Carol Tomé CFO and Executive Vice President, Corporate Services Financial Overview December 6, 2017 1 Discussion Overview Fiscal 2017 Financial Guidance Our View of the Economy and State of the U.S. Housing Market 2020 Financial Targets Capital Allocation 2
Fiscal 2017 Financial Guidance Projecting Record Sales, Operating Margin and Earnings Per Share FY 2017 Guidance As of December 2017 Comp Sales Growth ~6.5% Total Sales Growth ~6.3% Operating Margin ~14.6% Diluted EPS Growth ~14% to ~$7.36 3 Solid Record of Establishing and Meeting/Exceeding Financial Targets Year Established Operating Margin Targets ROIC Target Year Year Met / Exceeded 2009 1) ~10% ~15% 20xx 2012 2012 ~12% ~24% 2015 2014 2013 ~13% ~27% 2015 2015 2015 ~14.5% ~35% 2018 2017/2018F 2) 1) Launched from Fiscal 2009 operating margin of 7.3% and ROIC of 10.7% 2) Preliminary per December 2017 Guidance. Will exceed operating margin target in 2017; achieve ROIC target in 2018 4
Discussion Overview Fiscal 2017 Financial Guidance Our View of the Economy and State of the U.S. Housing Market 2020 Financial Targets Capital Allocation 5 Our View of the Economy Real U.S. GDP is expected to grow, supported by improved job market and higher consumer spending Drivers of home improvement related spending expected to trend positively and support economic growth Anticipating favorable economic conditions in Canada & Mexico 6
Real U.S. GDP is Expected to Grow, Making This the Longest Economic Recovery in History Real U.S. GDP (Year Over Year Percentage Change) Average: 2.2% 2.5% 1.6% 2.2% 1.7% 2.6% 2.9% 1.5% 2.2% 2.4% 2.1% 2.1% 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E Source: Bureau of Economic Analysis (Hist.), Composite average from various sources (Est.) 7 Proposed Tax Reform Tax Reform, if enacted could drive higher U.S. GDP growth Potential to lift U.S. GDP growth to 3+% We believe concern over mortgage interest deductibility is overblown ~5% of mortgages greater than $500,000 ~22% of all filers claim mortgage interest deduction No empirical evidence that tax deductibility impacts home ownership rate If enacted, The Home Depot would have a significant, immediate benefit to tax expense and cash taxes 8
2000 2001 2002 2003 2004 2005 2006 2007 2009 2010 2011 2012 2013 2014 2015 2016 Current 4.0% 4.7% 5.8% 6.0% 5.5% 5.1% 4.6% 4.6% 5.8% 5.3% 4.9% 4.1% 6.2% 9.3% 9.6% 8.9% 8.1% 7.4% Consumer Environment is Improving, and Customers are Spending Differently Unemployment Back to Pre-Recession Levels Unemployment Rates With the Exception of HI, Consumers Now Spending More on Experiences vs. Goods 6.4% 6.3% Consumer Spending YoY by Sector Q3 R12 vs. LY 3.5% 2.3% 0.3% (3.7%) (4.1%) (5.1%) HI Travel Lodging Food Service Clothing Discount Apparel Sporting Goods Dept. Stores Source: Bureau of Labor and the Conference Board, Bureau of Economic Analysis, U.S. Census Bureau. HI= Home Improvement 9 Drivers of Home Improvement Spend Household Formation Home Price Appreciation Housing Turnover Age of Housing Stock Impact on HI Spend Increases Demand Supports Incremental Investments Drives Spending Both Pre And Post Sale Demands Ongoing Repairs And Major Repairs Recent Impact Forward View Acceleration Continued Appreciation Stays At Current Rate Per Unit Spend Increases Expected Future Impact 10
