Item 1. Financial Statements.
THE HOME DEPOT, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
in millions, except per share data
|
August 4,
2019
|
|
February 3,
2019
|
|
Assets
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
$
|
2,547
|
|
|
$
|
1,778
|
|
|
Receivables, net
|
2,274
|
|
|
1,936
|
|
|
Merchandise inventories
|
14,741
|
|
|
13,925
|
|
|
Other current assets
|
1,137
|
|
|
890
|
|
|
Total current assets
|
20,699
|
|
|
18,529
|
|
|
Net property and equipment
|
22,387
|
|
|
22,375
|
|
|
Operating lease right-of-use assets
|
5,789
|
|
|
—
|
|
|
Goodwill
|
2,254
|
|
|
2,252
|
|
|
Other assets
|
881
|
|
|
847
|
|
|
Total assets
|
$
|
52,010
|
|
|
$
|
44,003
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Short-term debt
|
$
|
—
|
|
|
$
|
1,339
|
|
|
Accounts payable
|
9,494
|
|
|
7,755
|
|
|
Accrued salaries and related expenses
|
1,478
|
|
|
1,506
|
|
|
Sales taxes payable
|
766
|
|
|
656
|
|
|
Deferred revenue
|
2,233
|
|
|
1,782
|
|
|
Current installments of long-term debt
|
1,315
|
|
|
1,056
|
|
|
Current operating lease liabilities
|
831
|
|
|
—
|
|
|
Other accrued expenses
|
2,681
|
|
|
2,622
|
|
|
Total current liabilities
|
18,798
|
|
|
16,716
|
|
|
Long-term debt, excluding current installments
|
27,064
|
|
|
26,807
|
|
|
Long-term operating lease liabilities
|
5,263
|
|
|
—
|
|
|
Other long-term liabilities
|
2,045
|
|
|
2,358
|
|
|
Total liabilities
|
53,170
|
|
|
45,881
|
|
|
|
|
|
|
|
Common stock, par value $0.05; authorized: 10,000 shares; issued: 1,785 at August 4, 2019 and 1,782 shares at February 3, 2019; outstanding: 1,096 shares at August 4, 2019 and 1,105 shares at February 3, 2019
|
89
|
|
|
89
|
|
|
Paid-in capital
|
10,777
|
|
|
10,578
|
|
|
Retained earnings
|
49,446
|
|
|
46,423
|
|
|
Accumulated other comprehensive loss
|
(776
|
)
|
|
(772
|
)
|
|
Treasury stock, at cost, 689 shares at August 4, 2019 and 677 shares at February 3, 2019
|
(60,696
|
)
|
|
(58,196
|
)
|
|
Total stockholders’ (deficit) equity
|
(1,160
|
)
|
|
(1,878
|
)
|
|
Total liabilities and stockholders’ equity
|
$
|
52,010
|
|
|
$
|
44,003
|
|
See accompanying notes to consolidated financial statements.
THE HOME DEPOT, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
in millions, except per share data
|
August 4,
2019
|
|
July 29,
2018
|
|
August 4,
2019
|
|
July 29,
2018
|
|
Net sales
|
$
|
30,839
|
|
|
$
|
30,463
|
|
|
$
|
57,220
|
|
|
$
|
55,410
|
|
|
Cost of sales
|
20,407
|
|
|
20,098
|
|
|
37,771
|
|
|
36,428
|
|
|
Gross profit
|
10,432
|
|
|
10,365
|
|
|
19,449
|
|
|
18,982
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
5,044
|
|
|
5,004
|
|
|
9,984
|
|
|
9,783
|
|
|
Depreciation and amortization
|
492
|
|
|
460
|
|
|
972
|
|
|
917
|
|
|
Total operating expenses
|
5,536
|
|
|
5,464
|
|
|
10,956
|
|
|
10,700
|
|
|
Operating income
|
4,896
|
|
|
4,901
|
|
|
8,493
|
|
|
8,282
|
|
|
Interest and other (income) expense:
|
|
|
|
|
|
|
|
|
Interest and investment income
|
(19
|
)
|
|
(26
|
)
|
|
(34
|
)
|
|
(48
|
)
|
|
Interest expense
|
302
|
|
|
272
|
|
|
590
|
|
|
533
|
|
|
Interest and other, net
|
283
|
|
|
246
|
|
|
556
|
|
|
485
|
|
|
Earnings before provision for income taxes
|
4,613
|
|
|
4,655
|
|
|
7,937
|
|
|
7,797
|
|
|
Provision for income taxes
|
1,134
|
|
|
1,149
|
|
|
1,945
|
|
|
1,887
|
|
|
Net earnings
|
$
|
3,479
|
|
|
$
|
3,506
|
|
|
$
|
5,992
|
|
|
$
|
5,910
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares
|
1,095
|
|
|
1,144
|
|
|
1,098
|
|
|
1,148
|
|
|
Basic earnings per share
|
$
|
3.18
|
|
|
$
|
3.06
|
|
|
$
|
5.46
|
|
|
$
|
5.15
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares
|
1,099
|
|
|
1,149
|
|
|
1,103
|
|
|
1,154
|
|
|
Diluted earnings per share
|
$
|
3.17
|
|
|
$
|
3.05
|
|
|
$
|
5.43
|
|
|
$
|
5.12
|
|
See accompanying notes to consolidated financial statements.
THE HOME DEPOT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
in millions
|
August 4,
2019
|
|
July 29,
2018
|
|
August 4,
2019
|
|
July 29,
2018
|
|
Net earnings
|
$
|
3,479
|
|
|
$
|
3,506
|
|
|
$
|
5,992
|
|
|
$
|
5,910
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
59
|
|
|
(187
|
)
|
|
16
|
|
|
(263
|
)
|
|
Cash flow hedges, net of tax
|
4
|
|
|
20
|
|
|
6
|
|
|
48
|
|
|
Other
|
(4
|
)
|
|
(11
|
)
|
|
5
|
|
|
7
|
|
|
Total other comprehensive income (loss)
|
59
|
|
|
(178
|
)
|
|
27
|
|
|
(208
|
)
|
|
Comprehensive income
|
$
|
3,538
|
|
|
$
|
3,328
|
|
|
$
|
6,019
|
|
|
$
|
5,702
|
|
See accompanying notes to consolidated financial statements.
