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home depot PDF Carol Tomé Presentation

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This document provides a financial overview and discussion of Home Depot's performance in Q1 2008 and outlook for 2008. Some key points: - Q1 2008 sales were down 3.4% and operating income was down 56.5% due to housing market challenges. - For 2008, Home Depot expects total sales to decline 4-5%, negative comps in the mid-to-high single digits, and operating margin decline of 170-210 basis points. - Home Depot has a staggered debt maturity schedule with low refinancing risk and strong cash flow and liquidity. - The company is focused on capital efficiency through store rationalization, supply chain improvements, and driving productivity across operations

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2008 Investor & Analyst Conference Financial Overview Carol Tomé Chief Financial Officer, EVP - Corporate Services
Discussion Overview 2008 Financial Highlights Capital Efficiency Private Label Credit Card Normalized Earnings and Operating Targets Investor Returns Principles 2
Q1 2008 Highlights $ billions, except as noted. Continuing Operations Q1/2008 Q1/2008 1 as reported V% LY as adjusted V% LY Comp Sales (6.5%) Total Sales $ 17.9 (3.4%) Gross Margin -- % of sales 33.9% 14 bps 34.0% 19 bps Operating Income $ 0.7 (56.5%) $ 1.3 (24.0%) Operating Margin -- % of sales 4.1% (495 bps) 7.1% (192 bps) Earnings from Continuing Operations $ 0.4 (62.4%) $ 0.7 (26.4%) Earnings per Share from Continuing Operations $ 0.21 (56.3%) $ 0.41 (14.6%) Solid Execution in a Tough Market 3 1)”As adjusted” excludes the Store Rationalization charge
Q1 2008 U.S. Comp Sales Greater than (6%) (4%) – (6%) Less than (4%) Varied Performance 4
2008 Outlook Situation Update Outlook Total sales decline of 4-5% Q1 2008 generally on plan Negative comps in the mid May and June are critical selling months to high single digit range - By June typically generate ~43% of annual sales Flat to slightly positive We see more headwinds than tailwinds for the gross margin expansion balance of 2008 Operating margin decline Tailwinds Headwinds of 170 to 210 basis points Economic Stimulus Commodity Price Pressure Continuing Operations Package US Dollar Depreciation Earnings per Share decline Easier comps Rising Fuel Costs of 19 to 24 percent1 beginning in Pressure on the Consumer September - Low Confidence - Credit Crunch - Inflation - Unemployment Housing Softness More Comfortable with Low End of EPS Guidance 5 1) As Adjusted
2008 Capital Spending Plan $ millions, Continuing Operations Business/Function Overview 2007 2008F Total Growth (new stores) $ 1,997 $ 996 Merchandising/Maintenance/Operations 780 580 Supply Chain 75 118 Total US Retail $ 855 $ 698 IT (Growth/Renewal/Compliance) 275 265 Corporate 93 62 International 1 168 179 Total Sustaining $ 1,391 $ 1,204 Total Capital $ 3,388 $ 2,200 1) Includes Canadian ERP know as “SCORE” capital spending of $91 million in 2007 and $36 million in 2008 6
Solid Cash Flow & Liquidity $ billions Continuing Operations A2/P2 CP Program Total Program $ 3.45 ~ $ 4.8 Outstanding Q1 2008 $ 0.50 $0.5 $0.5 FYE 2007 Net Cash Flow CapEx Dividends FYE 2008F from the business Note: Projected Depreciation & Amortization ~ $1.9 billion 7
