The Home Depot, Inc. The difference between a company with a concept and one without is the difference between a stock that sells for 20 times earnings and one that sells for 10 times earn ings. The Home Depor is definitely a concept stock, and it has the multiple to prove it — 27-28 rimes likely earnings in the current fiscal year ending this month. On the face (of it, The Home Depot might seem like a tough one for the concept-mongers to work with. I's a chain of hardware stores. But, as we noted in our last visi 10 the company in the spring of 83, these hardware siores are huge warehouse outlets ~ 60,000 to £80,000 feet in space. You can ft an awful lot of saws in these and stil have plenty of 00m leftover to knack together a very decent concept. ‘And in truth, the warehouse notion isthe hottest thing in retailing these days. The Home Depot buys in quantum quantities, which means that les suppliers are eager to leep within its good graces and hence provide it with a lot of extra service. The compa ry, as it happens, is masterful in promotion and pricing, The last time we counted, it had 22 stores, all of them located where the sun shines all the time. Growth has been sizzling. Revenues, a mere $22 million in fiscal ‘80, shot past the quarter billion mark three years later. AS to earnings, they have climbed front wo ‘cents in fiscal '80 10 an estimated 60 cents inthe fiscal year coming to an end [in Jan- ary 1985}. ‘ts many boosters in the Street, moreover, anticipate more of the same as far as the bullish eye can see. They're confidently estimating 30% growth in the new fiscal ‘year as well. Could be. But while we share their esteem forthe company's merchan- Uising skills and imagination, we're as bemused now as we were the first time we looked at The Home Depot by its rick multiple. Maybe a little more now than then.! ‘The above report appeared on January 21, 1985, in “Up & Down Wall Street.” a regular column in Barron's financial weekly. COMPANY BACKGROUND Bernard Marcus and Arthur Blank founded The Home Depot in 1978 to bring the ware- ‘house retailing concept to the home center industry. The company operated retail “do- ‘yoursel?” (DIY) warehouse stores which sold a wide assortment of building materials and home improvement products, Sales, which were on a cash-and-carry basis, were concen trated in the home remodeling market. The company targeted as its customers individual homeowners and small contractors. ‘The Home Depots strategy had several important elements. The company offered low and competitive prices, a feature central to the warehouse reailing concept. The Home Depot's stores, usually in subucbs, were also the warehouses, with inventory stacked over merchandise displayed on industrial racks. The warehouse format of the stores Kept the ‘ovethead low and allowed the company to pass the savings to customers. Costs were fur- ther reduced by emphasizing higher volume and lower margins with a high inventory Profesor Krishna Palepo prepared ds cae. The cao I tended sole asthe tal for cae cusion and it ‘not Inunded to serve sam endorsement, source of primary de, orHustration of fective or Inalecve ae gement. Copyrigre © 1988 by the President and Flows of Harvard College. HBS Case 9188-148, |. Repened wth permis frm Baro’, Jansary 21,1985.Franca Arable tumover. While offering low prices, The Home Depot was careful not to sacrifice the depth ‘of merchandise and the quality of products offered forsale. ‘To ensure that the right products were stocked at all times, each Home Depot store car- ried approximately $4,500,000 of inventory, at retail, consisting of approximately 25,000 separate stock-keeping units. All these items were kept on the sales floor of the store, thus {increasing convenience to the customer and minimizing out-of-stock occurrences. The company also assured its customers that the products sold by it were of the best quality. ‘The Home Depot offered nationally advertised brands as well as lesser known brands carefully chosen by the company’s merchandise managers, Every product sold by The Home Depot was guaranteed by either the manufacturer or by the company itself, ‘The Home Depot complemented the above merchandising strategy with excellent sales assistance. Since the great majority of the company's customers were individual home- ‘owners with no prior experience in their home improvement projects, The Home Depot considered its employees’ technical knowledge and service orientation to be very impor- ‘ant to its marketing success. The company pursued a number of policies to address this ‘need. Approximately 90% of the company's employees were on a full-time basis. To attract and retain a strong sales force, the company maintained salary and wage levels sbove those ofits competitors. All the floor sales personnel attended special traning ses- sions to gain thorough knowledge of the company’s home improvement products and their basic applications. This training enabled them to answer shoppers’ questions and help cus- tomers in choosing equipment and material appropriate for their projects. Often, the expert advice the sales personnel provided created a bond that resulted in continuous contact with the customer throughout the duration of the customer's project. Finally to atract customers, The Home Depot pursued an aggressive advertising pro- 7am utilizing newspapers, television, radio, and direct mail catalogues. The company's advertising stressed promotional pricing, the broad assortment and depth of its mer- chandlse, and the assistance provided by its sales personnel. The company also sponsored in-store demonstrations of do-it-yourself techniques and product uses. To increase custom ‘ers’ shopping convenience, The Home Depot's stores were open seven days a week, including weekday evenings. Fortune magazine commented on The Home Depot's strategy as follows: Warehouse stores typically offer shoppers deep discounts with minimal service and back-to-basics ambiance. The Home Depot's outlets have all the charm of a freight ‘yard and predictably low prices. But they also offer unusually helpful customer ser- vice. Although warehouse retailing looks simple i is not: As discounting cuts into {gross profit margins, the merchant must carefully control buying, merchandising, and inventory costs. Throwing in service, which is expensive and hard to systematize, ‘makes the job even tougher. In the do-it-yourself (DIY) segment of the industry — which includes old-style hardware stores, building supply warehouses, andthe every- thing-under-one-roof home centers ~The Home Depot isthe only company that has. successfully Brought off the union of low prices and high service? ‘The Home Depots strategy was successful in fueling an impressive growth inthe com- ppany's operations. The first three Home Depot stores, opened in Atlanta in 1979, were a quick success. From this modest beginning, the company grew rapidly and weat pub 1981. The company's stock initially traded overthe-counter and was listed on the New ‘York Stock Exchange in April 1984, Several new stores were opened in