DBRS Changes Trend on Home Depot to Positive from Stable

DBRS has today confirmed the Issuer Rating and Senior Unsecured Debt rating of The Home Depot, Inc. at A (low) and has changed the trends to Positive from Stable. DBRS has also confirmed the Commercial Paper ratings of The Home Depot, Inc. and Home Depot of Canada Inc. (Home Depot or the Company) at R-1 (low), both with Stable trends.

On July 19, 2012, DBRS confirmed the ratings of Home Depot and maintained the Stable trend. The rating actions considered Home Depot’s improving operating results over the longer term and the possibility that the Company could undertake debt-financed share repurchases.

Subsequently, Home Depot released its F2012 financials, which continue to deliver strong operating results. Sales increased to $74.8 billion, representing an increase of 4.5% (excluding the 53rd week), and comparable store sales increased 4.6%. EBITDA margins continued their consistent improvement as the Company remains focused on improving efficiency and reducing costs, while also benefitting in F2012 from the more favourable-than-expected settlement of real estate in China. As such, EBITDA increased to over $9.3 billion in F2012 versus $8.2 billion in F2011 and nearly $7.5 billion in F2010, within the context of a slow U.S. economic recovery and an intense competitive environment.

Combined with stable balance-sheet debt of approximately $10.7 billion at year-end F2012, lease-adjusted debt-to-EBITDAR improved to 1.55 times (x) in F2012 versus 1.74x in F2011 and 1.81x in F2010 (capitalizing operating lease expense by 6.0x as per DBRS’s “Rating Companies in the Merchandising Industry” methodology). EBIT coverage has also benefitted from both rising operating income and lower interest rates on recent issuances, improving to 8.9x in F2012 versus 7.9x in F2011. In considering the current rating actions, DBRS notes that, on its February 26, 2013, conference call, the Company reiterated its leverage target at 2.0x lease-adjusted debt-to-EBITDAR (using an 8.0x multiple to capitalize operating lease expense, the equivalent to 1.85x lease-adjusted debt-to-EBITDAR using a 6.0x multiple to capitalize operating leases per the DBRS methodology) and announced its intention to use existing debt capacity to fund share repurchases in the near-to-medium term.

In terms of outlook, DBRS has changed the trend to Positive in recognition of the Company’s continued improvement in operating performance and market position in recent years while noting that Home Depot will return leverage toward historically normal levels. The Company’s impressive results have outperformed the market and key competitors and have been delivered through both growing the top line and expanding margins. Such significant improvements in operating performance have further solidified Home Depot’s market positions, particularly in the United States where macroeconomic factors should be increasingly favourable to the home improvement market. Should DBRS become confident that Home Depot will maintain sound operating performance going forward, and key credit metrics within its targeted range (i.e., lease-adjusted debt-to-EBITDAR of approximately 2.0x using an 8.0x multiple to capitalize operating lease expense, or approximately 1.85x using a 6.0x multiple), a ratings upgrade to “A” would likely result.

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

The rating of Home Depot of Canada Inc.’s Commercial Paper is based on a guarantee from The Home Depot, Inc.

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 to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Companies in the Merchandising Industry, which can be found on our website under Methodologies.