THE HOME DEPOT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
in millions
|
August 4,
2019
|
|
July 29,
2018
|
|
August 4,
2019
|
|
July 29,
2018
|
|
Common Stock:
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
$
|
89
|
|
|
$
|
89
|
|
|
$
|
89
|
|
|
$
|
89
|
|
|
Shares issued under employee stock plans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Balance at end of period
|
89
|
|
|
89
|
|
|
89
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in Capital:
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
10,590
|
|
|
10,017
|
|
|
10,578
|
|
|
10,192
|
|
|
Shares issued under employee stock plans
|
123
|
|
|
110
|
|
|
59
|
|
|
11
|
|
|
Stock-based compensation expense
|
64
|
|
|
69
|
|
|
140
|
|
|
144
|
|
|
Repurchases of common stock
|
—
|
|
|
(117
|
)
|
|
—
|
|
|
(268
|
)
|
|
Balance at end of period
|
10,777
|
|
|
10,079
|
|
|
10,777
|
|
|
10,079
|
|
|
|
|
|
|
|
|
|
|
|
Retained Earnings:
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
47,459
|
|
|
41,221
|
|
|
46,423
|
|
|
39,935
|
|
|
Cumulative effect of accounting changes
|
—
|
|
|
—
|
|
|
26
|
|
|
75
|
|
|
Net earnings
|
3,479
|
|
|
3,506
|
|
|
5,992
|
|
|
5,910
|
|
|
Cash dividends
|
(1,492
|
)
|
|
(1,184
|
)
|
|
(2,991
|
)
|
|
(2,373
|
)
|
|
Other
|
—
|
|
|
—
|
|
|
(4
|
)
|
|
(4
|
)
|
|
Balance at end of period
|
49,446
|
|
|
43,543
|
|
|
49,446
|
|
|
43,543
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income (Loss):
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
(835
|
)
|
|
(596
|
)
|
|
(772
|
)
|
|
(566
|
)
|
|
Cumulative effect of accounting change
|
—
|
|
|
—
|
|
|
(31
|
)
|
|
—
|
|
|
Foreign currency translation adjustments
|
59
|
|
|
(187
|
)
|
|
16
|
|
|
(263
|
)
|
|
Cash flow hedges, net of tax
|
4
|
|
|
20
|
|
|
6
|
|
|
48
|
|
|
Other
|
(4
|
)
|
|
(11
|
)
|
|
5
|
|
|
7
|
|
|
Balance at end of period
|
(776
|
)
|
|
(774
|
)
|
|
(776
|
)
|
|
(774
|
)
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock:
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
(59,446
|
)
|
|
(49,044
|
)
|
|
(58,196
|
)
|
|
(48,196
|
)
|
|
Repurchases of common stock
|
(1,250
|
)
|
|
(1,884
|
)
|
|
(2,500
|
)
|
|
(2,732
|
)
|
|
Balance at end of period
|
(60,696
|
)
|
|
(50,928
|
)
|
|
(60,696
|
)
|
|
(50,928
|
)
|
|
Total stockholders' (deficit) equity
|
$
|
(1,160
|
)
|
|
$
|
2,009
|
|
|
$
|
(1,160
|
)
|
|
$
|
2,009
|
|
See accompanying notes to consolidated financial statements.
THE HOME DEPOT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
in millions
|
August 4,
2019
|
|
July 29,
2018
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
Net earnings
|
$
|
5,992
|
|
|
$
|
5,910
|
|
|
Reconciliation of net earnings to net cash provided by operating activities:
|
|
|
|
|
Depreciation and amortization
|
1,107
|
|
|
1,062
|
|
|
Stock-based compensation expense
|
139
|
|
|
144
|
|
|
Changes in receivables, net
|
(338
|
)
|
|
(192
|
)
|
|
Changes in merchandise inventories
|
(810
|
)
|
|
(1,355
|
)
|
|
Changes in other current assets
|
(244
|
)
|
|
(468
|
)
|
|
Changes in accounts payable and accrued expenses
|
2,051
|
|
|
2,617
|
|
|
Changes in deferred revenue
|
452
|
|
|
287
|
|
|
Changes in income taxes payable
|
11
|
|
|
21
|
|
|
Changes in deferred income taxes
|
58
|
|
|
(120
|
)
|
|
Other operating activities
|
79
|
|
|
1
|
|
|
Net cash provided by operating activities
|
8,497
|
|
|
7,907
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
Capital expenditures, net of non-cash capital expenditures
|
(1,246
|
)
|
|
(1,091
|
)
|
|
Proceeds from sales of property and equipment
|
11
|
|
|
16
|
|
|
Other investing activities
|
(14
|
)
|
|
—
|
|
|
Net cash used in investing activities
|
(1,249
|
)
|
|
(1,075
|
)
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
Repayments of short-term debt, net
|
(1,339
|
)
|
|
(1,559
|
)
|
|
Proceeds from long-term debt, net of discounts and premiums
|
1,404
|
|
|
—
|
|
|
Repayments of long-term debt
|
(1,030
|
)
|
|
(28
|
)
|
|
Repurchases of common stock
|
(2,619
|
)
|
|
(3,121
|
)
|
|
Proceeds from sales of common stock
|
157
|
|
|
125
|
|
|
Cash dividends
|
(2,991
|
)
|
|
(2,373
|
)
|
|
Other financing activities
|
(70
|
)
|
|
142
|
|
|
Net cash used in financing activities
|
(6,488
|
)
|
|
(6,814
|
)
|
|
Change in cash and cash equivalents
|
760
|
|
|
18
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
9
|
|
|
(123
|
)
|
|
Cash and cash equivalents at beginning of period
|
1,778
|
|
|
3,595
|
|
|
Cash and cash equivalents at end of period
|
$
|
2,547
|
|
|
$
|
3,490
|
|
|
|
|
|
|
|
Supplemental Disclosures:
|
|
|
|
|
Cash paid for interest, net of interest capitalized
|
$
|
558
|
|
|
$
|
515
|
|
|
Cash paid for income taxes
|
1,912
|
|
|
2,009
|
|
See accompanying notes to consolidated financial statements.
THE HOME DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
|
|
1.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis of Presentation
The accompanying consolidated financial statements of The Home Depot, Inc. and its subsidiaries (the "Company," "Home Depot," "we," "our" or "us") have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by GAAP 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. Results of operations for interim periods are not necessarily indicative of results for the entire year. As a result, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our 2018 Form 10-K.
There were no significant changes to our significant accounting policies as disclosed in the 2018 Form 10-K, except as set forth below.
Leases
On February 4, 2019, we adopted the new leases standard using the modified retrospective transition method, which requires that we recognize leases differently pre- and post-adoption. See "—Recently Adopted Accounting Pronouncements—ASU No. 2016-02" below for more information.
We categorize leases at their inception as either operating or finance leases. Lease agreements cover certain retail locations, office space, warehouse and distribution space, equipment, and vehicles. Most of these leases are operating leases; however, certain retail locations and equipment are leased under finance leases. Operating leases are included in operating lease right-of-use assets, current operating lease liabilities, and long-term operating lease liabilities in our consolidated balance sheets. Finance leases are included in net property and equipment, current installments of long-term debt, and long-term debt, excluding current installments in our consolidated balance sheets.
Leased assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. We use a secured incremental borrowing rate as the discount rate for present value of lease payments when the rate implicit in the contract is not readily determinable. We determine a secured rate on a quarterly basis and update the weighted average discount rate accordingly. For operating leases with variable payments dependent upon an index or rate that commenced subsequent to adoption of ASU No. 2016-02, we apply the active index or rate as of the lease commencement date. Variable lease payments not based on an index or rate are not included in the operating lease liability as they cannot be reasonably estimated and are recognized in the period in which the obligation for those payments is incurred. Leases that have a term of twelve months or less upon commencement date are considered short-term in nature. Accordingly, short-term leases are not included on the consolidated balance sheets and are expensed on a straight-line basis over the lease term, which commences on the date we have the right to control the property.
