This summary is based on the first quarter fiscal 2008 earnings call conducted by The Home Depot, Inc. (HD) on May 20, 2008.
Management:
Senior Vice President, Investor Relations: Diane Dayhoff
Chairman, Chief Executive Officer: Frank Blake
Senior Vice President, Merchandising: Craig Menear
Executive Vice President of U.S. Stores: Paul Raines
Chief Financial Officer, Executive Vice President Corporate Services: Carol B. Tome
Senior Vice President, Supply Chain: Mark Holifield
Key Investors Issues
- EPS were 21 cents a share compared to 53 cents per share last year.
- Net income dropped 66% to $356 million from $1.05 billion a year ago.
- Sales fell 3.4% to $17.91 billion.
First Quarter Highlights
Sales were $17.9 billion, a 3.4% decrease from last year, reflecting negative same-store sales of 6.5%, offset in part by sales from new stores.
- Earnings per share were 21 cents, which reflect a charge of $543 million, due to the recently announced closing of 15 stores and removal of 50 stores from future growth pipeline.
- The company is going to refer to this charge as the store rationalization charge. Excluding the store rationalization charge, earnings per share from continuing operations were 41 cents, down 14.6% from last year. Comparable store sales decline was worse than plan.
- Comparable store sales or same-store sales were negative 6.5%, with negative comparable store sales of 6.4% in February, negative 8.7% in March, and negative 4.9% in April. Comparable store sales remain negative in May but are running in line with expectation.
- In 2007, the company had 53 weeks in the year. This shifted 2008 fiscal calendar. Because of this shift, and given the seasonal nature of business, first quarter sales benefited from a seasonal timing change. The calendar shift added about $524 million to first quarter comparable store sales. Adjusting for this, comparable store sales would have been negative 9.2%.
Gross margin was 33.9%, an increase of 14 basis points from last year.
- Gross margin expansion is due principally to lower markdowns than last year. While it isn’t material, gross margin expansion is net of a five basis point, or $10 million impact of markdowns associated with inventory in 15 closing stores.
- The calendar shift did not impact the gross margin rate but drove gross margin dollars. For the quarter, the calendar shift resulted in approximately 4 cents of year-over-year earnings per share growth.
- Operating expenses increased by 508 basis points to 29.8% of sales. Excluding the charge of $533 million related to store rationalization, operating expense increased by 211 basis points to 26.9%. Expense deleverage reflects the impact of negative sales, where for every point of negative comparable store sales the company expects to deleverage expenses by about 20 basis points.
- The negative comparable store sales resulted in expense deleverage of approximately 115 basis points. Further, as expected, the company experienced an additional 96 basis points of expense deleverage due to a higher cost of credit associated with private label credit card.
- Operating margin was 4.1%, down 495 basis points from last year. Excluding the store rationalization charge, operating margin was 7.1%, down 192 basis points from last year and in line with plan.
- Net interest expense was $164 million, up $4 million from last year. Income tax provision rate was 36.9%, reflecting the impact of the store rationalization charge. The company expect tax rate to be approximately 37% for the year.
- Shares were 1.68 billion shares, compared to 1.97 billion shares last year. The reduction in outstanding shares is due to share repurchase program and includes the tender offer completed last September.
- The company did not repurchase any shares and the completion of recapitalization plan remains on pause as it is waiting for stability, both in business and the credit markets.
The company opened 26 new stores, including two relocations for an ending store count of 2,258.
- Today, 247 stores representing approximately 11% of store base operate in Canada, Mexico, and China.
- At the end of the first quarter, selling square footage was $237 million, a 3.9% increase from last year. Reflecting the sales environment, total sales per square foot were approximately $305 for the quarter, down 7.4% from last year.
- At the end of the quarter, retail inventory was $12.6 billion, down from $12.7 billion last year. On a per store basis, inventory was down 4.6%.
The company instituted a new seasonal inventory planning process and as a result, seasonal inventory levels are in good shape relative to the sales environment.
- But based on the sales environment, inventory turnover was 3.9 times compared to 4.2 times last year.
- Computed on the average of beginning and ending long-term debt and equity for the trailing four quarters, return on invested capital for continuing operations was approximately 12%, down 240 basis points from last year due to the decline in operating profit and the store rationalization charge. Excluding the store rationalization charge, return on invested capital was approximately 13%.
- The company ended the quarter with $45.6 billion in assets, including $779 million in cash and short-term investments. This is an increase of approximately $322 million in cash and short-term investments from the end of fiscal 2007, reflecting cash flow generated by the business of approximately $2.4 billion, offset by $530 million of capital expenditures, $379 million of dividends paid, and a $1.2 billion repayment of outstanding commercial paper.
The company experienced a negative sales growth in all departments except garden.
- Plumbing, while negative, outperformed the company average comp. As expected, the weakness came from continued softness in big ticket and construction departments. Building materials, electrical, millwork, and kitchens all had double-digit comp declines. With softness in these project businesses, among others, average ticket was down 2.8% from last year to $57.36.
- Regionally in markets where home prices have declined approximately 15%, the company is continuing to see double-digit negative comparable store sales. This was reflected in results in California and in Florida. Even garden, which posted positive comparable store sales for the company reported negative comparable store sales in those areas.
- While these two regions remain weak, there are a few areas of the country, such as the Ohio Valley and the Southwest region, as well as international businesses that are helping to offset some of those declines.