markets 2 Repeeted wth permison fom Fornine, February 1988, p72. ‘The Home Depot‘The Home Depot Pare.» Business Ana}yss and Valuation Tools throughout the Sunbelt, and the number of stores operated by The Home Depot grew from in 1979 to 50 by the end of fiscal 1985, As a result, sales grew from $7 million in 1979 to ‘$700 million in 1985, Exhibit 1 provides a summary of the growth in the company’s oper- ations. The company's stock price performance during 1985 is summarized in Exhibit 2. INDUSTRY AND COMPETITION ‘The home improvement industry was large and growing during the 1980s. The industry sales totaled approximately $80 billion in 1985 and strong industry growth was expected to continue, especially in the do-it-yourself (DIY) segment, which had grown at a compound. ed annual rate of 14 percent over the last 15 years. With the number of two-wage-eamer households growing, there was an increase in families’ average disposable income, making it possible to increase the frequency and magnitude of home improvement projects. Further, ‘many homeowners were undertaking these projects by themselves rather than hiring a con- tractor. Research conducted by the Do-It-Yourself Instnute, an industry trade group, showed that DIY activities had become America’s second most popular leisure-time activity after watching television. ‘The success of warehouse retailing pioneered by The Home Depot attracted a numer of other companies into the industry. Among the store chains currently operating in the industry were Builders Square (a division of K Mart), Mt. HOW (a division of Service Merchandise), The Home Club (a division of Zayre Corp,), Payless Cashways (a division ‘of WR. Grace), and Hechinger Co. Most ofthese store chains were relatively new and not yet achieving significant profitability. ‘Among The Home Depot's competitors the most successful was Hechinger, which had ‘operated hardware stores for along time and recently entered the do-it-yourself segment of the industry. Using a strategy quite different from The Home Depot's, Hechinger ran gleaming upscale stores and simed at high profit margins. As of the end of fiscal 1985, the Company operated 55 stores, loceted primarily in southeastem states. Hechinger announced that it planned to expand its sales by 20 to 25 percent a year by adding 10 to 14 stores a ‘year. A summary of Hechinger’s recent financial performance is presented in Exhibit 3. THE HOME DEPOT’S FUTURE While The Home Depot had achieved rapid growth every year since its inception, fiscal 1985 was probably the most important in the company's seven-year history. During 1985 the company implemented its most ambitious expansion plan to date by adding 20 new stores in eight new markets, Nine of these stores were acquired from Bowater, a competing store chain which was in financial difficulty. As The Home Depot engaged in major expan- sion, its revenues rose 62 percent from $432 million in fiscal 1984 to $700 million in 1985. However, the company's earnings declined in 1985 from the record levels achieved during the previous fiscal year. In fiscal 1985, The Home Depot earned $8.2 million, or $0.33 pet share, as compared with $14.1 million or $0.56 per share in fiscal 1984. Bernard Marcus, The Home Depot's chairman and chief executive officer, commented on the company’s performance as follows: Fiscal 1985 was a year of rapid expansion and continued growth for The Home De- ‘Pot. Feeling the time was ripe for us to enhance our share of the do-it-yourself mar- kes, we seized the opportunity 10 make a significant investment in our long-term future. At the same time, we recognized that our short-term profit growth would be affected.‘The Home Depot's 1985 annual report (Exhibit 4) provided more details on the firm's ‘financial performance during the year. As fiscal 1985 came to a close, The Home Depot faced some critical issues. The com- petition inthe do-it-yourself industry was heating up. The fight for market dominance was expected to result in pressure on margins, and industry analysts expected only the stron- Best and most capable firms in the industry to survive. Also, The Home Depot had announced plans for further expansion that included the opening of nine new stores in 1986. The company estimated that site acquisition and construction would cost about $6.6 tmllion for each new store, and investment in inventory (net of vendor financing) would require an additional $1.8 million per store. The company needed significant additional financing to implement these plans. Home Depot relied on external financing—both debt and equity—to fund its growth in 1984 and 1985, However, the significant drop in its stock price in 1985 made further equity financing less attractive. While the company could borrow from its line of credit, i hhad to make sure that it could satisfy the interest coverage requirements (see Note 3 in Exhibit 4 for a discussion of debt covenant restrictions). Clearly, generating more cash from its own operations would be the best way for Home Depot to invest in its growth on a sustainable basis. QUESTIONS 1. Evaluate Home Depot's business strategy. Do you think itis a viable strategy in the Jong run? 2 Analyze Home Depot's financial performance during the fiscal years 1983-1985. ‘Compare Home Depot's performance in this period with Hechinger’s performance. (You may use the ratios and the cash flow analysis in Exhibit 3 im this summary.) ‘3. How productive were Home Depot's stores in the fiscal years 1983-19857 (You may use the statistics in Exhibit 1 in this analysis.) 4, Home Depot's stock price dropped by 23 percent between January 1985 and February 1986, making it difficult forthe company torely on equity capital to finance its growth. ‘Covenants on existing debt (discussed in Note 3 of Exhibit 4) restrict the magnitude of ‘he company’s future borrowing. Given these constrains, what specific actions should Home Depot take with respect to its current operations and growth strategy? How can ‘the company improve its operating performance? Should the company change its stat- egy? If 50, how? ‘The Home DepotCC 5-48 ‘Part 2 + Business Analysis and Valuation Tools EXHIBIT ‘The Home Depot, Inc. - Summary of Performance During Fiscal Years 1981-1985 NET SALES NET EARNINGS fo STOCKHOLDERS! Tea NNSS pp zourry & Smt 8] aaane g TOTALASSETS ‘CUSTOMER COUNT fa 8 > a e 3 5 2 = 7aRea Ss NUMBER OF NUMBER OF STORES EMPLOYEES ATYEAR END. ons a2 8 4SEXHIBIT 2 ‘The Home Depot’s Common Stock Price and Standard & Poor's 500 Composite Index from January 1985 to February 1986 Home Depot Date Stock Price tes $17.15 1654 ues 16375 1796 3s 19.000 1832 anes 17.000 1813. sires 18.000 1784 613res 16.125 1993 78s 13.000 1924 ares 12.625 192 9218s (87s 1979 ores 11375 ast ties 10.750 1915. ranves 1.000 200 ies 12625 2096 213186 13.05 2140 (Cumulative Recurn: aK 294% The Home Depot's 8 = 1.3 (Valve Une estima), ‘The Home Depot550 Pare + Buniness Arai and Vahatin Toots EXHIBIT 3 ‘The Home Depot, Ine. ~ Summary of Financial Performance of Hechinger Company 1. Hechinger’s Financial Ratios ‘The Home Depot. ‘Assured 