Recently Adopted Accounting Pronouncements
ASU No. 2018-02. In February 2018, the FASB issued ASU No. 2018-02, "Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," which allows for an optional reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects as a result of the Tax Act. On February 4, 2019, we adopted ASU No. 2018-02 resulting in an increase of $31 million to retained earnings and a decrease of $31 million to accumulated other comprehensive income.
ASU No. 2017-12. In August 2017, the FASB issued ASU No. 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities," which amends the hedge accounting recognition and presentation requirements. ASU No. 2017-12 eliminates the concept of recognizing periodic hedge ineffectiveness for cash flow and net investment hedges and allows an entity to apply the shortcut method to partial-term fair value hedges of interest rate risk. On February 4, 2019, we adopted ASU No. 2017-12 with no impact to our consolidated financial statements. We expect the impact of the adoption to be immaterial to our financial position, results of operations, and cash flows on an ongoing basis.
ASU No. 2016-02. In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)," which establishes a right-of-use model and requires an entity that is a lessee to recognize the right-of-use assets and liabilities arising from leases on the balance sheets. ASU No. 2016-02 also requires disclosures about the amount, timing, and uncertainty of cash flows arising from leases. Leases will be classified as finance or operating, with classification affecting both the pattern and classification of expense recognition in the statements of earnings. This guidance was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842; and ASU No. 2018-11, Targeted Improvements. ASU No. 2016-02 and subsequent updates require a modified retrospective transition, with the cumulative effect of transition, including initial recognition of lease assets and liabilities for existing operating leases, as of (i) the effective date or (ii) the beginning of the earliest comparative period presented. These updates also provide a number of practical expedients for implementation which we are applying, as discussed below.
On February 4, 2019 (the “effective date”), we adopted ASU No. 2016-02 and subsequent updates, collectively referred to as Topic 842, using the modified retrospective transition method. In addition, we adopted the package of practical expedients in transition, which permits us to not reassess our prior conclusions pertaining to lease identification, lease classification, and initial direct costs on leases that commenced prior to our adoption of the new standard. We also elected the ongoing practical expedient to not recognize operating lease right-of-use assets and operating lease liabilities related to short-term leases. We did not elect the use-of-hindsight or land easements practical expedients. For leases beginning subsequent to the effective date, we elected to not separate lease and non-lease components for certain classes of assets including real estate and certain equipment. To determine the measurement of the lease liability for operating leases with variable payments based on an index or rate that commenced prior to the adoption of Topic 842, we elected to apply the active index or rate at the effective date.
As a result of adopting Topic 842, we recognized net operating lease right-of-use assets of $5.7 billion and operating lease liabilities of $6.0 billion on the effective date. Existing prepaid rent, accrued rent, and closed store reserves were recorded as an offset to our gross operating lease right-of-use assets. The cumulative effect of the adoption resulted in an immaterial adjustment to the opening balance of retained earnings as of February 4, 2019. The standard did not have a material impact on our results of operations or cash flows.
Recently Issued Accounting Pronouncements
Recent accounting pronouncements pending adoption not discussed above or in the 2018 Form 10-K are either not applicable or will not have or are not expected to have a material impact on our consolidated financial condition, results of operations, or cash flows.
No sales to an individual customer accounted for more than 10% of net sales during the three and six months ended August 4, 2019 and July 29, 2018. Net sales, classified by geography, follow.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
in millions
|
August 4,
2019
|
|
July 29,
2018
|
|
August 4,
2019
|
|
July 29,
2018
|
|
Net sales – in the U.S.
|
$
|
28,186
|
|
|
$
|
27,852
|
|
|
$
|
52,639
|
|
|
$
|
50,895
|
|
|
Net sales – outside the U.S.
|
2,653
|
|
|
2,611
|
|
|
4,581
|
|
|
4,515
|
|
|
Net sales
|
$
|
30,839
|
|
|
$
|
30,463
|
|
|
$
|
57,220
|
|
|
$
|
55,410
|
|
Net sales by products and services follow.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
in millions
|
August 4,
2019
|
|
July 29,
2018
|
|
August 4,
2019
|
|
July 29,
2018
|
|
Net sales – products
|
$
|
29,480
|
|
|
$
|
29,076
|
|
|
$
|
54,712
|
|
|
$
|
52,811
|
|
|
Net sales – services
|
1,359
|
|
|
1,387
|
|
|
2,508
|
|
|
2,599
|
|
|
Net sales
|
$
|
30,839
|
|
|
$
|
30,463
|
|
|
$
|
57,220
|
|
|
$
|
55,410
|
|
Major product lines, as well as the associated merchandising departments (and related services) follow.
|
|
|
|
|
|
|
Major Product Line
|
|
Merchandising Departments
|
|
Building Materials
|
|
Building Materials, Electrical/Lighting, Lumber, Millwork, and Plumbing
|
|
Décor
|
|
Appliances, Décor/Storage, Flooring, Kitchen and Bath, and Paint
|
|
Hardlines
|
|
Hardware, Indoor Garden, Outdoor Garden, and Tools
|
During the first quarter of fiscal 2019, we combined the Electrical and Lighting merchandising departments into one department, Electrical/Lighting, and we renamed the Décor merchandising department to Décor/Storage. These changes had no impact on our net sales presentations.
Net sales by major product lines (and related services) follow.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
in millions
|
August 4,
2019
|
|
July 29,
2018
|
|
August 4,
2019
|
|
July 29,
2018
|
|
Building Materials
|
$
|
10,495
|
|
|
$
|
10,660
|
|
|
$
|
19,899
|
|
|
$
|
19,981
|
|
|
Décor
|
10,050
|
|
|
9,653
|
|
|
18,795
|
|
|
18,066
|
|
|
Hardlines
|
10,294
|
|
|
10,150
|
|
|
18,526
|
|
|
17,363
|
|
|
Net sales
|
$
|
30,839
|
|
|
$
|
30,463
|
|
|
$
|
57,220
|
|
|
$
|
55,410
|
|
—————
Note: Net sales for certain merchandising departments were reclassified in the first quarter of fiscal 2019. As a result, prior-period amounts have been reclassified to conform with the current-period presentation.
Net Property and Equipment
Net property and equipment includes accumulated depreciation and amortization of $21.3 billion as of August 4, 2019 and $20.6 billion as of February 3, 2019.
Leases
We lease certain retail locations, office space, warehouse and distribution space, equipment, and vehicles. While most of these leases are operating leases, certain retail locations and equipment are leased under finance leases. We consider various factors such as market conditions and the terms of any renewal options that may exist to determine whether we will renew or replace the lease. A substantial majority of our leases have remaining lease terms of one to 20 years, typically with the option to extend the leases for up to five years. Some of our leases may include the option to terminate in less than five years. In the event we are reasonably certain to exercise the option to extend a lease, we will include the extended terms in the operating lease right-of-use asset and operating lease liability. Real estate taxes, insurance, maintenance, and operating expenses applicable to the leased property are generally our obligations under the lease agreements.
Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. Further, certain lease agreements include rental payments based on an index or rate and others include rental payments based on a percentage of sales.
