SEC-10K Report on The Home Depot, Inc (2)

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Financial Analysis Report on The Home Depot, Inc. Philip Anthony Mendez ACCT 220 6380 Prof. Laura Fittanto-Vande Vusse February 27, 2024

1 The Home Depot, Inc., listed in the U.S. Securities and Exchange Commission under the symbol HD, is a leading retailer specializing in home improvement products and services. Headquartered in Atlanta, Georgia, and incorporated in Delaware, the company operates a widespread network of retail outlets offering an extensive array of home improvement merchandise, ranging from building materials and tools to appliances and garden supplies. The purpose of this report is to conduct a comprehensive financial analysis of The Home Depot to gain insights into its financial performance, assess its liquidity, and understand its overall financial health. Financial Analysis: Income Statement Analysis: The Consolidated Statements of Comprehensive Income for the fiscal year ended January 29, 2023, reveals that The Home Depot reported a Net Earnings of $17,105 million. Additionally, the company achieved a Gross Profit of $52,778 million, translating to a Gross Profit Percentage of 33.53%. Balance Sheet Analysis: Cash and Cash Equivalents: The Home Depot, Inc. displayed a strong liquidity position in fiscal year 2022, with its cash and cash equivalents increasing from $2,343 million as of January 30, 2022, to $2,757 million by January 29, 2023.This indicates the company's ability to meet short-term financial obligations and pursue investment opportunities as they arise. Receivables, Net: Although there was a slight decrease in receivables, net, from $3,426 million to $3,317 million during the same period, The Home Depot, Inc. maintained efficient receivables management. This decline suggests effective credit control measures and timely collection practices, contributing to the company's overall financial stability. This figure encompasses various components, including card receivables, rebate receivables, customer receivables, and other receivables. The diverse nature of receivables highlights the company's engagement in multiple revenue streams and its interaction with different stakeholders. Statement of Stockholders Equity: The Statement of Stockholders' Equity revealed significant positive shifts for The Home Depot, Inc. in fiscal year 2022. There was a noteworthy increase in paid-in capital, rising from $12,132 million to $12,592 million, indicating strong investor confidence and potentially reflecting successful capital-raising activities. Additionally, retained earnings saw substantial growth, increasing from $67,580 million to $76,896 million. Overall, the total stockholders' equity for

2 The Home Depot, Inc. improved significantly, transitioning from a deficit of ($1,696) million to a positive balance of $1,562 million. This positive shift underscores the company's strengthened financial position and enhanced investor confidence, reflecting positively on its overall performance and strategic initiatives. Inventory: The Home Depot employs a detailed approach to inventory management, ensuring operational efficiency and financial prudence. Their merchandise inventories are valued at the lower of cost (first-in, first-out) or market, following the retail inventory method, which considers factors like markups, markdowns, and inventory losses (or shrink). Approximately 42% of the total merchandise inventory balance comprises items valued at the lower of cost or net realizable value in select subsidiaries and distribution centers. The company conducts routine physical inventory counts or cycle counts across its stores and distribution centers to maintain accurate records, meticulously monitoring and managing shrink through a combination of physical counts and estimated losses. Despite variations between estimated shrink and actual losses, these discrepancies have had no significant impact on the company's annual financial results. Additionally, in their income statement for the fiscal year ended January 29, 2023, The Home Depot predominantly values its merchandise inventories at the lower of cost (LIFO) or market, with around 42% of merchandise inventories in certain subsidiaries following a lower of cost or net realizable value as determined by a cost method. The gross profit percentage for 2022 was 33.53%, slightly lower than the previous year's 33.62%, despite an increase in net sales from $151,157 million in 2021 to $157,403 million in 2022. Statement of Cash Flows: Cash Flows from Operating Activities: In fiscal years 2020, 2021, and 2022, The Home Depot, Inc. demonstrated consistent positive cash flows from operating activities, amounting to $18,839 million, $16,571 million, and $14,615 million, respectively. This positive trend indicates the company's ability to generate cash from its core business operations. Net earnings increased from $12,866 million in 2020 to $17,105 million in 2022, reflecting improved profitability over the period. The reconciliation of net earnings to net cash provided by operating activities shows various adjustments, including depreciation and amortization, stock-based compensation expense, and changes in working capital accounts such as receivables, inventories, and payables. Cash Flows from Investing Activities: The Home Depot, Inc. invested in capital expenditures, acquisitions, and other activities to support its growth and expansion initiatives. In fiscal years 2020, 2021, and 2022, the company utilized cash flows from investing activities primarily for capital expenditures, with amounts of ($2,463) million, ($2,566) million, and ($3,119) million, respectively. Additionally, the company engaged in acquisitions, notably in fiscal 2020, where payments for businesses acquired amounted to ($7,780) million. These investments reflect The Home Depot's strategic focus on enhancing its operational capabilities and market position.

