously served as Vice
President-Merchandising of the Northeast Division from 1991 until his promotion
to his current position.
LAWRENCE A. SMITH, age 51, has been Senior Vice President - Legal
since February 1998. Mr. Smith has been employed by the Company since 1983 and
served as Vice President - Legal prior to his promotion to his current
position. Mr. Smith is the nephew of Mr. Marcus.
DAVID SULITEANU, age 46, has served as Group President - Diversified
Businesses since April 1998. Mr. Suliteanu previously served as Vice Chairman
and Director of Stores for Macy's East, a position he held from 1993 until he
joined The Home Depot.
ANNETTE M. VERSCHUREN, age 42, has been President of The Home Depot
Canada since 1996. In 1992, Ms. Verschuren formed Verschuren Ventures Inc. and
remained there until joining Michaels of Canada Inc. in 1993, where she served
as President until joining The Home Depot.
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M. FAYE WILSON, age 61, has served as Senior Vice President - Value
Initiatives since 1998 and as a director since 1992. From 1992 until joining
The Home Depot, she was an Executive Vice President of Bank of America NT&SA.
Ms. Wilson serves as a director of Farmers Insurance Group.
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Item 2. PROPERTIES
The following tables show the number of Home Depot store locations by
state in the United States and internationally as of January 31, 1999:
Number of Stores
State in State
- ---------------------------------------------------
Alabama 6
Alaska 1
Arizona 21
Arkansas 3
California 106
Colorado 13
Connecticut 13
Delaware 3
Florida 72
Georgia 39
Idaho 2
Illinois 26
Indiana 3
Iowa 2
Kansas 3
Kentucky 5
Louisiana 12
Maine 2
Maryland 17
Massachusetts 21
Michigan 26
Minnesota 10
Mississippi 4
Missouri 9
Montana 1
Nevada 6
New Hampshire 5
New Jersey 27
New Mexico 3
New York 38
North Carolina 18
Ohio 17
Oklahoma 6
Oregon 8
Pennsylvania 23
Rhode Island 1
South Carolina 10
Tennessee 19
Texas 63
Utah 6
Vermont 1
Virginia 18
Washington 15
Wisconsin 3
---
Subtotal 707
---
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Number of Stores
International Location in Location
-----------------------------------------------
Canadian Provinces
Alberta 6
British Columbia 8
Manitoba 2
Ontario 26
Saskatchewan 1
Latin America
Chile 2
Puerto Rico 1
---
Subtotal 46
---
TOTAL HOME DEPOT STORES 753
===
The following table shows the number of EXPO Design Center store locations by
state as of January 31, 1999:
Number of Stores
State In State
---------------------------------------------------------
California 1
Florida 3
Georgia 1
New York 1
Texas 2
-
TOTAL EXPO DESIGN CENTER STORES 8
=
Of our 761 Home Depot stores and EXPO Design Center stores at January
31, 1999, approximately 75% were owned (including those owned subject to a
ground lease) consisting of approximately 60,734,000 square feet and
approximately 25% were leased consisting of approximately 20,793,000 square
feet. In recent years, we have increased the relative percentage of new stores
that are owned. Although we take advantage of lease financing opportunities, we
generally prefer to own stores because of greater operating control and
flexibility, generally lower occupancy costs and certain other economic
advantages.
Our executive, corporate staff and accounting offices occupy
approximately 1,308,000 square feet of leased and owned space in Atlanta,
Georgia. We are currently building an additional approximately 632,000 square
feet of office space in Atlanta. In addition, as of January 31, 1999, we
occupied an aggregate of approximately 997,000 square feet, of which
approximately 236,000 square feet is owned and approximately 761,000 square
feet is leased, for divisional store support centers and subsidiary customer
support centers. These support centers are located in Fullerton and San Diego,
California; Tampa, Florida; Atlanta, Georgia; Arlington, Illinois; Southfield,
Michigan; South Plainfield, New Jersey; Dallas, Texas; Tukwila, Washington;
Scarborough, Ontario, Canada; and Santiago, Chile.
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At January 31, 1999, we utilized approximately 5,816,000 square feet
of warehousing and distribution space, of which approximately 709,000 is owned
and approximately 5,107,000 is leased.
We believe that at the end of existing lease terms, our current leased
space can be either relet or replaced by alternate space for lease or purchase
that is readily available.
Item 3. LEGAL PROCEEDINGS
We have litigation arising from the normal course of business. In our
opinion, this litigation will not materially affect our consolidated financial
position or the results of operations.
