HD » Topics » Fiscal 2004 Compared to Fiscal Year Ended February 1, 2004 ("fiscal 2003")

This excerpt taken from the HD 10-K filed Mar 29, 2006.

Fiscal 2004 Compared to Fiscal Year Ended February 1, 2004 ("fiscal 2003")

Net Sales

Net Sales for fiscal 2004 increased 12.8% to $73.1 billion from $64.8 billion for fiscal 2003. Fiscal 2004 Net Sales growth was driven by an increase in comparable store sales of 5.4%, sales from the 183 net new stores opened during fiscal 2004, sales from the 175 net new stores opened during fiscal 2003 and sales from our newly acquired businesses.

The increase in comparable store sales in fiscal 2004 reflects a number of factors. Our average ticket, which increased 7.3% to $54.89, increased in all selling departments and our comparable store sales growth in fiscal 2004 was positive in all selling departments. We experienced strong comparable store sales increases in building materials due in part to the impact of several hurricanes in the Southeastern U.S. Lumber was another strong category during fiscal 2004, driven primarily by commodity price inflation. Additionally, we had strong sales growth in our kitchen and bath categories, driven by appliances, bath fixtures, vanities and sinks. Finally, our comparable store sales growth in fiscal 2004 reflects the impact of cannibalization. As of the end of fiscal 2004, certain new stores cannibalized approximately 17% of our existing stores and we estimate that store cannibalization reduced fiscal 2004 comparable store sales by approximately 2.2%.

The growth in Net Sales for fiscal 2004 reflects growth in services revenue, which increased 28% to $3.6 billion for fiscal 2004 from $2.8 billion for fiscal 2003, driven by strength in a number of areas including countertops, HVAC, kitchens and our flooring companies.

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Gross Profit

Gross Profit increased 18.7% to $24.4 billion for fiscal 2004 from $20.6 billion for fiscal 2003, an increase of 167 basis points. Gross Profit as a percent of Net Sales was 33.4% for fiscal 2004, compared to 31.8% for fiscal 2003. The adoption of Emerging Issues Task Force 02-16, "Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor" ("EITF 02-16"), reduced our Cost of Sales by co-op advertising allowances of $891 million, or 122 basis points, in fiscal 2004 and $40 million, or 6 basis points, in fiscal 2003. See section "Impact of the Adoption of EITF 02-16." Excluding the impact of the adoption of EITF 02-16, our Gross Profit as a percent of Net Sales would have been 32.2% for fiscal 2004 compared with 31.7% for fiscal 2003. Improved inventory management, which resulted in lower shrink levels, contributed 18 basis points of our increase in Gross Profit. Finally, 33 basis points resulted from benefits arising from a change in merchandising mix, offset by the cost of our deferred interest programs.

Operating Expenses

Operating Expenses increased 20.2% to $16.5 billion for fiscal 2004 from $13.7 billion for fiscal 2003. Operating Expenses as a percent of Net Sales were 22.6% for fiscal 2004 compared to 21.2% for fiscal 2003.

SG&A increased 20.0% to $15.3 billion for fiscal 2004 from $12.7 billion for fiscal 2003. As a percent of Net Sales, SG&A was 20.9% for fiscal 2004 compared to 19.6% for fiscal 2003. The increase in SG&A in fiscal 2004 includes $1.0 billion of advertising expense related to the adoption of EITF 02-16. Excluding the impact of EITF 02-16, SG&A increased 12.2% to $14.3 billion, or 19.5% of Net Sales, in fiscal 2004 compared with 19.6% of Net Sales in fiscal 2003. The decrease in SG&A as a percent of Net Sales for fiscal 2004, excluding the impact of EITF 02-16, was due to an increase in labor productivity and benefits from our private label credit card, which carries a lower discount rate than other forms of credit, like bank cards. Labor productivity, as measured by sales per labor hour, reached an all-time high in fiscal 2004, as we moved our associates from tasking to selling activities. This reduction in costs was partially offset by 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 Net Sales growth.

