Our MD&A includes the following sections: • Executive Summary • Results of Operations and Non-GAAP Financial Measures • Liquidity and Capital Resources • Critical Accounting Policies Executive Summary The following table presents quarter to date and year to date highlights of our financial performance: Three Months Ended Nine Months Ended October 31, November 1, October 31, November 1, dollars in millions, except per share data 2021 2020 2021 2020 Net sales$ 36,820 $ 33,536 $ 115,438 $ 99,849 Net earnings 4,129 3,432 13,081 10,009 Diluted earnings per share$ 3.92 $ 3.18 $ 12.31 $ 9.28 Net cash provided by operating activities$ 13,386 $ 17,415 Proceeds from long-term debt, net of discounts and premiums 2,979 4,960 Repayments of long-term debt 1,480 1,836 Repurchases of common stock 10,374 791 We reported net sales of$36.8 billion in the third quarter of fiscal 2021. Net earnings were$4.1 billion , or$3.92 per diluted share. For the first nine months of fiscal 2021, net sales were$115.4 billion and net earnings were$13.1 billion , or$12.31 per diluted share. We opened four stores in theU.S. and one store inMexico during the third quarter of fiscal 2021, resulting in a total store count of 2,317 at the end of the third quarter of fiscal 2021, which includes 14 stores in theU.S. from a small acquisition completed during the second quarter of fiscal 2021. As ofOctober 31, 2021 , a total of 311 stores, or 13.4%, were located inCanada andMexico . For the third quarter of fiscal 2021, sales per retail square foot were$587.28 . Our inventory turnover ratio was 5.4 times at the end of the third quarter of fiscal 2021, compared to 5.9 times at the end of the third quarter of fiscal 2020. We generated$13.4 billion of cash flow from operations and issued$3 billion of long-term debt during the first nine months of fiscal 2021. This cash flow, together with cash on hand, was used to fund cash payments of$10.4 billion for share repurchases, pay$5.3 billion of dividends, fund$1.7 billion in capital expenditures, and repay an aggregate of$1.5 billion of long-term debt. InFebruary 2021 , we announced a 10% increase in our quarterly cash dividend to$1.65 per share. Our ROIC for the trailing twelve-month period was 43.9% at the end of the third quarter of fiscal 2021 and 41.6% at the end of the third quarter of fiscal 2020. See the " Non-GAAP Financial Measures " section below for our definition and calculation of ROIC, as well as a reconciliation of NOPAT, a non-GAAP financial measure, to net earnings (the most comparable GAAP financial measure). 13
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Results of Operations and Non-GAAP Financial Measures The tables and discussion below should be read in conjunction with our consolidated financial statements and related notes included in this report and in the 2020 Form 10-K and with our MD&A included in the 2020 Form 10-K. The following table presents the percentage relationship between net sales and major categories in our consolidated statements of earnings. Fiscal 2021 and Fiscal 2020 Three Month Comparisons Three Months Ended October 31, November 1, 2021 2020 % of % of dollars in millions $ Net Sales $ Net Sales Net sales$ 36,820 $ 33,536 Gross profit 12,563 34.1 % 11,456 34.2 % Operating expenses: Selling, general and administrative 6,168 16.8 6,076 18.1 Depreciation and amortization 600 1.6 528 1.6 Total operating expenses 6,768 18.4 6,604 19.7 Operating income 5,795 15.7 4,852 14.5 Interest and other (income) expense: Interest and investment income (15) - (11) - Interest expense 341 0.9 340 1.0 Interest and other, net 326 0.9 329 1.0 Earnings before provision for income taxes 5,469 14.9 4,523 13.5 Provision for income taxes 1,340 3.6 1,091 3.3 Net earnings$ 4,129 11.2 %$ 3,432 10.2 % -----
Note: Certain percentages may not sum to totals due to rounding.
