Home Depot 2005 Annual Report Download

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Leading. Changing. Growing.
2005 Annual Report

Table of contents

  • Page 1
    Leading. Changing. Growing. 2005 Annual Report

  • Page 2
    ...'02 '03 '04 '05 Performance Summary: (amo unts in billio ns, except fo r earning s per share and sto re co unt) Fiscal 2005 N et sales N et earning s Diluted earning s per share T o tal assets Cash and sho rt-term investments Sto ckho lders' equity T o tal liabilities Sto re co unt Fiscal...

  • Page 3
    ...customers can access everything from power tools to home furnishings and choose from more than 30,000 products online. Homedepot.com attracts over 3 million visits a week. A critical part of our strategy to create new revenue streams is our services business, or The Home Depot's expert installations...

  • Page 4
    ...Hughes Supply, the largest acquisition in our history. Through close coordination between our stores and our branches, we will provide unmatched services to our existing base of professional customers as well as to new customers. Internationally, we are the #1 home improvement retailer in Canada and...

  • Page 5
    .... Changing. Growing. Our story over the past five years is one of non-stop leading, changing and growing - setting the tone for the next five years. Our core purpose is focused: Improve Everything We Touch. Our commitment is: Putting Our Customers First. 2005 Annual Report 3 The Home Depot Inc...

  • Page 6
    ...enhanced. Our commitment to investing in modernizing our stores ensures a fun and easy shopping experience for our customers. Growing: Enhancing the core contributes to profitable growth by increasing average ticket to an all-time high and improving store productivity. By protecting the heart of our...

  • Page 7
    ... our store formats to best meet our customers' needs. Growing: As we continue to open new stores and extend our service offerings through multiple channels, the conveniences offered by our 2,000-plus locations grow even stronger. Extend the business 2005 Annual Report 5 The Home Depot Inc...

  • Page 8
    ... acquisitions have created a unique value chain in the professional space, offering products and services from infrastructure to lifetime maintenance. A general contractor developing a planned community can look to National Waterworks to provide the pipe for water and sewer lines, to White Cap 6

  • Page 9
    ... the builder comprehensive design center services along with sales and installation of multiple interior finish options, including flooring, countertops, cabinets and window coverings. Growing: We're in business to build, and we're always breaking new ground - supporting our customers who develop...

  • Page 10
    ... by leading a Corporate Month of Service, the largest volunteer project in our company's history. With nonprofit partner Hands On Network, more than 40,000 volunteers from The Home Depot transformed the communities in which we live, work and play. We logged more than 320,000 hours of work on 1,300...

  • Page 11
    ... (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (770) 433-8211 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED Common Stock, $0.05 Par Value Per Share New York Stock...

  • Page 12
    ... Related Transactions Principal Accountant Fees and Services 60 60 60 60 60 Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management's Discussion and Analysis of Financial Condition and Results of Operations...

  • Page 13
    ... Puerto Rico and the Virgin Islands), Canada and Mexico. In addition to The Home Depot stores, we have a retail store format that sells products and services primarily for home decorating and remodeling projects called EXPO Design Center and two retail store formats focused on professional customers...

  • Page 14
    ... $3.5 billion. Upon closing, Hughes Supply will be part of Home Depot Supply. The Home Depot, Inc. is a Delaware corporation that was incorporated in 1978. Our Store Support Center (corporate office) is located at 2455 Paces Ferry Road, N.W., Atlanta, Georgia 30339. Our telephone number is (770) 433...

  • Page 15
    ... our customers a broader selection of innovative products and better value, while enhancing our gross margin. Our product development merchants travel internationally to identify opportunities to purchase items directly for our stores. Additionally, we have two sourcing offices located in Shanghai...

  • Page 16
    .... Services. The Home Depot and EXPO Design Center stores offer a variety of installation services. These services target D-I-F-M customers who select and purchase products and installation of those products from us. These installation programs include products such as carpeting, flooring, cabinets...

  • Page 17
    ... conducts operations from 37 facilities in 14 states and employs approximately 2,900 associates. Home Depot Supply Stores Home Depot Supply stores offer personal service to contractors and other professional customers by providing experienced account managers, expanded lumber and building material...

  • Page 18
    ...building materials to professional, residential and commercial builders. Williams Bros. operates through 16 branches located throughout Georgia and employs 1,600 associates. Home Depot Direct Home Depot Direct offers customers expanded merchandise selection and extra time convenience through website...