Depreciation and Amortization increased 22.2% to $1.2 billion for fiscal 2004 from $1.0 billion for fiscal 2003. Depreciation and Amortization as a percent of Net Sales was 1.7% for fiscal 2004 and 1.6% for fiscal 2003. The increase in fiscal 2004 was primarily due to our investment in store modernization and technology.

Interest, net

In fiscal 2004, we recognized $14 million of net Interest Expense compared to $3 million in fiscal 2003. Net Interest Expense as a percent of Net Sales was less than 0.1% for both fiscal 2004 and fiscal 2003. Interest Expense increased 12.9% to $70 million for fiscal 2004 from $62 million for fiscal 2003 primarily due to an increase in outstanding indebtedness and a reduction in the amount of capitalized interest. Interest Expense also increased due to the addition of $38 million in capital leases during the year. Interest and Investment Income decreased 5.1% to $56 million for fiscal 2004 from $59 million for fiscal 2003 primarily due to a lower interest rate environment.

Provision for Income Taxes

Our combined federal and state effective income tax rate decreased to 36.8% for fiscal 2004 from 37.1% for fiscal 2003. The majority of this reduction was due to the reversal of a $31 million valuation

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allowance as we were able to recognize previous capital losses for which no tax benefit had been recorded at the time the capital loss was incurred.

Diluted Earnings per Share

Diluted Earnings per Share were $2.26 and $1.88 for fiscal 2004 and fiscal 2003, respectively. The adoption of EITF 02-16 negatively impacted Diluted Earnings per Share for fiscal 2004 by $0.04 per share. Diluted Earnings per Share were favorably impacted in fiscal 2004 as a result of the repurchase of shares of our common stock in fiscal 2003 and fiscal 2004.

This excerpt taken from the HD 10-K filed Apr 11, 2005.

Fiscal 2004 Compared to Fiscal 2003

Net Sales

        Net Sales for fiscal 2004 increased 12.8% to $73.1 billion from $64.8 billion for fiscal 2003. Fiscal 2004 Net Sales growth was driven by an increase in comparable store sales of 5.4%, sales from the 183 net new stores opened during fiscal 2004, sales from the 175 net new stores opened during fiscal 2003 and sales from our newly acquired businesses. We plan to open 175 new stores during the fiscal year ending January 29, 2006, ("fiscal 2005"). We expect sales growth of 9% to 12% for fiscal 2005, driven by comparable store sales growth, sales from new stores opened during fiscal 2004 and fiscal 2005 and sales from newly acquired businesses.

        The increase in comparable store sales in fiscal 2004, our best performance since 1999, reflects a number of factors. Our average ticket, which increased 7.3% to a company record of $54.89, increased in all selling departments and our comparable store sales growth in fiscal 2004 was positive in all selling departments. We experienced strong comparable store sales increases in building materials due in part to the impact of several hurricanes in the Southeastern U.S. Lumber was another strong category during fiscal 2004, driven primarily by commodity price inflation. Additionally, we had strong sales growth in our kitchen and bath categories, driven by appliances, bath fixtures, vanities and sinks. Finally, our comparable store sales growth in fiscal 2004 reflects the impact of cannibalization.

        In order to meet our customer service objectives, we strategically open stores near market areas served by existing stores ("cannibalize") to enhance service levels, gain incremental sales and increase market penetration. As of the end of fiscal 2004, certain new stores cannibalized approximately 17% of our existing stores and we estimate that store cannibalization reduced fiscal 2004 comparable store sales by approximately 2.2%. Additionally, we believe that our sales performance has been, and could continue to be, negatively impacted by the level of competition that we encounter in various markets. However, due to the highly-fragmented U.S. home improvement industry, in which we estimate our market share is approximately 12%, measuring the impact on our sales by our competitors is extremely difficult.