Three
Months Ended
October 31, November 1, Selected financial and sales data: 2021 2020 % Change Comparable sales (% change) (1) 6.1 % 24.1 % N/A Comparable customer transactions (% change) (1) (2) (5.8) % 13.0 % N/A Comparable average ticket (% change) (1) (2) 12.7 % 10.0 % N/A Customer transactions (in millions) (1) (2) 428.2 453.2 (5.5) % Average ticket (1) (2) (3)$ 82.38 $ 72.98 12.9 % Sales per retail square foot (1) (2) (4)$ 587.28 $ 552.85 6.2 % Diluted earnings per share$ 3.92 $ 3.18 23.3 % ----- (1)Does not include results for HD Supply, which was acquired inDecember 2020 . (2)Does not include results for the legacy Interline Brands business. (3)Average ticket represents the average price paid per transaction and is used by management to monitor the performance of the Company, as it represents a primary driver in measuring sales performance. (4)Sales per retail square foot represents annualized sales divided by retail store square footage. Sales per retail square foot is a measure of the efficiency of sales based on the total square footage of our stores and is used by management to monitor the performance of the Company's retail operations as an indicator of the productivity of owned and leased square footage for these retail operations. Sales. We assess our sales performance by evaluating both net sales and comparable sales.Net Sales . Net sales for the third quarter of fiscal 2021 increased 9.8% to$36.8 billion from$33.5 billion for the third quarter of fiscal 2020. The increase in net sales for the third quarter of fiscal 2021 primarily reflected the impact of positive comparable sales driven by an increase in comparable average ticket, offset by a decrease in comparable 14 -------------------------------------------------------------------------------- Table of Contents customer transactions, as well as sales from HD Supply, which was acquired in the fourth quarter of fiscal 2020. Online sales, which consist of sales generated online through our websites for products picked up at our stores or delivered to customer locations, represented 12.8% of net sales and grew by 8.4% during the third quarter of fiscal 2021 compared to the third quarter of fiscal 2020. The increase in online sales for the third quarter of fiscal 2021 was driven by customers continuing to leverage our digital platforms for their shopping needs. A weakerU.S. dollar positively impacted sales growth by$193 million in the third quarter of fiscal 2021. Comparable Sales. Comparable sales is a measure that highlights the performance of our existing locations and websites by measuring the change in net sales for a period over the comparable prior-period of equivalent length. Comparable sales includes sales at all locations, physical and online, open greater than 52 weeks (including remodels and relocations) and excludes permanently closed stores. Retail stores become comparable on the Monday following their 52nd week of operation. Acquisitions are typically included in comparable sales after they have been owned for more than 52 weeks. Comparable sales is intended only as supplemental information and is not a substitute for net sales presented in accordance with GAAP. Total comparable sales increased 6.1% for the third quarter of fiscal 2021, reflecting a 12.7% increase in comparable average ticket, partially offset by a 5.8% decrease in comparable customer transactions compared to the third quarter of fiscal 2020. The increase in comparable average ticket was primarily driven by inflation across several product categories, including core commodity price inflation largely from copper and building materials, which was partially offset by deflation in lumber. Comparable average ticket also increased due to an increase in big-ticket transactions and strong demand for new and innovative products. The decrease in comparable customer transactions was primarily due to lapping comparable transactions of 13.0% that we experienced in the third quarter of fiscal 2020. Total comparable sales for the third quarter of fiscal 2020 included a significant acceleration in sales growth and strong performance across our departments, driven in part by the increase in demand during the COVID-19 pandemic, resulting in comparable sales performance of 24.1% for the third quarter of fiscal 2020. During the third quarter of fiscal 2021, 12 of our 14 merchandising departments posted positive comparable sales. Comparable sales for our Appliances, Plumbing, Electrical/Lighting,Building Materials , Tools, Kitchen and Bath, Décor/Storage, Millwork, and Flooring merchandising departments were above the company average in the third quarter of fiscal 2021. Comparable sales for our Indoor Garden merchandising department were essentially flat, and our Lumber department had high single-digit negative comparable sales in the third quarter of fiscal 2021, as a result of lumber price deflation. Comparable sales for our Lumber department grew by more than 50% in the third quarter of fiscal 2020. Gross Profit. Gross profit for the third quarter of fiscal 2021 increased 9.7% to$12.6 billion from$11.5 billion for the third quarter of fiscal 2020. Gross profit as a percentage of net sales, or gross profit margin, was 34.1% for the third quarter of