365 dey nthe fecal yoor, reaameawees ee aS a et ope pean pr oo sto|, Hechinger’s Cash Flow Dollars in Thousands) ‘ash Provided from Operations letearnings ‘me not requiring the use of cash or marketable securities: Depreciation and amortization Deferred income raxes Deferred rent expense ‘ash Invested in Operations ‘ccounts receivable ferchandise Inventories Dher current assets \ccounts payable and accrued expenses ‘axes on income — current tot Cash Provided from Operations {ash Used for Investment Activities penditures for property, furniture and equipment, nt of disposals, and other assets ash Used to Pay Dividends to Shareholders ash Provided from Financing Activities ‘roceeds from public offering of 81% converted subor- diated debentures, net of expenses ‘roceeds from public offering of common stock net of expenses ‘roceeds from sale and easeback transactions under ‘operating leases serease (decrease) in long-term debe Decrease in short-term debt “xereise of stock options including income tax benefit Decrease in capital lease obligations nerease in Cash and Marketable Securities February |, 1986 $323,111 6594 1375 2321 33,401 4657 17998 4891 (6620) 285 21211 12,190 86,037) (1,550) 23,969 180 Gu) 78,838 $344 ancl Analysis Year Ending February2, January 28, 1985, 1984 $205923 16243 Agr 3429 2.040 1515 2.064 29,649 7,905 7,954 8,045 20596 3,760 1,304 (12,099) (o76n), 3,031 (673) 10,642 19,512 19,007 3,138 (25,531) (16,346) (1,091) (868) 85010 - = 13,439 0338 6874 (4750) 6,366 — (318) 674 on (280) (254) 38,992 $1642 551 ‘The Home Depot‘The Home Depot Pare © Business Anas and Valinion Tooke EXHIBIT 4 The Home Depot, Inc.—Abridged Annual Report for Fiscal Year 1985 A Letter to Our Shareholders: Fiscal 1985 was a year of rapid expansion and contin- ued growth for The Home Depot. Feeling the time _was ripe for us to enhance our share ofthe do-t-your- self market, we seized the opportunity to make a si—- nificant Investment in our long-term future. At the ‘same time, we recognized that our short-term profit growth would be affected, ‘The Home Depot intends to be the dominant factor in cevery market wa serve. The key to our success has been that upon encaring 2 new market, we make a sub- standal commitment—opening multiple stores, provid- tng excallenc customer service, creating highly visible ‘promotions, and growing the entire market. We turn the novice into a do--yoursefer and enable the expert to do more for less money. From shordy before the end of fiscal 1984 to the lose of fiscal 1985, The Home Depot entered elghe new rmarkets—Dalias, Houston, Jacksorvile, San Diego, Los Angeles, Shreveport, Baton Rouge and Mobile—in 1 pertod of approximately 13 months. n that time, the number of Home Depot stores rose dramatically fom 22 t0 50, incuding 9 stores acquired inthe Bowater ‘acquisition which had not been in our original plan. “Twenty of these stores were opened during the past fiscal year alone. During this ue span, we have become the only rational warehouse retaling chain. serving markets across the Sunbelt. “Ths expansion program required a cremendous invest rent of pial expendicures and inventory 5 well as in personnel Asa result, our net earings dectined from record levels achieved during the previous fiscal year. In cal 1985, The Home Depot earned $38,219,000, or $.33 per share as compared with $14,122,000, or $.56 per share, in cal 1984. How- ‘ever, 35 The Home Depot engaged in this major thrust forward, also increased its marketshare and market Dresence a revenues rose 62% from $432779,000 in fiscal 1984 vo $700,729,00 in fiscal 1985. Despice our sgntficanc investments, we stl continu to bein avery strong francialcondlion In December, ‘The Home Depot replaced a prior $100 milion bank credit line with an eight-year decreasing revolving credit agreement of $200 millon In addon, we are Pursuing sale-and-leaseback negations for an aggre- tate of proximately $50 milion for ten of our sores. These sources of addidoral funds, along with seemed rach flows wal provide us with an sample financal foundation to continue to underwrite ‘our growth over the next several years. ‘We are also quite proud that The Home Depot achieved fs substantial gain in sles and market share in what tumed out to be a very difficult year for our industry and recalling in general, The do-t-yoursef “warehouse” Industry, which we ploneered only afew shore years ago, has recandy atracted many compet- ‘tors, some of whom have already fallen bythe wayside, ‘having mistaken our dramatic success aa path towards easy profits. Now the industry is faced witha sttuation when only the strongest and most capable ‘will survive, As this process continues, we expect to encounter addiional cost competition in the Fight for ‘market dominance. However, with our strengths— ‘both firanclal and our successful ability to develop a foyal customer base—we are confident that The Home Depot will emerge an even stronger company. ‘We have never doubted The Home Depot ability to bea leader in our business. We have the market dom nance, the supertor retailing concepts and the neces- sary foundation of experienced management. Further, we have the determination to maintain aur positon. ‘Looking at some of our markets individually, clearly ‘our most dificle environment has been in Houston, ‘where the oil-related economy is undergoing painful contractions combined with parieularly eres indis- ‘ry compection. Ths has caused our newly-opened stores to operate at a sub par level. in Dallas/Fort ‘Worth, the stores we acquired a thé end of fiscal 1984 have not yet generated the profits we expect Such dificult market conditions demand a fexble ‘reaction both in merchandising and operations. Recognizing the future potential of both ofthese mar ‘eats, our management team is addressing the Issues and fees confident that the fnal outcome will be post tive. lathe other markats entered ths year, the siaation has been considerably more positive. There, our stores are experiencing growth much closer to our historical patterns. {hn support of our California and Arizona operations # ‘West Coase division was Inaugurated to facicae 3 ‘ely response to the demands of that markesplsct. ‘With management personnel in place, this division srow responsible forthe merchandising and operations ofall cores inthe western states. COvher highlights of the past year’ acthvties include tho ‘we have made In expanding our management {eam and the computer systems we installed Into our operations to enkance our efficiency. During the year, we completed the store price look-up pase of our management Information system, This feats cracking individual ers’ sales through our registers, resuking n a more concise method af inven- tory reorder and margin management with the Infor- mation now avaiable. During the coming year we will be testing a perpetual ‘nventory te-in with our price look-up system, elimi- rating pricing of our merchandise atthe store level. ‘The later is being tested in several stores presently and hopefully will be expanded to include all of our stores by year end, This