Morningstar 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 (Morningstar 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 with Stable trends.

KEY CREDIT RATING CONSIDERATIONS
The confirmations reflect Home Depot's resilient operating performance during the last 12 months, which was in line with Morningstar DBRS’ expectations, and are supported by our view that Home Depot is well placed in the current credit rating category with adequate cushion to absorb additional demand moderation as well as stubborn inflationary pressures in the near term. Furthermore, the Stable trends reflect Morningstar DBRS’ expectation that the Company will continue to balance investment spending and shareholder returns, such that leverage remains relatively stable and appropriate for the current credit rating category.

CREDIT RATING DRIVERS
Looking ahead, if an economic downturn were to pressure Home Depot’s medium-term earnings beyond Morningstar DBRS’ current expectations, such that the Company were to experience a fundamental long-term deterioration in profit, cash flow generation, and/or a sustainable deterioration in key credit metrics (i.e., debt-to-EBITDA leverage rise above 2.5 times (x)), Morningstar DBRS may take a negative credit rating action.

Conversely, and although highly unlikely given the economic climate, if Home Depot’s earnings profile were to improve considerably and/or capital allocation were managed such that key credit metrics remain strong for the current rating (i.e., debt-to-EBITDA leverage is maintained structurally well below 2.0x), Morningstar DBRS may take a positive credit rating action.

EARNINGS OUTLOOK
Morningstar DBRS expects Home Depot’s earnings profile to remain well placed in the current “A” credit rating category despite the expectation of further demand moderation for home-improvement products and persistent margin pressures in the near term. Morningstar DBRS expects demand for large home-related renovation projects or higher ticket product categories to continue to remain subdued in the near term, given our expectation that higher interest rates, effects of which have not yet been fully felt, and the compounded effects of stubborn gradually moderating inflation will negatively affect consumer spending through most of 2024. At the same time, demand for repair, remodelling, and smaller projects is expected to be sustained on account of the ageing housing stock in Home Depot’s core markets and relatively robust home owners’ balance sheet position, especially in the U.S. market. Furthermore, volume pressures are likely to be more pronounced for discretionary product categories such as home décor, seasonal products, or high ticket product categories, which together constitute only 20%–25% of total Company sales. As such, Morningstar DBRS forecasts revenues to decline further in low single digits toward $152.0 billion in F2024 (fiscal year ending in January 2025) and F2025, from $154.0 billion in F2023 but remaining considerably higher than pre-pandemic levels of about $110 billion in F2019. Morningstar DBRS expects EBITDA margins to remain pressured and return to relatively stable pre-pandemic levels of approximately 16.3% to 16.4%, compared with 16.6% for 9M F2023. As such, Morningstar DBRS forecasts EBITDA to be between approximately $24.5 billion and $25.0 billion in F2024 and F2025 versus approximately $26.0 billion estimated for F2023.

FINANCIAL OUTLOOK
In terms of financial profile, Morningstar DBRS expects Home Depot’s strong free cash flow-generating ability and disciplined financial management to continue to offset earnings moderation in the near term. Morningstar DBRS forecasts cash flow from operations will track moderation in operating income and decline toward $18.0 billion in F2024 and F2025 from approximately $19.0 billion estimated in F2023, but continues to remain more than sufficient for relatively higher annual capital expenditure outflow of $3.1 billion and dividend payments of around $8.2 billion annually during this period. While Morningstar DBRS forecasts Home Depot will continue to issue incremental debt for share repurchases, Morningstar DBRS expects the Company to do so within the bounds of its publicly stated leverage target (i.e., lease-adjusted debt-to-EBITDAR of 2.0x using an 8.0x multiple to capitalize operating leases) and remain relatively stable with a Morningstar DBRS calculated debt-to-EBITDA ratio of 1.9x at the end of Q3 F2023 on a last-12-months basis.

CREDIT RATING RATIONALE
Home Depot’s credit ratings are supported by its dominant market position, large scale, geographic diversification, and free cash-generating capacity. The credit ratings also reflect the intense competition and cyclicality of the home improvement retail industry as well as risks related to possible future growth strategies.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS 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/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (July 4, 2023).

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)

(A) Weighting of BRA Factors
In the analysis of The Home Depot, Inc., the relative weighting of the BRA factors was approximately equal.

(B) Weighting of FRA Factors
In the analysis of The Home Depot, Inc., the relative weighting of the FRA factors was approximately equal.

(C) Weighting of the BRA and the FRA
In the analysis of The Home Depot, Inc., the BRA carries greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodology: Global Methodology for Rating Companies in the Merchandising Industry (July 21, 2023; https://www.dbrsmorningstar.com/research/417461);

The following methodologies have also been applied:
-- DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (February 24, 2023; https://www.dbrsmorningstar.com/research/410196); and
-- DBRS Morningstar Criteria: Guarantees and Other Forms of Support (March 28, 2023; https://www.dbrsmorningstar.com/research/411694)

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/397223.

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 credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

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

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at [email protected].

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