  • Page 19
    .... Your Other Warehouse operates five distribution facilities and a call center and employs approximately 900 associates. Store Support Services Information Technologies. During fiscal 2005, we continued to improve our technology capabilities by opening a second technology center, located in Austin...

  • Page 20
    ...-Canadian. Credit Services. We offer credit purchase programs through third-party credit providers to professional, D-I-Y and D-I-F-M customers. In fiscal 2005, approximately 4 million new The Home Depot credit accounts were opened, bringing the total number of The Home Depot account holders to...

  • Page 21
    .... Our business is highly competitive, based in part on price, store location, customer service and depth of merchandise. In each of the markets we serve, there are a number of other home improvement stores, electrical, plumbing and building materials supply houses and lumber yards. With respect to...

  • Page 22
    ... and enter new markets. Our ability to open new stores will depend primarily on our ability to: • identify attractive locations, • negotiate leases or real estate purchase agreements on acceptable terms, • attract and train qualified employees, and • manage pre-opening expenses, including...

  • Page 23
    ... service to our customers and to provide our customers a better in-store experience. The cost and potential problems and interruptions associated with the implementation of our technology initiatives could disrupt or reduce the efficiency of our operations in the near term. In addition, our new...

  • Page 24
    ... our market share. Our business is highly competitive, based principally on price, store location, customer service and depth of merchandise. In each of the markets we serve, there are a number of other home improvement stores, electrical, plumbing and building materials supply houses and lumber...

  • Page 25
    ...In addition, changes in federal, state or local regulations governing the sale of some of our products could increase our costs of doing business. Item 1B. Unresolved Staff Comments. Not applicable. Item 2. Properties. The following tables show locations of the 1,793 The Home Depot stores located in...

  • Page 26
    ...EXPO Design Center stores located in Arizona, California, Florida, Georgia, Illinois, Maryland, Massachusetts, Missouri, New Jersey, New York, Tennessee, Texas and Virginia; three Home Depot Supply stores located in California and Arizona; 11 The Home Depot Landscape Supply stores located in Georgia...

  • Page 27
    ... because of greater operating control and flexibility, generally lower occupancy costs and certain other economic advantages. Our executive, corporate staff, divisional staff and financial offices occupy approximately 1.9 million square feet of leased and owned space in Atlanta, Georgia. At the end...

  • Page 28
    ... Chief Information Officer for Delta Air Lines, Inc. from September 1999 until February 2002. From February 1995 to September 1999, he served as Senior Technology Officer at Citibank for the Card Products Group. From February 1993 to February 1995, he was President of Sabre Development Services for...

  • Page 29
    ... Director of the MS Tax Program at The State University of New York at Albany. CARL C. LIEBERT, III, age 40, has been Executive Vice President - The Home Depot Stores since August 2005. From June 2004 through August 2005, he served as Senior Vice President - Operations. From August 2003 until June...

  • Page 30
    PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Since April 19, 1984, our common stock has been listed on the New York Stock Exchange, trading under the symbol ''HD.'' The Company paid its first cash dividend on June 22, ...

  • Page 31
    ... this plan. Equity Compensation Plan Information The information required by this item is incorporated in Item 12 hereof by reference to the section entitled ''Executive Compensation'' in the Company's Proxy Statement for the 2006 Annual Meeting of Shareholders. Item 6. Selected Financial Data. The...

  • Page 32
    Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Executive Summary and Selected Consolidated Statements of Earnings Data For fiscal year ended January 29, 2006 (''fiscal 2005''), we reported Net Earnings of $5.8 billion and Diluted Earnings per Share of ...

  • Page 33
    ... end of fiscal 2005, 191 of our stores were located in Canada and Mexico compared to 161 at the end of fiscal 2004. In fiscal 2005, we closed 20 of our EXPO Design Center (''EXPO'') stores, four of which are being converted to The Home Depot store format. We recorded $91 million of asset impairment...

  • Page 34
    ... Investment Income Interest Expense Interest, net EARNINGS BEFORE PROVISION FOR INCOME TAXES Provision for Income Taxes NET EARNINGS SELECTED SALES DATA Number of Customer Transactions (000s)(2) Average Ticket(2) Weighted Average Weekly Sales per Operating Store(2) Weighted Average Sales per Square...

  • Page 35
    ..., kitchens, windows and HVAC. We continued to drive our services programs, which focus primarily on providing products and services to our do-it-for-me customers. We also arrange for the provision of flooring, countertop, cabinet, and window covering installation services to production home builders...

