HOME DEPOT, INC. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion provides an analysis of the Company’s financial condition and results of operations from management's perspective and should be read in conjunction with the consolidated financial statements and related notes included in this report and in the 2021 Form 10-K and with our MD&A included in the 2021 Form 10-K. Our MD&A includes the following sections: • Executive Summary • Results of Operations • Liquidity and Capital Resources • Critical Accounting Policies EXECUTIVE SUMMARY The following table presents quarter-to-date and year-to-date highlights of our financial performance: dollars in millions, except per share data Three Months Ended Nine Months Ended October 30, 2022 October 31, 2021 October 30, 2022 October 31, 2021 Net sales $ 38,872 $ 36,820 $ 121,572 $ 115,438 Net earnings 4,339 4,129 13,743 13,081 Diluted earnings per share $ 4.24 $ 3.92 $ 13.37 $ 12.31 Net cash provided by operating activities $ 10,021 $ 13,386 Proceeds from long-term debt, net of discounts 6,942 2,979 Repayments of long-term debt 2,423 1,480 Repurchases of common stock 5,136 10,374 We reported net sales of $38.9 billion in the third quarter of fiscal 2022. Net earnings were $4.3 billion, or $4.24 per diluted share. For the first nine months of fiscal 2022, net sales were $121.6 billion and net earnings were $13.7 billion, or $13.37 per diluted share. During the third quarter of fiscal 2022 , we opened one new store in the U.S. and two new stores in Mexico, and we had no store closures, resulting in a store co unt of 2,319 at the end of the quarter. As of October 30, 2022, a total of 313 stores, or 13.5% of our total store count, w ere located in Canada and Mexico. For the third quarter of fiscal 2022, sales per retail square foot were $618.50, and for the first nine months of fiscal 2022, sales per retail square foot were $646.81. Our inventory turnover ratio was 4.3 times at the end of the third quarter of fiscal 2022, compared to 5.4 times at the end of the third quarter of fiscal 2021. The decrease in our inventory turnover ratio was driven by an increase in average inventory levels during the first nine months of fiscal 2022 resulting from strategic investments to promote higher in-stock levels and pull forward merchandise in response to ongoing global supply chain disruption, as well as continued investment in our new supply chain facilities and carry over of some spring seasonal inventory. We generated $10.0 billion of cash flow from operations and issued $6.9 billion of long-term debt, net of discounts, during the first nine months of fiscal 2022. This cash flow, together with cash on hand, was used to fund cash payments of $5.9 billion for dividends and $5.1 billion for share repurchases. In addition, we repaid $2.4 billion of long-term debt and $1.0 billion of net short-term debt and funded $2.2 billion in capital expenditures. In February 2022, we announced a 15% increase in our quarterly cash dividend to $1.90 per share. Our ROIC for the trailing twelve-month period was 43.3% at the end of the third quarter of fiscal 2022 and 43.9% at the end of the third quarter of fiscal 2021. See the Non-GAAP Financial Measures section below for our definition and calculation of ROIC, as well as a reconciliation of NOPAT, a non-GAAP financial measure, to net earnings (the most comparable GAAP financial measure). 13 Table of Contents RESULTS OF OPERATIONS The following table presents the percentage relationship between net sales and major categories in our consolidated statements of earnings. FISCAL 2022 AND FISCAL 2021 THREE MONTH COMPARISONS Three Months Ended October 30, 2022 October 31, 2021 dollars in millions $ % of Net Sales $ % of Net Sales Net sales $ 38,872 $ 36,820 Gross profit 13,224 34.0 % 12,563 34.1 % Operating expenses: Selling, general and administrative 6,468 16.6 6,168 16.8 Depreciation and amortization 608 1.6 600 1.6 Total operating expenses 7,076 18.2 6,768 18.4 Operating income 6,148 15.8 5,795 15.7 Interest and other (income) expense: Interest income and other, net (7) — (15) — Interest expense 413 1.1 341 0.9 Interest and other, net 406 1.0 326 0.9 Earnings before provision for income taxes 5,742 14.8 5,469 14.9 Provision for income taxes 1,403 3.6 1,340 3.6 Net earnings $ 4,339 11.2 % $ 4,129 11.2 % ————— Note: Certain percentages may not sum to totals due to rounding. Three Months Ended Selected financial and sales data: October 30, 2022 October 31, 2021 % Change Comparable sales (% change) 4.3 % 6.1 % N/A Comparable customer transactions (% change) (1) (4.4) % (5.8) % N/A