Fitch Affirms Home Depot at 'A-'; Outlook Stable
Fitch Ratings has affirmed its long-term Issuer Default Rating (IDR) on The Home Depot, Inc. at 'A-', and its short-term IDR at 'F2'. The Rating Outlook is Stable. Home Depot had $10.8 billion of debt outstanding as of Oct. 28, 2012. A full rating list is shown below.
The affirmation reflects Home Depot's solid operating momentum, strong free cash flow, and public statements that it has a maximum leverage target of 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. Sales to pros, which are more indicative of the housing market, make up approximately 35% of its sales, and could support improved sales growth as the housing market recovers. Despite industry headwinds, Fitch currently projects U.S. home improvement spending to increase 4.5% in 2012 and 4.0% in 2013.
Home Depot's comparable store sales have been positive for ten of the past eleven quarters, following four years of negative comps. Total sales growth is expected to be approximately 5% in 2012 (on a 53 week basis) and in the positive low single digits in 2013-2014, in-line with the overall market.
Home Depot has produced a strong margin recovery over the past two years, with EBIT margins improving to 10.7% in the twelve months ending Oct. 29, 2012, from 9.5% in the comparable period 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 2.0 times (x).
Home Depot has a solid liquidity position supported by a seasonally strong cash balance of $2.5 billion at Oct. 29, 2012, together with an undrawn $2.0 billion credit facility. The company also benefits from its 89% store base ownership. The next major debt maturity is a $1.3 billion note coming due in December 2013, which Fitch expects will be refinanced.
What Would Lead To Consideration of a Negative Rating Action
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.
What Would Lead To Consideration of a Positive 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 has affirmed the following ratings on Home Depot:
--Long-term Issuer Default Rating (IDR) at 'A-';
--Senior unsecured notes at 'A-';
--Bank credit facilities at 'A-';
--Short-term IDR at 'F2';
--Commercial paper at 'F2'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Short-Term Ratings Criteria for Non-Financial Corporates' (Aug. 8, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Short-Term Ratings Criteria for Non-Financial Corporates
Augustinus Wong, +1-212-908-0762
70 West Madison Street
Chicago, IL 60602
Philip Zahn, CFA, +1-312-606-2336
Monica Aggarwal, +1-212-908-0282
Brian Bertsch, New York, +1 212-908-0549