2005 2006 2007 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2001 2002 2003 2004 2005 2006 2007 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E Household Formation Growing Household Formation Percentage of Young Adults Living at Home Change Ann. Avg. Households (MM) 60-year Avg. (MM) Young Adults Living at Home Long-term Avg. 2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 1.9 1.3 0.9 1.2 1.6 1.4 1.3 34% 32% 30% 28% 26% 24% 22% 20% 32% 30% Source: US Census Bureau, Moody s Analytics (Est.), Pew Research Center, United Nations Department of Economic and Social Affairs, Internal analysis 11 80% 60% Home Prices in Many Metro Areas Have Yet to Fully Recover, Even on Nominal Basis Case-Shiller Home Price Index (Nominal) Best Performers Best Performance Dallas, TX Denver, CO Seattle, WA Portland, OR 40% 20% Charlotte, NC Average Average Performers Performance Boston, MA Atlanta, GA National Index San Francisco, CA 0% San Diego, CA Los Angeles, CA 20-City Composite Cleveland, OH (20%) Minneapolis, MN Tampa, FL 10-City Composite Detroit, MI (40%) (60%) Low Performers Low Performance New York, NY Washington, DC Chicago, IL Miami, FL Phoenix, AZ (80%) 2006 2007 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E Las Vegas, NV Source: Case-Shiller (Hist.), John Burns Real Estate Consulting (Est.) 12
2005 2006 2007 2009 2010 2011 2012 2013 2014 2015 2016 2017 2005 2006 2007 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E Wealth Effect Driving Bigger Spend, and Capacity Remains Average Spend per Large Home Improvement Project $ in Thousands -19% 11.4 11% 9.2 8.2 $ in Billions $800 $700 $600 HELOC HELOC Originations and Cash-out Home Equity -64% $500 $400 77% $300 $200 $100 2006 2012 2016 $0 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 R12 Source: John Burns Real Estate Consulting, Freddie Mac, Inside Mortgage Finance 13 Inventory Constraints and High Affordability Should Drive Home Price Appreciation Months of Supply Affordability Mos. Supply (Existing Homes) Healthy Balance Affordability Index Equilibrium Long-term Avg. 12 11 10 11.0 11.4 250 225 200 198.8 9 8 7 6 5 4 3 3.9 175 150 125 100 75 50 107.9 166.2 Source: National Association of Realtors, Moody s Economy.com 14
1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2010 2012 2014 Q2 2015 Q4 2015 Q2 2016 Q4 2016 Q2 2017 Q3 2017 Aging Housing Stock Creates Additional Demand for Projects 2016 2015 2014 2013 2012 2011 2010 2009 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 Age of Housing Stock 40+ yrs 30-39 yrs 20-29 yrs 10-19 yrs 0-9 yrs 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Home Age 1995 2005 2016 2020E 0-9 17% 15% 8% 6% 10-19 18% 15% 14% 13% 20-29 17% 16% 13% 13% 30-39 14% 15% 14% 14% >40 33% 40% 51% 54% Spend per House $ $ $$ $$ $$$ Source: John Burns Real Estate Consulting 15 Private Fixed Residential Investment (PFRI) 10% PFRI as % of GDP (Real $) PFRI as % of GDP (Nominal $) 60-year Avg. (Real) 60-year Avg. (Nominal) 9% 8% 7% 6% 5% 4% 3% 2% A better measure of recovery than a predictor of future growth Source: Bureau of Economic Analysis 16
Discussion Overview Fiscal 2017 Financial Guidance Our View of the Economy and State of the U.S. Housing Market 2020 Financial Targets Capital Allocation 17 The Home Depot s Financial Model Epitomizes Operating Leverage Op Margin & Comp Sales Growth Labor Cost Leverage Productivity is our Virtuous Cycle Op Margin Sales per Labor Hour 12.6% 13.3% ~ 14.2% 14.6% 11.6% 10.4% Comp Sales Growth 2012 2013 2014 2015 2016 2017F 4.6% 6.8% 5.3% 5.6% 5.6% ~ 6.5% 2012 2013 2014 2015 2016 2017F 18
Looking Ahead, In a Business As Usual Environment Our Operating Margin Would Lift +100 bps ~14.6% 2017F 2018 2019 2020 Illustrative BAU Operating Margin Assuming ~4% CAGR 19 We Plan to Invest Operating Margin Expansion in Support of Key Strategic Initiatives Operating Margin Target 2018 2020 3 Year Investments 1) Our BAU Operating Margin will be reinvested As we nearly double our investment spend $11.1B +40 bps ~14.6% -20 bps $5.7B 2015 BAU Target 1) Investments: Capital and Expense, excludes incremental depreciation 20