In fiscal 1997, we settled, without admitting wrongdoing, a class
action lawsuit and three other lawsuits seeking class action status, each of
which involved claims of gender discrimination. In connection with these
settlements, we expedited the implementation of certain programs and practices
to ensure that we are hiring, assigning, promoting and paying our associates in
a non-discriminatory manner. These programs and practices include using minimum
objective and job-related criteria for filling certain positions, implementing
training for managers and supervisors and developing a system to allow
qualified applicants and associates to register their interest in certain
positions. Additionally, we are monitoring and reporting to plaintiffs' counsel
the progress of the implementation of these programs and practices.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the
fourth quarter of fiscal 1998.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since April 19, 1984, our common stock has been listed on the New York
Stock Exchange under the symbol "HD." The table below sets forth the low and
high sales prices of our common stock on the New York Stock Exchange Composite
Tape as reported in The Wall Street Journal and the quarterly cash dividends
declared per share of common stock during the periods indicated.
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PRICE RANGE* CASH
----------------- DIVIDENDS
LOW HIGH DECLARED*
--- ---- ---------
FISCAL YEAR 1997
First Quarter ended May 4, 1997 $16.50 $19.54 $.020
Second Quarter ended August 3, 1997 19.13 25.00 .025
Third Quarter ended November 2, 1997 23.53 28.32 .025
Fourth Quarter ended February 1, 1998 26.47 30.82 .025
FISCAL YEAR 1998
First Quarter ended May 3, 1998 $30.63 $36.34 $.025
Second Quarter ended August 2, 1998 33.84 49.00 .030
Third Quarter ended November 1, 1998 31.63 45.94 .030
Fourth Quarter ended January 31, 1999 43.13 62.00 .030
FISCAL YEAR 1999
First Quarter (through April 16, 1999) $53.81 $67.94 --
- ---------------------------
*On July 2, 1998, there was a two-for-one stock split on all shares of stock
owned by stockholders as of June 11, 1998. On July 3, 1997, there was a
three-for-two stock split on all shares of stock owned by stockholders as of
June 12, 1997. The prices and dividends in the table set forth above have been
adjusted to reflect these splits.
The Company paid its first cash dividend on June 22, 1987, and has
paid dividends, during each subsequent quarter. Future dividend payments will
depend on the Company's earnings, capital requirements, financial condition and
other factors considered relevant by the Board of Directors.
The number of record holders of The Home Depot's Common Stock as of
April 15, 1999 was 151,178 (excluding individual participants in nominee
security position listings).
Item 6. SELECTED FINANCIAL DATA
We refer you to "Ten Year Summary of Financial and Operating Results"
contained in our Annual Report to Stockholders for the fiscal year ended
January 31, 1999 for information on fiscal years 1994-1998.
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
The data below reflect 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.
PERCENTAGE
INCREASE (DECREASE)
IN DOLLAR AMOUNTS
FISCAL YEAR(1) ---------------------
SELECTED CONSOLIDATED ------------------------------------------- 1998 1997
STATEMENTS OF EARNINGS DATA 1998 1997 1996 vs. 1997 vs. 1996
- --------------------------- ---- ---- ---- -------- --------
NET SALES ........................................... 100.0% 100.0% 100.0% 25.1% 23.7%
GROSS PROFIT ........................................ 28.5 28.1 27.8 26.9 24.8
OPERATING EXPENSES:
Selling and Store Operating(2) .................. 17.7 17.8 18.0 24.1 21.9
Pre-Opening ..................................... 0.3 0.3 0.3 34.1 19.7
General and Administrative ...................... 1.7 1.7 1.7 24.9 27.2
Non-Recurring Charge ............................ -- 0.4 -- NM(3) NM(3)
--------- --------- --------- ----- -----
Total Operating Expenses ..................... 19.7 20.2 20.0 21.7 25.0
--------- --------- --------- ----- -----
OPERATING INCOME ............................. 8.8 7.9 7.8 40.4 24.3
INTEREST INCOME (EXPENSE):
Interest and Investment Income .................. 0.1 0.2 0.1 (32.1) 73.8
Interest Expenses ............................... (0.1) (0.2) -- (11.0) 160.8
--------- --------- --------- ----- -----
Interest, net ................................ -- -- 0.1 (386.2) (73.7)
--------- --------- --------- ----- -----
Earning Before Income Taxes .................. 8.8 7.9 7.9 39.8 23.7
Income Taxes ........................................ 3.5 3.1 3.1 40.9 23.7
--------- --------- --------- ----- -----
NET EARNINGS ................................. 5.3% 4.8% 4.8% 39.1% 23.7%
--------- --------- --------- ----- -----
SELECTED CONSOLIDATED SALES DATA
Number of Transactions (000s) ....................... 665,125 550,226 464,089 20.9% 18.6%
Average Sale per Transaction ........................ $ 45.05 $ 43.63 $ 42.09 3.3 3.7
Weighted Average Weekly Sales Per Operating Store ... $ 844,000 $ 829,000 $ 803,000 1.8 3.2
Weighted Average Sales per Square Foot .............. $ 409.79 $ 405.56 $ 398.29(4) 1.0 1.8
- ----------------------
(1) Fiscal years 1998, 1997 and 1996 refer to the fiscal years ended January
31, 1999; February 1, 1998; and February 2, 1997, respectively.
(2) Minority interest has been reclassified to selling and store operating
expenses.