Comparable average ticket (% change) (1) 8.8 % 12.7 % N/A Customer transactions (in millions) (1) 409.8 428.2 (4.3) % Average ticket (1) (2) $ 89.67 $ 82.38 8.8 % Sales per retail square foot (1) (3) $ 618.50 $ 587.28 5.3 % Diluted earnings per share $ 4.24 $ 3.92 8.2 % ————— (1) Does not include results for HD Supply. (2) Average ticket represents the average price paid per transaction and is used by management to monitor the performance of the Company, as it represents a primary driver in measuring sales performance. (3) Sales per retail square foot represents annualized sales divided by retail store square footage. Sales per retail square foot is a measure of the efficiency of sales based on the total square footage of our stores and is used by management to monitor the performance of the Company’s retail operations as an indicator of the productivity of owned and leased square footage for these retail operations. Sales We assess our sales performance by evaluating both net sales and comparable sales. Net Sales. Net sales for the third quarter of fiscal 2022 were $38.9 billion, an increase of 5.6% from $36.8 billion for the third quarter of fiscal 2021. The increase in net sales for the third quarter of fiscal 2022 primarily reflected the impact of positive comparable sales driven by an increase in comparable average ticket, partially offset by a decrease in comparable customer transactions. A strong er U.S. dollar negatively impacted net sales by $132 million in the third quarter of fiscal 2022. 14 Table of Contents Online sales, which consist of sales generated through our websites and mobile applications for products picked up at our stores or delivered to customer locations, represented 13.3% of net sales during the third quarter of fiscal 2022 and grew by 9.6% compared to the third quarter of fiscal 2021. The increase in online sales for the third quarter of fiscal 2022 was a result of customers continuing to leverage our digital platforms and reflects our ongoing investments to enhance these platforms and related fulfillment capabilities, which support our interconnected retail strategy. Comparable Sales. Comparable sales is a measure that highlights the performance of our existing locations and websites by measuring the change in net sales for a period over the comparable prior period of equivalent length. Comparable sales includes sales at all locations, physical and online, open greater than 52 weeks (including remodels and relocations) and excludes closed stores. Retail stores become comparable on the Monday following their 52 nd week of operation. Acquisitions are typically included in comparable sales after they have been owned for more than 52 weeks. Comparable sales is intended only as supplemental information and is not a substitute for net sales presented in accordance with GAAP. Total comparable sales for the third quarter of fiscal 2022 increased 4.3%, reflecting an 8.8% increase in comparable average ticket, partially offset by a 4.4% decrease in comparable customer transactions compared to the third quarter of fiscal 2021. The increase in comparable avera ge ticket was primarily driven by inflation, as well as demand for new and innovative pro ducts. The decrease in comparable customer transactions reflects the impact of macroeconomic factors including the broader inflationary environment. During the third quarter of fiscal 2022, 11 of our 14 merchandising departments posted positive comparable sales compared to the third quarter of fiscal 2021, led by Building Materials, Plumbing, Lumber, Millwork, Paint, and Hardware, which posted comparable sales above the Company average. Our Appliances, Flooring, and Indoor Garden departments posted negative comparable sales. Gross Profit Gross profit for the third quarter of fiscal 2022 increased 5.3% to $13.2 billion from $12.6 billion for the third quarter of fiscal 2021. Gross profit as a percentage of net sales, or gross profit margin, was 34.0% for the third quarter of fiscal 2022 compared to 34.1% for the third quarter of fiscal 2021. The decrease in gross pr ofit margin during the third quarter of fiscal 2022 was primarily driven by investments in our supply chain network and higher product and transportation costs, offset by the benefit from higher retail prices. Operating Expenses Our operating expenses are composed of SG&A and depreciation and amortization. Selling, General & Administrative. SG&A for the third quarter of fiscal 2022 increased $300 million, or 4.9%, to $6.5 billion from $6.2 billion for the third quarter of fiscal 2021. As a percentage