Q1 2008 Capital Structure Current Maturities1 Outstanding Indebtedness Moody’s LT Debt Rating Baa1 (stable) Standard & Poor’s LT Debt Rating BBB+ (stable) $ millions 2,968 2,959 Commerical Paper $495 3.00% Advantage Lease $282 5.95% '09 Senior Notes $999 3.75% '09 Senior Notes (Floater) $750 2.93% 1,749 '10 Senior Notes $998 4.63% 1,244 '11 Senior Notes $1,000 5.20% 998 1,000 '13 Senior Notes $1,244 5.25% '16 Senior Notes $2,968 5.40% 282 '36 Senior Notes $2,959 5.88% Capital Leases/Other $439 Total Debt / Avg Coupon $12,134 5.00% 08 09 11 16 36 10 12 13 26 20 20 20 20 20 Swap Adjusted Coupon 4.80% 20 20 20 20 Total Shareholder Equity $17,706 Total Capital $29,840 Rents $819 Adj Debt/EBITDAR2 2.1x 1.7x Staggered Maturities, Low Refinancing Risk 1) 2) Excludes capital leases and commercial paper Includes 8x Rents TTM and $1bn HDS guarantee; As adjusted. 88
The Evolution of our Capital Efficiency Strategy Focus Focus on Core Retail business and rationalize non-Core (e.g., disposition of HD Supply, walk away from Enerbank); Invest in key priorities February 2007 Move to capital structure that facilitates capital distribution June 2007 Optimize with targeted investor return principles (Announced $22.5 billion recapitalization; new financial risk profile) Rationalize new square footage May 2008 Enhance growth and existing stores Drive productivity and efficiency Ongoing Superior Capital Efficiency and Cash Flow 9
Recapitalization Plan In 2007, announced $22.5 billion recapitalization plan - Completed 48% using proceeds from HD Supply and cash on hand - Remaining program on pause until business and credit market stabilize Since 2002, have repurchased 743 million shares (~32% of total outstanding shares1) for $27.2 billion 1) Outstanding as at FYE 2001 10
The U.S. Home Improvement Market is Heavily Stored… Household Saturation by Large Format Home Improvement Stores 4,000 80,000 Number of Large Format Home Improvement Stores 3,500 70,000 Households per Home Improvement Store Average Number of Households per 3,000 60,000 Home Improvement Store Number of Stores 2,500 50,000 2,000 40,000 1,500 30,000 1,000 20,000 500 10,000 0 - 2/1/1998 1/31/1999 1/30/2000 1/28/2001 2/3/2002 2/2/2003 2/1/2004 2/1/2005 2/1/2006 2/1/2007 2/1/2008 Includes Home Depot, Lowe’s, Menards stores and former competitors (Builders Square, HomeBase and Home Quarters); excludes EXPO, HD Supply, HD Landscape Supply, Floor Store, Lowe’s Contractor Yard …and well Saturated except for Market Growth 11
Existing Stores: Expected Return Criteria Expect Stores to: Be 4-wall cash flow positive Have NPV of operating > NPV of exit Generate higher returns as they reach maturity − Stores under 3-years old are immature Use ROIC as a benchmark 12
New Stores: Expected Return Criteria Incremental per store return equal to or better than return on share repurchases − Will make selected strategic investments where existing stores are vulnerable and/or it’s a unique market opportunity Will deliver double-digit new store portfolio returns Beginning 2009, Project 1.5% Square Footage Growth Per Annum 13
Projected Capital Spending $ billions 2008F 2009F 2010F 2011F 2012F Total Capital $ 2.2 $ 2.2 $ 2.3 $ 2.1 $ 2.1 Depreciation & Amortization $ 1.9 $ 2.0 $ 2.1 $ 2.1 $ 2.1 Driving Capital Efficiency 14