(3) Not meaningful.
(4) Adjusted to reflect the first 52 weeks of the 53-week fiscal year in 1996.
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RESULTS OF OPERATIONS
For an understanding of the significant factors that influenced the Company's
performance during the past three fiscal years, the following discussion should
be read in conjunction with the consolidated financial statements presented in
our Annual Report to Stockholders for the fiscal year ended January 31, 1999.
FISCAL YEAR ENDED JANUARY 31, 1999 COMPARED TO FEBRUARY 1, 1998
Net sales for fiscal 1998 increased 25.1% to $30.2 billion from $24.2 billion
in fiscal 1997. This increase was attributable to, among other things, full
year sales from the 112 new stores opened during fiscal 1997, a 7% comparable
store-for-store sales increase, and 138 new store openings and 4 store
relocations during fiscal 1998. One store opened during fiscal 1998 was
subsequently closed during the year and is planned to reopen during fiscal
1999.
Gross profit as a percent of sales was 28.5% for fiscal 1998 compared to 28.1%
for fiscal 1997. The rate increase was primarily attributable to a lower cost
of merchandise resulting from product line reviews and other merchandising
initiatives begun in fiscal 1996 and continued through fiscal 1997 and 1998. In
addition, sales mix changes, better inventory shrink results, and benefits from
import strategies contributed to the overall gross profit improvement.
Operating expenses as a percent of sales were 19.7% for fiscal 1998 compared to
20.2% for fiscal 1997. Operating expenses for fiscal 1997 included a $104
million non-recurring charge related to the settlements of a class action
gender discrimination lawsuit and three other gender discrimination lawsuits.
Excluding the non-recurring charge, operating expenses as a percent of sales
were 19.8% for fiscal 1997.
Selling and store operating expenses as a percent of sales decreased to 17.7%
in fiscal 1998 from 17.8% in fiscal 1997. The decrease was primarily
attributable to lower net advertising expenses resulting from higher
cooperative advertising participation by vendors, increased use of national
advertising and leverage achieved from opening stores in existing markets. In
addition, improved claims management and focus on safety programs resulted in
lower workers' compensation and general liability claims experience as a
percent of sales. Also, minority interest decreased from fiscal 1997, mainly
due to the purchase of the remaining 25% of The Home Depot Canada partnership
from The Molson Companies during the first quarter of fiscal 1998. Partially
offsetting these decreases were higher medical costs from increased family
enrollment in the Company's medical plans and higher store selling payroll
expenses as a percent of sales. The increase in store selling payroll expenses
was primarily due to increased sales penetrations in higher margin decor
categories, which require more hours and higher average pay rates to support.
Overall productivity, in terms of sales per labor hour, increased from fiscal
1997.
Pre-opening expenses as a percent of sales were 0.3% for both fiscal 1998 and
1997. The Company opened 138 new stores and relocated 4 stores in fiscal 1998,
and opened 112 new
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stores and relocated 5 stores in fiscal 1997. Pre-opening expenses averaged
$618,000 per store in fiscal 1998 compared to $559,000 per store in fiscal
1997. The higher average expense resulted primarily from the Company's initial
entry into markets such as Chile, Puerto Rico and Alaska, which involve longer
pre-opening periods and higher travel and relocation costs.
General and administrative expenses as a percent of sales were 1.7% for both
fiscal 1998 and 1997. Incremental expenses related to long-term growth and
business planning initiatives incurred in fiscal 1998 were offset by
efficiencies realized from increased sales.
Interest and investment income as a percent of sales decreased to 0.1% in
fiscal 1998 from 0.2% in fiscal 1997 due to lower investment balances and lower
interest rates. Interest expense as a percent of sales was 0.1% in fiscal 1998
compared to 0.2% in fiscal 1997. The decrease from fiscal 1997 was primarily
attributable to economies realized from a 25.1% increase in sales for fiscal
1998 and higher capitalized interest resulting from a higher percentage of
owned stores under construction.
The Company's combined federal and state effective income tax rate was 39.2%
for fiscal 1998 compared to 38.9% for fiscal 1997. The increase was due to a
reduction in tax-exempt interest income as investment balances declined during
the year and to higher effective state tax rates.
Net earnings as a percent of sales were 5.3% for fiscal 1998 compared to 4.8%
for fiscal 1997, reflecting a higher gross profit rate, lower selling and store
operating expenses as a percent of sales and the non-recurring charge recorded
in fiscal 1997. Diluted earnings per share were $1.06 for fiscal 1998 compared
to $0.78 for fiscal 1997. Excluding the non-recurring charge, diluted earnings
per share were $0.82 for fiscal 1997.
FISCAL YEAR ENDED FEBRUARY 1, 1998 COMPARED TO FEBRUARY 2, 1997
Fiscal 1997 consisted of 52 weeks compared to 53 weeks in fiscal 1996. Net
sales for fiscal 1997 increased 23.7% to $24.2 billion from $19.5 billion in
fiscal 1996. The increase was attributable to, among other things, full year
sales from the 89 new stores opened during fiscal 1996, a 7% comparable 52-week
store-for-store sales increase, and 112 new store openings and 5 store
relocations during fiscal 1997. The percentage increase in sales was negatively
impacted by one less week of sales in fiscal 1997 versus fiscal 1996.