of net sales, SG&A was 16.6% for the third quarter of fiscal 2022 compared to 16.8% for the third quarter of fiscal 2021, primarily reflectin g leverage from a positive comparable sales environment and lower incentive compensation, partially offset by wage investments for hourly associates and increased operational costs, including investments designed to drive efficiencies in our stores. Depreciation and Amortization. Depreciation and amortization for the third quarter of fiscal 2022 increased $8 million, or 1.3%, to $608 million from $600 million for the third quarter of fiscal 2021. As a percentage of net sales, depreciation and amortization was 1.6% for the third quarter of both fiscal 2022 and fiscal 2021 , primarily reflecting leverage from a positive comparable sales environment, offset by increased depreciation expense from strategic investments in the business. Interest and Other, net Interest and other, net, was $406 million for the third quarter of fiscal 2022 compared to $326 million for the third quarter of fiscal 2021. Interest and other, net, as a percentage of net sales was 1.0% for the third quarter of fiscal 2022 compared to 0.9% for the third quarter of fiscal 2021, primarily reflecting higher interest expense due to higher debt balances and increased variable rate interest from our interest rate swaps during the third quarter of fiscal 2022, partially offset by leverage from a positive comparable sales environment. Provision for Income Taxes Our combined effective income tax rate was 24.4% for the third quarter of fiscal 2022 compared to 24.5% for the third quarter of fiscal 2021. 15 Table of Contents Diluted Earnings per Share Diluted earnings per share were $4.24 for the third quarter of fiscal 2022 compared to $3.92 for the third quarter of fiscal 2021 . The increase in diluted earnings per share was driven by higher net earnings during the third quarter of fiscal 2022, as well as lower diluted shares due to share repurchases. FISCAL 2022 AND FISCAL 2021 NINE MONTH COMPARISONS Nine Months Ended October 30, 2022 October 31, 2021 dollars in millions $ % of Net Sales $ % of Net Sales Net sales $ 121,572 $ 115,438 Gross profit 40,852 33.6 % 38,970 33.8 % Operating expenses: Selling, general and administrative 19,735 16.2 18,975 16.4 Depreciation and amortization 1,830 1.5 1,780 1.5 Total operating expenses 21,565 17.7 20,755 18.0 Operating income 19,287 15.9 18,215 15.8 Interest and other (income) expense: Interest income and other, net (12) — (26) — Interest expense 1,166 1.0 1,006 0.9 Interest and other, net 1,154 0.9 980 0.8 Earnings before provision for income taxes 18,133 14.9 17,235 14.9 Provision for income taxes 4,390 3.6 4,154 3.6 Net earnings $ 13,743 11.3 % $ 13,081 11.3 % ————— Note: Certain percentages may not sum to totals due to rounding. Nine Months Ended Selected financial and sales data: October 30, 2022 October 31, 2021 % Change Comparable sales (% change) 4.2 % 12.5 % N/A Comparable customer transactions (% change) (1) (5.3) % 1.1 % N/A Comparable average ticket (% change) (1) 9.7 % 11.5 % N/A Customer transactions (in millions) (1) 1,287.9 1,357.2 (5.1) % Average ticket (1) (2) $ 90.45 $ 82.43 9.7 % Sales per retail square foot (1) (3) $ 646.81 $ 615.98 5.0 % Diluted earnings per share $ 13.37 $ 12.31 8.6 % ————— (1) Does not include results for HD Supply. (2) Average ticket represents the average price paid per transaction and is used by management to monitor the performance of the Company, as it represents a primary driver in measuring sales performance. (3) Sales per retail square foot represents annualized sales divided by retail store square footage. Sales per retail square foot is a measure of the efficiency of sales based on the total square footage of our stores and is used by management to monitor the performance of the Company’s retail operations as an indicator of the productivity of owned and leased square footage for these retail operations. Sales We assess our sales performance by evaluating both net sales and comparable sales. Net Sales. Net sales for the first nine months of fiscal 2022 were $121.6 billion, an increase of 5.3% from $115.4 billion for the first nine months of fiscal 2021. The increase in net sales for the first nine months of fiscal 2022 primarily reflected the impact of positive comparable sales driven by an increase in comparable average ticket, partially offset by a decrease in comparable customer transactions . A stronger U.S. dollar negatively impacted net sales by $284 million for the first nine months of fiscal 2022. 