Private Label Credit Card Portfolio Overview Portfolio Philosophy Existing Product Suite Product Suite Value Proposition In 2003 switched from fee-based arrangement with GE to profit sharing Everyday Offer Consumer Consumer arrangement with Citi – we receive all of No Payment Private Revolving profitability after Citi’s targeted return No Interest for Label Credit Purchases >$299 Increased sales & market share Rewards Consumer & Earn Points for by facilitating customer spend Master Business Co- Purchases Card and capturing valuable Brand consumer information Consumer Low Interest, HIL Installment Fixed Payments ~30% penetration as of FY 2007; Loan average net receivable ~$14 billion Commercial PO/Job Name CRC Revolving Tracking Credit SKU Level Detail on Statements Commercial Account On-line PROX “Pay in Full” PO/Job Name Credit Tracking Product Suite Spans Consumer and Commercial Customers 15 15
Cost of Credit Illustrative 2007 2008F Deferred Interest COGS (flat fee charged on XX XX deferred financing sales) Interchange Fee XX XX Expense Gain Share (XX) (XX) Total Cost of Credit ~200 bps1 as % of Credit Sales ~ 50 bps Lower Portfolio Profitability Driving Higher Cost of Credit 1) Downside believed to be no higher than 4% of private label credit sales. 16
Annual Housing Performance vs. L-T Averages L-T Average Housing Metric '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 Starts YOY% (highest correlation metric) (9.2) 6.7 (1.6) 12.4 2.2 (5.7) 3.2 7.2 10.4 6.6 7.1 (14.2) (29.6) 0.4 Ex home sales YOY% (best lead indicator) (1.1) 7.7 5.0 13.1 3.2 (0.5) 2.4 5.8 9.0 8.6 4.4 (7.5) (13.0) 3.2 New home sales YOY% 0.3 12.9 6.7 10.3 (1.2) 0.2 3.1 7.6 11.7 10.1 6.5 (18.0) (26.3) 1.5 New home prices YOY% 2.3 5.1 3.4 4.8 5.4 4.6 3.3 7.5 3.3 13.5 8.4 3.0 0.5 5.1 Ex home prices YOY% 2.8 4.6 5.2 6.0 5.1 6.2 6.1 8.1 8.3 11.6 11.8 0.9 (0.4) 5.1 % refis resulting in 5% higher loan amount 57.8 63.0 62.0 46.9 63.8 78.8 55.5 52.0 38.1 50.2 72.4 86.1 83.3 63.9 Year closest to 1999 has the lowest variance from 1985-2007 averages long-term average 1999 is Most ‘Normal’ Year Compared to L-T Averages Source: Moody’s 17
Lag Effect (Housing Market vs. Comps) 1995 to 2007 Performance Rankings (1=Best, 13=Worst) Metric '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 Starts 11 5 9 1 8 10 7 3 2 6 4 13 12 Ex Home Sales 11 4 6 1 8 10 9 5 2 3 7 13 12 HD comps 9 4 3 2 1 6 10 11 7 5 8 12 13 1999’s ‘normal’ level of 1998’s large spike in housing activity drove HD housing activity drove HD average performance in 2000 outstanding performance in 1999 HD Performance Lags Housing Market by ~ 1 Year 18 Source: Moody’s
Normalized Earnings +180 bps Operating Margin + 20 - 30 bps Credit + 20 - 40 bps Supply chain +160 bps +140 - 110 bps Merchandising transformation ~11% + 180 bps Comps2 +200 bps - 40 bps Permanent Cost change +160 bps ~9.2% ~7.6%1 2008 Guidance Normalized (2000 levels) Normalized (with Enablers) 1) As adjusted. Reflects higher end of guidance. 2) Reflects lower cannibalization due to fewer new store openings 19
Operating Targets Targets Rules of Thumb (norm) Sales Growth 3-5% per annum Sales per Labor Hour YoY increase Sales Per Square Foot YoY increase Operating Expenses YoY increase < Sales growth Operating Income YoY increase > Sales growth Inventory YoY increase 50% of Sales growth Accounts Payable Growth > Inventory growth Capital Spending Approximate depreciation/amortization Return on Invested Capital YoY increase Earnings per Share Double digit growth Drive Productivity and Efficiency 20
Shareholder Return Principles Dividend Principle − Deliver predictable annual increase1, targeting payout at approximately 30% of earnings Share Repurchase Principle − After meeting the needs of the business, use excess liquidity to repurchase shares, as long as value creating Return on Invested Capital Principle − Maintain high return on invested capital, benchmarking all uses of excess liquidity against value created for shareholders through repurchases 1) When earnings stabilize 21