Gross profit as a percent of sales was 28.1% for fiscal 1997 compared to 27.8%
for fiscal 1996. The rate increase was primarily attributable to a lower cost
of merchandise resulting from product line reviews and other merchandising
initiatives begun in fiscal 1996 and continued through fiscal 1997. In
addition, lower and more stable lumber costs, sales mix changes, and better
inventory shrink results contributed to the gross profit improvement.
Operating expenses as a percent of sales were 20.2% for fiscal 1997 compared to
20.0% for fiscal 1996. Operating expenses for fiscal 1997 included a $104
million non-recurring charge related to the settlements of a class action
gender
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discrimination lawsuit and three other gender discrimination lawsuits. The
non-recurring charge included $65 million for the plaintiff class members,
$22.5 million for the plaintiffs' attorneys and approximately $17 million for
other related internal costs, including implementation or enhancement of
certain human resources programs, as well as the settlement terms of the three
other lawsuits. Excluding the non-recurring charge, operating expenses as a
percent of sales were 19.8% for fiscal 1997.
Selling and store operating expenses as a percent of sales decreased to 17.8%
in fiscal 1997 from 18.0% in fiscal 1996. The decrease was primarily
attributable to lower net advertising expenses resulting from higher
cooperative advertising participation by vendors and increased use of national
advertising, as well as lower medical insurance costs primarily due to a higher
percentage of the Company's associates using in-network providers. Partially
offsetting these decreases were higher store payroll expenses as a percent of
sales, mainly due to increased focus on certain higher margin merchandising
categories that require more labor hours to support, such as flooring and other
decor areas.
Pre-opening expenses as a percent of sales were 0.3% for both fiscal 1997 and
1996. The Company opened 112 new stores and relocated 5 stores in fiscal 1997,
and opened 89 new stores and relocated 7 stores in fiscal 1996. Pre-opening
expenses averaged $559,000 per store in fiscal 1997 compared to $570,000 per
store in fiscal 1996.
General and administrative expenses as a percent of sales were 1.7% for both
fiscal 1997 and 1996. Incremental expenses related to long-term growth and
business planning initiatives incurred in fiscal 1997 were partially offset by
efficiencies realized from increased sales.
Interest and investment income as a percent of sales increased to 0.2% in
fiscal 1997 from 0.1% in fiscal 1996 due to a full year of investment income
earned in fiscal 1997 from the proceeds of the issuance of $1.1 billion of the
Company's 3 1/4% Convertible Subordinated Notes ("3 1/4% Notes") in October
1996 (see "--Liquidity and Capital Resources"). Interest expense as a percent
of sales was 0.2% in fiscal 1997 compared to 0% in fiscal 1996. The increase
from the prior year was primarily attributable to a full year of interest
expense on the 3 1/4% Notes in fiscal 1997, compared to a partial year of
interest expense on the 3 1/4% Notes and lower levels of long-term debt prior
to issuance of the 3 1/4% Notes in fiscal 1996.
The Company's combined federal and state effective income tax rate was 38.9%
for both fiscal 1997 and 1996.
Net earnings as a percent of sales were 4.8% for both fiscal 1997 and 1996,
reflecting a higher gross profit percentage and lower selling and store
operating expenses as a percent of sales, offset by the non-recurring charge
recorded during fiscal 1997, as described above. Diluted earnings per share
were $0.78 for fiscal 1997 compared to $0.65 for fiscal 1996. Excluding the
non-recurring charge, diluted earnings per share were $0.82 for fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow generated from store operations provides the Company with a
significant source of
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liquidity. Additionally, a significant portion of the Company's inventory is
financed under vendor credit terms.
The Company plans to open approximately 167 new stores and relocate 8 existing
stores during fiscal 1999. It is anticipated that approximately 84% of these
locations will be owned, and the remainder will be leased. The Company also
plans to open approximately 200 stores, including relocations, in fiscal 2000.
During the last three fiscal years, the Company entered into two operating
lease agreements totaling $882 million for the purpose of financing
construction costs of certain new stores. Under the operating lease agreements,
the lessor purchases the properties, pays for the construction costs and
subsequently leases the facilities to the Company. The leases provide for
substantial residual value guarantees and include purchase options at original
cost on each property. The Company financed a portion of its new stores in
fiscal 1997 and 1998 under the operating lease agreements and anticipates
utilizing these facilities to finance selected new stores in fiscal 1999 and
2000 and an office building in fiscal 1999. In addition, some locations for
fiscal 1999 will be leased individually.
