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

DBRS Limited (DBRS) 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 strong operating performance through the end of Q3 F2017 combined with its stable leverage target, while considering the Company’s planned incremental investments in One Home Depot over the medium term. One Home Depot is the Company’s platform for creating a seamless shopping experience across retail channels for both customers and associates and includes investments in the Company’s stores, associates, digital capabilities and supply chain. 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 stable over the medium term, as the Company continues to benefit from tailwinds in the U.S. housing market while significantly increasing its investments in the One Home Depot experience. Home Depot’s net sales are expected to increase in the mid-single-digit range over the near to medium term, rising to above $115 billion by the end of F2020, based primarily on growth in comparable-store and online sales. EBITDA margins should remain relatively flat or improve modestly over the period as the Company reinvests the benefits of expense leverage and productivity improvements in the One Home Depot strategy. As such, DBRS believes EBITDA will increase toward and above the $18.0 billion level over the medium term.

DBRS expects Home Depot to maintain a financial profile consistent with the current “A” ratings over the medium term based on its free-cash-generating capacity and stable leverage target (i.e., lease-adjusted debt-to-EBITDAR of 2.00 times (x) using an 8.00x multiple to capitalize operating leases, or approximately 1.85x, as calculated by DBRS, using a 6.00x multiple to capitalize operating leases). Cash flow from operations is expected to continue to track operating income but should benefit from a lower effective tax rate as a result of changes to U.S. tax laws, while capital expenditures (capex) are expected to increase materially because of the incremental investment in One Home Depot. Capex is expected to increase to an average of approximately $2.7 billion per year through the end of F2020 from approximately $1.8 billion in the last 12 months ended Q3 F2017. Dividends should continue to rise at a steady pace on a per-share basis after the Company increased its target payout ratio to 55% of prior-year net income. Therefore, DBRS expects free cash flow after dividends but before changes in working capital to moderate somewhat but remain in the $4.0 billion- to $4.5 billion-per-year range through F2020. DBRS believes Home Depot will continue to use free cash flow, incremental debt and, possibly, cash on hand (if repatriated) to complete share repurchases and tuck-in acquisitions as well as to possibly accelerate planned investments, while remaining in line with the Company’s stated leverage target.

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

The principal 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 dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

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

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

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