DBRS Confirms Home Depot at A (low), Stable

DBRS has today confirmed the rating of The Home Depot, Inc.’s (Home Depot or the Company) Senior Unsecured Debt at A (low) with a Stable trend. The Commercial Paper rating has also been confirmed at R-1 (low) with a Stable trend. The trend on the long-term debt was changed to Stable from Negative in February 2010 (the trend on the commercial paper program remained Stable throughout this period). The confirmation reflects the Company’s successful efforts in managing its financial performance in the face of the worst economic downturn since the Company was established. With the U.S. economy showing some signs of recovery in the first half of this year, the Company’s performance started to improve from the lows witnessed during 2008 and 2009 to levels more consistent with the A (low) rating. However, the U.S. economic indicators are becoming mixed, which could mean the turnaround in sales-per-square foot could remain a challenge for the full year.

Home Depot’s successful efforts last year include: (i) lower overhead, with reduced non-sales labour, 15 store closures and the removal of 50 stores from the new store pipeline, (ii) growing operating efficiencies, with new rapid deployment centers and support technologies to help improve inventory control, supply and merchandising, and (iii) good liquidity management. These measures have helped to sustain the Company’s profitability. Specifically, gross margin remained above 33%, EBITDA was above $6 billion and debt-to-EBITDAR remained below 2.3 times (x), which allowed cash flow from operations to remain well above $4 billion. With capex under $1 billion, free cash flow rose to near $2 billion. This enhanced liquidity allowed the Company to finish the year with higher cash-on-hand (now about $2.4 billion) and lower total debt.

Home Depot’s prospects for the rest of 2010, despite continuing high unemployment and a large housing inventory, suggest modest growth in revenue, based on higher same-store sales and stable market share. This outlook assumes that Home Depot will maintain its leading market position, supported by improving operating systems that need to become best-in-class (its IT infrastructure lags competitors’). As well, a key focus for the Company has been improving the customer in-store experience. This means that even with all the operating enhancements implemented, success must still be supported by a consistently positive experience on the sales floor. While progress has been made, there is still room for improvement in all three primary customer groups: do-it-yourself, do-it-for-me and professional.

For 2010, EBITDA should be near $7 billion and cash flow from operations should rise above $5 billion, based on continuing productivity improvements. As a result, debt-to-EBITDAR should remain well below 2.3x. With $1.25 billion in capex and $1.6 billion in dividends, free cash flow this year is expected to exceed $2 billion. Assuming the debt coming due this year will be refinanced, the Company may return to the share buyback program.

If the economic downturn were protracted, DBRS believes that Home Depot has the ability to minimize the impact on its credit metrics. However, if a serious deterioration in cash flow or liquidity were allowed to persist with elevated capex, debt-financed share buybacks or large acquisitions, the result could be renewed pressure on the ratings.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The rating of Home Depot of Canada Inc.’s Commercial Paper is based on a guarantee from The Home Depot, Inc.

The applicable methodology is Rating Merchandisers, which can be found on our website under Methodologies.

This is a Corporate rating.