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 2022 Form 10-K and with our MD&A included in the 2022 Form 10-K. TABLE OF CONTENTS Executive Summary 13 Results of Operations 14 Liquidity and Capital Resources 16 Critical Accounting Estimates 18 EXECUTIVE SUMMARY The following table presents quarter-to-date highlights of our financial performance: dollars in millions, except per share data Three Months Ended April 30, 2023 May 1, 2022 Net sales $ 37,257 $ 38,908 Net earnings 3,873 4,231 Diluted earnings per share $ 3.82 $ 4.09 Net cash provided by operating activities $ 5,614 $ 3,789 Proceeds from long-term debt, net of discounts — 3,957 Repayments of long-term debt 1,063 1,054 We reported net sales of $37.3 billion in the first quarter of fiscal 2023. Net earnings were $3.9 billion, or $3.82 per diluted share. We opened two new stores in Mexico during the first quarter of fiscal 2023, resulting in a total store count of 2,324 at April 30, 2023. A total of 317 stores, or 13.6%, were located in Canada and Mexico. For the first quarter of fiscal 2023, sales per retail square foot were $592.94. Our inventory turnover ratio was 3.9 times at the end of the first quarter of fiscal 2023, compared to 4.4 times at the end of the first quarter of fiscal 2022. The decrease in our inventory turnover ratio was primarily driven by lower sales on higher average inventory levels during the first quarter of fiscal 2023. We generated $5.6 billion of cash flow from operations during the first three months of fiscal 2023. This cash flow, together with cash on hand, was used to fund cash payments of $2.9 billion for share repurchases and $2.1 billion for dividends. In addition, we repaid $1.1 billion of long-term debt and funded $905 million in capital expenditures during the first three months of fiscal 2023. In February 2023, we announced a 10% increase in our quarterly cash dividend to $2.09 per share. Our ROIC for the trailing twelve-month period was 43.6% at the end of the first quarter of fiscal 2023 and 45.3% at the end of the first quarter of fiscal 2022. 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). Fiscal Q1 2023 Form 10-Q 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 2023 AND FISCAL 2022 THREE MONTH COMPARISONS Three Months Ended April 30, 2023 May 1, 2022 dollars in millions $ % of Net Sales $ % of Net Sales Net sales $ 37,257 $ 38,908 Gross profit 12,557 33.7 % 13,145 33.8 % Operating expenses: Selling, general and administrative 6,355 17.1 6,610 17.0 Depreciation and amortization 651 1.7 606 1.6 Total operating expenses 7,006 18.8 7,216 18.5 Operating income 5,551 14.9 5,929 15.2 Interest and other (income) expense: Interest income and other, net (33) (0.1) (3) — Interest expense 474 1.3 372 1.0 Interest and other, net 441 1.2 369 0.9 Earnings before provision for income taxes 5,110 13.7 5,560 14.3 Provision for income taxes 1,237 3.3 1,329 3.4 Net earnings $ 3,873 10.4 % $ 4,231 10.9 % ————— Note: Certain percentages may not sum to totals due to rounding. Three Months Ended Selected financial and sales data: April 30, 2023 May 1, 2022 % Change Comparable sales (% change) (4.5) % 2.2 % N/A Comparable customer transactions (% change) (1) (5.0) % (8.4) % N/A Comparable average ticket (% change) (1) 0.2 % 11.2 % N/A Customer transactions (in millions) (1) 390.9 410.7 (4.8) % Average ticket (1) (2) $ 91.92 $ 91.72 0.2 % Sales per retail square foot (1) (3) $ 592.94 $ 621.99 (4.7) % Diluted earnings per share $ 3.82 $ 4.09 (6.6) % ————— (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 quarter of fiscal 2023 were $37.3 billion, a decrease of 4.2% from $38.9 billion for the first quarter of fiscal 2022. The decrease in net sales for the first quarter of fiscal 2023 reflects the impact of a negative comparable sales environment, primarily driven by a decrease in comparable customer transactions. Fiscal Q1 2023 Form 10-Q 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 14.5% of net sales during the first quarter of fiscal 2023 and decreased by 2.9% compared to the first quarter of fiscal 2022. A stronger U.S. dollar negatively im pacted net sales by $25 million during the first quarter of fiscal 2023. 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 first quarter of fiscal 2023 decreased 4.5%, reflecting a 5.0% decrease in comparable customer transactions, slightly offset by a 0.2% increase in comparable average ticket compared to the first quarter of fiscal 2022. The decrease in comparable customer transactions reflects the impact of macroeconomic factors including the broader inflationary environment and moderating demand, as well as unfavorable weather particularly in the western United States. The slight increase in comparable average ticket was primarily due to inflation across several product categories, offset by commodity price deflation which negatively impacted average ticket growth by approximately 335 basis points, driven primarily by lumber. During the first quarter of fiscal 2023, four of our 14 merchandising departments—Building Materials, Hardware, Plumbing, and Millwork—posted positive comparable sales compared to the first quarter of fiscal 2022. All of our other merchandising departments posted negative comparable sales during the first quarter of fiscal 2023, with our Lumber department posting a double-digit comparable sales decline primarily resulting from lumber price deflation. Gross Profit Gross profit for the first quarter of fiscal 2023 decreased 4.5% to $12.6 billion from $13.1 billion for the first quarter of fiscal 2022. Gross profit as a percentage of net sales, or gross profit margin, was 33.7% for the first quarter of fiscal 2023 compared to 33.8% for the first quarter of fiscal 2022. The decrease in gross pr ofit margin during the first quarter of fiscal 2023 was primarily driven by higher supply chain and product costs along with increased pressure from shrink, partially offset by the benefit from