16 Table of Contents Online sales, which consist of sales generated through our websites and mobile applications for products picked up in our stores or delivered to customer locations, represented 13.8% of net sales during the first nine months of fiscal 2022 and grew by 8.4% compared to the first nine months of fiscal 2021. The increase in online sales for the first nine months of fiscal 2022 was a result of customers continuing to leverage our digital platforms and reflects our ongoing investments to enhance these platforms and related fulfillment capabilities, which support our interconnected retail strategy. Comparable Sales. Total comparable sales for the first nine months of fiscal 2022 increased 4.2%, reflecting a 9.7% increase in comparable average ticket, partially offset by a 5.3% decrease in comparable customer transactions compared to the first nine months of fiscal 2021. The increase in comparable average ticket was primarily driven by inflation, as well as demand for new and innovative products. The decrease in comparable customer transactions reflects the impact of macroeconomic factors including the broader inflationary environment, as well as cycling favorable weather and government stimulus during the first nine months of fiscal 2021. During the first nine months of fiscal 2022, 11 of our 14 merchandising departments posted positive comparable sales when compared to the first nine months of fiscal 2021, led by Building Materials, Plumbing, Millwork, Paint, Hardware, and Kitchen and Bath, which posted comparable sales above the Company average. Our Indoor Garden, Outdoor Garden and Appliances departments posted negative comparable sales. Gross Profit Gross profit for the first nine months of fiscal 2022 increased 4.8% to $40.9 billion from $39.0 billion for the first nine months of fiscal 2021. Gross profit as a percentage of net sales, or gross profit margin, was 33.6% for the first nine months of fiscal 2022 compared to 33.8% for the first nine months of fiscal 2021. The decrease in gross profit margin during the first nine months of fiscal 2022 was primarily driven by investments in our supply chain network and higher product and transportation costs, offset by the benefit from higher retail prices. Operating Expenses Our operating expenses are composed of SG&A and depreciation and amortization. Selling, General & Administrative. SG&A for the first nine months of fiscal 2022 increased $760 million, or 4.0% to $19.7 billion from $19.0 billion for the first nine months of fiscal 2021. As a percentage of net sales, SG&A was 16.2% for the first nine months of fiscal 2022 compared to 16.4% for the first nine months of fiscal 2021, primarily reflecting leverage from a positive comparable sales environment and lower incentive compensation, partially offset by wage investments for hourly associates and increased operational costs, including investments designed to drive efficiencies in our stores. Depreciation and Amortization. Depreciation and amortization for the first nine months of fiscal 2022 increased $50 million, or 2.8% to $1.8 billion. As a percentage of net sales, depreciation and amortization was 1.5% for the first nine months of both fiscal 2022 and fiscal 2021 , reflecting leverage from a positive comparable sales environment, offset by increased depreciation expense from strategic investments in the business. Interest and Other, net Interest and other, net for the first nine months of fiscal 2022 was $1.2 billion compared to $980 million for the first nine months of fiscal 2021. Interest and other, net, as a percentage of net sales was 0.9% for the first nine months of fiscal 2022 and 0.8% for the first nine months of fiscal 2021, primarily reflecting higher interest expense due to higher debt balances and increased variable rate interest from our interest rate swaps during the first nine months of fiscal 2022, partially offset by leverage from a positive comparable sales environment. Provision for Income Taxes Our combined effective income tax rate was 24.2% for the first nine months of fiscal 2022 compared to 24.1% for the first nine months of fiscal 2021. Diluted Earnings per Share Diluted earnings per share were $13.37 for the first nine months of fiscal 2022, compared to $12.31 for the first nine months of fiscal 2021. The increase in diluted earnings per share was driven by higher net earnings during the first nine months of fiscal 2022, as well as lower diluted shares due to share repurchases. 