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

DBRS Limited (DBRS) has today 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 is based on Home Depot’s solid operating performance in F2015 and H1 F2016 while also reflecting the Company’s use of cash flow and incremental debt to fund increasing shareholder returns. Home Depot’s ratings continue to be supported by its dominant market position, large scale, geographic diversification and free cash-generating capacity. The ratings also reflect the intense competition and cyclicality of the home improvement retail industry as well as risks related to possible future growth strategies.

Home Depot’s earnings profile is expected to remain relatively stable at a level considered to be well placed for the current “A” rating over the medium term. The Company is expected to continue to refine its customer experience and product assortment, leveraging its interconnected retail platform and recent acquisition of Interline Brands, Inc. while continuing to improve productivity in its supply chain. Net sales should continue to increase in the mid-single digit range over the medium term, rising above the $100 billion level, based primarily on same-store sales growth rather than meaningful new store openings. EBITDA margins should continue to improve over the medium term, benefiting from operating leverage and productivity improvements, including the Company’s multi-year roll-out of its Supply Chain Sync initiative. As such, DBRS believes that EBITDA will increase above $16 billion and toward the $17 billion level in the medium term.

DBRS expects that Home Depot will continue to maintain a financial profile that is consistent with its current “A” rating over the medium term, based on its free cash-generating capacity and stable leverage target. Cash flow from operations is expected to continue to track operating income while capital expenditures should remain in the $1.6 billion per-year range over the medium term. Dividend policy is not expected to change, targeting a payout ratio of 50% of prior-year net income. As such, free cash flow after dividends but before changes in working capital should remain in the $5.0 billion per-year range over the medium term. DBRS believes that Home Depot will continue to use free cash flow and incremental debt primarily to complete share repurchases while remaining in line with the Company’s leverage target, a level considered to be appropriate for the current “A” rating.

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.

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

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

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

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.