        Comparable store sales in fiscal 2005 are estimated to increase 4% to 7%. We expect our comparable store sales to be favorably impacted by the introduction of innovative and distinctive new merchandise as well as positive customer reaction to our ongoing store modernization program. Increased customer traffic, traffic conversion and higher average ticket are key to our 2005 sales growth forecast. This forecast of comparable store sales growth is net of an estimated cannibalization impact of about 2%. We do not believe that changing prices for commodities will have a material effect on Net Sales or results of operations in fiscal 2005.

        The growth in Net Sales for fiscal 2004 reflects growth in services revenue, which increased 28% to $3.6 billion for fiscal 2004 from $2.8 billion for fiscal 2003, driven by strength in a number of areas including countertops, HVAC, kitchens and our flooring companies. We continued to drive our services programs, which focus primarily on providing products and services to our do-it-for-me customers. These programs are offered through Home Depot and EXPO Design Center stores. We also arrange for the provision of flooring, countertop and window coverings installation services to production homebuilders through HD Builder Solutions Group, Inc. Our services revenue is expected to benefit from the growing percentage of mature customers as they rely more heavily on installation services.

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        During fiscal 2004, we continued the implementation or expansion of a number of in-store initiatives. We believe these initiatives will enhance our customers' shopping experience as they are fully implemented in our stores. The Pro initiative adds programs to our stores like job lot order quantities of merchandise and a dedicated sales desk for our Pro customer base. Our Appliance initiative offers customers an assortment of in-stock name brand appliances, including General Electric® and Maytag®, and offers the ability to special order over 2,300 additional related products through computer kiosks located in the stores. Our DesignplaceSM initiative offers our design and décor customers personalized service from specially-trained associates and provides distinctive merchandise in an attractive setting. Our Tool Rental Centers, which are located inside our stores, provide a cost effective way for our do-it-yourself and Pro customers to rent tools to complete home improvement projects. During fiscal 2004, we opened our 1,000th Tool Rental Center, making us the largest in the industry as measured by number of locations.

        The following table provides the number of stores with these initiatives:

 
   
  Fiscal Year
 
  Fiscal Year
2005
Estimate

 
  2004
  2003
  2002
Store Count   2,065   1,890   1,707   1,532

Initiatives:

 

 

 

 

 

 

 

 
Pro   1,728   1,563   1,356   1,135
Appliance   1,952   1,787   1,569   743
DesignplaceSM   1,952   1,787   1,625   873
Tool Rental Centers   1,186   1,061   825   601

Gross Profit

        Gross Profit increased 18.7% to $24.4 billion for fiscal 2004 from $20.6 billion for fiscal 2003, an increase of 167 basis points. Gross Profit as a percent of Net Sales was 33.4% for fiscal 2004, the highest annual rate in our company's history, compared to 31.8% for fiscal 2003. The adoption of Emerging Issues Task Force ("EITF") 02-16, "Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor" ("EITF 02-16"), reduced our Cost of Merchandise Sold by co-op advertising allowances of $891 million, or 122 basis points, in fiscal 2004 and $40 million, or 6 basis points, in fiscal 2003. See section "Impact of the Adoption of EITF 02-16". Excluding the impact of the adoption of EITF 02-16, our gross margin would have been 32.2% for fiscal 2004 compared with 31.7% for fiscal 2003. Improved inventory management, which resulted in lower shrink levels, contributed 18 basis points of our increase in gross profit. Finally, 33 basis points resulted from benefits arising from a change in merchandising mix, offset by the cost of our deferred interest programs, as the cost of these programs is reflected in our gross margin. Our deferred interest programs offer no interest and no payment programs over a six or twelve-month period through our private label credit card. We believe these programs deliver long-term benefits, including higher average tickets and customer loyalty.

Operating Expenses

        Operating Expenses increased 20.2% to $16.5 billion for fiscal 2004 from $13.7 billion for fiscal 2003. Operating Expenses as a percent of Net Sales were 22.6% for fiscal 2004 compared to 21.2% for fiscal 2003.