The cost of new stores to be constructed and owned by the Company varies
widely, principally due to land costs, and is currently estimated to average
approximately $12.9 million per location. The cost to remodel and/or fixture
stores to be leased is expected to average approximately $3.2 million per
store. In addition, each new store will require approximately $3.1 million to
finance inventories, net of vendor financing.
During fiscal 1996, the Company issued, through a public offering, $1.1 billion
of 3 1/4% Convertible Subordinated Notes due October 1, 2001. The 3 1/4% 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 $23.0417 per share, subject to adjustment under
certain conditions. The 3 1/4% Notes may be redeemed by 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 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 January 31, 1999, there was $246 million
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 impact the Company's
liquidity or capital resources.
As of January 31, 1999, the Company had $62 million in cash and cash
equivalents. Management believes that its current cash position, internally
generated funds, funds available from its $800 million commercial paper
program, funds available from the operating lease
22
25
agreements, and the ability to obtain alternate sources of financing should
enable the Company to complete its capital expenditure programs, including
store openings 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 internal systems impacted by the Year 2000 Problem, or
implement new systems to become year 2000 compliant in a timely manner. This
compliance plan consists of four major areas of focus: systems, desktops,
facilities and supplier management. The total cost of executing this plan is
estimated at $13 million, and as of January 31, 1999, the Company had expended
approximately $8.75 million to effect the plan.
The Company has completed the initial phases of the systems portion of the
compliance plan. The initial phases included completing an inventory of all
software programs operating on Company systems and identifying year 2000
problems. The next phase involved creating an appropriate testing environment,
and as of January 31,1999, this phase was substantially complete. Subsequent
phases of the systems portion of the compliance plan involve testing and
installing year 2000 compliant software in the production environment, which
were approximately 95% and 80% complete, respectively, at the end of fiscal
1998. The Company anticipates substantially completing the systems portion of
its compliance plan by the end of the first quarter of fiscal 1999.
All desktop applications critical to the Company's overall business have been
inventoried and evaluated under the method described above, and as of January
31, 1999, this process was complete. Desktop infrastructure is also being
tested and is expected to be substantially complete during the first quarter of
fiscal 1999.
Substantially all critical facilities systems, including, but not limited to,
security systems, energy management, material handling, copiers and faxes, have
been inventoried and are being tested. As of January 31, 1999, this process was
approximately 60% complete. The Company anticipates completing the facilities
systems portion of its compliance plan before the end of the second quarter of
fiscal 1999.
The Company is assessing the year 2000 compliance status of its suppliers, many
of which participate in electronic data interchange ("EDI") or similar programs
with the Company. The Company anticipates conducting substantial testing with
EDI merchandise suppliers during 1999. In addition, the Company plans to
communicate with all its transportation carriers and to conduct similar
testing. With respect to merchandise suppliers participating in EDI programs
with the Company, the Company anticipates conducting point-to-point testing of
these EDI systems for year 2000 compliance.
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26
The Company's risks involved with not solving the Year 2000 Problem include,
but are not limited to, the following: loss of local or regional electrical
power, loss of telecommunication services, delays or cancellations of
merchandise shipments, manufacturing shutdowns, delays in processing customer
transactions, bank errors and computer errors by suppliers. Because the
Company's year 2000 compliance is dependent upon certain third parties
(including infrastructure providers) also being year 2000 compliant on a timely
basis, there can be no assurance that the Company's efforts will prevent a
material adverse impact on its results of operations, financial condition or
business.
The Company is modifying its existing disaster recovery plans to include year
2000 contingency planning. Also, the Company is identifying critical activities
that would normally be conducted during the first two weeks of January 2000,
which may be completed instead in December 1999. The Company expects its year
2000 contingency planning to be substantially complete by the end of the second
quarter of fiscal 1999, and to test and modify contingency plans throughout the
remainder of 1999.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities," effective for all fiscal quarters of
fiscal years beginning after June 15, 1999.
SFAS 133 requires all derivatives to be carried on the balance sheet at fair
value. Changes in the fair value of derivatives must be recognized in the
Company's Consolidated Statements of Earnings when they occur; however, there
is an exception for derivatives that qualify as hedges as defined by SFAS 133.
If a derivative qualifies as a hedge, a company can elect to use "hedge
accounting" to eliminate or reduce the income statement volatility that would
arise from reporting changes in a derivative's fair value. Adoption of SFAS 133
is not expected to materially impact the Company's reported financial results.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
Certain statements we make in this report, and other written or oral statements
made by or on behalf of the Company, may constitute "forward-looking
statements" within the meaning of the federal securities laws. Words or phrases
such as "should result," "are expected to," "we estimate," "we project," or
similar expressions are intended to identify forward-looking statements.
Examples of such statements in this report include descriptions of our plans
with respect to new store openings and relocations, our plans to enter new
markets and expectations relating to our
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continuing growth. These statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from the
Company's historical experience and its present expectations or projections.
Management believes that these forward-looking statements are reasonable;
however, you should not place undue reliance on such statements. Such
statements speak only as of the date they are made and we undertake no
obligation to publicly update or revise any forward-looking statement, whether
as a result of future events, new information or otherwise.
