Fitch Rates The Home Depot, Inc.'s New Notes 'A-'; Outlook Stable
NEW YORK -- April 2, 2013
Fitch Ratings has assigned a rating of 'A-' to The Home Depot, Inc.'s (Home
Depot) new $2 billion 10- and 30-year senior notes. The Rating Outlook is
Stable. Proceeds are expected to be used for general corporate purposes,
including share buybacks. A full list of ratings follows at the end of this
KEY RATING DRIVERS
The rating reflects Home Depot's solid operating momentum, strong free cash
flow, and the company's stated target of managing adjusted debt/EBITDAR within
2x. The ratings also consider Home Depot's leading position in the home
improvement retail sector in North America as well as the challenges posed by
a slow recovery by the housing market and persistently high unemployment.
Home Depot has been able to generate positive operating momentum in the midst
of a home improvement industry that has seen consumers focus on repair and
maintenance projects while avoiding more complex projects. Growth of sales to
pros, which are more indicative of the housing market and make up
approximately 35% of sales, have recently caught up to sales growth to
consumers after having lagged since the recession. Despite industry headwinds,
Fitch currently projects U.S. home improvement spending to increase 4.0% in
Home Depot's comparable store sales have been positive for 11 of the past 12
quarters, following four years of negative comps. Total sales grew 6.2% in
2012 (on a 53 week basis) and are expected to grow in the positive low single
digits in 2013 -2014.
Home Depot has produced a strong margin recovery over the past two years, with
EBIT margins improving to 10.9% in 2012, from 9.9% in 2011 driven by a
combination of gross margin improvement and strong expense management. Fitch
sees moderate additional margin upside made possible by the investments Home
Depot is making in its technology and supply chain, and thinks the company can
achieve a 12% EBIT margin by 2015.
Home Depot plans to build only 8 - 10 new stores per year over the coming few
years, to be focused primarily in Mexico. Low levels of capital expenditures
have resulted in strong free cash flow after dividends (FCF), which is
expected to track around $3 - 4 billion annually going forward as capital
expenditures remain at less than 2% of sales.
FCF, and some incremental borrowings, will be directed to share repurchases,
as the company manages its financial leverage (adjusted debt/EBITDAR) at or
under 2.0x. Financial leverage (adjusted debt/EBITDAR) was 1.6x at the end of
2012 and will increase to 1.9x proforma the $2 billion debt issuance.
Home Depot has a solid liquidity position supported by a seasonally strong
cash balance of $2.5 billion at Feb. 3, 2013, together with an undrawn $2.0
billion credit facility. The company also benefits from its 89% store base
The next major debt maturity is a $1.3 billion note coming due in December
2013, which Fitch expects will be refinanced. After that, there is no maturity
until 2016 when $3 billion comes due.
Weaker operating trends or a move by management to more shareholder friendly
policies that increase adjusted leverage to the mid 2x range could lead to a
negative rating action.
Continued positive operating trends together with a sustained reduction in
adjusted leverage to below 1.5x, could lead to a positive rating action
Fitch currently rates Home Depot as follows:
--Long-term Issuer Default Rating (IDR) 'A-';
--Senior unsecured notes 'A-';
--Bank credit facilities 'A-';
--Short-term IDR 'F2';
--Commercial paper 'F2'.
The Rating Outlook is Stable.
In accordance with Fitch's policies, the issuer appealed and provided
additional information to Fitch that resulted in a rating action which is
different than the original rating committee outcome.
Additional information is available at 'www.fitchratings.com'. The ratings
above were unsolicited and have been provided by Fitch as a service to
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Short-Term Ratings Criteria for Non-Financial Corporates'(Aug. 9, 2012).
Applicable Criteria and Related Research
Corporate Rating Methodology
Short-Term Ratings Criteria for Non-Financial Corporates
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Augustinus Wong, +1-212-908-0762
Fitch Ratings, Inc.
One State Street
New York, NY 10004
Philip M. Zahn, CFA, +1-312-606-2336
Monica Aggarwal, +1-212-908-0282
Brian Bertsch, +1-212-908-0549
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