The balance sheet location of assets and liabilities related to operating and finance leases follow.
|
|
|
|
|
|
|
|
|
in millions
|
Balance Sheet Caption
|
August 4,
2019
|
|
Assets:
|
|
|
|
Operating lease assets
|
Operating lease right-of-use assets
|
$
|
5,789
|
|
|
Finance lease assets
|
Net property and equipment
|
863
|
|
|
Total lease assets
|
|
$
|
6,652
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
Current:
|
|
|
|
Operating lease liabilities
|
Current operating lease liabilities
|
$
|
831
|
|
|
Finance lease liabilities
|
Current installments of long-term debt
|
67
|
|
|
Long-term:
|
|
|
|
Operating lease liabilities
|
Long-term operating lease liabilities
|
5,263
|
|
|
Finance lease liabilities
|
Long-term debt, excluding current installments
|
1,020
|
|
|
Total lease liabilities
|
|
$
|
7,181
|
|
The components of lease cost follow.
|
|
|
|
|
|
|
|
|
|
|
|
|
in millions
|
Statement of Earnings Caption
|
Three Months Ended
August 4, 2019
|
|
Six Months Ended
August 4, 2019
|
|
Operating lease cost
|
Selling, general and administrative
|
$
|
205
|
|
|
$
|
415
|
|
|
Finance lease cost:
|
|
|
|
|
|
Amortization of leased assets
|
Depreciation and amortization
|
22
|
|
|
43
|
|
|
Interest on lease liabilities
|
Interest expense
|
23
|
|
|
46
|
|
|
Short-term lease cost
|
Selling, general and administrative
|
18
|
|
|
43
|
|
|
Variable lease cost
|
Selling, general and administrative
|
64
|
|
|
122
|
|
|
Sublease income
|
Selling, general and administrative
|
(4
|
)
|
|
(7
|
)
|
|
Net lease cost
|
|
$
|
328
|
|
|
$
|
662
|
|
ASU 2016-02 requires that public companies use a secured incremental borrowing rate as the discount rate for present value of lease payments when the rate implicit in the contract is not readily determinable. We determine a secured rate on a quarterly basis and update the weighted average discount rate accordingly. Lease terms and discount rates follow.
|
|
|
|
|
|
|
|
August 4,
2019
|
|
Weighted Average Remaining Lease Term (Years):
|
|
|
Operating leases
|
10
|
|
|
Finance leases
|
13
|
|
|
|
|
|
Weighted Average Discount Rate:
|
|
|
Operating leases
|
3.1
|
%
|
|
Finance leases
|
11.3
|
%
|
The approximate future minimum lease payments under operating and finance leases at August 4, 2019 follow.
|
|
|
|
|
|
|
|
|
|
|
|
in millions
|
Operating
Leases
|
|
Finance
Leases
|
|
Fiscal 2019
|
$
|
479
|
|
|
$
|
82
|
|
|
Fiscal 2020
|
942
|
|
|
158
|
|
|
Fiscal 2021
|
834
|
|
|
153
|
|
|
Fiscal 2022
|
734
|
|
|
150
|
|
|
Fiscal 2023
|
640
|
|
|
143
|
|
|
Thereafter
|
3,341
|
|
|
993
|
|
|
Total lease payments
|
6,970
|
|
|
1,679
|
|
|
Less imputed interest
|
876
|
|
|
592
|
|
|
Present value of lease liabilities
|
$
|
6,094
|
|
|
$
|
1,087
|
|
—————
Note: Amounts presented do not include payments relating to immaterial leases excluded from the balance sheets as part of transition elections adopted upon implementation of Topic 842. Additionally, we have excluded approximately $1.4 billion of leases (undiscounted basis) that have not yet commenced. These leases will commence between 2019 and 2020 with lease terms of one to 20 years.
The approximate future minimum lease payments under capital and operating leases at February 3, 2019 and accounted for under previous lease guidance follow.
|
|
|
|
|
|
|
|
|
|
|
|
in millions
|
Operating
Leases
|
|
Capital
Leases
|
|
Fiscal 2019
|
$
|
976
|
|
|
$
|
150
|
|
|
Fiscal 2020
|
912
|
|
|
167
|
|
|
Fiscal 2021
|
792
|
|
|
143
|
|
|
Fiscal 2022
|
682
|
|
|
142
|
|
|
Fiscal 2023
|
584
|
|
|
137
|
|
|
Thereafter
|
3,090
|
|
|
970
|
|
|
|
$
|
7,036
|
|
|
1,709
|
|
|
Less imputed interest
|
|
|
660
|
|
|
Net present value of capital lease obligations
|
|
|
1,049
|
|
|
Less current installments
|
|
|
57
|
|
|
Long-term capital lease obligations, excluding current installments
|
|
|
$
|
992
|
|
Other lease information follows.
|
|
|
|
|
|
|
|
in millions
|
Six Months Ended
August 4, 2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
Operating cash flows – operating leases
|
$
|
500
|
|
|
Operating cash flows – finance leases
|
46
|
|
|
Financing cash flows – finance leases
|
30
|
|
|
Leased assets obtained in exchange for new operating lease liabilities
|
520
|
|
|
Leased assets obtained in exchange for new finance lease liabilities
|
67
|
|
|
|
|
|
4.
|
DEBT AND DERIVATIVE INSTRUMENTS
|
June 2019 Issuance. In June 2019, we issued two tranches of senior notes.
|
|
|
|
•
|
The first tranche consisted of $1.0 billion of 2.95% senior notes due June 15, 2029 (the “2029 notes”) at a discount of $6 million. Interest on the 2029 notes is due semi-annually on June 15 and December 15 of each year, beginning December 15, 2019.
|
|
|
|
|
•
|
The second tranche consisted of $400 million of 3.90% senior notes due June 15, 2047 (the “2047 notes”) at a premium of $10 million. The 2047 notes form a single series with the Company’s $750 million 3.90% senior notes due June 15, 2047 that were issued in June 2017 and have the same terms. The aggregate principal amount outstanding of the Company’s senior notes due June 15, 2047 is $1.2 billion. Interest on the 2047 notes is due semi-annually on June 15 and December 15 of each year, beginning December 15, 2019, with interest accruing from June 15, 2019.
|
|
|
|
|
•
|
Issuance costs totaled $9.9 million. The net proceeds of the June 2019 issuance were used to repay the Company's 2.00% senior notes that matured on June 15, 2019 and for general corporate purposes, including repurchases of common stock.
|
The 2029 notes and 2047 notes may be redeemed by us at any time, in whole or in part, at the redemption price plus accrued interest up to the redemption date. The redemption price is equal to the greater of (1) 100% of the principal amount of the notes to be redeemed, or (2) the sum of the present values of the remaining scheduled payments of principal and interest to the Par Call Date, as defined in the respective notes. Additionally, if a Change in Control Triggering Event, as defined in the notes, occurs, holders of all notes have the right to require us to redeem those notes at 101% of the aggregate principal amount of the notes plus accrued interest up to the redemption date. We are generally not limited under the indentures governing the notes in our ability to incur additional indebtedness or required to maintain financial ratios or specified levels of net worth or liquidity. The indentures governing the notes contain various customary covenants; however, none are expected to impact our liquidity or capital resources.
Also, in June 2019, we entered into an interest rate swap agreement with a notional amount of $350 million, accounted for as a fair value hedge, to hedge against changes in the fair value of the 2029 notes attributable to changes in the designated benchmark interest rate.