  • Page 36
    ...annual rate in our Company's history. Our gross profit margin was impacted by a number of factors during the year including a change in the mix of merchandise sold, markdowns taken in connection with our decision to close or convert 20 EXPO stores, the increasing penetration of our Home Depot Supply...

  • Page 37
    ... to an increase in the state effective tax rate in fiscal 2005. The American Jobs Creation Act of 2004 (''AJC Act'') provides a one-time 85% dividends-received deduction that applies to qualified cash dividends received from controlled foreign corporations if the funds are reinvested in the United...

  • Page 38
    ... higher expenses associated with incentive programs, like our success sharing program and our management incentive plan and stock-based compensation expense. In addition, our planned investment in store modernization and technology caused remodel and repair expenses to rise at a faster rate than our...

  • Page 39
    ... from a vendor is presumed to be a reduction of the prices of the vendor's products or services and should, therefore, be recorded as a reduction of Cost of Sales when recognized in our Consolidated Statements of Earnings. That presumption is overcome when the consideration is either a reimbursement...

  • Page 40
    ...45⁄8% Senior Notes (see Note 3 in ''Notes to Consolidated Financial Statements'') at a discount of $5 million. The net proceeds of $995 million were used to pay for a portion of the acquisition price of National Waterworks. Commercial paper borrowings in the fourth quarter of fiscal 2005 supported...

  • Page 41
    ... liquidity or capital resources. We use capital and operating leases to finance a portion of our real estate, including our stores, distribution centers and store support centers. The net present value of capital lease obligations is reflected in our Consolidated Balance Sheets in Long-Term Debt. In...

  • Page 42
    ... (1) Contractual obligations include Short-Term Debt, Long-Term Debt comprised primarily of $2.5 billion of Senior Notes further discussed in ''Quantitative and Qualitative Disclosures about Market Risk'' and future minimum lease payments under capital and operating leases used in the normal course...

  • Page 43
    ...to the Company as of the end of fiscal 2005 and fiscal 2004. Independent physical inventory counts or cycle counts are taken on a regular basis in each store, distribution center and Home Depot Supply location to ensure that amounts reflected in the accompanying Consolidated Financial Statements for...

  • Page 44
    ... on our Consolidated Financial Statements. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. The information required by this item is incorporated by reference to Item 7. ''Management's Discussion and Analysis of Financial Conditions and Results of Operations'' of this report. 32

  • Page 45
    ... of the management of The Home Depot, Inc. These financial statements have been prepared in conformity with U.S. generally accepted accounting principles and properly reflect certain estimates and judgments based upon the best available information. The financial statements of the Company have been...

  • Page 46
    ... the Public Company Accounting Oversight Board (United States), the Consolidated Balance Sheets of The Home Depot, Inc. and subsidiaries as of January 29, 2006 and January 30, 2005, and the related Consolidated Statements of Earnings, Stockholders' Equity and Comprehensive Income, and Cash Flows for...

  • Page 47
    ... their operations and their cash flows for each of the fiscal years in the three-year period ended January 29, 2006, in conformity with U.S. generally accepted accounting principles. As discussed in Note 1 to the Consolidated Financial Statements, effective February 3, 2003, the Company changed its...

  • Page 48
    THE HOME DEPOT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS Fiscal Year Ended(1) January 29, January 30, February 1, 2006 2005 2004 amounts in millions, except per share data NET SALES Cost of Sales GROSS PROFIT Operating Expenses: Selling, General and Administrative Depreciation and...

  • Page 49
    ... Retained Earnings Accumulated Other Comprehensive Income Unearned Compensation Treasury Stock, at cost, 277 shares at January 29, 2006 and 200 shares at January 30, 2005 Total Stockholders' Equity Total Liabilities and Stockholders' Equity See accompanying Notes to Consolidated Financial Statements...

  • Page 50
    ... Compensation Treasury Stock Shares Amount BALANCE, FEBRUARY 2, 2003 Net Earnings Shares Issued Under Employee Stock Plans Tax Effect of Sale of Option Shares by Employees Translation Adjustments Stock Options, Awards and Amortization of Restricted Stock Repurchase of Common Stock Cash Dividends...

  • Page 51
    ...in Investing Activities CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from Short-Term Borrowings, net Proceeds from Long-Term Borrowings, net of discount Repayments of Long-Term Debt Repurchase of Common Stock Proceeds from Sale of Common Stock, net Cash Dividends Paid to Stockholders Net Cash Used...