will havea significant effect on labor productivity at the store level. ‘The Home Depot is aways looking for ways In which tw do things better, priding ourselves on our flexbley and ably to Innovate and to react to changing ‘onttions. Whether itis a matter of developing state- ‘oftheart computer systems, reevauating our store layouts or adapting to fast-changing markets and new ‘ypes of merchandising, flexblity has always been a ‘Home Depot characteristic. In fiscal 1986, The Home Depot will continue to ‘expand, but ata much more moderate pace. We plan ‘0 open nine new stores. These stores willbe In exist- Ing markats except for two locations in the new mar ket of San Jose, California, ‘When we open stores in existing markets, sharing advertising costs and operational expenses, we achieve ‘faster return than stores in new markets. With this In ming, in january 1986, we withdrew from the Detroit market and delayed the opening of stores in San Francisco. These stores were targeted fora sub- ‘stantial inkl loss In earnings that would have been necessary to achieve markt dominance. From our standpolne, these new markets would have had the ‘combined effect of luting our personnel and nega ‘ively affecting our earnings. ‘chas always been Home Depot’ philosophy to maln- ‘ain orderly growth and achleve market dominance as ‘we expand to new markets. Indeed, growth for srownh’s sake has never been and never will be our ‘objective. We intend to Invest prudent and expand ‘aggressively In our business and our markets only ‘when such expendieures meet our criteria for long ‘term profitably. Franch Araiyse ‘We are quice optimistic about our company’s future— both for fiscal 1986 and for the years to follow. Essen- ‘tal to this optimism Is the fact that The Home Depot fas consistandy proven that we can grow the market in every geographical area we enter. Simply, this means ‘that we do not have to take business away from hard= ware stores and other existing home-improvement. ‘outlets, but rather, to create new do-t-yourselfers out of those who have never done their own home Improvements. (Our phitosophy isto educate our customers on how to be do-I-yourselfers. Our customers have come to ‘expect The Home Depot’ knowledgeable sales staff ‘to guide them through any project they care to under: ‘take, whether i be instaling kitchen cabinets, con- structing a deck, or bulding an entire house. Our sales ‘staff knows how to complete each project, what tools and material to Include, and how to sell our customers everything they need, ‘The Home Depot tratitionaly holds clnis for is cus ‘tomers in such skils as elocerica wiring, carpentry, and ‘plumbing, co name a few Upon the successful comple- ‘don of such clinics, our customers are confident in ‘themselves and in The Home Depot. This confidence allows them to attempt increasingly advanced and complex home improvements. ‘Concerning our facilites, Home Depot’ warehouse etalling concept allows us to carry a truly fantastic. selection of merchandise and offer i at the lowest postible prices. Each of our stores ranges from about 65,000 to over 100,000 square feet of sling space, with an adaltional 4000 to 10,000 square feet of out- door sling area In these large stores, we are able to stock all the materials and tools needed to build a house from scratch, and to landscape Is grounds. ‘With each store functioning as tts own warehouse, ‘with a capacity of over 25,000 diferent ems, we are able to keep our prices ata minimum while providing the greatest selection of building materials and name ‘brand merchandise. For the majority of Americans, heir home is their most valuable asset. eis an asset that consistency Apprecaes. Ie isalso an ase n need of ongolng care and maintenance. By becoming do-i-yourseiers, homeowners can significant enkance the value of their homes. We at The Home Depot have found that by success delivering this message, we have cre- ated loyal and satisfied customers. And by maintaining leadership in our markets, we have established a sound toss on which eo build a fusra of groweh with proft- abi. 53 ‘The Home Depot‘The Home Depot Pare2 * Busnes: Anat and Vabaon Tools ‘The Home Depot management and staff are dedicated 1 the propostion that we ar—and will remale— ‘Americas leading do--yoursel rele. Bernard Marcus (Chairman and (Chief Executive Officer ‘Arthur M. Blank President and ‘Chief Operating Officer CONSOLIDATED STATEMENTS OF EARNINGS Fiscal Year Ended ag SE ere a sn eas Net Sales (note 2) $70,729,000 $43,773,000 $256,184000 See cae Gross Profit Rik 14,319,000 T7O0TF ‘Operating Expenses: ‘Selling and store operating expenses 134,354,000 74,447,000 43,514,000 —— an ee eee Sigaeccs” ae ie Soe ae ESE ‘Other income (Expense): Net gain on disposition of property and ‘equipment (nove 7) 1,317,000 — = Interest income 1,481,000 5,236,000 2422,000 3 Interest expense (note 3) 10,206,000) (4,122,000) (1 3 = Earnings Before Income Taxes i 3652006 78986, 000 Income Taxes (note 4) 3,400,000 12,130,000 8,725,000 ‘Net Earnings ¥7Rr19,000 sare 0 a esas eo’, Weighted Average Number of Common ‘and Common Equivalent Shares 25,247,000 25,302,000Franc Anas CONSOLIDATED BALANCE SHEETS February 2, 1986 February 3, 1985 ASSETS Current Assets: ‘Cash, Including time deposits of $43,374,000 in 1985 $9,671,000 ‘Accounts recelvable, net (note 7) 21,505,000 Refundable incoma tos 3,659,000 Merchandise inventories 152,700,000 Prepaid expenses. Total current assets Property and Equipment, at Cost (note 3): Land 44,396,000 30,044,000 Baldings 38,005,000 3,728,000 Fornicre, fotires, and equipment 34,786,000 18,162,000 Leasehold improvements 23,748,000 11,743,000 Construction in progress 27,694,000 14,039,000 T7760 ‘Less accumulated depreciation and amortization 4.139.000 [Net property and equipment 160,816,000 3577000 Cost in Excess of the Falr Value of Net Assets Acquired, net of accumulated amortization of $730,000 in 1985, and $93,000 in 1984 (note 2) 24,561,000 25,198,000 Other 4,755,000 3.177.000 $249,364.00 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabitities: ‘Accouns payable $53,881,000 $ 32,356,000 ‘Accrued salaries and related expenses 5,397,000 31819,000 Other seerdetbapenses 13,950,000 10,214,000 Income taxes payable (note 4) — 626,000 ‘Current portion of long-term debt (note 3) 287,000 ‘Total current liabilities Ei Long-Term Debt, Excluding Current installments, (note 3): Convertible subordinated debereures 100,250,000 100,250,000 (Other long-term debt 99,693,000 17,692,000 99. Other Liabitities 861,000 1,320,000 Deferred Income Taxes (note 4) 6,687,000 2,586,000 (continued) ‘The Home DepotFrancal Analyt 5 CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION (continued) Fiscal Year Ended February 2.1906 Febnaary3. 