        Selling and Store Operating Expenses, which are included in Operating Expenses, increased 20.0% to $15.1 billion for fiscal 2004 from $12.6 billion for fiscal 2003. As a percent of Net Sales, Selling and Store Operating Expenses were 20.7% for fiscal 2004 compared to 19.4% for fiscal 2003. The increase in Selling and Store Operating Expenses in fiscal 2004

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includes $1.0 billion of advertising expense related to the adoption of EITF 02-16. Excluding the impact of EITF 02-16, Selling and Store Operating Expenses increased 12.1% to $14.1 billion, or 19.2% of Net Sales, in fiscal 2004 compared with 19.4% of Net Sales in fiscal 2003.

        The decrease in Selling and Store Operating Expenses as a percent of Net Sales for fiscal 2004, excluding the impact of EITF 02-16, was due to an increase in labor productivity and benefits from our private label credit card, which carries a lower discount rate than other forms of credit, like bank cards. Labor productivity, as measured by sales per labor hour, reached an all-time high in fiscal 2004, as we moved our associates from tasking to selling activities. This reduction in costs was partially offset by higher expenses associated with incentive programs, like our success sharing program and our management incentive plan. In addition, our planned investment in store modernization and technology caused remodel and repair expenses as well as depreciation expense to rise at a faster rate than our sales growth.

        General and Administrative Expenses, which are included in Operating Expenses, increased 22.1% to $1.4 billion for fiscal 2004 from $1.1 billion for fiscal 2003. General and Administrative Expenses as a percent of Net Sales were 1.9% for fiscal 2004 and 1.8% for fiscal 2003. The increase in fiscal 2004 was primarily due to expenses associated with incentive programs and stock-based compensation expense.

        While we will continue to drive productivity, our expenses will be under pressure in fiscal 2005 for two primary reasons. Given our continued reinvestment in our business in prior years and our capital expenditure forecast of $3.7 billion for fiscal 2005, our total depreciation expense is estimated to increase by approximately $250 million to approximately $1.6 billion for fiscal 2005, of which approximately $1.3 billion and $300 million are included in Selling and Store Operating Expenses and General and Administrative Expenses, respectively. Stock-based compensation expense is estimated to increase by $125 million in fiscal 2005 with approximately $65 million of the increase due to the adoption of Statement of Financial Accounting Standards ("SFAS") No. 123(R), "Share-Based Payment" ("SFAS 123(R)"). See section "Recent Accounting Pronouncements."

Interest, net

        In fiscal 2004, we recognized $14 million of net Interest Expense compared to $3 million in fiscal 2003. Net Interest Expense as a percent of Net Sales was less than 0.1% for both fiscal 2004 and fiscal 2003. Interest Expense increased 12.9% to $70 million for fiscal 2004 from $62 million for fiscal 2003 primarily due to an increase in outstanding indebtedness and a reduction in the amount of capitalized interest. Interest Expense also increased due to the addition of $38 million in capital leases during the year. Interest and Investment Income decreased 5.1% to $56 million for fiscal 2004 from $59 million for fiscal 2003 primarily due to a lower interest rate environment.

Provision for Income Taxes

        Our combined federal and state effective income tax rate decreased to 36.8% for fiscal 2004 from 37.1% for fiscal 2003. The majority of this reduction was due to the reversal of a $31 million valuation allowance as we were able to recognize previous capital losses for which no tax benefit had been recorded at the time the capital loss was incurred.

Diluted Earnings per Share

        Diluted Earnings per Share were $2.26 and $1.88 for fiscal 2004 and fiscal 2003, respectively. The adoption of EITF 02-16 negatively impacted Diluted Earnings per Share for fiscal 2004 by $0.04 per share. Diluted Earnings per Share were favorably impacted in fiscal 2004 as a result of the repurchase of shares of our common stock in fiscal 2003 and fiscal 2004.

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Over the past three fiscal years, we have repurchased 200.5 million shares of our common stock for a total of $6.7 billion. In fiscal 2005, we estimate Diluted Earnings per Share growth of 10% to 14%.

EXCERPTS ON THIS PAGE:

10-K
Mar 29, 2006
10-K
Apr 11, 2005
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