higher retail prices as well as favorable product mix. Operating Expenses Our operating expenses are composed of SG&A and depreciation and amortization. Selling, General & Administrative. SG&A for the first quarter of fiscal 2023 decreased $255 million, or 3.9%, to $6.4 billion from $6.6 billion for the first quarter of fiscal 2022. As a percentage of net sales, SG&A was 17.1% for the first quarter of fiscal 2023 compared to 17.0% for the first quarter of fiscal 2022, primarily reflecting deleverage from a negative comparable sales environment and wage investments for hourly associates, partially offset by the one-time benefit from the favorable settlement of litigation with a vendor as well as lower incentive compensation. Depreciation and Amortization. Depreciation and amortization for the first quarter of fiscal 2023 increased $45 million, or 7.4%, to $651 million from $606 million for the first quarter of fiscal 2022. As a percentage of net sales, depreciation and amortization was 1.7% for the first quarter of fiscal 2023 compared to 1.6% for fiscal 2022 , primarily reflecting deleverage from a negative comparable sales environment. Interest and Other, net Interest and other, net, for the first quarter of fiscal 2023 increased $72 million, or 19.5%, to $441 million from $369 million for the first quarter of fiscal 2022. As a percentage of net sales, interest and other, net was 1.2% for the first quarter of fiscal 2023 compared to 0.9% for the first quarter of fiscal 2022, primarily due to increased variable rate interest on floating rate debt resulting from interest rate swaps, higher debt balances, and deleverage from a negative comparable sales environment. Provision for Income Taxes Our combined effective income tax rate was 24.2% for the first quarter of fiscal 2023 compared to 23.9% for the first quarter of fiscal 2022. Fiscal Q1 2023 Form 10-Q 15 Table of Contents Diluted Earnings per Share Diluted earnings per share were $3.82 for the first quarter of fiscal 2023 compared to $4.09 for the first quarter of fiscal 2022 . The decrease in diluted earnings per share was driven by lower net earnings during the first quarter of fiscal 2023, partially offset by lower diluted shares due to share repurchases. 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 April 30, 2023 May 1, 2022 Net earnings $ 16,747 $ 16,519 Interest and other, net 1,634 1,339 Provision for income taxes 5,280 5,330 Operating income 23,661 23,188 Income tax adjustment (1) (5,671) (5,628) NOPAT $ 17,990 $ 17,560 Average debt and equity $ 41,264 $ 38,761 ROIC 43.6 % 45.3 % ————— (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 April 30, 2023, we had $1.3 billion in cash and cash equivalents, of which $678 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 2023, 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. Capital expenditures were $905 million for the first three months of fiscal 2023. Fiscal Q1 2023 Form 10-Q 16 Table of Contents In February 2023, we announced a 10% increase in our quarterly cash dividend from $1.90 to $2.09 per share. During the first three months of fiscal 2023, we paid cash dividends of $2.1 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. 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. The August 2022 authorization does not have a prescribed expiration date. As of April 30, 2023, approximately $9.5 billion of the $15.0 billion share repurchase authorization remained available. During the first three months of fiscal 2023, we had cash payments of $2.9 billion for repurchases of our common stock through open market purchases. DEBT We have a commercial paper program that allows for borrowings up to $5.0 billion. In connection with our program, we have back-up credit facilities with a consortium of banks for borrowings of up to $5.0 billion, which consist of 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. All of our short-term borrowings in the first three months of fiscal 2023 were under our commercial paper program, and the maximum amount outstanding at any time was $1.5 billion. At April 30, 2023, 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. We did not have any issuances of senior notes during the first three months of fiscal 2023. In April 2023, we repaid $1.0 billion of senior notes at maturity. 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 increased by $1.8 billion in the first three months of fiscal 2023 compared to the first three months of fiscal 2022, primarily driven by changes in working capital, slightly offset by a decrease in net earnings. Changes in working capital were primarily driven by lower inventory purchases in the first quarter of fiscal 2023 relative to the first quarter of fiscal 2022. Investing Activities Cash used in investing activities increased by $202 million in the first three months of fiscal 2023 compared to the first three months of fiscal 2022, primarily resulting from increased capital expenditures. Financing Activities Cash used in financing activities in the first three months of fiscal 2023 primarily reflected $2.9 billion of share repurchases, $2.1 billion of cash dividends paid, and $1.1 billion of repayments of long-term debt. Cash used in financing activities in the first three months of fiscal 2022 primarily reflected $2.3 billion of share repurchases, $2.0 billion of cash dividends paid, $1.1 billion of repayments of long-term debt, and $1.0 billion of repayments for short-term debt, partially offset by $4.0 billion of net proceeds from long-term debt. Fiscal Q1 2023 Form 10-Q 17 Table of Contents CRITICAL ACCOUNTING ESTIMATES During the first three months of fiscal 2023, there were no changes to our critical accounting estimates or our significant accounting policies as disclosed in the 2022 Form 10-K. Our significant accounting policies are disclosed in Note 1 to our consolidated financial statements. 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.