DBRS Revises Trend to Negative on Home Depot, Inc.’s A (low) Long-Term Debt Rating

DBRS has today revised the trend on The Home Depot, Inc.’s (Home Depot or the Company) A (low) Senior Unsecured Debt rating to Negative from Stable. At the same time, DBRS has confirmed the Commercial Paper rating at R-1 (low) with a Stable trend.

The trend change reflects DBRS’s view that the current economic downturn will be more severe and prolonged than previously anticipated. In addition to a very weak forecast for the remainder of 2008, DBRS expects 2009 to remain very difficult for U.S. home improvement retailers, resulting in potentially meaningful deterioration of credit metrics for Home Depot over that time frame.

The U.S, housing market has been deteriorating sharply since the middle of 2007, with the majority of U.S. home improvement retailers posting negative same-store sales and declining earnings. Sales trends continue to decline – for the nine-month period ended November 2, 2008, Home Depot’s same-store sales decreased 7.5%, Q3 F2008 same-store sales were down 8.3% and October same-store sales were down double-digits. The Company reduced its estimate for full year same-store sales to approximately -8%, meaning same-store sales for the remainder of 2008 will likely stay in negative double-digit territory.

Early in 2008, DBRS recognized that the year would be more difficult than originally anticipated, and estimated that EBITDA may decrease to as low as $7 billion. That said, DBRS believed management had the capacity to keep credit metrics within its target range (lease-adjusted debt-to-EBITDAR of 2.3x – using a 6-times multiple to capitalize operating lease expense) by refraining from share repurchases and reducing capex until the environment began to improve in 2009. DBRS also stated that a sharper and/or longer than expected downturn that risks weakening credit metrics beyond committed levels would result in pressure on the current rating.

The greater-than-expected decline in sales has caused DBRS to revise its estimate for EBITDA to approximately $6.5 billion (from previous estimate of over $7.0 billion) for 2008 (i.e., year ending January 2009), which will likely cause Home Depot to push up against its targeted credit metrics by the end of this year.

Since DBRS is no longer expecting a recovery for this sector in 2009, it is setting its estimate for 2009 EBITDA to be approximately $6 billion – based on same-store sales averaging in the high, negative single-digits range through the year. DBRS believes this level of performance would erode the Company’s financial flexibility to a point where it would be challenged to maintain credit metrics in a range comfortable for the A (low) rating category without further capital conserving initiatives.

That said, DBRS notes that Home Depot continues to benefit from its industry leading market position and operating leverage which has previously kept the Company well placed in the A (low) rating category. On this basis, DBRS believes the Company will remain well positioned to recover as the economic climate improves. DBRS will therefore reassess its trend after the 2009 summer season. Should DBRS’s outlook on the economy, combined with the Company’s relative performance to that point, lead to a view that a recovery is likely in 2010, then the trend could stabilize. If the outlook for U.S. housing remains bleak or worsens, such that credit metrics are expected to remain stressed (lease-adjusted debt-to-EBTIDAR meaningfully above 2.3x) into 2010, a ratings downgrade is possible.

The trend on Home Depot’s short-term rating remains Stable as the Company remains free cash flow positive with CP/bank facilities with limits of $3.25 billion until December 2010, and manageable level of long-term debt maturities over the near term ($1.75 billion in 2009, $1 billion in 2010, $1 billion in 2011). DBRS would reconsider Home Depot’s short-term rating and trend if the Company’s long-term rating fell to BBB (high). That said, Home Depot has the potential to maintain an R-1(low) short-term rating, with a BBB (high) long-term rating, if it continued to be a significant free cash flow (after capex and dividends) generating company.

Note:
All figures are in U.S. dollars unless otherwise noted.
The applicable methodology is Rating Merchandisers, which can be found on the DBRS website under Methodologies.

This is a Corporate Rating.