Stock Rollforward
A reconciliation of the number of shares of our common stock and dividends per share follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares in millions
|
Three Months Ended
|
|
Six Months Ended
|
|
August 4,
2019
|
|
July 29,
2018
|
|
August 4,
2019
|
|
July 29,
2018
|
|
Common stock:
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
1,784
|
|
|
1,781
|
|
|
1,782
|
|
|
1,780
|
|
|
Shares issued under employee stock plans
|
1
|
|
|
1
|
|
|
3
|
|
|
2
|
|
|
Balance at end of period
|
1,785
|
|
|
1,782
|
|
|
1,785
|
|
|
1,782
|
|
|
Treasury stock:
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
(683
|
)
|
|
(627
|
)
|
|
(677
|
)
|
|
(622
|
)
|
|
Repurchases of common stock
|
(6
|
)
|
|
(10
|
)
|
|
(12
|
)
|
|
(15
|
)
|
|
Balance at end of period
|
(689
|
)
|
|
(637
|
)
|
|
(689
|
)
|
|
(637
|
)
|
|
Shares outstanding at end of period
|
1,096
|
|
|
1,145
|
|
|
1,096
|
|
|
1,145
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per share
|
$
|
1.36
|
|
|
$
|
1.03
|
|
|
$
|
2.72
|
|
|
$
|
2.06
|
|
|
|
|
|
6.
|
FAIR VALUE MEASUREMENTS
|
The fair value of an asset is considered to be the price at which the asset could be sold in an orderly transaction between unrelated knowledgeable and willing parties. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor, rather than the amount that would be paid to settle the liability with the
creditor. Assets and liabilities recorded at fair value are measured using a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Assets and liabilities that are measured at fair value on a recurring basis follow.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at August 4, 2019 Using
|
|
Fair Value at February 3, 2019 Using
|
|
in millions
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant
Observable Inputs
(Level 2)
|
|
Significant
Unobservable Inputs
(Level 3)
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant
Observable Inputs
(Level 2)
|
|
Significant
Unobservable Inputs
(Level 3)
|
|
Derivative agreements – assets
|
$
|
—
|
|
|
$
|
190
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
138
|
|
|
$
|
—
|
|
|
Derivative agreements – liabilities
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
(11
|
)
|
|
—
|
|
|
Total
|
$
|
—
|
|
|
$
|
189
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
127
|
|
|
$
|
—
|
|
We use derivative financial instruments from time to time in the management of our interest rate exposure on long-term debt and our exposure on foreign currency fluctuations. The fair value of our derivative financial instruments was measured using observable market information (level 2).
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The carrying amounts of cash and cash equivalents, receivables, short-term debt, and accounts payable approximate fair value due to the short-term maturities of these financial instruments.
Long-lived assets and other intangible assets are subject to nonrecurring fair value measurement for the assessment of impairment or as the result of business acquisitions. We did not have any material assets or liabilities subject to nonrecurring fair value measurements as of August 4, 2019 or February 3, 2019, respectively.
The aggregate fair values and carrying values of our senior notes follow.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 4,
2019
|
|
February 3,
2019
|
|
in millions
|
Fair Value
(Level 1)
|
|
Carrying
Value
|
|
Fair Value
(Level 1)
|
|
Carrying
Value
|
|
Senior notes
|
$
|
30,910
|
|
|
$
|
27,293
|
|
|
$
|
28,348
|
|
|
$
|
26,814
|
|
|
|
|
|
7.
|
WEIGHTED AVERAGE COMMON SHARES
|
The reconciliation of our basic to diluted weighted average common shares follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
in millions
|
August 4,
2019
|
|
July 29,
2018
|
|
August 4,
2019
|
|
July 29,
2018
|
|
Basic weighted average common shares
|
1,095
|
|
|
1,144
|
|
|
1,098
|
|
|
1,148
|
|
|
Effect of potentially dilutive securities
|
4
|
|
|
5
|
|
|
5
|
|
|
6
|
|
|
Diluted weighted average common shares
|
1,099
|
|
|
1,149
|
|
|
1,103
|
|
|
1,154
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive securities excluded from diluted weighted average common shares
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
|
|
|
8.
|
COMMITMENTS AND CONTINGENCIES
|
We are involved in litigation arising in the normal course of business. In management’s opinion, any such litigation is not expected to have a material adverse effect on our consolidated financial condition, results of operations, or cash flows.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
The Home Depot, Inc.:
Results of Review of Interim Financial Information
We have reviewed the Consolidated Balance Sheet of The Home Depot, Inc. and its subsidiaries (the “Company”) as of August 4, 2019, the related Consolidated Statements of Earnings, Comprehensive Income, and Stockholders’ Equity for the three-month and six-month periods ended August 4, 2019 and July 29, 2018, the related Consolidated Statements of Cash Flows for the six-month periods ended August 4, 2019 and July 29, 2018, and the related notes (collectively, the “Consolidated Interim Financial Information”). Based on our reviews, we are not aware of any material modifications that should be made to the Consolidated Interim Financial Information for it to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Consolidated Balance Sheet of the Company as of February 3, 2019, and the related Consolidated Statements of Earnings, Comprehensive Income, Stockholders’ Equity, and Cash Flows for the year then ended (not presented herein); and in our report dated March 28, 2019, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying Consolidated Balance Sheet as of February 3, 2019, is fairly stated, in all material respects, in relation to the Consolidated Balance Sheet from which it has been derived.
Basis for Review Results
This Consolidated Interim Financial Information is the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with the standards of the PCAOB. A review of consolidated interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
/s/ KPMG LLP
Atlanta, Georgia
August 26, 2019
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Our MD&A includes the following sections:
Executive Summary
Quarter to date and year to date highlights of our financial performance follow.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
dollars in millions, except per share data
|
Three Months Ended
|
|
Six Months Ended
|
|
August 4,
2019
|
|
July 29,
2018
|
|
August 4,
2019
|
|
July 29,
2018
|
|
Net sales
|
$
|
30,839
|
|
|
$
|
30,463
|
|
|
$
|
57,220
|
|
|
$
|
55,410
|
|
|
Net earnings
|
3,479
|
|
|
3,506
|
|
|
5,992
|
|
|
5,910
|
|
|
Effective tax rate
|
24.6
|
%
|
|
24.7
|
%
|
|
24.5
|
%
|
|
24.2
|
%
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
$
|
3.17
|
|
|
$
|
3.05
|
|
|
$
|
5.43
|
|
|
$
|
5.12
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
|
|
$
|
8,497
|
|
|
$
|
7,907
|
|
|
Proceeds from long-term debt, net of discounts and premiums
|
|
|
|
|
1,404
|
|
|
—
|
|
|
Repayments of long-term debt
|
|
|
|
|
1,030
|
|
|
28
|
|
|
Repurchases of common stock
|
|
|
|
|
2,619
|
|
|
3,121
|
|
We reported net sales of $30.8 billion in the second quarter of fiscal 2019. Net earnings were $3.5 billion, or $3.17 per diluted share. For the first six months of fiscal 2019, net sales were $57.2 billion and net earnings were $6.0 billion, or $5.43 per diluted share.