fiscal 2021 compared to 34.2% for the third quarter of fiscal 2020. The decrease in gross profit margin during the third quarter of fiscal 2021 was primarily driven by higher transportation costs and pressure from product mix, partially offset by the benefit from higher retail prices. Operating Expenses. Our operating expenses are composed of SG&A and depreciation and amortization. Selling, General & Administrative. SG&A for the third quarter of fiscal 2021 increased$92 million or 1.5% to$6.2 billion from the third quarter of fiscal 2020. As a percentage of net sales, SG&A was 16.8% for the third quarter of fiscal 2021 compared to 18.1% for the third quarter of fiscal 2020. The decrease in SG&A as a percentage of net sales was primarily driven by leverage resulting from a positive comparable sales environment, including payroll leverage, and cycling COVID-19-related expenses that we incurred during the third quarter of fiscal 2020, including$354 million of additional expenses related to expanded benefits to support our associates and an additional$59 million of operational expenses. Total COVID-19-related expenses were$35 million for the third quarter of fiscal 2021. These benefits were partially offset by an increase in hourly payroll-related costs in the third quarter of fiscal 2021 driven by the wage investments we made in the latter part of fiscal 2020. Depreciation and Amortization. Depreciation and amortization increased 13.6% to$600 million for the third quarter of fiscal 2021 from$528 million for the third quarter of fiscal 2020. As a percentage of net sales, depreciation and amortization was 1.6% for the third quarter of both fiscal 2021 and fiscal 2020, primarily reflecting increased depreciation expense from our strategic investments in the business as well as higher intangible asset amortization expense, offset by leverage resulting from a positive comparable sales environment. Interest and Other, net. Interest and other, net, was$326 million for the third quarter of fiscal 2021 compared to$329 million for the third quarter of fiscal 2020. Interest and other, net, as a percentage of net sales was 0.9% for the third quarter of fiscal 2021 compared to 1.0% for the third quarter of fiscal 2020. The decrease in interest and 15 -------------------------------------------------------------------------------- Table of Contents other, net, as a percentage of net sales primarily reflected leverage resulting from a positive comparable sales environment. Provision for Income Taxes. Our combined effective income tax rate was 24.5% for the third quarter of fiscal 2021 compared to 24.1% for the third quarter of fiscal 2020. Diluted Earnings per Share. Diluted earnings per share were$3.92 for the third quarter of fiscal 2021 compared to$3.18 for the third quarter of fiscal 2020. The increase in diluted earnings per share was primarily driven by the factors discussed above. Fiscal 2021 and Fiscal 2020 Nine Month Comparisons Nine Months Ended October 31, November 1, 2021 2020 % of % of dollars in millions $ Net Sales $ Net Sales Net sales$ 115,438 $ 99,849 Gross profit 38,970 33.8 % 34,022 34.1 % Operating expenses: Selling, general and administrative 18,975 16.4 18,260 18.3 Depreciation and amortization 1,780 1.5 1,567 1.6 Total operating expenses 20,755 18.0 19,827 19.9 Operating income 18,215 15.8 14,195 14.2 Interest and other (income) expense: Interest and investment income (26) - (37) - Interest expense 1,006 0.9 1,010 1.0 Interest and other, net 980 0.8 973 1.0 Earnings before provision for income taxes 17,235 14.9 13,222 13.2 Provision for income taxes 4,154 3.6 3,213 3.2 Net earnings$ 13,081 11.3 %$ 10,009 10.0 % -----
Note: Certain percentages may not sum to totals due to rounding.
Nine
Months Ended
October 31, November 1, Selected financial and sales data: 2021 2020 % Change Comparable sales (% change) (1) 12.5 % 18.3 % N/A Comparable customer transactions (% change) (1) (2) 1.1 % 7.4 % N/A Comparable average ticket (% change) (1) (2) 11.5 % 10.3 % N/A Customer transactions (in millions) (1) (2) 1,357.2 1,339.5 1.3 % Average ticket (1) (2) (3)$ 82.43 $ 73.90 11.5 % Sales per retail square foot (1) (2) (4)$ 615.98 $ 549.26 12.1 % Diluted earnings per share$ 12.31 $ 9.28 32.7 % ----- (1)Does not include results for HD Supply, which was acquired inDecember 2020 . (2)Does not include results for the legacy Interline Brands business. (3)Average ticket represents the average price paid per transaction and is used by management to monitor the performance of the Company, as it represents a primary driver in measuring sales performance. (4)Sales per retail square foot represents annualized sales divided by retail store square footage. Sales per retail square foot is a measure of the efficiency of sales based on the total square footage of our stores and is used by management to monitor the performance of the Company's retail operations as an indicator of the productivity of owned and leased square footage for these retail operations. 