1985 january 29,1984 1,728,000 25540000 252,000 6'341,000 50,792,000 __36417,000 "$140,700,000 | "F5Z807.000 Changes in Components of Working Capital: Increate (decrease) in current assets: cash (42,391,000) $29,894.00 $ 13,917,000 Recebabls, net 15,799,000 7,170,000 1'567,000. Merchandise inventories 65,654,000 25334000 41,137,000 Prepaid expenses 587,000 1'206,000 227,000 649,000 63,504,000 56,848,000 Increase (decrease) in current labilis: ‘Accounes payable 21,525,000 10505000 17,150,000 ‘Accrued salaries and related expenses 1,578,000 (63,000) 2'524,000 Other accrued expenses 3,736,000 2824,000 341,000 Income exes payable (626,000) (657,000) Current portion of long-term debt 233,000 17812,000 Increase in Working Capital $50,792,006 5.37 ‘The Home Depot536 Pare» Business Anas and Vahation Tools CONSOLIDATED BALANCE SHEETS (continued) February 2,1986 February 3, 1985 ‘Stockholders’ Equity (note 5): ‘Common stock, par value $:05, Authorized: 50,000,000 shares; issued and outstanding ~ 25,150,063 shares at February 2. 1986 and 25,055,188 shares at February 3, 1985 1,258,000, Paldsin caplal 48,900,000 Retained earnings Total stockholders’ equity 1,253,000 48,246,000 30,715,000 20274,000 ‘Commitments and Contingencies (notes 5,6 and 8) $249,364,000 CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION ary 29,1984 g Fiscal Year Ended 2 February 21986 ebrary 3.1988 2 Sources of Working Capital: 5 Necearnings $8,219,000 $14,122,000 Eras which do not use working capita 2 Depreciation and amortization of property and F equipment 4,376,000 2275,000 Deferred income taxes 3,612,000 1508,000 ‘Arnortztion of cost in excess ofthe fir value of net assets required 637,000 93,000 Net gain on disposition of property and equipment (1,317,000) — Other 180,000 77900 Working capital provided by operations 15,707,000” 18,075,000 Proceeds from disposition of property and ‘equipment 9,469,000, 861,000 Proceeds from long-term borrowings 97,400,000 120,350,000 Proceeds from sale of common stock, net 659,000 814,000 $118,235,000 —_“$140,100,000 $ 10,261,000 903,000 713.000 Uses of Working Capital: ‘Additions to property and equipment $99,767,000 $50,769,000 Current installments and repayments of long-term debt 10,399,000 6,792,000 Acquitition of Bowater Home Center, Inc, net of ‘working capital of $9,227,000 (note 2): Property and equipment - 4,815,000 Costin excess ofthe fair value of net assets acquired - 25,291,000 Other assets, net of bilities - (213,000)558 Pare2 «Business Aras and Valin Took, SELECTED FINANCIAL DATA fc Yar Ended February 2, 3, jamaary 29, ‘ruary30, Aanwary3t, Trae ia ee ma mm Selected Consliated Statement of Easing, Dat Nein ‘$700,729000 HOL779G00 —$2SKI04Q00 $1I7/SQ00 $8150 Gross profe 181,487,000 1143319,000 70,014.00 «33,358,000 14738000 Eran bere comets and earacrdinary bem 1,619,000 26,252,000 18,986,000 + 9,870,000 1,963,000 Eamings before extraordinary em 8,219,000 14,122,000 10,261,000 5,315,000 1.211.000 Exrerdary kere of (rome tos tng rom coryormrd frp? roving eet = = — 24000 (Net earnings $ 8,219,000 $ 14,122,000 $10,261,000 $5,315,000, $1,445,000 Fe Common and Common quale Stare: Lining tebre emnerdmryhen 8.33 $56 sai +4 $00 B coeeunen eee eee Neamne a Ls a ea a Cf Ste ee Se oo oo z ‘commen and common Z saeco asamreno samen asa assem 210s Selacad Conmalidatd alice Sheet Dat. ‘Wenn pa Slosshaao —s10n19q00 —$ anainqm0 (201m Semon: om aeeieaoas — ‘a#paeqo0o —“Iesa3no00 * shotenoo “ses04000 Long-term debe 199,943,000 117,942,000 4,384,000 236,000 3,738,000 Sebel onde tworzce —eaaiano0 ——«Srap00 «18354000 SNA ‘2 Showec fc! yar; ol others were S2-wesk focal year.Franca Analysis MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION ‘The data below reflec the percentage relationship between sales and major categories in the Consolidated Statements of Earnings and selected sales data of the percentage change in the dollar amounts of each of the items. Increase ) of Doar Fal Yar Taw 1965 1304 1983 1983 Selcted Consolidated Statements of Earnings Dats Net sles 619K 689% Geos profe sar 633 Contand expenses Seling and sare operating sos 71 Preopeing 223 Gis) Gene andadiniserve oo4 | 738 "Nec pin on postion of property and equipment = 2 inarest income qin 162 trares expense 176 38685 m9 7s amin before income ces GS 83 Income (720) 390 Nesearsings 619%) 376% Selected Consolidated Sales Data: Number of customer mansions 23,324,000 14256000 8479000 63.6% BLK, ‘Average amount of leper transaction $30.04 $3036 $3021 (Le) s Weighed werage weelly sles per operaung sore $ 342,500 $ 265500 $ 360300 © (63) 14 Pcl year 1985, 1984 and 1983 refer to the fecal years ended February 2, 1986, February 3, 1985 end ‘bewory 29,1984 repectvly, Face! 1984 cessed of 53 week wile 1985 ond 1983 each consed of 52 weeks Results of Operations For an understanding of the significant factors that influenced the Company’ performance during the past three fiscal years, the following discussion should be readin conjunesion with ‘the consolidated fnaneal statements appearing elsewhere in this annual report. Fiscal Year Ended February 2, 1986 Compared to February 3, 1985 [Net sales in fiscal year 1985 increased 62% from $422.779,000 to $700,729.000, The srowth is atriburable to several factors. First, the Company opened 20 new stores during 1985 and closed one store. Second, second-year sales increases were realized from the three. new stores opened in 1984 and from the nine former Bowater Home Centar stores acquired during 1984. Third, comparable store sales increases of 23% wore achieved despite comparing the S2-week 1985 fiscal year to the sales of the S3-week 1964 fiscal yer, due In part to the ‘number of eustomer transactions increasing by 64%. Finally, the weighted average weekly sales per operating store declined 6% in 1985 due tothe significant increase in the ratio of che num- ber of new stores to total stores In operation—new stores have a lower sales rate than mature stores une they establish market share. 559 The Home Depoty ‘The Home Depot Part? + Business Aras and Vahatin Took Gross profi in 1985 increased 59% from $114,319,000 to $181,457,000. This increase was, due to the Increased sales and was partially offset by a reduction in the gross profit margin from 26.4% to 25.9%. The reduction is primarily due to lower margins achleved witle estab- Fishing market presence in new markets, Cost and expenses increased 93% during 1985 and, as a percent of sales, increased from 203% to 247%. The increase in seling and store operating, preopening expenses and net Interest expense Is due tothe opening of 20 new stores, the costs associated with the former Bowater Home Center stores, and the related cost of bullding market share. The large per centage of new stores which have lower sales but fxed occupancy and certaln minimum oper- ating expenses tends to cause the percentage of seling and store operating costs to increase a5 a percentage of sales. The net gain on disposition of property and equipment is discussed folly in note 7 to the fnanchl statements, Earnings before income taxes decreased 56% from $26,252,000 to $11,619,000 resulting from the increase in operating expenses to support the Company's expansion program. The ‘Company’ effective income tax rate declined from 46.2% to 29.3% resulting from an increase In investment and other tax credit asa percentage of the total mx provision, As a percentage: ‘of sales, earnings decreased from 