  • Page 52
    ... customers, home improvement contractors, tradespeople and building maintenance professionals. In addition, the Company operates EXPO Design Center stores (''EXPO''), which offer products and services primarily related to design and renovation projects, The Home Depot Landscape Supply stores, which...

  • Page 53
    ..., distribution center and Home Depot Supply location to ensure that amounts reflected in the accompanying Consolidated Financial Statements for Merchandise Inventories are properly stated. During the period between physical inventory counts in stores, the Company accrues for estimated losses related...

  • Page 54
    ... Sheets. Certain development costs not meeting the criteria for capitalization are expensed as incurred. Revenues The Company recognizes revenue, net of estimated returns, at the time the customer takes possession of merchandise or receives services. The liability for sales returns is estimated...

  • Page 55
    ... Consolidated Statement of Earnings as a reduction in Selling, General and Administrative Expenses (''SG&A''). Services Revenue Net Sales include services revenue generated through a variety of installation and home maintenance programs. In these programs, the customer selects and purchases material...

  • Page 56
    ... sold and services performed, the cost of transportation of merchandise from vendors to the Company's stores, locations or customers, the operating cost of the Company's distribution centers and the cost of deferred interest programs offered through the Company's private label credit card program...

  • Page 57
    ... 2005 related to inventory markdowns in these stores. Affected customers are being served by existing The Home Depot and EXPO stores. In fiscal 2005, the Company also closed two Home Depot Supply stores which did not have a material impact to the Company's financial results. Stock-Based Compensation...

  • Page 58
    ... Net Earnings, as reported Add: Stock-based compensation expense included in reported Net Earnings, net of related tax effects Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects Pro forma net earnings Earnings per Share...

  • Page 59
    .... Revenues and Expenses are generally translated at a daily exchange rate and equity transactions are translated using the actual rate on the day of the transaction. Segment Information The Company operates within a single operating segment within North America. Net Sales for Canada and Mexico were...

  • Page 60
    ... 15 53⁄8% Senior Notes; due April 1, 2006; interest payable semiannually on April 1 and October 1 Capital Lease Obligations; payable in varying installments through January 31, 2055 Other Total Long-Term Debt Less current installments Long-Term Debt, excluding current installments $ 996 996...

  • Page 61
    ... other long-term borrowings, excluding capital lease obligations, was approximately $314 million compared to the carrying value of $312 million. These fair values were estimated using a discounted cash flow analysis based on the Company's incremental borrowing rate for similar liabilities. 4. INCOME...

  • Page 62
    ... the applicable fiscal years is as follows (amounts in millions): January 29, 2006 Fiscal Year Ended January 30, 2005 February 1, 2004 Income taxes at federal statutory rate State income taxes, net of federal income tax benefit Foreign rate differences Change in valuation allowance Other, net Total...

  • Page 63
    ...issues relating to the examinations of fiscal years 2001 and 2002 are under appeal, the outcome of which is not expected to have a material impact on the Company's financial statements. 5. EMPLOYEE STOCK PLANS The Home Depot, Inc. 2005 Omnibus Stock Incentive Plan (''2005 Plan'') and The Home Depot...

  • Page 64
    ..., modified or settled and expense related to the ESPP after the beginning of 2003 (see Note 1 under the caption ''Stock-Based Compensation''). Under the Plans, as of January 29, 2006, the Company had issued 6 million shares of restricted stock with a weighted average grant date value of $35.76 per...

  • Page 65
    ....71 49.06 $38.47 6. LEASES The Company leases certain retail locations, office space, warehouse and distribution space, equipment and vehicles. While most of the leases are operating leases, certain locations and equipment are leased under capital leases. As leases expire, it can be expected that...

  • Page 66
    ... 79% of the initial book value of the assets and includes a purchase option at the original cost of each property. As the leased assets were placed into service, the Company estimated its liability under the residual value guarantee. The maximum amount of the residual value guarantee relative to the...

  • Page 67
    ...for the maximum compensation limits under the Internal Revenue Code. The Company funds the restoration plan through contributions made to a grantor trust, which are then used to purchase shares of the Company's common stock in the open market. The Company's contributions to the Benefit Plans and the...

