DBRS Confirms Home Depot at A (low), R-1 (low), Stable Trend

DBRS has today confirmed the long- and short-term ratings of The Home Depot, Inc. and Home Depot of Canada, Inc. (Home Depot or the Company) at A (low) and R-1 (low) respectively, with Stable trends. Home Depot continues to benefit from its position as the largest home improvement retailer in North America.

Despite intense regional competition, a slowly recovering economy has continued to result in improved performance. Net sales increased 2.8% to $68 billion in F2010 primarily on the basis of a 2.9% increase in same store sales (2.4% increase in average transactions and 0.5% increase in average ticket) as well as the opening of four net new stores. F2010 also displayed a significant improvement to EBITDA margins (120 basis points (bps)) as a result of the inherently high degree of operating leverage, efficiency improvements and reductions in promotional pricing. As such, Home Depot’s F2010 EBITDA increased significantly to $7.5 billion. In terms of financial profile, Home Depot remains strong as a result of its significant free cash flow generating capacity. Cash flow from operations reached $5.3 billion in F2010, while capex remained low as the pace of store openings has slowed as the North American market matures. Dividend policy has remained consistent with moderate increases year-over-year (yoy) to $1.6 billion in F2010. As such, free cash flow before changes in working capital was $2.6 billion in F2010. Home Depot used free cash flow generated along with cash on hand to complete approximately $2.6 billion in share repurchases. Debt levels therefore, remained relatively unchanged in F2010 leading to an improvement in lease-adjusted debt-to-EBITDAR of 1.77x (from 1.99x in F2009). In Q1 F2011, Home Depot issued incremental debt of nearly $1 billion, the proceeds of which were used, along with free cash generated to fund capex (approximately $200 million), dividends (approximately $400 million) and share repurchases (approximately $1.3 billion). As a result, lease-adjusted debt-to-EBITDAR for the last 12 months ended Q1 F2011 increased to 1.87x.

Going forward, DBRS expects Home Depot’s earnings profile to remain stable on the strength of its market position. DBRS forecasts that the Company’s net sales should increase in the low-single digits through the end of F2011 and into F2012 as the North American economy continues to recover, but employment, housing and discretionary income levels remain challenged. DBRS forecasts EBITDA margins to remain relatively stable and as a result, EBITDA should increase moderately to within the $7.5 billion to $8.5 billion range through the end of F2011 and F2012. In terms of financial profile, cash flow from operations should continue to track earnings and display moderate growth in F2011 and F2012 in the range of $5.5 billion to $6.0 billion. DBRS expects capex to remain consistent with current levels, while dividends should continue to increase as the economy strengthens. Home Depot is expected to use free cash flow, cash on hand and debt to complete additional share repurchases ($3.5 billion total in F2011). DBRS believes the Company will increase debt in order to keep the key credit metric of lease-adjusted debt-to-EBITDAR close to 2.0x, and consistent with the current rating category.

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.