3.3% in 1964 to 1.2% In 1985 due tothe increase in operat- Ing expenses as discussed above, Fiscal Year Ended February 3, 1985 Compared to January 29, 1984 Net sales in fiscal 1984 Increased 69% from $256,1€4,000 to $432.779,000. The growth was acributable to several factors. First, the company opened three new stores during Ascal 1984. Second, the Company had sales of $9,755,000 from the nine former Bowater Home Center stores acquired on December 3, 1964. Third, second-year sales Increases were realized from the nine stores opened during fical 1983. Fourth, comparable store sales increases of 14% ‘were due in pat to 53 weeks in fiscal 1984 compared to 52 weeks in fiscal 1983 and in part to the number of customer transactions increasing by 63%. Fnaly, excluding the sales of the former Bowater Home Center stores, the weighted average weekly sles per operating store Increased 6% to $383,500 In fiscal 1904. Gross profit In fiscal 1984 increased 63% from $70.014,000 to $114319,000. This net Increase was due to the increased sales and was partially offtt by a reduction in the gross profit margin from 27.3% to 26.4%. The reduction in the gross profc percentage is largely the result of the purchase ofa high proportion of promoted merchandise by customers in the sec ‘ond quareer. Coss and expenses increased 73% during fiscal 1984. As a percent of sales, costs and ‘expenses increased from 19.9% to 203% due to increased selling, store operating general and administrative expenses. This planned increase was in preparation of the Company's future ‘expansion. Interest expense Increased signficanty as a result of the issuance of substant debe during fiscal 1984 to fund the Company's expansion, These increases were partially offset by reduced preopening expenses and increased interest income resulting from temporary Investment of the proceeds of the debt financing. Earnings before income taxes increased 38% from $12,986,000 to $26,252,000 resulting from the factors discussed above. Such pretax earings, however, were reduced by a loss from ‘the Bowater stores of approximately $1,900,000 from date of acquisition (December 1964) to year end. The Company's effective income tox rata increased slighty from 46.0% to 46.2% ‘resulting principally from less investment and other tax credits as a percentage of the toca tax provision. As a percentage of sales, earings decreased from 4.0% In fiscal 1963 to 3.3% in fis ‘al 1984. The decline 1s a resuk of the company’s reduced gross profie percentage and Increases In the operating expenses discussed above, Impact of inflation and Changing Prices ‘Atthough the Company cannot accurately determine the precise effect of inflation on tes operations, it does not believe inflaton fas had a material effect on sales or resuks of Babee Je otFranch Analysis operations. The Company has complied with the reporting requirements of the Financial ‘Aecounting Standards Board Statement No. 33 in note 10 to the financtl statements. Due to ‘the experimental techniques, subjective estimates and assumptions, and the incomplete pre- Sentation required by this accounting pronouncement, the Company questions the value of the required reporting Liquidity and Capital Resources Cash flow gonerated from existing store operations provided the Company witha signif cant source of iqudity since sales are on a cash-and-carry basis. In adztion a significant por tion of the Company’ fnventory Is financed under vendor credit terms. The Company has supplemented its operating cath flow from time to time with bank credit and equity and debt financing. During fical 1985, $88,000,000'of working capital was provided by the revolving tank credit ne, $4,400,000 from industrial reverue bonds, and approximately $15,707,000, from operations. In addition, during fiscal 1985, che Company entered into anew credit agree- ‘ment for a $200,000,000 revolving credit facility with a group of banks. “The Company hat announced plans to open nine new stores during ical 1986, two in the new market of northera California and the balance in existing markets. The cost of this store ‘expanzion program will depend upon, among other factors, the extent to which the Company is able to lease second-use store space 25 opposed to acquiring leases or sites and having ‘ores constructed to its own specifications. The Company estimates that approximately $6,600,000 per store will be required to acquire sites and construct facilities to the Com- pany’ specficaions and that approximately $1,700,000 will be required to open a store in leased space plus any addtional costs of acquiring the lease. These estimates include costs for se acquisition, construction expenditures, faures and equipment, and in-store minicomput- ers and pointofsale terminals. In addon, each new store will require approximately $1,800,000 to finance inventories, not of vendor financing. The Company believes it has the ability to finance these expendicures through existing cash resources, current bank tines of Credit which include a $200,000,000 elgheyear revolving credit agreement, funds generated from operations, and other forms of fianeing, including but not liited to various forms of real estate financing and unsecured borrowings ‘The Home Depot‘The Home Depot Pare2 + Busnes Ary and Vahation Took NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1, Summary of Significant Accounting Policies Fiscal Year ‘The Company's ical year ends on the Sunday closest tothe fat day of fanuary and usually consists of 52 weeks. Every five or sb years, however, there is a 53-weck year. The fiscal year ‘ended February 2, 1986 (1985) consisted of 52 weeks, the year ended February 3, 1985 (1984) consisted of 53 weeks and the year ended january 28, 1984 (1963) consisted of 52 weeks, Principles of Consolidation “The consolidated financial statements include the accounts of the Company and its wholly ‘owed subsilary. Al sigificaneIncercompany transacdons have been eliminated in consofida- ‘don, Certain reckssfestions were made to the 1984 talance sheet to conform to current year presentation. Merchandise Inventories Inventories are stated at the lower of cost (frstin, first-out) or market, as determined by the reral Inventory method. Depreciation and Amortization ‘The Company's buildings, furninur, focoures, and equipment are depreciated using the Straightline method over the estimated useful INes of the assets, improvements to leased pre- mises are amortized on the straight-line method over the life of the lease or the usefl life of the improvement, whichever is shorter. Investment Tax Credit Inwestment tax credits ara recorded as a reduction of Federal Income taxes In the year the credits are reafized. Store Preopening Costs Non-capital expenditures associated with opening new stores are charged to expense as Incurred, Eamings Per Common and Common Equivalent Share Eamings per common and common equivalent share are based on the weighted average numberof shares and equialens cursandng. Common equivalent shares used in he caleula- tion of earings per share represent shares granted under the Company's employee stock option plan and employee stock purchase plan, ‘Shares tsuable upon conversion of the 8X converte subordinated debentures are also ‘common stock equivalents. Shares lsiable upon conversion of the 9% convertible subord- rated debentures would only be Incded inthe computation of fly cuted earnings per share. However, nether shares issuable upon conversion of the 84% nor the 9% converdble ddebencures were dlutive in any year presented, and thus nether were considered in the earn- {ngs per share computations. 