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3 Cash Flows from Financing Activities: The Home Depot, Inc. managed its financing activities to optimize its capital structure and shareholder returns. In fiscal years 2020, 2021, and 2022, the company engaged in various financing activities, including proceeds from long-term debt issuance, repayments of debt, repurchases of common stock, and payment of dividends. Notably, the company repurchased common stock worth ($791) million, ($14,809) million, and ($6,696) million in 2020, 2021, and 2022, respectively, reflecting its commitment to returning value to shareholders. Moreover, the payment of dividends amounted to ($6,451) million, ($6,985) million, and ($7,789) million in the same respective years, demonstrating a consistent dividend policy. Accounts Receivable: Accounts receivable for The Home Depot Inc. were reported as $3,317 million for the fiscal year 2022, slightly lower than the $3,426 million reported in 2021. The company experienced a positive change in receivables, net of $111 million in 2022, contrasting with a decrease of $435 million in 2021 and $465 million in 2020. Debt and Derivative Instruments: Regarding debt,The Home Depot Inc. made strategic moves to enhance financial flexibility. In July 2022, they expanded their commercial paper program from $3.0 billion to $5.0 billion. The company utilized its commercial paper program for short-term borrowings in both fiscal 2022 and 2021. On January 29, 2023, they had no borrowings outstanding under the commercial paper program, whereas on January 30, 2022, $1.0 billion was outstanding. The maximum amount outstanding during fiscal 2022 and 2021 under this program was $2,745 million and $1,368 million, respectively. The average daily short-term borrowings were $269 million in fiscal 2022 and $45 million in fiscal 2021. The Home Depot Inc. also detailed its long-term debt structure, which includes various senior notes with differing interest rates and maturities. On January 29, 2023, the total principal amount of senior notes was $41,150 million, compared to $39,908 million on January 30, 2022. Additionally, they issued new tranches of senior notes in September 2022 and March 2022, while also making repayments and redemptions as part of their debt management strategy. Furthermore, the company engages in derivative instruments such as interest rate swap agreements and foreign currency forward contracts to manage exposure to interest rates and foreign currency exchange rates. These instruments are accounted for as fair value hedges or cash flow hedges, with collateral security arrangements in place to manage credit risk. As of January 29, 2023, the cash collateral posted related to derivative instruments was $634 million, recorded in other current assets. Property, Plant, and Equipment (PPE) Analysis: During the fiscal year spanning from January 30, 2022, to January 29, 2023, The Home Depot saw a steady expansion in its Property, Plant, and Equipment (PPE) values. PPE, including land, buildings, improvements, furniture, fixtures, equipment, and leasehold improvements, increased from $51,329 million to $52,275 million. This growth was accompanied by a rise in

4 Accumulated Depreciation, climbing from $26,130 million to $26,644 million, reflecting the ongoing use and wear of the company's tangible assets. Despite this increase in depreciation, the company's Net Property and Equipment (Net PPE) showed a net growth from $25,199 million to $25,631 million. This suggests that while the company continues to invest in its infrastructure and operational assets, it is effectively managing its depreciation expenses, resulting in a positive overall trend in its net investment in tangible assets. Auditor's Report: KPMG LLP serves as the auditor for The Home Depot. They conducted an audit of the company's internal control over financial reporting as of January 29, 2023. Based on the criteria outlined in the Internal Control – Integrated Framework (2013) by the Committee of Sponsoring Organizations of the Treadway Commission, KPMG LLP expressed an opinion that The Home Depot maintained effective internal control over financial reporting in all material respects. The responsibility for maintaining effective internal control over financial reporting lies with the company's management, while KPMG LLP's role is to provide an opinion on the effectiveness of internal control over financial reporting based on their audit, conducted in accordance with the standards set by the PCAOB (Public Company Accounting Oversight Board). Conclusion: The Home Depot, Inc. presents a robust financial position, underscored by its strong revenue generation, healthy liquidity, and prudent management of tangible assets. Across various facets of its operations, including income statements, balance sheets, cash flows, accounts receivable, debt management, and property assets, The Home Depot has demonstrated resilience and strategic acumen. Notably, the company's strong liquidity position, efficient inventory management practices, consistent positive cash flows from operating activities, and prudent financing strategies highlight its robust financial foundation. Moreover, significant positive shifts in stockholders' equity underscore investor confidence and affirm the company's enhanced financial position. The audit conducted by KPMG LLP further reinforces The Home Depot's commitment to maintaining effective internal control over financial reporting, thereby instilling trust and confidence in its stakeholders. Overall, these findings reflect The Home Depot's steadfast dedication to operational excellence, financial prudence, and strategic growth, positioning it as a leading player in the home improvement retail sector.

5 References The Home Depot. (2023). Annual Report on Form 10-K. U.S. Securities and Exchange Commission. Retrieved from https://www.sec.gov/ixviewer/ix.html?doc=/Archives/edgar/data/0000354950/000035495 023000059/hd-20230129.htm

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