We opened one new store in the U.S. and one new store in Mexico during the second quarter of fiscal 2019, for a total store count of 2,291 at the end of the quarter. As of August 4, 2019, a total of 306 of our stores, or 13.4%, were located in Canada and Mexico. For the second quarter of fiscal 2019, total sales per square foot were $509.55 and our inventory turnover ratio was 5.1 times.
We generated $8.5 billion of cash flow from operations and issued $1.4 billion of long-term debt, net of discounts and premiums, during the first six months of fiscal 2019. This cash flow, together with cash on hand, was used to pay $3.0 billion of dividends, fund cash payments of $2.6 billion for share repurchases, repay $1.3 billion of net short-term borrowings, fund $1.2 billion in capital expenditures, and repay $1.0 billion of senior notes that matured in June 2019. In February 2019, we announced a 32.0% increase in our quarterly cash dividend to $1.36 per share.
Our ROIC for the trailing twelve-month period was 43.7% at the end of the second quarter of fiscal 2019. See the "Non-GAAP Financial Measures" section below for our definition and calculation of ROIC, as well as a reconciliation of NOPAT, a non-GAAP financial measure, to net earnings (the most comparable GAAP financial measure).
Results of Operations and Non-GAAP Financial Measures
The tables and discussion below should be read in conjunction with our consolidated financial statements and related notes included in this report and in the 2018 Form 10-K and with our MD&A included in the 2018 Form 10-K. We believe the percentage relationship between net sales and major categories in our consolidated statements of earnings, as well as the percentage change in the associated dollar amounts, are relevant to an evaluation of our business.
Fiscal 2019 and Fiscal 2018 Three Month Comparisons
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
August 4,
2019
|
|
July 29,
2018
|
|
dollars in millions
|
$
|
|
% of
Net Sales
|
|
$
|
|
% of
Net Sales
|
|
Net sales
|
$
|
30,839
|
|
|
|
|
$
|
30,463
|
|
|
|
|
Gross profit
|
10,432
|
|
|
33.8
|
%
|
|
10,365
|
|
|
34.0
|
%
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
5,044
|
|
|
16.4
|
|
|
5,004
|
|
|
16.4
|
|
|
Depreciation and amortization
|
492
|
|
|
1.6
|
|
|
460
|
|
|
1.5
|
|
|
Total operating expenses
|
5,536
|
|
|
18.0
|
|
|
5,464
|
|
|
17.9
|
|
|
Operating income
|
4,896
|
|
|
15.9
|
|
|
4,901
|
|
|
16.1
|
|
|
Interest and other (income) expense:
|
|
|
|
|
|
|
|
|
Interest and investment income
|
(19
|
)
|
|
(0.1
|
)
|
|
(26
|
)
|
|
(0.1
|
)
|
|
Interest expense
|
302
|
|
|
1.0
|
|
|
272
|
|
|
0.9
|
|
|
Interest and other, net
|
283
|
|
|
0.9
|
|
|
246
|
|
|
0.8
|
|
|
Earnings before provision for income taxes
|
4,613
|
|
|
15.0
|
|
|
4,655
|
|
|
15.3
|
|
|
Provision for income taxes
|
1,134
|
|
|
3.7
|
|
|
1,149
|
|
|
3.8
|
|
|
Net earnings
|
$
|
3,479
|
|
|
11.3
|
%
|
|
$
|
3,506
|
|
|
11.5
|
%
|
—————
Note: Certain percentages may not sum to totals due to rounding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Selected financial and sales data:
|
|
|
August 4,
2019
|
|
July 29,
2018
|
|
% Change
|
|
Comparable sales (% change)
|
|
|
3.0%
|
|
|
8.0%
|
|
|
N/A
|
|
Comparable customer transactions (% change) (1)
|
|
|
1.0%
|
|
|
2.9%
|
|
|
N/A
|
|
Comparable average ticket (% change) (1)
|
|
|
2.0%
|
|
|
4.9%
|
|
|
N/A
|
|
Customer transactions (in millions) (1)
|
|
|
455.5
|
|
|
455.4
|
|
|
0.0%
|
|
Average ticket (1)
|
|
|
$
|
67.31
|
|
|
$
|
66.20
|
|
|
1.7%
|
|
Sales per square foot (1)
|
|
|
$
|
509.55
|
|
|
$
|
504.20
|
|
|
1.1%
|
|
Diluted earnings per share
|
|
|
$
|
3.17
|
|
|
$
|
3.05
|
|
|
3.9%
|
—————
|
|
|
|
(1)
|
Does not include results for Interline.
|
Sales. We assess our sales performance by evaluating both net sales and comparable sales.
Net Sales. Net sales for the second quarter of fiscal 2019 increased 1.2% to $30.8 billion from $30.5 billion in the second quarter of fiscal 2018. The increase in net sales in the second quarter of fiscal 2019 primarily reflected the impact of positive comparable sales driven by an increase in comparable average ticket and comparable customer transactions. Online sales, which consist of sales generated online through our websites for products picked up in our stores or delivered to customer locations, represented 8.9% of net sales and grew 20.1% during the second quarter of fiscal 2019. A stronger U.S. dollar negatively impacted sales growth by $29 million in the second quarter of fiscal 2019.
Comparable Sales. Comparable sales is a measure that highlights the performance of our existing locations and websites by measuring the change in net sales for a period over the comparable prior-period of equivalent length. Comparable sales includes sales at all locations, physical and online, open greater than 52 weeks (including remodels and relocations) and excluding closed stores. Retail stores become comparable on the Monday following their 365th day of operation. Acquisitions, digital or otherwise, are included in comparable sales after we own the acquired assets for more than 52 weeks. Comparable sales includes new product and service offering sales that have been offered for more than 52 weeks. Comparable sales excludes prior-year sales of product and service offerings that we have exited in the current period. Fiscal 2019 includes 52 weeks and fiscal 2018 included 53
weeks. For our calculation of comparable sales in fiscal 2019, we will compare weeks 1 through 52 in fiscal 2019 against weeks 2 through 53 in fiscal 2018. Comparable sales is intended only as supplemental information and is not a substitute for net sales presented in accordance with GAAP.
Total comparable sales increased 3.0% in the second quarter of fiscal 2019, consisting of a 2.0% increase in comparable average ticket and a 1.0% increase in comparable customer transactions. The increase in comparable sales reflected a number of factors, including execution of our strategic efforts to drive an enhanced interconnected experience in both the physical and digital worlds. The difference between our comparable sales growth and total sales growth in the second quarter of fiscal 2019 was primarily due to the shift in our fiscal calendar as a result of the 53rd week in fiscal 2018.
All of our departments posted positive comparable sales in the second quarter of fiscal 2019 except for Lumber, which was negatively impacted by commodity price deflation. We expect lumber prices to remain depressed in the second half of fiscal 2019. Comparable sales for our Appliances, Tools, Décor/Storage, Indoor Garden, Building Materials, Paint, Outdoor Garden, Hardware, and Plumbing merchandising departments were above the Company average in the second quarter of fiscal 2019.
Gross Profit. Gross profit was $10.4 billion for the second quarter of both fiscal 2019 and 2018. Gross profit as a percent of net sales, or gross profit margin, was 33.8% in the second quarter of fiscal 2019 compared to 34.0% for the second quarter of fiscal 2018. The decrease in gross profit margin was primarily driven by higher shrink, a change in product mix, and higher supply chain expense.
