DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Debt rating of The Home Depot, Inc. (Home Depot or the Company) at “A” and the Commercial Paper (CP) ratings of Home Depot and Home Depot of Canada Inc. at R-1 (low). All trends are Stable. The rating confirmations are supported by steady operating income growth and financial metrics, despite a higher level of capital intensity and continued growth in returns to shareholders. Home Depot’s ratings continue to be supported by its dominant market position, large scale, geographic diversification, and free-cash-generating capacity. The ratings also reflect the intense competition and cyclicality of the home-improvement retail industry as well as risks related to possible future growth strategies.
Home Depot’s earnings and financial profiles were stable through the first three quarters of F2019 (9M F2019). The Company continues to benefit from investment in its far-reaching One Home Depot experience initiative, which facilitates a seamless shopping experience regardless of product, location, channel (in person or online), or delivery method while allocating capital in a manner such as to maintain the Company’s leverage target.
Over the near to medium term, Home Depot’s earnings profile is expected to remain well placed in the current “A” rating category. DBRS Morningstar expects Home Depot’s reported net sales to increase to approximately $110 billion in F2019 and rise to over $121 billion by F2022, primarily reflecting continued comparable-store and online revenue growth rather than new-store openings. Over the near to medium term, DBRS Morningstar expects EBITDA margins to be essentially flat as the benefits from expense leverage and productivity improvements are offset by the heavy investment in the multiyear One Home Depot plan. As a result, DBRS Morningstar expects EBITDA to increase to over $18.0 billion in F2019 and to approximately $20.0 billion by F2022.
Home Depot’s financial profile remains stable within the rating category as the Company continues to finance its capital program and fund dividend payments through internally generated cash flow. Home Depot’s financial profile should continue to be supported by its strong free cash flow generating ability and prudent financial management such that the Company is able to maintain a stable leverage target (i.e., lease-adjusted debt-to-EBITDAR of 2.00 times (x) using an 8.00x multiple to capitalize operating leases, or approximately 1.85x, as calculated by DBRS Morningstar, using a 6.00x multiple to capitalize operating leases). Accounting for continued dividend growth and a higher level of capital expenditure related to the One Home Depot project, DBRS Morningstar expects free cash flow before changes in working capital to be approximately $5.0 billion in F2019 and range between $4.5 billion to $5.0 billion through F2022 (an average of 14% of balance sheet debt).
All figures are in U.S. dollars unless otherwise noted.
The principal methodologies are Rating Companies in the Merchandising Industry, DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers, DBRS Morningstar Criteria: Guarantees and Other Forms of Support and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships, which can be found on dbrs.com under Methodologies & Criteria.
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The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
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