Debt Holder Principles Maintain strong investment grade rating with access to A2/P2 commercial paper market Target, on average, Total Adjusted Debt/EBITDAR ratio of 2.5 times 22

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home depot PDF Carol Tomé Presentation

  • 1. 2008 Investor & Analyst Conference Financial Overview Carol Tomé Chief Financial Officer, EVP - Corporate Services
  • 2. Discussion Overview 2008 Financial Highlights Capital Efficiency Private Label Credit Card Normalized Earnings and Operating Targets Investor Returns Principles 2
  • 3. Q1 2008 Highlights $ billions, except as noted. Continuing Operations Q1/2008 Q1/2008 1 as reported V% LY as adjusted V% LY Comp Sales (6.5%) Total Sales $ 17.9 (3.4%) Gross Margin -- % of sales 33.9% 14 bps 34.0% 19 bps Operating Income $ 0.7 (56.5%) $ 1.3 (24.0%) Operating Margin -- % of sales 4.1% (495 bps) 7.1% (192 bps) Earnings from Continuing Operations $ 0.4 (62.4%) $ 0.7 (26.4%) Earnings per Share from Continuing Operations $ 0.21 (56.3%) $ 0.41 (14.6%) Solid Execution in a Tough Market 3 1)”As adjusted” excludes the Store Rationalization charge
  • 4. Q1 2008 U.S. Comp Sales Greater than (6%) (4%) – (6%) Less than (4%) Varied Performance 4
  • 5. 2008 Outlook Situation Update Outlook Total sales decline of 4-5% Q1 2008 generally on plan Negative comps in the mid May and June are critical selling months to high single digit range - By June typically generate ~43% of annual sales Flat to slightly positive We see more headwinds than tailwinds for the gross margin expansion balance of 2008 Operating margin decline Tailwinds Headwinds of 170 to 210 basis points Economic Stimulus Commodity Price Pressure Continuing Operations Package US Dollar Depreciation Earnings per Share decline Easier comps Rising Fuel Costs of 19 to 24 percent1 beginning in Pressure on the Consumer September - Low Confidence - Credit Crunch - Inflation - Unemployment Housing Softness More Comfortable with Low End of EPS Guidance 5 1) As Adjusted
  • 6. 2008 Capital Spending Plan $ millions, Continuing Operations Business/Function Overview 2007 2008F Total Growth (new stores) $ 1,997 $ 996 Merchandising/Maintenance/Operations 780 580 Supply Chain 75 118 Total US Retail $ 855 $ 698 IT (Growth/Renewal/Compliance) 275 265 Corporate 93 62 International 1 168 179 Total Sustaining $ 1,391 $ 1,204 Total Capital $ 3,388 $ 2,200 1) Includes Canadian ERP know as “SCORE” capital spending of $91 million in 2007 and $36 million in 2008 6
  • 7. Solid Cash Flow & Liquidity $ billions Continuing Operations A2/P2 CP Program Total Program $ 3.45 ~ $ 4.8 Outstanding Q1 2008 $ 0.50 $0.5 $0.5 FYE 2007 Net Cash Flow CapEx Dividends FYE 2008F from the business Note: Projected Depreciation & Amortization ~ $1.9 billion 7
  • 8. Q1 2008 Capital Structure Current Maturities1 Outstanding Indebtedness Moody’s LT Debt Rating Baa1 (stable) Standard & Poor’s LT Debt Rating BBB+ (stable) $ millions 2,968 2,959 Commerical Paper $495 3.00% Advantage Lease $282 5.95% '09 Senior Notes $999 3.75% '09 Senior Notes (Floater) $750 2.93% 1,749 '10 Senior Notes $998 4.63% 1,244 '11 Senior Notes $1,000 5.20% 998 1,000 '13 Senior Notes $1,244 5.25% '16 Senior Notes $2,968 5.40% 282 '36 Senior Notes $2,959 5.88% Capital Leases/Other $439 Total Debt / Avg Coupon $12,134 5.00% 08 09 11 16 36 10 12 13 26 20 20 20 20 20 Swap Adjusted Coupon 4.80% 20 20 20 20 Total Shareholder Equity $17,706 Total Capital $29,840 Rents $819 Adj Debt/EBITDAR2 2.1x 1.7x Staggered Maturities, Low Refinancing Risk 1) 2) Excludes capital leases and commercial paper Includes 8x Rents TTM and $1bn HDS guarantee; As adjusted. 88
