DBRS Confirms The Home Depot, Inc. and Home Depot of Canada Inc. at “A” and R-1 (low), Stable

DBRS Limited (DBRS) has confirmed the Issuer Rating and Senior Unsecured Debt rating of The Home Depot, Inc. (Home Depot or the Company) at “A” and the Commercial Paper ratings of Home Depot and Home Depot of Canada Inc. at R-1 (low). All trends are Stable. The confirmation of the ratings reflects the continued strength of Home Depot’s operating performance balanced by its use of incremental debt to fund increasing shareholder returns and the recent acquisition of Interline Brands, Inc. (Interline Brands). DBRS notes Home Depot’s statement that a planned upcoming debt issuance to support the acquisition of Interline Brands will result in leverage metrics slightly above stated leverage targets. The Company’s stated leverage target remains unchanged (i.e., lease-adjusted debt-to-EBITDAR of approximately 2.00 times (x) using an 8.00x multiple to capitalize operating lease expense, or approximately 1.85x using a 6.00x multiple).

Home Depot’s earnings profile should remain strong for the “A” rating category on a through-the-cycle basis based on the Company’s strong market position, scale and operating efficiency and geographic diversification. DBRS forecasts that net sales should increase in the mid- to high-single digit range over the near to medium term based on mid-single digit comparable store sales as well as contributions from the Company’s recent acquisition of Interline Brands ($1.7 billion of sales in 2014). Home Depot’s core retail business should continue to grow at a solid pace, benefiting from an improving U.S. housing market, partially offset by the impact of a stronger U.S. dollar. EBITDA margins should improve modestly over the near to medium term based primarily on operating leverage driven by same-store sales growth in addition to its continued focus on improving efficiency and reducing costs. As such, DBRS expects that EBITDA will increase toward the $14.5 billion level over the near to medium term.

DBRS expects Home Depot to maintain a financial profile consistent with its “A” rating over the medium term based on the strength of its free cash-generating capacity and target leverage metrics. Cash flow from operations should continue to track operating income while capital expenditures are expected to increase modestly toward the $1.6 billion level as the Company continues to invest in interconnected retail capabilities and information technology security. Dividends are expected to continue to increase in line with earnings growth, consistent with the Company’s targeted payout ratio of 50% of earnings. DBRS believes that Home Depot will continue to use free cash flow generated as well as cash on hand and incremental debt (as earnings grow) primarily to increase shareholder returns. DBRS expects that Home Depot will be managed to maintain credit metrics near the Company’s stated leverage target (lease-adjusted debt-to-EBITDAR below 1.85x using a 6.00x multiple to capitalize operating leases).

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

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

The applicable methodologies are Rating Companies in the Merchandising Industry (August 2015), DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (April 2015) and DBRS Criteria: Guarantees and Other Forms of Explicit Support (February 2015), which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.