The following are some of the factors that could cause the Company's
actual results to differ materially from the expected results described in the
Company's forward-looking statements:
- - Conditions affecting the availability, acquisition, development and
ownership of real estate, including local zoning and land use issues,
environmental regulations and general conditions in the commercial
real estate market.
- - Adverse or unanticipated weather conditions, which may affect the
Company's overall level of sales and sales of particular lines of
products, such as building materials, lumber and lawn and garden
supplies.
- - Instability of costs and availability of sourcing channels, which may
affect the prices that the Company pays for certain commodity
products, such as lumber and plywood, as well as the Company's ability
to improve its mix of merchandise. Our cost of sales is affected by
our ability to maintain favorable arrangements and relationships with
our suppliers. Our sources of supply may be affected by trade
restrictions, tariffs, currency exchange rates, transport costs and
capacity, and other factors affecting domestic and international
markets.
- - Our ability to attract, train and retain highly qualified associates
to staff both existing and new stores.
- - Our ability to replace, modify or upgrade computer programs and other
systems in order to adequately address the Year 2000 Problem, and the
ability of our suppliers, other business partners and other entities
to address this issue.
- - The impact of competition, including competition for customers,
locations and products and in other important aspects of our business.
Our primary competitors include chains of electrical, plumbing and
building materials supply houses, lumber yards, home improvement
stores and other local, regional or national hardware stores, as well
as discount department stores and any other channel of distribution
that offers products that we sell. Our business is highly competitive,
and we may face new types of competitors as we enter new markets or
lines of business.
- - General economic conditions, which affect consumer confidence and home
improvement and home-building spending, including interest rates, the
overall level of economic activity, the availability of consumer
credit and mortgage financing and unemployment rates.
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- - Changes in laws and regulations, including changes in accounting
standards, tax statutes or regulations and environmental and land use
regulations, and uncertainties of litigation.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have not entered into any transactions using derivative financial
instruments or derivative commodity instruments and believe that our exposure
to market risk associated with other financial instruments (such as
investments) are not material.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
We refer you to the "Consolidated Statements of Earnings,"
"Consolidated Balance Sheets," "Consolidated Statements of Stockholders' Equity
and Comprehensive Income," "Consolidated Statements of Cash Flows," "Notes to
Consolidated Financial Statements" and "Independent Auditors' Report" contained
in our Annual Report to Stockholders for the fiscal year ended January 31,
1999.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
We refer you to our Proxy Statement for the 1999 Annual Meeting of
Stockholders and the heading "Election of Directors and Nominee Biographies,"
"Standing Director Biographies" and "Board of Directors Information."
Biographical information on our executive officers is contained in Item I of
this Annual Report on Form 10-K.
Item 11. EXECUTIVE COMPENSATION
We refer you to the information in our Proxy Statement for the 1999
Annual Meeting of Stockholders under the heading "Executive Compensation."
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
We refer you to the information in our Proxy Statement for the 1999
Annual Meeting of Stockholders under the heading "Stock Ownership."
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Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We refer you to the information in our Proxy Statement for the 1999
Annual Meeting of Stockholders under the heading "Insider Transactions."
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following financial statements are incorporated by reference from
pages 22 through 33 of our Annual Report to Stockholders for the fiscal year
ended January 31, 1999, as provided in Item 8 hereof:
- Consolidated Statements of Earnings for the fiscal years ended
January 31, 1999; February 1, 1998 and February 2, 1997.
- Consolidated Balance Sheets as of January 31, 1999 and February 1,
1998.
- Consolidated Statements of Stockholders' Equity and Comprehensive
Income for the fiscal years ended January 31, 1999, February 1, 1998 and
February 2, 1997.
- Consolidated Statements of Cash Flows for the fiscal years ended
January 31, 1999, February 1, 1998 and February 1, 1997.
- Notes to Consolidated Financial Statements.
- Independent Auditors' Report.
2. Financial Statement Schedules
All schedules are omitted as the required information is inapplicable
or the information is presented in the consolidated financial statements or
related notes.
(b) Reports on Form 8-K
There were no Current Reports on Form 8-K filed during the fourth
quarter of fiscal 1998.
(c) Exhibits
Exhibits marked with an asterisk (*) are incorporated by reference to
exhibits or appendices previously filed with the SEC, as indicated by the
references in brackets.