Strategic Investments for the Future Strategic Investment 2018 2020 Investments Investment Capital & Expense BAU Capital & Expense 4.1 $ in Billions Other Investment 3.8 1.8 3.3 1.9 1.9 1.9 1.4 1.9 2.1 New Stores Supply Chain 0.8 0.6 5.0 Stores BAU 1.9 1.9 1.9 1.9 1.9 1.9 Other 0.8 New Stores 0.6 Supply Chain 0.2 2.4 Stores IT / Online 2.9 2018B 2019B 2020B BAU Total 3 Year BAU: $5.7B 2018T 2019T Investment Total 3 Year Investment: $11.1B 1.7 IT Note: Expenses exclude incremental depreciation 21 2020 Sales Target Sales Growth Key Drivers $ in Billions $119.8B Sales CAGR ~ 4.5% 6.0% $100.6B $114.7B Base comp of ~4% plus sales from key initiatives New Stores ~ 3 7 per Year Fill voids but not a significant driver of growth 2017F 22
2020 Gross Margin Target Gross Margin Rate Key Drivers ~34.0% ~33.6% Driving Productivity Through Cost-Out Efforts ~(40) bps Reinvestment Investing in One Home Depot Supply Chain 2017F Productivity Reinvestment One Supply Chain 23 2020 Expense Leverage Target Expense % of Sales Expense Growth Factor (EGF) 1) ~19.4% ~20 80 bps of Leverage ~19.2% Leverage a Function of Sales Growth and Investments ~18.6% 4.5% Comp EGF = 90% 6.0% Comp EGF = 75% 2017F 1) Defined as YoY expense growth divided by YoY sales growth rate 24
2020 Operating Margin Target Operating Margin Key Drivers ~14.6% -20 to +40 bps ~15.0% ~14.4% Sales Growth Productivity 2017F 25 Discussion Overview Fiscal 2017 Financial Guidance Our View of the Economy and State of the U.S. Housing Market 2020 Financial Targets Capital Allocation 26
Capital Allocation Disciplined and Balanced Approach Won t Change Working Capital and Other Depreciation Cumulative Cash Flow ~$37.4B $7.7B Targeting 5.4x Inventory Turns Cumulative Investments ~$35.4B 23% Capital Expenditures ~$8.2B 42% Dividends ~$14.7B Net Earnings $28.1B 35% Share Repurchases ~$12.5B $ in Billions Note: 2018 2020 Target; cash flow and cash return to shareholders based on low end of financial range 27 Average Annual Spend ~$2.7 Billion or 2.5% of Sales Average annual depreciation expense now expected to be ~$2.6 billion Key Areas of Investment Include: Capital Spending Expected ROI One Home Depot Supply Chain Wayfinding for all U.S. Stores New Front End for Top 40 Market Stores Merchandising Resets Technology Productivity / Sales Customer Satisfaction Productivity Sales Productivity 28
Shareholder Return Principles Dividend Principle Targeting payout of ~55% of earnings. Intend to increase dividend every year Return on Invested Capital Principle Maintain high return on invested capital, benchmarking all uses of excess liquidity against value created for shareholders through repurchases Adjusted debt/ebitdar ratio not to exceed 2.0x Share Repurchase Principle After meeting the needs of the business, use excess liquidity to repurchase shares, as long as value creating Note: Payout calculated on prior year earnings per share 29 Optimizing Invested Capital Lowered Cost of Capital Superior ROIC $ in Billions $29.2 Equity Total Debt $27.2 $1.7 $29.3 $3.8 ROIC ~34.4% ~39.6% ~36.4% $17.8 $25.5 $25.5 9.5% $11.4 2017F Note: Equity based on midpoint of financial range 2017F 30
Bond Maturity / Debt Capacity $ in Billions $1.8 $2.4 Bond Maturities (Total LT Debt - $24.75B) 1) $2.3 $3.0 Weighted Avg. Maturity Weighted Avg. Coupon Ratings 14.1 Years $1.6 3.7% A/A2 Debt Capacity (at 2.0x Adjusted Debt / EBITDAR Target) 1.9x ~$5.7 Billion Capacity $1.2 $1.0 $1.3 $1.0 $1.1 $1.0 $1.0 $1.0 $1.0 $1.0 $1.0 $1.0 $0.5 $0.8 Projected Leverage 1.7x 2017F 1) As of October 2017 31 History Share Repurchases 2002 2017 YTD: Repurchased 1.3 billion shares for $73 billion or $54.22 per share 2017F: Targeting ~$2.1 billion for Q4 2017; $8.0 billion for Fiscal 2017 Looking Ahead : Targeting $12.5 billion over three years, funded with internally generated cash flow $ in Billions Announcing New $15 Billion Authorization Replacing Existing Authorization 32
Enhancing the Customer Experience, Investing for the Future, Creating Value Sales Operating Margin ROIC ~$119.8B ~15.0% ~39.6% ~$114.7B ~14.6% ~14.4% ~34.4% ~36.4% $100.6B $ in Billions 2017F 2017F 2017F One Home Depot 33