Fitch Rates The Home Depot, Inc.'s New Notes 'A-'; Outlook Stable

Business Wire

CHICAGO--(BUSINESS WIRE)--

Fitch Ratings has assigned a rating of 'A-' to Home Depot, Inc.'s benchmark issue of five-, 10- and 30-year senior notes. The Rating Outlook is Stable. Proceeds are expected to be used to refinance the $1.25 billion of 5.25% senior notes due Dec. 16, 2013 and also for general corporate purposes, including share buybacks. A full rating list is provided at the end of this release.

Key Rating Drivers

The rating reflects Home Depot's leading position in the home improvement retail sector in North America, strong operating momentum and free cash flow, and steady adjusted debt/EBITDAR within the company's 2.0x target. The ratings also consider the cyclical nature of home improvement retailing and the challenges posed by a slow economic recovery.

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 big-ticket projects. Despite industry headwinds, Fitch currently projects U.S. home improvement spending to increase 4% in 2013.

Home Depot's comparable store sales have been positive for the past three and a half years, following four years of negative comps. Total sales grew 6.2% in 2012 (on a 53 week basis) and 8.5% in the first half of 2013, and are expected to grow in the positive low to mid-single digits over the next two years.

Home Depot has produced a strong margin recovery, with EBIT margins improving to 11.3% in the 12 months ending Aug. 4, 2013, from 10.9% in 2012 and 9.9% in 2011, as strong sales growth has enabled the company to leverage its fixed expenses. Fitch sees moderate additional margin upside made possible by the investments Home Depot is making in its technology and supply chain.

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 $4 billion annually going forward as capital expenditures remain at less than 2% of sales.

FCF, and some incremental borrowings, will be directed to share repurchases, as the company manages its financial leverage (adjusted debt/EBITDAR) at or under 2.0x. Financial leverage (adjusted debt/EBITDAR) was 1.7x as of August 2013, and will likely increase toward 1.9x pro forma the new issuance.

Home Depot has a solid liquidity position supported by a seasonally strong cash balance of $3.4 billion at Aug. 4, 2013, together with an undrawn $2 billion credit facility. The company also benefits from owning 89% of its stores.

Rating Sensitivities

Weaker operating trends or a move by management to more shareholder friendly policies that increase adjusted leverage to the mid 2x range could lead to a negative rating action.

Continued positive operating trends together with a sustained reduction in adjusted leverage to below 1.5x, could lead to a positive rating action.

Fitch currently rates Home Depot as follows:

--Long-term Issuer Default Rating (IDR) 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'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology', Aug. 5, 2013;

--'Short-Term Ratings Criteria for Non-Financial Corporates', Aug. 5, 2013.

Applicable Criteria and Related Research:

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Short-Term Ratings Criteria for Non-Financial Corporates

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=714415

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contact:
Fitch Ratings
Primary Analyst:
Philip Zahn, CFA
Senior Director
+1-312-606-2336
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Isabel Hu
Associate Director
+1-212-908-0672
or
Committee Chairperson:
Monica Aggarwal
Senior Director
+1-212-908-0282
or
Media Relations:
Brian Bertsch
+1-212-908-0549
brian.bertsch@fitchratings.com

Rates

View Comments (0)