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*3.l Restated Certificate of Incorporation of The Home Depot, Inc., as amended. [FORM 10-Q FOR THE FISCAL
QUARTER ENDED AUGUST 2, 1998, EXHIBIT 3.1]
*3.2 By-laws, as amended. [FORM 10-Q FOR THE FISCAL QUARTER END AUGUST 2, 1998, EXHIBIT 3.2]
*4.1 Indenture dated as of October 1, 1996, between The Home Depot, Inc., as issuer and The First National Bank of
Chicago, as trustee for $1,104,000,000 aggregate principal amount of 3 1/4% Convertible Subordinated Notes due
2001. [FORM S-3 REGISTRATION STATEMENT NO. 333-12575, EXHIBIT 4.2]
*10.1 Investment Banking Consulting Contract dated April 17, 1985, between Invemed Associates, Inc. and
the Registrant. [FORM 10-K FOR THE FISCAL YEAR ENDED FEBRUARY 1, 1998, EXHIBIT 10.1]
*10.2 +Corporate Office Management Bonus Plan of the Registrant dated March 1, 1991. [FORM 10-K FOR THE
FISCAL YEAR ENDED FEBRUARY 1, 1998, EXHIBIT 10.2]
*10.3 +Employee Stock Purchase Plan, as amended. [APPENDIX A TO REGISTRANT'S PROXY STATEMENT FOR THE
ANNUAL MEETING OF STOCKHOLDERS HELD MAY 31, 1995]
*10.4 +Senior Officers' Bonus Pool Plan, as amended. [APPENDIX A TO REGISTRANT'S PROXY STATEMENT FOR THE
ANNUAL MEETING OF STOCKHOLDERS TO BE HELD MAY 26, 1999]
*10.5 +Executive Officers' Bonus Plan. [APPENDIX B TO REGISTRANT'S PROXY STATEMENT FOR THE ANNUAL MEETING OF
STOCKHOLDERS HELD MAY 27, 1998]
*10.6 +The Home Depot, Inc. 1997 Omnibus Stock Incentive Plan. [FORM 10-K FOR THE FISCAL YEAR ENDED FEBRUARY
1, 1998, EXHIBIT 10.5]
10.7 +Executive Medical Reimbursement Plan, effective January 1, 1992.
*10.8 +The Home Depot ESOP Restoration Plan. [FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 29, 1995, EXHIBIT 10.8]
*10.9 $800,000,000 Credit Agreement dated as of December 20, 1995 among The Home Depot, Inc., the Banks Listed
Therein and Wachovia Bank of Georgia, N.A., as Agent (without exhibits). [FORM 10-K FOR THE FISCAL YEAR
ENDED JANUARY 28, 1996, EXHIBIT 4.1]
10.10 Participation Agreement dated as of October 22, 1998 among The Home Depot, Inc. as Guarantor; Home Depot
U.S.A., Inc. as Lessee; HD Real Estate Funding Corp. II as Facility Lender; Credit Suisse Leasing 92A L.P. as
Lessor; The Bank of New
28
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York as Indenture Trustee; and Credit Suisse First Boston Corporation and Invemed
Associates, Inc. as Initial Purchasers.
10.11 Participation Agreement dated as of June 25, 1996 among The Home Depot, Inc. as Guarantor; Home Depot U.S.A.,
Inc. as Lessee and Construction Agent; HD Real Estate Funding Corp. as Facility Lender; the lenders named on
the Schedule thereto as Lenders; Credit Suisse First Boston Corporation as Agent Bank and Lender; and Credit
Suisse Leasing 92A L.P. as Lessor.
10.12 First Amendment and Supplement to the Participation Agreement dated as of May 8, 1997 among The Home Depot,
Inc. as Guarantor; Home Depot U.S.A., Inc. as Lessee and Construction Agent; HD Real Estate Funding Corp. as
Facility Lender; the lenders named on the Schedule thereto as Lenders; Credit Suisse First Boston Corporation
as Agent Bank and Lender; and Credit Suisse Leasing 92A L.P. as Lessor.
10.13 Master Modification Agreement dated as of April 20, 1998 among The Home Depot, Inc. as Guarantor; Home Depot
U.S.A., Inc., as Lessee and Construction Agent; HD Real Estate Funding Corp., as Facility Lender; Credit Suisse
Leasing 92A L.P. as Lessor; the lenders named on the Schedule thereto as Lenders; and Credit Suisse First Boston
Corporation as Agent Bank.
10.14 +Supplemental Executive Choice Program, effective January 1, 1999.
*11 Computation of Earnings Per Common and Common Equivalent Share. [ANNUAL REPORT TO STOCKHOLDERS FOR
THE FISCAL YEAR ENDED JANUARY 31, 1999, FILED HEREWITH AS EXHIBIT 13, NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS, NOTE 7]
13 The Registrant's Annual Report to Stockholders for the fiscal year ended January 31, 1999. Only those portions
of said report which are specifically designated in this Form 10-K as being incorporated by reference are
being electronically filed pursuant to the Securities Exchange Act of 1934.
*21 List of Subsidiaries of the Registrant. [FORM 10-K FOR THE FISCAL YEAR ENDED FEBRUARY 1, 1998, EXHIBIT 21]
23 Consent of Independent Auditors.
24 Special Powers of Attorney authorizing execution of this Form 10-K Annual Report have been granted and are
filed herewith as follows:
Power of Attorney from Frank Borman.
Power of Attorney from John L. Clendenin.
Power of Attorney from Berry R. Cox.
