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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 2, 1999
- 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 1,481,685,346 Shares, as of May 28, 1999
THE HOME DEPOT, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
May 2, 1999
Page
Part I. Financial Information:
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF EARNINGS -
Three-Month Periods Ended May 2,1999 and May 3,1998..............3
CONSOLIDATED CONDENSED BALANCE SHEETS -
As of May 2,1999 and January 31, 1999............................4
CONSOLIDATED STATEMENTS OF CASH FLOWS -
Three-Month Periods Ended May 2, 1999 and May 3,1998.............5
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME-
Three-Month Periods Ended May 2, 1999 and May 3,1998.............6
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.................7
Item 2. Management's Discussion and Analysis of Result
of Operations and Financial Condition................. 8 - 13
Item 3. Quantitative and Qualitative Disclosures about Market
Risk.......................................................13
Part II. Other Information:
Item 4. Submission of Matters to a Vote of Security Holders........13
Item 5. Other Information..........................................13
Item 6. Exhibits and Reports on Form 8-K...........................13
Signature Page......................................................14
Index to Exhibits...................................................15
See accompanying notes to consolidated condensed financial statements.
See accompanying notes to consolidated condensed financial statements.
See accompanying notes to consolidated condensed financial statements.
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 January 31, 1999, as
filed with the Securities and Exchange Commission (File No. 1-8207).
THE HOME DEPOT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
FORWARD-LOOKING STATEMENTS
Certain written and oral statements made by The Home Depot, Inc. and
subsidiaries (the "Company") or with the approval of an authorized executive
officer of the Company may constitute "forward-looking statements" as
defined under the Private Securities Litigation Reform Act of 1995. Words
or phrases such as "should result," "are expected to," "we anticipate," "we
estimate," "we project," or similar expressions are intended to identify
forward-looking statements. These statements are subject to certain risks
and uncertainties that could cause actual results to differ materially from
the Company's historical experience and its present expectations or
projections. These risks and uncertainties include, but are not limited to,
unanticipated weather conditions, stability of costs and availability of
sourcing channels, our ability to attract,train and retain highly qualified
associates, conditions affecting the availability, acquisition,development
and ownership of real estate, year 2000 problems, general economic
conditions, the impact of competition and regulatory and litigation matters.
Caution should be taken not to place undue reliance on any such forward-
looking statements, since such statements speak only as of the date of the
making of such statements. Additional information concerning these risks and
uncertainties is contained in the Company's Annual Report on Form 10-K for
the year ended January 31, 1999, as filed with the Securities and Exchange
Commission.
RESULTS OF OPERATIONS
Sales for the first quarter of fiscal 1999 increased 25.7% to $8.952 billion
from $7.123 billion for the first quarter of fiscal 1998. The sales
increase for the period was primarily attributable to 141 new stores (total
of 797 stores at the end of the first quarter of fiscal 1999 compared with
656 at the end of the first quarter of fiscal 1998) and a comparable store-
for-store sales increase of 9% for the first quarter of fiscal 1999.
Gross profit as a percent of sales was 28.7% for the first quarter of fiscal
1999 compared with 27.6% for the first quarter of fiscal 1998. The gross
profit rate increase for the period was primarily attributable to sales mix
changes and to lower costs of merchandise resulting from continued product
line reviews and other merchandising initiatives including direct sourcing
of imports.
Total operating expenses as a percent of sales decreased to 19.6% for the
first quarter of fiscal 1999 from 19.7% for the first quarter of fiscal
1998. Selling and store operating expenses as a percent of sales decreased
to 17.7% for the first quarter of fiscal 1999 from 17.8% for the first
quarter of fiscal 1998. Net advertising expenses decreased as a percent of
sales due to increased national advertising, cost leverage achieved from
opening new stores in existing markets, and higher vendor co-op advertising
support. Partially offsetting this decrease were higher credit card
discounts due to higher penetrations of credit sales and increases in non-
private label credit card discount rates. Pre-opening expenses as a percent
of sales were 0.2% for the first quarter of both fiscal 1999 and fiscal
1998. The Company opened 37 new stores and relocated 1 store during the
first quarter of fiscal 1999 compared with 32 new stores opened during the
first quarter of fiscal 1998. General and administrative expenses as a
percent of sales were 1.7% for the first quarter of both fiscal 1999 and
fiscal 1998. Certain variable G&A expenses were lower than last year as a
percent of sales, which offset increased cost of staffing and investments
for various growth initiatives.