2. Acquisition ‘On December 3, 1964 the Company acquired the outstanding capital stock of Bowater Home Canter, Ine. (Bowater) for approximately $38,420,000 including costs incurred in con- ‘nection with the acquisition. Bowater operated nine retall home center stores primary in the Dalas, Texas metropolitan area. The acquisition was accounted for by the purchase methodand, accordingly, results of operations have been Included with those of the Company from ‘the dite of acquiskion. Cost in excess of the fair value of net assets acquired amounted to approximately $25,291,000, which ls belng amortized over forty years from date of acquisition sing the straigheine method. ‘The following rable summarizes, on a pro forma, unaudited basis the estimated combined results of operations of the Company and Bowaser for the years ended February 3, 1985 and ‘pnuary 29, 1964, 25 though the acquisition were made at the beginning of fiscal year 1983. ‘This pro forma Information does not purport to be indicative of the results of operations which would have actually been obtained ifthe acquisiéon had been effective on the dates, Indicated. Fiscal Year Ended February 3, 1985 January 29, 1984" (Unaudited) Net sales $482,752.00 ‘$274,660.00 Net earnings 9,009,000 6,913,000 Earnings per common and common ‘equivalent share 36 2B ‘tee per nd pr fra zm fom ae of pen of es eprtns nApe 3. Long-Term Debt and Lines of Credit Long-term debt consists of the following: February 21986 February 3, 1985 82% convertible subordinated debentures, ue July 1, 2009, con- ‘eruible into shares of common stock ofthe Company ata conversion price of $26.50 per share. The debentures are redeemable by the Company ata premium from July 1, 1986 1 July 1, 1995, wl retire 70% of the Issue prior to maturity. Interest is payable semi-annually, $86,250,000 $86,250,000 ‘9% convertible subordinated debentures, due December 15, 1999, convertible into shares of common stock ofthe Com pany ata conversion price of $16.90 per share. The debentures are redeemable by the Company ata premium from December 15, 1986 to December 15, 1994, An annual mandatory sinking fund of $2,000,000 per year Is required from 1994 to 1998, Incarest is payable sembannualy. 14,000,000 14,000,000 ‘Total convertible subordinated debentures 700,250,000 ~ 100,250,000 Revolving credit agreement. Interest may be foxed for ary portion ‘outstanding for up to 160 days, a the Company's option, based ‘ona CD rate plus 2%, the LIBOR rate plus A% or atthe prime rite, 188,000,000 = ‘Variable Rate Industral Revenue Bond (see note 7) 10,100,000, 10,100,000 ‘"Varlable Rate Industrial Revenue Bond, secured by a etter of credit, payable in sinking fund instalments from December 1991 through December 1, 2010 4,400,000 - ‘946% Industrial Reverwe Bond, secured by a leer of credit, payable ‘on December 1, 1993, with Interest payable sembannualy 4,200,000 4,200,000 (continued) ‘The Home Depot 7564 Pare2 + Basins Anas and Vakation Tools February 2, 1986 February 3, 1985 ‘Variable Rate industrial Revenue Bond, secured by fand, payable {annual installments of $233,000 with interest payable semi- annualy 3,267,000 3.500.000 Other 108,000 179.000 “oa long-term debt “iems.006 | —Tez.005 ‘Less current portion 10,382,000 287,000 Long-term debe, excusing curren portion Fivgpaoos = STI79205 ‘The ieret rte cn the variable roe Indes revene Bond ee reltd wo varus shore nk ney ‘market compose ree. Maurie of longtarm debt are approximately $10,382,000 for fiscal 1986 and $234,000 for each of the next four subsequent years ‘During the fiscal year ended February 2, 1986, the Company entered into a new unsecured revolving line of credit for a maximum of $200,000,000, subject to certain Himations, of which $88,000,000 is outseanding at yearend. Commitment amounts under the agreement decrease ‘by $15,000,000 on July 31, 1990, by $20,000,000 each sic months from that date through Jan~ Luary 31, 1993, by $35,000,000 on July 31, 1993, and with the remaining $50,000,000 commit- ‘ment expiring on fanuary 31, 1994, Maximum borrowings outstanding within the commitment Limits may not exceed specfed percentages of inventories, land and buildings, and feeures and ‘equipment, all ax defied in the Agreement. Under cerain conditions che comments may bbe extended andlor increased. An anrwal commitment fee of Hi to 'A% is required to be pald ‘on the unused portion of the revolving line of credit. lncrest rates specifid may be Increased bby a maximum of % of 1% based on specified ratios of interest rate coverage and debe 10 equi. Under the revolving credit agreement. the Company is required, among other things, 1 maintain during fiscal year 1965 a minimum tangible net worth (defined to include the con- ‘veruble subordinated debentures) of $150,000,000 (Increasing annually to $213,165,000 by January 3, 1989), a debe to cangible net worth ratio of no more than 2 to |, a current ratio of ‘not less than 1.5 to |, and a rato of earnings before interest expense and income taxes to Interest expense, ne, of not less than 2to 1. The Company was in compliance with al reserie- ‘dive covenants as of February 2, 1986, The restrictive covenants related to the leter of credit agreements securing the industrial revenue bonds and the corwertible subordinated deben- ‘ures are no more restrictive than those under the revohing line of credit agreement. Incerest expense in the accompanying consolidated statements of earnings i net of ncerest Operating assets turnover Nec debe. “Total interest-bearing liabilities ~ Cash and marketable securities Nec fianctal leverage Net interest expense after tax Net interest rate after tx Net pretax interest rate Nec aftertax interest rate = Spread Financial leverage effect. Nee debe / Equity (lnterest expense ~ Interest income) x (I~ effective tax rate) (Net incerest expense after tax) / Net debe (Ineerese expense — interest and investment Income) / Net debt Net pretax interest rate x (I Effective tax rate) Operating ROA ~ Net interest rate after tax Net financial leverage x Spread Source: Plepu, Healy, and Berard, Bushess Anat and Vola, second elton. Home Depot in the New Millennium _adesuoy pur Loot voneryta xljeuy aiadsoug le-suoneypoes saan ofes endo snsodes enuve fuedon s25un0s “vows Liquann puo utiou 0 Jo poduypougur> 2p rund OW HL '00) Fun aDu0 709 owsay aBoru dq popup ciogop ufuou said m yusuntouy Lonauy to wm iow sik = TOMWD. + 6661-9861 ‘Hed [ouonEIady yodaq emozy ‘Booz Lenuof jo pue Ta PAT RS TSF GSA om PD me Laat « 2 Oor'oz G0L'951 cor'r21 oor'as ooe'0e o0e's9 | cOv'OS