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 strong market position and geographic diversification as the largest home improvement retailer in North America. The rating also reflects the highly competitive and cyclical nature of home improvement retailing. DBRS’s confirmation is based on Home Depot’s strong operating results, outperforming competitors’ comparable store sales in recent periods, balanced by the Company’s focus on returning value to shareholders in the form of debt-financed share repurchases, which is likely to increase leverage but not beyond levels considered acceptable for the current rating category.

Home Depot’s earnings profile improved within the current rating category from F2010 through Q1 F2012 as the Company has reinforced its position as the leader in home improvement retailing in North America, while improving efficiency and expanding margins. Net sales reached $70.4 billion based on strong comparable store sales growth internationally and in the U.S. Home Depot achieved EBITDA margin expansion for the second consecutive year, benefiting from enhanced operating leverage from the positive comp store sales environment, and increased supply-chain efficiency. As a result, Home Depot’s EBITDA increased significantly for the second consecutive year, reaching $8.5 billion for the LTM ended Q1 F2012, from $7.5 billion in F2010 and $6.5 billion in F2009.

In terms of financial profile, Home Depot remains strong based on its free cash flow generating capacity. Cash flow from operations continued to track operating income, while capex increased moderately but remained low relative to previous levels as a result of the slower pace of new store openings. Dividends continued the recent trend of increasing each year, as the Company announced a 16% increase during F2011. As a result, free cash flow before changes in working capital increased to more than $3 billion for the LTM ended Q1 F2012.

Home Depot used free cash flow, cash-on-hand and incremental debt to complete approximately $3.5 billion of share repurchases in F2011, resulting in an increase in balance sheet debt of approximately $1 billion. Despite the increase in balance-sheet debt to a total of $10.8 billion, credit metrics improved modestly (i.e., lease-adjusted debt-to-EBITDAR of 1.69x for the LTM ended Q1 F2012 versus 1.77x for F2010.) as a result of the increase in earnings.

Going forward, DBRS expects Home Depot’s earnings profile will remain relatively stable or improve moderately in the near to medium term based on the Company’s strong market position, geographic diversification and focus on efficiency. DBRS forecasts that net sales should increase in the low- to mid-single digits through the end of F2012 and into F2013 as the economic environment in North America continues to stabilize. EBITDA margins should remain steady as input cost inflation moderates and Home Depot continues to benefit from recent efficiency improvements. As such, DBRS believes EBITDA could increase toward the $9 billion range by F2013.

In terms of financial profile, Home Depot is expected to maintain a financial profile commensurate with the current rating category. Cash flow from operations is expected to continue to track operating income and improve in F2012 and into F2013, while capex should remain relatively stable. Dividend policy displaying moderate increases should remain consistent as Home Depot seeks to grow returns to shareholders as operating performance improves. Home Depot is expected to use free cash flow, cash on hand and additional debt to complete share repurchases in F2012. As such, DBRS believes Home Depot will increase debt to a level that will keep the key credit metric of lease-adjusted debt-to-EBITDAR close to 2.0x, which would be 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 Companies in the Merchandising Industry, which can be found on our website under Methodologies.