DBRS Morningstar 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 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 rating confirmations acknowledge the stronger-than-expected operating performance over the last 18 months, which has been driven by a surge in home improvement activity but balanced internally through a multiyear supply chain investment cycle, continued dividend growth, acquisition activity, and the use of share purchases in order to maintain a steady level of leverage. 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 continue to benefit from an elevated level of demand in the home improvement sector as customers are taking on larger projects. Further, the Company's five-year supply chain investment is enabling it to manage supply chain disruptions, reduce shopping/fulfillment friction, and provide a meaningful value proposition to customers that is resulting in an increased share of wallet despite a challenging sourcing, logistics, and fulfillment operating environment.

Despite Home Depot’s stronger-than-expected earnings performance during the last two years, the Company's financial profile remains stable within the rating category. Home Depot continues to finance its capital investment program and fund dividend payments (and growth) through internally generated cash flow and has effectively used incremental debt to further finance acquisition and/or repurchase activity to maintain the Company's corporate target leverage.

Over the near to medium term, DBRS Morningstar expects Home Depot’s earnings profile to remain well placed in the current “A” rating category. The Company's five-year supply chain investment should continue to provide inventory, product volume, and logistics support despite supply chain bottlenecks and friction that are expected to persist into 2022. However, while consumer spending remains strong, job backlogs remain high, and housing metrics such as residential house appreciation remain positive, DBRS Morningstar anticipates inflationary pressures and expects that the transition to a rising interest rate environment will slow annual growth beginning in the latter half of F2022.

Home Depot’s financial profile should continue to be supported by its strong free cash flow-generating ability and disciplined financial management such that the Company is able to maintain a stable leverage target (i.e., lease-adjusted debt-to-EBITDAR of 2.00 times (x) using an 8.00x multiple to capitalize operating leases) despite a slightly higher capital intensity related to ongoing supply chain investment, continued dividend per share growth, and the continued use of share repurchase activity in order to return excess capital.

Looking ahead, if an economic downturn were to pressure medium-term earnings such that Home Depot were to experience a fundamental deterioration in profit, cash flow generation, and/or a sustainable rise in leverage above 2.5x, DBRS Morningstar may take a negative rating action.

Conversely, while it is highly unlikely given the economic climate, if Home Depot’s earnings profile remains elevated (i.e., post-pandemic the surge in earnings growth persists for a sustained period) and/or capital allocation is managed so that financial leverage is maintained structurally below 2.0x, DBRS Morningstar may take a positive rating action.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodologies are Rating Companies in the Merchandising Industry (July 26, 2021; https://www.dbrsmorningstar.com/research/382073), DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 9, 2021; https://www.dbrsmorningstar.com/research/375001), and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (May 31, 2021; https://www.dbrsmorningstar.com/research/379424), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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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