Power of Attorney from Milledge A. Hart, III.
29
32
Power of Attorney from Donald R. Keough.
Power of Attorney from Kenneth G. Langone.
Power of Attorney from M. Faye Wilson.
27 Financial Data Schedule. [FILED ELECTRONICALLY WITH SEC ONLY.]
- ---------------
+Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this form pursuant to Item 14(c) of this report.
30
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Arthur M. Blank
---------------------------------------
(Arthur M. Blank, President & CEO)
Date: April 16, 1999
------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant, The Home Depot, Inc., and in the capacities and on the dates
indicated.
Signature Title Date
- --------- ----- ----
/s/ Bernard Marcus Chairman of the Board April 16, 1999
- ----------------------------
(Bernard Marcus)
/s/Arthur M. Blank President & CEO April 16, 1999
- ---------------------------- and Director
(Arthur M. Blank) (Principal Executive Officer)
/s/ Ronald M. Brill Executive Vice President,
- ---------------------------- Chief Administrative Officer, Assistant April 16, 1999
(Ronald M. Brill) Secretary and Director
* Director
- ----------------------------
(Frank Borman)
/s/ Dennis Carey Executive Vice President and April 16, 1999
- ---------------------------- Chief Financial Officer (Principal Financial
(Dennis Carey) Officer)
31
34
Signature Title Date
- --------- ----- ----
/s/ Marshall Day Senior Vice President-Finance April 16, 1999
- ---------------------------- and Accounting
(Marshall Day)
* Director
- ----------------------------
(John L. Clendenin)
* Director
- ----------------------------
(Berry R. Cox)
* Director
- ----------------------------
(Milledge A. Hart, III)
* Director
- ----------------------------
(Donald R. Keough)
* Director
- ----------------------------
(Kenneth G. Langone)
* Director
- ----------------------------
(M. Faye Wilson)
* The undersigned, by signing his name hereto, does hereby sign this
report on behalf of each of the above-indicated directors of the
Registrant pursuant to powers of attorney, executed on behalf of each
such director.
By: /s/ Arthur M. Blank
------------------------------------------
(Arthur M. Blank, Attorney-in-fact)
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EXHIBIT INDEX
- -------------
10.7 +Executive Medical Reimbursement Plan, effective January 1, 1992.
10.10 Participation Agreement dated as of October 22, 1998 among The Home
Depot, Inc. as Guarantor; Home Depot U.S.A., Inc. as Lessee; HD Real
Estate Funding Corp. II as Facility Lender; Credit Suisse Leasing 92A
L.P. as Lessor; The Bank of New York as Indenture Trustee; and Credit
Suisse First Boston Corporation and Invemed Associates, Inc. as
Initial Purchasers.
10.11 Participation Agreement dated as of June 25, 1996 among The Home Depot,
Inc. as Guarantor; Home Depot U.S.A., Inc. as Lessee and Construction
Agent; HD Real Estate Funding Corp. as Facility Lender; the lenders
named on the Schedule thereto as Lenders; Credit Suisse First Boston
Corporation as Agent Bank and Lender; and Credit Suisse Leasing 92A
L.P. as Lessor.
10.12 First Amendment and Supplement to the Participation Agreement dated as of
May 8, 1997 among The Home Depot, Inc. as Guarantor; Home Depot
U.S.A., Inc. as Lessee and Construction Agent; HD Real Estate Funding
Corp. as Facility Lender; the lenders named on the Schedule thereto as
Lenders; Credit Suisse First Boston Corporation as Agent Bank and
Lender; and Credit Suisse Leasing 92A L.P. as Lessor.
10.13 Master Modification Agreement dated as of April 20, 1998 among The Home
Depot, Inc. as Guarantor; Home Depot U.S.S., Inc. As Lessee and Construction
Agent; HD Real Estate Funding Corp., as Facility Lender; Credit Suisse Leasing
92A L.P. as Lessor; the Lenders named on the Schedule thereto as Lenders; and
Credit Suisse First Boston Corporation as Agent Bank.
10.14 +Supplemental Executive Choice Program, effective January 1, 1992.
13 The Registrant's Annual Report to Stockholders for the fiscal year
ended January 31, 1999. Only those portions of said report which are
specifically designated in this Form 10-K as being incorporated by
reference are being electronically filed pursuant to the Securities
Exchange Act of 1934.
23 Consent of Independent Auditors.
24 Special Powers of Attorney authorizing execution of this Form 10-K
Annual Report have been granted and are filed herewith as follows:
Power of Attorney from Frank Borman.
Power of Attorney from John L. Clendenin.
Power of Attorney from Berry R. Cox.
Power of Attorney from Milledge A. Hart, III.
Power of Attorney from Donald R. Keough.
Power of Attorney from Kenneth G. Langone.
Power of Attorney from M. Faye Wilson.
36
27 Financial Data Schedule. [FILED ELECTRONICALLY WITH SEC ONLY.]
- -----------------
+Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this form pursuant to Item 14(c) of this report.