  • 9. The Evolution of our Capital Efficiency Strategy Focus Focus on Core Retail business and rationalize non-Core (e.g., disposition of HD Supply, walk away from Enerbank); Invest in key priorities February 2007 Move to capital structure that facilitates capital distribution June 2007 Optimize with targeted investor return principles (Announced $22.5 billion recapitalization; new financial risk profile) Rationalize new square footage May 2008 Enhance growth and existing stores Drive productivity and efficiency Ongoing Superior Capital Efficiency and Cash Flow 9
  • 10. Recapitalization Plan In 2007, announced $22.5 billion recapitalization plan - Completed 48% using proceeds from HD Supply and cash on hand - Remaining program on pause until business and credit market stabilize Since 2002, have repurchased 743 million shares (~32% of total outstanding shares1) for $27.2 billion 1) Outstanding as at FYE 2001 10
  • 11. The U.S. Home Improvement Market is Heavily Stored… Household Saturation by Large Format Home Improvement Stores 4,000 80,000 Number of Large Format Home Improvement Stores 3,500 70,000 Households per Home Improvement Store Average Number of Households per 3,000 60,000 Home Improvement Store Number of Stores 2,500 50,000 2,000 40,000 1,500 30,000 1,000 20,000 500 10,000 0 - 2/1/1998 1/31/1999 1/30/2000 1/28/2001 2/3/2002 2/2/2003 2/1/2004 2/1/2005 2/1/2006 2/1/2007 2/1/2008 Includes Home Depot, Lowe’s, Menards stores and former competitors (Builders Square, HomeBase and Home Quarters); excludes EXPO, HD Supply, HD Landscape Supply, Floor Store, Lowe’s Contractor Yard …and well Saturated except for Market Growth 11
  • 12. Existing Stores: Expected Return Criteria Expect Stores to: Be 4-wall cash flow positive Have NPV of operating > NPV of exit Generate higher returns as they reach maturity − Stores under 3-years old are immature Use ROIC as a benchmark 12
  • 13. New Stores: Expected Return Criteria Incremental per store return equal to or better than return on share repurchases − Will make selected strategic investments where existing stores are vulnerable and/or it’s a unique market opportunity Will deliver double-digit new store portfolio returns Beginning 2009, Project 1.5% Square Footage Growth Per Annum 13
  • 14. Projected Capital Spending $ billions 2008F 2009F 2010F 2011F 2012F Total Capital $ 2.2 $ 2.2 $ 2.3 $ 2.1 $ 2.1 Depreciation & Amortization $ 1.9 $ 2.0 $ 2.1 $ 2.1 $ 2.1 Driving Capital Efficiency 14
  • 15. Private Label Credit Card Portfolio Overview Portfolio Philosophy Existing Product Suite Product Suite Value Proposition In 2003 switched from fee-based arrangement with GE to profit sharing Everyday Offer Consumer Consumer arrangement with Citi – we receive all of No Payment Private Revolving profitability after Citi’s targeted return No Interest for Label Credit Purchases >$299 Increased sales & market share Rewards Consumer & Earn Points for by facilitating customer spend Master Business Co- Purchases Card and capturing valuable Brand consumer information Consumer Low Interest, HIL Installment Fixed Payments ~30% penetration as of FY 2007; Loan average net receivable ~$14 billion Commercial PO/Job Name CRC Revolving Tracking Credit SKU Level Detail on Statements Commercial Account On-line PROX “Pay in Full” PO/Job Name Credit Tracking Product Suite Spans Consumer and Commercial Customers 15 15