17 Table of Contents NON-GAAP FINANCIAL MEASURES To provide clarity on our operating performance, we supplement our reporting with certain non-GAAP financial measures. However, this supplemental information should not be considered in isolation or as a substitute for the related GAAP measures. Non-GAAP financial measures presented herein may differ from similar measures used by other companies. Return on Invested Capital We believe ROIC is meaningful for investors and management because it measures how effectively we deploy our capital base. We define ROIC as NOPAT, a non-GAAP financial measure, for the most recent twelve-month period, divided by average debt and equity. We define average debt and equity as the average of beginning and ending long-term debt (including current installments) and equity for the most recent twelve-month period. The following table presents the calculation of ROIC, together with a reconciliation of NOPAT to net earnings (the most comparable GAAP measure): Twelve Months Ended dollars in millions October 30, 2022 October 31, 2021 Net earnings $ 17,095 $ 15,938 Interest and other, net 1,477 1,307 Provision for income taxes 5,540 5,053 Operating income 24,112 22,298 Income tax adjustment (1) (5,844) (5,378) NOPAT $ 18,268 $ 16,920 Average debt and equity $ 42,222 $ 38,519 ROIC 43.3 % 43.9 % ————— (1) Income tax adjustment is defined as operating income multiplied by our effective tax rate for the trailing twelve months. LIQUIDITY AND CAPITAL RESOURCES At October 30, 2022, we had $2.5 billion in cash and cash equivalents, of which $719 million was held by our foreign subsidiaries. We believe that our current cash position, cash flow generated from operations, funds available from our commercial paper program, and access to the long-term debt capital markets should be sufficient not only for our operating requirements, any required debt payments, and satisfaction of other contractual obligations, but also to enable us to invest in the business, fund dividend payments, and fund any share repurchases through the next several fiscal years. In addition, we believe that we have the ability to obtain alternative sources of financing, if necessary. Our material cash requirements include contractual and other obligations arising in the normal course of business. These obligations primarily include long-term debt and related interest payments, operating and finance lease obligations, and purchase obligations. In addition to our cash requirements, we follow a disciplined approach to capital allocation. This approach first prioritizes investing in the business, followed by paying dividends, with the intent of then returning excess cash to shareholders in the form of share repurchases. For fiscal 2022, we plan to invest approximately $3 billion back into the business in the form of capital expenditures, in line with our expectation of approximately two percent of net sales on an annual basis. However, we may adjust our capital expenditures to support the operations of the business, to enhance long-term strategic positioning, or in response to the economic environment, as necessary or appropriate. In February 2022, we announced a 15% increase in our quarterly cash dividend from $1.65 to $1.90 per share. During the first nine months of fiscal 2022, we paid cash dividends of $5.9 billion to shareholders. We intend to pay a dividend in the future; however, any future dividend is subject to declaration by our Board of Directors based on our earnings, capital requirements, financial condition, and other factors considered relevant by our Board of Directors. 18 Table of Contents In August 2022, our Board of Directors approved a $15.0 billion share repurchase authorization that replaced the previous authorization of $20.0 billion, which was approved in May 2021. This new authorization does not have a prescribed expiration date. As of October 30, 2022, approximately $14.0 billion of the $15.0 billion share repurchase authorization remained available. During the first nine months of fiscal 2022, we had cash payments of $5.1 billion for repurchases of our common stock through open market purchases. DEBT In July 2022, we expanded our commercial paper program from $3.0 billion to $5.0 billion to further enhance our financial flexibility. All of our short-term borrowings in the first nine months of fiscal 2022 were under our commercial paper program, and the maximum amount outstanding at any time was $2.7 billion. In connection with our program, we have back-up credit facilities with a consortium of banks. In July 2022, we also expanded the borrowing capacity under these back-up facilities from $3.0 billion to $5.0 billion, by entering into a five-year $3.5 billion credit facility