Operating Expenses. Our operating expenses are composed of SG&A and depreciation and amortization.
Selling, General & Administrative. SG&A was $5.0 billion for the second quarter of both fiscal 2019 and 2018. As a percent of net sales, SG&A was 16.4% for the second quarter of both fiscal 2019 and 2018, driven by expense leverage resulting from the positive comparable sales environment and continued expense control, partially offset by strategic investments in the business.
Depreciation and Amortization. Depreciation and amortization increased $32 million to $492 million in the second quarter of fiscal 2019 from $460 million in the second quarter of fiscal 2018. As a percent of net sales, depreciation and amortization was 1.6% in the second quarter of fiscal 2019 compared to 1.5% for the second quarter of fiscal 2018, reflecting strategic investments in the business, leverage resulting from the positive comparable sales environment, and timing of asset additions.
Interest and Other, net. Interest and other, net, was $283 million in the second quarter of fiscal 2019 compared to $246 million in the second quarter of fiscal 2018. Interest and other, net, as a percent of net sales was 0.9% in the second quarter of fiscal 2019 and 0.8% in the second quarter of fiscal 2018, due primarily to higher interest expense resulting from higher debt balances.
Provision for Income Taxes. Our combined effective income tax rate was 24.6% for the second quarter of fiscal 2019 compared to 24.7% for the second quarter of fiscal 2018. The decrease in the provision for income taxes in the second quarter of fiscal 2019 was primarily due to the tax benefit related to stock compensation and the positive impact of certain state tax settlements.
Diluted Earnings per Share. Diluted earnings per share were $3.17 for the second quarter of fiscal 2019 compared to $3.05 for the second quarter of fiscal 2018.
Fiscal 2019 and Fiscal 2018 Six Month Comparisons
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
August 4,
2019
|
|
July 29,
2018
|
|
dollars in millions
|
$
|
|
% of
Net Sales
|
|
$
|
|
% of
Net Sales
|
|
Net sales
|
$
|
57,220
|
|
|
|
|
$
|
55,410
|
|
|
|
|
Gross profit
|
19,449
|
|
|
34.0
|
%
|
|
18,982
|
|
|
34.3
|
%
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
9,984
|
|
|
17.4
|
|
|
9,783
|
|
|
17.7
|
|
|
Depreciation and amortization
|
972
|
|
|
1.7
|
|
|
917
|
|
|
1.7
|
|
|
Total operating expenses
|
10,956
|
|
|
19.1
|
|
|
10,700
|
|
|
19.3
|
|
|
Operating income
|
8,493
|
|
|
14.8
|
|
|
8,282
|
|
|
14.9
|
|
|
Interest and other (income) expense:
|
|
|
|
|
|
|
|
|
Interest and investment income
|
(34
|
)
|
|
(0.1
|
)
|
|
(48
|
)
|
|
(0.1
|
)
|
|
Interest expense
|
590
|
|
|
1.0
|
|
|
533
|
|
|
1.0
|
|
|
Interest and other, net
|
556
|
|
|
1.0
|
|
|
485
|
|
|
0.9
|
|
|
Earnings before provision for income taxes
|
7,937
|
|
|
13.9
|
|
|
7,797
|
|
|
14.1
|
|
|
Provision for income taxes
|
1,945
|
|
|
3.4
|
|
|
1,887
|
|
|
3.4
|
|
|
Net earnings
|
$
|
5,992
|
|
|
10.5
|
%
|
|
$
|
5,910
|
|
|
10.7
|
%
|
—————
Note: Certain percentages may not sum to totals due to rounding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
Selected financial and sales data:
|
|
|
August 4, 2019
|
|
July 29, 2018
|
|
% Change
|
|
Comparable sales (% change)
|
|
|
2.8%
|
|
|
6.2%
|
|
|
N/A
|
|
Comparable customer transactions (% change) (1)
|
|
|
0.8%
|
|
|
0.9%
|
|
|
N/A
|
|
Comparable average ticket (% change) (1)
|
|
|
2.0%
|
|
|
5.3%
|
|
|
N/A
|
|
Customer transactions (in millions) (1)
|
|
|
845.5
|
|
|
831.2
|
|
|
1.7%
|
|
Average ticket (1)
|
|
|
$
|
67.31
|
|
|
$
|
66.12
|
|
|
1.8%
|
|
Sales per square foot (1)
|
|
|
$
|
472.22
|
|
|
$
|
458.07
|
|
|
3.1%
|
|
Diluted earnings per share
|
|
|
$
|
5.43
|
|
|
$
|
5.12
|
|
|
6.1%
|
—————
|
|
|
|
(1)
|
Does not include results for Interline.
|
Sales.
Net Sales. For the first six months of fiscal 2019, net sales increased 3.3% to $57.2 billion from $55.4 billion in the first six months of fiscal 2018. The increase in net sales for the first six months of fiscal 2019 primarily reflected the impact of positive comparable sales driven by an increase in comparable average ticket growth and comparable customer transactions. Online sales, which consist of sales generated online through our websites for products picked up in our stores or delivered to customer locations, represented 8.9% of net sales and grew 21.4% during the first six months of fiscal 2019. A stronger U.S. dollar negatively impacted sales growth by $105 million in the first six months of fiscal 2019.
Comparable Sales. For the first six months of fiscal 2019, total comparable sales increased 2.8%. This increase reflected a number of factors, including the execution of our strategic efforts to drive an enhanced interconnected experience in both the physical and digital worlds. Our comparable average ticket increased 2.0% for the first six months of fiscal 2019, due in part to big ticket purchases.
During the first six months of fiscal 2019, all of our departments except for three posted positive comparable sales. Comparable sales for our Appliances, Indoor Garden, Tools, Décor/Storage, Building Materials, Outdoor Garden, Plumbing, Hardware, and Paint merchandising departments were above the Company average for the first six months of fiscal 2019. Comparable sales for Flooring and Electrical/Lighting were slightly negative due to the impact
of prior-year hurricane-related sales and price deflation in light bulbs, respectively. Comparable sales for Lumber were negatively impacted by commodity price deflation.
Gross Profit. For the first six months of fiscal 2019, gross profit increased $467 million to $19.4 billion from $19.0 billion in the first six months of fiscal 2018. Gross profit as a percent of net sales, or gross profit margin, was 34.0% in the first six months of fiscal 2019 compared to 34.3% for the first six months of fiscal 2018. The decrease in gross profit margin was primarily driven by higher shrink, a change in product mix, and higher supply chain expense.
Operating Expenses. Our operating expenses are composed of SG&A and depreciation and amortization.
Selling, General & Administrative. SG&A increased $201 million to $10.0 billion for the first six months of fiscal 2019 from $9.8 billion in the first six months of fiscal 2018. As a percent of net sales, SG&A was 17.4% for the first six months of fiscal 2019 compared to 17.7% for the first six months of fiscal 2018. The decrease in SG&A as a percent of net sales for the first six months of fiscal 2019 was primarily driven by expense leverage resulting from the positive comparable sales environment and continued expense control.