  • 16. Cost of Credit Illustrative 2007 2008F Deferred Interest COGS (flat fee charged on XX XX deferred financing sales) Interchange Fee XX XX Expense Gain Share (XX) (XX) Total Cost of Credit ~200 bps1 as % of Credit Sales ~ 50 bps Lower Portfolio Profitability Driving Higher Cost of Credit 1) Downside believed to be no higher than 4% of private label credit sales. 16
  • 17. Annual Housing Performance vs. L-T Averages L-T Average Housing Metric '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 Starts YOY% (highest correlation metric) (9.2) 6.7 (1.6) 12.4 2.2 (5.7) 3.2 7.2 10.4 6.6 7.1 (14.2) (29.6) 0.4 Ex home sales YOY% (best lead indicator) (1.1) 7.7 5.0 13.1 3.2 (0.5) 2.4 5.8 9.0 8.6 4.4 (7.5) (13.0) 3.2 New home sales YOY% 0.3 12.9 6.7 10.3 (1.2) 0.2 3.1 7.6 11.7 10.1 6.5 (18.0) (26.3) 1.5 New home prices YOY% 2.3 5.1 3.4 4.8 5.4 4.6 3.3 7.5 3.3 13.5 8.4 3.0 0.5 5.1 Ex home prices YOY% 2.8 4.6 5.2 6.0 5.1 6.2 6.1 8.1 8.3 11.6 11.8 0.9 (0.4) 5.1 % refis resulting in 5% higher loan amount 57.8 63.0 62.0 46.9 63.8 78.8 55.5 52.0 38.1 50.2 72.4 86.1 83.3 63.9 Year closest to 1999 has the lowest variance from 1985-2007 averages long-term average 1999 is Most ‘Normal’ Year Compared to L-T Averages Source: Moody’s 17
  • 18. Lag Effect (Housing Market vs. Comps) 1995 to 2007 Performance Rankings (1=Best, 13=Worst) Metric '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 Starts 11 5 9 1 8 10 7 3 2 6 4 13 12 Ex Home Sales 11 4 6 1 8 10 9 5 2 3 7 13 12 HD comps 9 4 3 2 1 6 10 11 7 5 8 12 13 1999’s ‘normal’ level of 1998’s large spike in housing activity drove HD housing activity drove HD average performance in 2000 outstanding performance in 1999 HD Performance Lags Housing Market by ~ 1 Year 18 Source: Moody’s
  • 19. Normalized Earnings +180 bps Operating Margin + 20 - 30 bps Credit + 20 - 40 bps Supply chain +160 bps +140 - 110 bps Merchandising transformation ~11% + 180 bps Comps2 +200 bps - 40 bps Permanent Cost change +160 bps ~9.2% ~7.6%1 2008 Guidance Normalized (2000 levels) Normalized (with Enablers) 1) As adjusted. Reflects higher end of guidance. 2) Reflects lower cannibalization due to fewer new store openings 19
  • 20. Operating Targets Targets Rules of Thumb (norm) Sales Growth 3-5% per annum Sales per Labor Hour YoY increase Sales Per Square Foot YoY increase Operating Expenses YoY increase < Sales growth Operating Income YoY increase > Sales growth Inventory YoY increase 50% of Sales growth Accounts Payable Growth > Inventory growth Capital Spending Approximate depreciation/amortization Return on Invested Capital YoY increase Earnings per Share Double digit growth Drive Productivity and Efficiency 20
  • 21. Shareholder Return Principles Dividend Principle − Deliver predictable annual increase1, targeting payout at approximately 30% of earnings Share Repurchase Principle − After meeting the needs of the business, use excess liquidity to repurchase shares, as long as value creating Return on Invested Capital Principle − Maintain high return on invested capital, benchmarking all uses of excess liquidity against value created for shareholders through repurchases 1) When earnings stabilize 21
  • 22. Debt Holder Principles Maintain strong investment grade rating with access to A2/P2 commercial paper market Target, on average, Total Adjusted Debt/EBITDAR ratio of 2.5 times 22