scheduled to expire in July 2027 and a 364-day $1.5 billion credit facility scheduled to expire in July 2023. These facilities replaced our previously existing five-year $2.0 billion credit facility, which was scheduled to expire in December 2023, and our 364-day $1.0 billion credit facility, which was scheduled to expire in December 2022. At October 30, 2022, we had no outstanding borrowings under our commercial paper program, and we were in compliance with all of the covenants contained in our credit facilities, none of which are expected to impact our liquidity or capital resources. We also issue senior notes from time to time as part of our capital management strategy. In March 2022, we issued $4.0 billion of senior notes. The net proceeds from this issuance were used for general corporate purposes, including repayment of outstanding indebtedness and repurchases of shares of our common stock. In September 2022, we issued $3.0 billion of senior notes. The net proceeds from this issuance are being used for general corporate purposes, including repurchases of shares of our common stock. During the first nine months of fiscal 2022, we repaid an aggregate of $2.25 billion of senior notes. The indentures governing our senior notes do not generally limit our ability to incur additional indebtedness or require us to maintain financial ratios or specified levels of net worth or liquidity. The indentures governing our notes contain various customary covenants; however, none are expected to impact our liquidity or capital resources. See Note 4 to our consolidated financial statements for further discussion of our debt arrangements. CASH FLOWS SUMMARY Operating Activities Cash flow generated from operations provides us with a significant source of liquidity. Our operating cash flows result primarily from cash received from our customers, offset by cash payments we make for products and services, associate compensation, operations, occupancy costs, and income taxes. Cash provided by or used in operating activities is also subject to changes in working capital. Working capital at any point in time is subject to many variables, including seasonality, inventory management and category expansion, the timing of cash receipts and payments, vendor payment terms, and fluctuations in foreign exchange rates. Net cash provided by operating activities decreased by $3.4 billion in the first nine months of fiscal 2022 compared to the first nine months of fiscal 2021, primarily driven by changes in working capital, slightly offset by an increase in net earnings. Working capital was impacted by higher merchandise inventories and reduced inventory turnover, timing of vendor payments, and decreases in deferred revenue in fiscal 2022. Our inventory position reflects the impact of inflation, along with strategic investments to promote higher in-stock levels and pull forward merchandise in response to ongoing global supply chain disruption, as well as continued investment in our new supply chain facilities and carry over of some spring seasonal inventory. Investing Activities Cash used in investing activities increased by $113 million in the first nine months of fiscal 2022 compared to the first nine months of fiscal 2021, primarily resulting from increased capital expenditures, partially offset by cash paid for an acquired business during the first nine months of fiscal 2021. 19 Table of Contents Financing Activities Cash used in financing activities in the first nine months of fiscal 2022 primarily reflected $5.9 billion of cash dividends paid, $5.1 billion of share repurchases, $2.4 billion of repayments of long-term debt, and $1.0 billion of net repayments of short-term debt, partially offset by $6.9 billion of net proceeds from long-term debt. Cash used in financing activities in the first nine months of fiscal 2021 primarily reflected $10.4 billion of share repurchases, $5.3 billion of cash dividends paid, and $1.5 billion of repayments of long-term debt, partially offset by $3.0 billion of net proceeds from long-term debt. CRITICAL ACCOUNTING POLICIES During the first nine months of fiscal 2022, there were no changes to our critical accounting policies as disclosed in the 2021 Form 10-K. Refer to Note 1 to our consolidated financial statements for further discussion regarding our significant accounting policies. ADDITIONAL INFORMATION For information on accounting pronouncements that have impacted or are expected to materially impact our consolidated financial condition, results of operations or cash flows, see Note 1 to our consolidated financial statements.