Depreciation and Amortization. Depreciation and amortization increased $55 million to $972 million for the first six months of fiscal 2019 from $917 million in the first six months of fiscal 2018. As a percent of net sales, depreciation and amortization was unchanged at 1.7% for the first six months of both fiscal 2019 and fiscal 2018, reflecting strategic investments in the business, leverage resulting from the positive comparable sales environment, and timing of asset additions.
Interest and Other, net. Interest and other, net was $556 million in the first six months of fiscal 2019, compared to $485 million for the first six months of fiscal 2018. As a percent of net sales, it was 1.0% for the first six months of fiscal 2019 compared to 0.9% for the first six months of fiscal 2018. The increase in interest and other, net as a percent of sales was due primarily to the impact of higher debt balances.
Provision for Income Taxes. Our combined effective income tax rate was 24.5% for the first six months of fiscal 2019 compared to 24.2% for the first six months of fiscal 2018. The increase in the provision for income taxes in the first six months of fiscal 2019 was primarily due to the positive impact of certain state tax settlements in the prior year.
Diluted Earnings per Share. Diluted earnings per share were $5.43 for the first six months of fiscal 2019, compared to $5.12 for the first six months of fiscal 2018.
Non-GAAP Financial Measures
To provide clarity, internally and externally, about our operating performance, we supplement our reporting with certain non-GAAP financial measures. However, this supplemental information should not be considered in isolation or as a substitute for the related GAAP measures. Non-GAAP financial measures presented herein may differ from similar measures used by other companies.
Return on Invested Capital. We believe ROIC is meaningful for investors and management because it measures how effectively we deploy our capital base. We define ROIC as NOPAT, a non-GAAP financial measure, for the most recent twelve-month period, divided by average debt and equity. We define average debt and equity as the average of beginning and ending long-term debt (including current installments) and equity for the most recent twelve-month period.
The calculation of ROIC, together with a reconciliation of NOPAT to net earnings (the most comparable GAAP measure), follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
|
|
dollars in millions
|
|
August 4,
2019
|
|
July 29,
2018
|
|
Net earnings
|
|
$
|
11,203
|
|
|
$
|
9,854
|
|
|
Interest and other, net
|
|
1,045
|
|
|
978
|
|
|
Provision for income taxes
|
|
3,493
|
|
|
4,319
|
|
|
Operating income
|
|
15,741
|
|
|
15,151
|
|
|
Income tax adjustment (1)
|
|
(3,791
|
)
|
|
(4,545
|
)
|
|
NOPAT
|
|
$
|
11,950
|
|
|
$
|
10,606
|
|
|
|
|
|
|
|
|
Average debt and equity
|
|
$
|
27,364
|
|
|
$
|
28,014
|
|
|
|
|
|
|
|
|
ROIC
|
|
43.7
|
%
|
|
37.9
|
%
|
—————
|
|
|
|
(1)
|
Income tax adjustment is defined as operating income multiplied by our effective tax rate for the trailing twelve months.
|
Additional Information
For information on accounting pronouncements that have impacted or are expected to materially impact our consolidated financial condition, results of operations, or cash flows, see Note 1 to our consolidated financial statements.
Liquidity and Capital Resources
Cash and Cash Equivalents
At August 4, 2019, we had $2.5 billion in cash and cash equivalents, of which $1.9 billion was held by our foreign subsidiaries. We believe that our current cash position, access to the long-term debt capital markets, cash flow generated from operations, and funds available under our commercial paper programs should be sufficient not only for our operating requirements but also to enable us to complete our capital expenditure programs and fund dividend payments, share repurchases, and any required long-term debt payments through the next several fiscal years. In addition, we believe that we have the ability to obtain alternative sources of financing.
As we continue our investments in the business, we expect capital expenditures of approximately $2.7 billion in fiscal 2019.
Debt and Derivatives
We have commercial paper programs that allow for borrowings of up to $3.0 billion. All of our short-term borrowings in the first six months of fiscal 2019 were under these commercial paper programs, and the maximum amount outstanding at any time was $2.1 billion. In connection with these programs, we have back-up credit facilities with a consortium of banks for borrowings up to $3.0 billion, which consist of a five-year $2.0 billion credit facility scheduled to expire in December 2022 and a 364-day $1.0 billion credit facility scheduled to expire in December 2019. At August 4, 2019, we were in compliance with all of the covenants contained in the credit facilities, and none are expected to impact our liquidity or capital resources. At August 4, 2019, there were no borrowings outstanding under the commercial paper programs. We also issue senior notes from time to time as part of our capital management strategy.
We use derivative financial instruments in the management of our exposure to fluctuations in foreign currency exchange rates and interest rates on certain long-term debt. See Note 4 to our consolidated financial statements for further discussion.
Share Repurchases
In February 2019, our Board of Directors authorized a new $15.0 billion share repurchase program that replaced the previous authorization. In the first six months of fiscal 2019, we had cash payments of $2.6 billion for repurchases of our common stock through open market purchases.
Cash Flows Summary
Operating Activities. Cash flow generated from operations provides us with a significant source of liquidity. Our operating cash flows result primarily from cash received from our customers, offset by cash payments we make for products and services, employee compensation, operations, and occupancy costs.
Cash provided by or used in operating activities is also subject to changes in working capital. Working capital at any specific point in time is subject to many variables, including seasonality, inventory management and category expansion, the timing of cash receipts and payments, vendor payment terms, and fluctuations in foreign exchange rates.
Net cash provided by operating activities increased $590 million in the first six months of fiscal 2019 compared to the first six months of fiscal 2018 and was primarily driven by net cash inflows associated with changes in working capital and an increase in net earnings. The increase in net earnings during the first six months of fiscal 2019 was due to the positive comparable sales environment and expense leverage.
Investing Activities. Cash used in investing activities primarily reflected capital expenditures from the continuation of our strategic investments in our business of $1.2 billion during the first six months of fiscal 2019 compared to $1.1 billion of capital expenditures in the first six months of fiscal 2018.
Financing Activities. Cash used in financing activities primarily reflected:
|
|
|
|
•
|
$3.0 billion of cash dividends paid, $2.6 billion of share repurchases, $1.3 billion of net repayments of short-term debt, and $1.0 billion of net repayments of long-term debt, partially offset by $1.4 billion of net proceeds from long-term debt in the first six months of fiscal 2019, and
|
|
|
|
|
•
|
$3.1 billion of share repurchases, $2.4 billion of cash dividends paid, and $1.6 billion of net repayments of short-term debt in the first six months of fiscal 2018.
|
Critical Accounting Policies
There were no changes during fiscal 2019 to our critical accounting policies as disclosed in the 2018 Form 10-K. Our significant accounting policies are disclosed in Note 1 to our consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Our exposure to market risks results primarily from fluctuations in interest rates. We are also exposed to risks from foreign currency exchange rate fluctuations on the translation of our foreign operations into U.S. dollars and on the purchase of goods by these foreign operations that are not denominated in their local currencies. There have been no material changes to our exposure to market risks from those disclosed in the 2018 Form 10-K.
Item 4. Controls and Procedures.
Under the direction and with the participation of our Chief Executive Officer and Chief Financial Officer, we evaluated our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) and concluded that our disclosure controls and procedures were effective as of August 4, 2019. There has been no change in our internal control over financial reporting during the fiscal quarter ended August 4, 2019, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.