DBRS Upgrades Home Depot to “A,” Trend Changed to Stable

DBRS has today upgraded the Issuer Rating and Senior Unsecured Debt rating of The Home Depot, Inc. to “A” from A (low) and has changed the trends to Stable from Positive. DBRS has also confirmed the Commercial Paper ratings of The Home Depot, Inc. and Home Depot of Canada Inc. (Home Depot or the Company) at R-1 (low), both with Stable trends.

On March 12, 2013, DBRS changed the trend on Home Depot’s long-term ratings to Positive, reflecting the Company’s continued improvement in operating performance, notable outperformance of competitors for an extended period and resulting improvement in the Company’s market position. At the time, DBRS stated that should Home Depot maintain sound operating performance and retain current leverage targets a ratings upgrade to “A” would likely result.

Subsequently, Home Depot released H1 F2013 results, which delivered very strong operating results. Sales increased to over $78 billion for the last 12 months (LTM) ended Q2 F2013 versus $74.8 billion in F2012, while comparable store sales (on a like-for-like basis) continued to outperform the market (10.7% in Q2 2013 and 4.3% in Q1 2013). EBITDA margins continued to improve based on gross margin expansion driven by recently acquired businesses, as well as improved efficiency and shrink, partially offset by changes in the mix of products sold. As such, EBITDA increased to approximately $10.2 billion for the LTM ended Q2 F2013 versus $9.3 billion in F2012.

In H1 F2013, the Company initiated share repurchases pursuant to its $17 billion share repurchase plan. In accordance with the plan, the Company increased balance-sheet debt by nearly $2 billion to approximately $12.7 billion. Combined with the improved earnings, lease-adjusted debt-to-EBITDAR deteriorated only modestly to approximately 1.62 times (x) for the LTM ended Q2 F2013 versus approximately 1.56x at year-end F2012, well below the Company’s stated leverage target of 1.85x (using a 6.0x multiple to capitalize operating leases). The Company’s free cash flow as a percentage of total debt, a key indicator of a Company’s ability to deleverage if necessary, remains very strong at approximately 28%.

Going forward, DBRS believes that Home Depot is now well placed in the “A” rating category on a through-the-cycle basis. While DBRS expects the Company will maintain sound operating performance, continued outperformance of the market is not considered necessary in order to maintain a business profile within the range acceptable for the current rating category. Home Depot’s financial policy and target financial leverage are expected to remain unchanged (i.e., lease-adjusted debt-to-EBITDAR of approximately 2.0x using an 8.0x multiple to capitalize operating lease expense or approximately 1.85x using a 6.0x multiple). DBRS believes the Company will use incremental balance-sheet debt (in addition to cash on hand and free cash flow) to increase shareholder returns, but not to a level beyond Home Depot’s stated leverage targets, which is considered acceptable for 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 related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is Rating Companies in the Merchandising Industry, which can be found on our website under Methodologies.