o0K'8e OOU'SZ OnS'IZ 005s o00'C! ODI's COR unread ae snlojdue foamy WOE REL WCE MUL KUTT KOT MNCL MYST MSST OKO OMEELOXEIZ. KOI“ XELI town Us OSHS FEMS OTHE ALIKE TIVE Crees. WLLES EFSES THES STS er pros exert vopoesueD _ndoperodemay Mt 990s ake tae aac Hwee sen” curs os 90rs aees Ose 90rs Secs cots ares wees eOES UTS sors. 200 suenbs sad sayes, 8s pres ores co8s tals ‘woes wots wus EES 9S$ SSS! HOPS IHS ses (000) sou and ses A044 3 ‘x01 mL mL mL mE co mL xst au ‘ol “el wel xer we ‘Sreasou] SOpes Oucte-oweS 2 § sor sol 901 SL SOLO Ot SCiCSCi«SCSCS SSC) ond 3 ‘efni0ay auenbs sfesony 2 ‘MSL MOTL KIEL OMPIZ MEST ATER KES OMEST OMIT OME ONT oMHEE NOTE ‘KOT sod) suenbs uj oseasouy 3 Coco! o00'l8 00099 ons —o00' —oa0'se ou'sz 0u'rz 00091 c00't! cO0'0! oO0'e 000° on0's (000) puoead aeetago} cone ed, ; pees ie Oe PCO CIS terre Oheceeeiree | rit | flees eee it oa cet cy 04038 yo _qUNNY HEYBCS GITOES 9ST HTS Sts‘eIS OLr'SIS cePTIS cEvss GPITS LEI'ss Sie'ts esc'tt coos FSIS LOIS. {(rvoqinu) sores, j Seer Besl 26619661 StI ual E66 6611661 G61 6861 BaGT 8619801 a2 unyuuoy MBN otp uy Jodeq WOH, 7 LIXSe EXHIBIT 3 Home Depot EPS and Stock Data, 1990-1999 1990 1991 1992 199319941995 19961997 _1998__1999 Diluted EPS $0.10 $0.13 $0.18 $022 $0.29 $034 $043 $055 $0.71 $1.00 Diluted EPS Increase 43% 40% «30% DKK ITH: 26% OH 29H AIK Weighted number of shares ols ‘assuming dilution (milions) 924 1,985 2.096 2,132 21421512195 2.287 2320 2.342 “Total return on stocle Home Depot 54% 16TH 48% 20% 19% OK BI IIR 77% S&P 500 “3% oe e% 10% 2% 3% DR MH 28% 21% Sources: Company Anns! Report: Blaomberg Home Depot in the New Millennium idesuen por hens wonenta ster snnaodsodg reeHome Depot in the New Millennium Pare + Business Analyst and Valuation Tools EXHIBIT 4 Home Depot Consolidated Financial Statements INCOME STATEMENTS (6 millions, except earning: per share) 5 a Ending January 72000, 1999 198 Net Sales 38,434 30219 24,156 Cost of Merchandise Sold 27,023 21614 17375 Gross Profit Tal Be 67e1 Operating Expenses Selling and Store Operating 6932 Sa 4303 Pre-Opening 113 en 65 General and Administrative on SIs 413 Non-Recurring Charge = = 104 Total Operating Expenses Tele 533 a5 (Operating Income 3,795 2661 1896 Anverest and Investment Income 37 30 “4 Incerest Expense ro) en (2) Incerest, net 7 1) 2 Earnings Before Income Taxes 3,804 2654 1998 Income Taxes 1.484 1,040 78 Net Earnings ~ 23201614 1.15 Basic Earnings Per Share 1.03 on 053, Diluted Earnings Per Share 1.00 ont 052 Net: Cort of merchandise sol acoder al ofthe compooys Jomertzadon expense, wich wtled eprecotion and EGU EIT), and $283 rion in eos ending anvany 2000, 1999, ond 1998, apociely By overs en tre foraee het od enor nent of merchandise sl figures thos e pert wpershnp ope line for them. Source: Company 10-K& | i Prospective Anahi: Vakuaion Theory and Concept BALANCE SHEETS ($ millions) As of End of January 72000 1999 ASSETS ‘Cath and Cash Equivalents Short-Term Investments Recelvables, net Merchandise inventories (Other Current Assets “Toral Current Assets Property and Equipment. Land Buildings Furnicure, Focures and Equipment Leasehold Improvements Construction in Progress apical Leases Less Accumulated Depreciation and Amortization Net Property and Equipment Costin Excess of the Fair Value of Net Assets Acquired Other Total Assets LIABILITIES AND STOCKHOLDERS’ EQUITY ‘Accounts Payable ‘Accrued Salaries and Related Expenses Sales Taxes Payable ‘Other Accrued Expenses Income Taxes Payable Current Installments of Long-Term Debe “oeal Current Lables Long-Term Debt, excluding curren installments ‘Other Long-Term Lables Deferred income Taxes Minority Interest ‘Stockholders’ Equity: ‘Common Stock Pald-in Captal ‘Total Stockholders’ Equity ‘Total Liabilities and Stockholders’ Equity a Source: Company 10K, Home Depot in the New Millennium836 Home Depot in the New Millennium Pare2 + Bushess Anais and Valuation Tools ‘CASH FLOW STATEMENTS (S millions) Year Ending fanuary 2000 1999 1998 ee Cash Flows from Operating Actives Net Earnings (2,320 1614 1160, Depreciation and Amortization 463 373 283 (increase) Decrease in Recehables, net @) 85 (166, Increase a Merchadelreeores (ua) 698) aa) Increase in Accounts Payal ad Accrued Expenses 20 2 s7 Increat a fcome Toes Payable 3 3 4 Oder at Ta 1317 Ts Cash Flows from Investing Activities 7 Capital Expenditures 581) 2.053) (1420) Purchase of ReainngIncres in The Home Depot Cansde ~ ast) = Payments for Businesses Acquired, net (101) © 1) Proceeds from Sls of Propersy and Equpmect 37 s os Purchases of Investments 2) @ (194) Proceeds rom Macres of vestments SO 4 3” ‘Abances Secured by Rel Esse et @) 2 2 (Geny Garly mm) Cath Flows from Financing Activities Repapnts) svance of Commercal en ae 46) 246 = Proceeds from Long-Term Borrowings. net om = 1s Repayments of Long-Term Debt im) @ 4) Proceeds from Sale of Common Stock net 27 er iz Cath Dideds aldo Stocbolders es) (les) (13) inert Interest Contains to Partnership 7 i to ir 8 3 tect of Exchange Rate Changes \ rm 7 Increase (Decrease) In Cash and Cath Equtalenes 106 ato) 2% ‘Cash and Cash Equivalents at Beginning of Year 62 172, 146 Cash and Cash Equalenes 2 End of Yar z 7 ‘Not: A the end of 1999 the cempony soit owned 77% ofits stares nd leased 23% of tem. In recent yeast hod increased the rela percertogs of sores thot were owned becouse kek thot dang so provided greteroperadng cael and flexiby end general lover occupancy car. K noted that the cas of nw stores to be consvuced en ‘owned by the campony evroged $13.2 mln. The cost wo fc up stares tbe leased overped $43 mion. The ost of tretoy for new stores eeroged $2.2 mifon, net of vendor forcing. Source: Company 10x.Prospacsve Analy Valuadon Theory and Concesse EXHIBIT 5 Projected Growth in U.S. Market for Home Improvement Products, as of June 2000 Percent Change Year Previous Year 2000 63% 2001 32% 2002 40% 2003 44% 2004 46% ‘Seurce: Home Improvement Reseach Intute, EXHIBIT 6 Summary Data for Lowe's (§ millions) 1999 1998 1997 Sales $15905 $13,330 $11,108, Nopar $77 $530 $393 NOPAT margin 46% 40% 3.6% Nec assers $4961 53545, $2810 ‘Operating ROA (NOPATINet assets) 147% 15.0% 142% Number of stores at yearend 576 520 477 Comparable store sales increase 6% 6% 4% Sales per square foot $303 $273 $302 GHRO! 169% 173% len Nate GRO! = gross margin resum on ivestary imesiment = gro margin dlrs chided by cveoge inventor blence tines 100, The GMROIcoptures the corned impct of poss margin nd bento inven Sources: Company Annual Report and 10K; ase writer’ eleulatons. Home Depot in the New Millennium.eae Home Depot in the New Millennium Pare» Business Aralyts and Vahation Tools EXHIBIT 7 Home Depot’s Stock Price 3 T 2 ies ae st po ° j Paar sp ; Trur*s pet RAPES go} : —— oy 1 it spe : i » : & EF ee € 2 2 = 8 8 § § &§ § & 8 & Date Data as of early October 2000: Home Depot's beta: 1.09 Yields on Treasury securities: 30-day-6.00%; 90-day-6.18%; l-year-6,13%; 10-year-5.80%; 30-year-5.83% ‘Sources: Bloomberg Federal Reserve; Wal Sve Jounal. EXHIBIT 8 Retum on Home Depot's Stock Compared to S&P Retail Index and S&P 500 Home Dope] SP Rea == SP 500