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

DBRS Limited (DBRS Morningstar) 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 confirmations reflect DBRS Morningstar’s view that, while Home Depot has benefitted from a surge in operating results related to the Coronavirus Disease (COVID-19) pandemic, there remains significant uncertainty regarding the economic outlook, which may ultimately pressure consumer behaviour over the medium term as the U.S. and Canada begin to deal with higher unemployment, growing Federal debt burdens, an eventual contraction in government stimulus, and the possibility of increasing inflation. 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. The action taken today and the outlook for the Company also incorporate the persistent uncertainty related to the coronavirus and the surge in demand witnessed by the Company as a result of the pandemic.

The surge in operating performance through the first three quarters of F2020 (9M F2020), driven in large part by DIY activity as customers sheltered-in-place and looked to complete home improvement projects, highlighted the Company’s timely investment in its comprehensive One Home Depot initiative. The multi-year initiative, which facilitates a seamless shopping experience regardless of product, location, channel (in person or online), or delivery method, enabled the Company to capitalize on the surge in demand despite operational challenges, variations to operating hours, and the necessity of implementing operating procedures in order to comply with local/state/provincial coronavirus regulations.

Although the surge in operating performance growth experienced in the year to date is unlikely to persist throughout all of F2021, DBRS Morningstar expects the impact of coronavirus-related social behaviour, such as social distancing and reduced travel, to remain prevalent in the near term and it should provide a positive secular tailwind for the home improvement sector. This is not to say that there does not remain significant uncertainty in the medium- to longer-term operating performance of the sector related to the highly unusual K-shaped economic recovery that appears to be underway, notwithstanding government support programs aimed at partially mitigating the recent economic turmoil in both the U.S. and Canada. As a result, organic operating earnings growth over the near to medium term may be more muted as the Company faces not only tough year-over-year growth comparables but also the potential of economic challenges that could negatively impact the home repair market if the crisis continues to affect payrolls.

In terms of financial profile, Home Depot’s credit metrics are expected to remain stable within the rating category as the Company continues to finance its capital program and fund dividend payments through internally generated cash flow. Further, Home Depot is expected to fund a majority of the approximately $8.0 billion HD Supply, Inc. acquisition that closed on December 24, 2020, through internally generated cash flow, resulting in a marginal impact on leverage heading into F2021. Home Depot’s financial profile should continue to be supported by its strong free cash flow generating ability and prudent financial management such that the Company is able to maintain a stable leverage target (i.e., gross debt-to-EBITDAR of 2.00 times (x) using an 8.00x multiple to capitalize operating leases). Share repurchase activity, which was suspended in March 2020, is expected to be active at historical levels again in F2021. DBRS Morningstar expects free cash flow before changes in working capital to be roughly $5.5 billion in F2020 and to increase to over $6.0 billion in F2021.

Home Depot has done well to navigate the challenges of the coronavirus crisis (e.g., adhering to local-area protocols and regulations) while maintaining its focus on operating performance, balance sheet stability, liquidity, and the continued rollout of the One Home Depot initiative. However, despite Home Depot’s designation as an essential service/product provider, a protracted economic downturn could put pressure on medium-term operating results and could ultimately pressure cash flow generation, which may preclude the Company from being able to invest in high-return initiatives and maximize shareholder value concurrently. If Home Depot were to experience a fundamental deterioration in profit and/or a sustainable rise in leverage above 2.5x, a negative rating action may occur.

Conversely, while it is highly unlikely given the current coronavirus crisis and economic challenges that are likely to intensify over the coming 12 to 24 months, if Home Depot’s earnings profile remains elevated after the initial pandemic surge and accelerates meaningfully for a sustained period and capital allocation is managed so that financial leverage is maintained structurally below 2.0x, a positive rating action may occur.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodologies are Rating Companies in the Merchandising Industry (July 30, 2020), DBRS Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 10, 2020), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 14, 2021) and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 [email protected].

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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