  • Page 68
    ...to build, repair and maintain water and wastewater transmission systems. The aggregate purchase price of this acquisition was $1.4 billion. The Company completed several other acquisitions during fiscal 2005, 2004 and 2003, primarily adding professional service capabilities to Home Depot Supply. The...

  • Page 69
    ...11. QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of the quarterly consolidated results of operations for the fiscal years ended January 29, 2006 and January 30, 2005 (dollars in millions, except per share data): Basic Earnings per Share Diluted Earnings per Share Net Sales Gross...

  • Page 70
    ... with a notional amount of $2.0 billion accounted for as a cash flow hedge to hedge interest rate fluctuations in anticipation of the issuance of the 5.40% Senior Notes due March 1, 2016. Upon issuance of the 5.40% Senior Notes due March 1, 2016, the Company settled its forward starting interest...

  • Page 71
    ..., processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to the Company's management, including the Chief Executive Officer and Chief Financial Officer, as appropriate...

  • Page 72
    ... Committee Report,'' ''Board of Directors Information'' and ''General - Leadership Development and Compensation Committee Interlocks and Insider Participation'' in the Company's Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters...

  • Page 73
    ... Internal Control Over Financial Reporting; and Reports of Independent Registered Public Accounting Firm. (2) Financial Statement Schedules All schedules are omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes...

  • Page 74
    ... Pursuant to The Home Depot, Inc. 1997 Omnibus Stock Incentive Plan. [Form 10-Q for the fiscal quarter ended October 31, 2004, Exhibit 10.3] Form of Executive Officer Long-Term Incentive Program Performance Unit Award Pursuant to The Home Depot, Inc. 1997 Omnibus Stock Incentive Plan. [Form 10-Q for...

  • Page 75
    ... Proxy Statement for the Annual Meeting of Shareholders held on May 30, 2003] The Home Depot, Inc. Management Incentive Plan Fiscal Year 2006 Performance Measures. [Form 8-K filed on February 27, 2006, Exhibit 10.5] The Home Depot, Inc. Non-Employee Directors' Deferred Stock Compensation Plan. [Form...

  • Page 76
    ..., Exhibit 10.26] Description of Employment Arrangement between Carol B. Tom´ e and The Home Depot, Inc., effective May 4, 2001. [''Executive Compensation'' in 2006 Proxy Statement for Annual Meeting of Shareholders] Non-Competition Agreement between Home Depot U.S.A., Inc. and Carol Tom´ e dated...

  • Page 77
    ...The Home Depot, Inc. as Guarantor; Home Depot U.S.A., Inc. as Lessee; HD Real Estate Funding Corp. II as Facility Lender; Credit Suisse Leasing 92A L.P. as Lessor; The Bank of New York as Indenture Trustee; and Credit Suisse First Boston Corporation and Invemed Associates, Inc. as Initial Purchasers...

  • Page 78
    ... requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant, The Home Depot, Inc., and...Executive Officer) Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer...

  • Page 79
    (This page has been left blank intentionally.)

  • Page 80
    ...672 2,148 Stockholders' equity 18.4 26,909 24,158 Book value per share ($) 18.5 12.67 11.06 Long-term debt-to-equity (%) - 9.9 8.9 Total debt-to-equity (%) - 15.2 8.9 Current ratio - 1.19:1 1.37:1 Inventory turnover - 4.8x 4.9x Return on invested capital (%) - 22.4 21.5 STATEMENT OF CASH FLOWS DATA...

  • Page 81
    ... Includes Net Sales at locations open greater than 12 months, including relocated and remodeled stores, and Net Sales of all the subsidiaries of The Home Depot, Inc. Stores and subsidiaries became comparable on the Monday following their 365th day of operation and include certain locations acquired...

  • Page 82
    ... PLAN New investors may make an initial investment, and shareholders of record may acquire additional shares, of The Home Depot, Inc.'s common stock through the Company's direct stock purchase and dividend reinvestment plan. Subject to certain requirements, initial cash investments, cash dividends...

  • Page 83
    ... Business Development & Corporate Operations Diane S. Dayhoff Vice President Investor Relations Joseph J. DeAngelo Executive Vice President Home Depot Supply Robert P . DeRodes Executive Vice President & Chief Information Officer Dennis M. Donovan Executive Vice President Human Resources Frank...

  • Page 84
    Exclusive at The Home Depot You can do it. We can help. SM The Home Depot Inc. 2455 Paces Ferry Road Atlanta, GA 30339-4024 USA 770.433.8211 2005 Annual Report