Net interest expense as a percent of sales was 0.1% for the first quarter of
both fiscal 1999 and fiscal 1998. As a percent of sales, interest and
investment income for the first quarter of fiscal 1999 decreased to 0.0%
from
THE HOME DEPOT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
RESULTS OF OPERATIONS - (Continued)
0.1% for the first quarter of fiscal 1998, primarily due to lower investment
balances. Interest expense as a
percent of sales decreased to 0.1% for the first quarter of fiscal 1999 from
0.2% for the comparable period of
fiscal 1998. The decrease was primarily attributable to leverage achieved
from higher sales in fiscal 1999 and to higher capitalized interest expense
during fiscal 1999.
The Company's combined federal and state effective income tax rate decreased
to 39.2% for the first quarter of fiscal 1999 from 39.3% for the comparable
period of fiscal 1998. During the fourth quarter of fiscal 1998, an
adjustment was made to lower the annual effective tax rate to 39.2%.
Net earnings as a percent of sales increased to 5.5% for the first quarter
of fiscal 1999 from 4.7% for the first quarter of fiscal 1998. The increase
as a percent of sales for fiscal 1999 was primarily attributable to higher
gross margin rates and lower selling and store operating expenses as
described above.
Diluted earnings per share was $0.32 for the first quarter of fiscal 1999
compared to $0.22 for the first quarter of fiscal 1998.
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. During the first
quarter of fiscal 1999, the Company opened 37 stores, relocated 1 store and
temporarily closed 1 store, which will be reopened on the same site during
the third quarter of fiscal 1999. During the remainder of fiscal 1999, the
Company plans to open approximately 130 new stores and relocate 6 stores,
for a growth rate of approximately 22%. It is currently anticipated that
approximately 85% of these locations will be owned, and the remainder will
be leased.
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 new stores opened 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 planned locations for
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
$13.0 million per location. The cost to remodel and/or fixture stores
to be leased is expected to average approximately $3.6 million per store.
In addition, each new store will require approximately $3.1 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 (the
"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 $23.0417
per share, subject to adjustment under certain conditions. The 3.25% 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. During the first quarter of fiscal 1999 the
Company repaid $246 million outstanding under the commercial paper program
and as of May 2, 1999, 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 2, 1999, the Company had $604 million in cash and cash
equivalents, as well as $15 million in long-term investments. Management
believes that its current cash position, the proceeds from long-term
investments, internally generated funds, funds available from its $800
million commercial paper program, funds available from the operating lease
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 May 2, 1999, the
Company had expended approximately $9.6 million to effect the plan.
The Company has substantially completed the systems portion of the
compliance plan. In implementing the systems portion of the plan, the
Company completed an inventory of all software programs operating on its
systems, identified year 2000 problems, and then created an appropriate
testing environment. Additionally, as of May 2, 1999, the Company had
substantially completed the final phases of the compliance plan, which
involve testing and installing year 2000 compliant software in the
production environment.
THE HOME DEPOT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
YEAR 2000 - (Continued)
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. The compliance plan for
desktop infrastructure was also substantially complete at the end of 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 May 2, 1999, this
process was over 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 will conduct substantial testing with
EDI merchandise suppliers and transportation carriers. With respect to
merchandise suppliers participating in EDI programs with the Company, the
Company is conducting point-to-point testing of these EDI systems for year
2000 compliance.
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.
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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has not entered into any transactions using derivative financial
instruments or derivative commodity instruments and believes that its exposure
to market risk associated with other financial instruments(such as investments)
and interest rate risk is not material.
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
During the first quarter of fiscal 1999, no matters were submitted to a
vote of security holders.
Item 5. OTHER INFORMATION
On May 13, 1999, the Board of Directors appointed William S. Davila to serve
as a member of the Board. Mr. Davila's term will expire at the Annual
Meeting of Stockholders in 2001. Mr. Davila is the retired President and
Chief Operating Officer of The Vons Companies, Inc., and he serves on the
Boards of Directors of Wells Fargo Bank, Pacific Gas & Electric Corporation
and Hormel Foods Corporation.
Item 6. EXHIBITS
3.1 Restated Certificate of Incorporation of The Home Depot,Inc.,
as amended
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 2, 1999
(Date)
THE HOME DEPOT, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
Exhibit Description
3.1 Restated Certificate of Incorporation of The Home Depot, Inc.,
as amended
11.1 Computation of Basic and Diluted Earnings Per Share
27. Financial Data Schedule (only submitted to SEC in electronic
format)