16 -------------------------------------------------------------------------------- Table of Contents Sales. We assess our sales performance by evaluating both net sales and comparable sales.Net Sales . For the first nine months of fiscal 2021, net sales increased 15.6% to$115.4 billion from$99.8 billion for the first nine months of fiscal 2020. The increase in net sales for the first nine months of fiscal 2021 primarily reflected the impact of positive comparable sales driven by an increase in comparable average ticket and comparable customer transactions, as well as sales from HD Supply, which was acquired in the fourth quarter of fiscal 2020. The impact of the COVID-19 pandemic and the actions we took in response to it had varying effects on our sales throughout the first nine months of fiscal 2020. At the beginning of the pandemic, we reduced store hours, limited customer traffic in stores, and canceled or modified certain annual merchandising events, all of which negatively impacted our sales during the first quarter of fiscal 2020. During the last three weeks of the first quarter of fiscal 2020 and continuing throughout fiscal 2020, we saw elevated home improvement demand with strong performance across our departments as customers focused on home improvement projects and repairs. Online sales, which consist of sales generated online through our websites for products picked up in our stores or delivered to customer locations, represented 13.4% of net sales and grew by approximately 11% during the first nine months of fiscal 2021 compared to the first nine months of fiscal 2020. The increase in online sales for the first nine months of fiscal 2021 was driven by customers continuing to leverage our digital platforms for their shopping needs. A weakerU.S. dollar positively impacted sales growth by$735 million for the first nine months of fiscal 2021. Comparable Sales. For the first nine months of fiscal 2021, total comparable sales increased 12.5%, reflecting an 11.5% increase in comparable average ticket and a 1.1% increase in comparable customer transactions compared to the first nine months of fiscal 2020. The increase in comparable sales reflected a number of factors, including increased consumer demand and benefits from our strategic efforts to drive an enhanced interconnected experience in both the physical and digital worlds. The increase in comparable average ticket was primarily driven by inflation, including commodity price inflation largely from lumber, an increase in big-ticket transactions, elevated project demand and strong demand for new and innovative products. During the first nine months of fiscal 2021, all of our merchandising departments posted positive comparable sales and 10 of our 14 merchandising departments posted double-digit positive comparable sales, led by Kitchen and Bath and Lumber, when compared to the first nine months of fiscal 2020. Our Outdoor Garden, Indoor Garden, Hardware and Paint departments had single-digit positive comparable sales when compared to the first nine months of fiscal 2020. Gross Profit. For the first nine months of fiscal 2021, gross profit increased 14.5% to$39.0 billion from$34.0 billion for the first nine months of fiscal 2020. Gross profit as a percentage of net sales, or gross profit margin, was 33.8% for the first nine months of fiscal 2021 compared to 34.1% for the first nine months of fiscal 2020. The decrease in gross profit margin during the first nine months of fiscal 2021 reflected pressure from product mix, including rate and mix pressure from lumber, higher transportation costs, and investments in our supply chain, partially offset by the benefit from higher retail prices. Operating Expenses. Our operating expenses are composed of SG&A and depreciation and amortization. Selling, General & Administrative. SG&A increased 3.9% to$19.0 billion for the first nine months of fiscal 2021 from$18.3 billion for the first nine months of fiscal 2020. As a percentage of net sales, SG&A was 16.4% for the first nine months of fiscal 2021 compared to 18.3% for the first nine months of fiscal 2020. The decrease in SG&A as a percentage of net sales for the first nine months of fiscal 2021 was primarily driven by leverage resulting from a positive comparable sales environment and cycling COVID-19-related expenses that we incurred during the first nine months of fiscal 2020, including$1.7 billion of additional expenses related to expanded benefits to support our associates and an additional$183 million of operational expenses. Total COVID-19-related expenses incurred in the first nine months of fiscal 2021 were$137 million . These benefits were partially offset by an increase in hourly payroll-related costs in the first nine months of fiscal 2021 driven by the wage investments we made in the latter part of fiscal 2020. Depreciation and Amortization. Depreciation and amortization increased 13.6% to$1.8 billion for the first nine months of fiscal 2021 from$1.6 billion for the first nine months of fiscal 2020. As a percentage of net sales, depreciation and amortization was 1.5% for the first nine months of fiscal 2021 compared to 1.6% for the first nine months of fiscal 2020. The decrease in depreciation and amortization as a percentage of net sales primarily reflected leverage resulting from a positive comparable sales environment, partially offset by increased depreciation expense from our strategic investments in the business as well as higher intangible asset amortization expense. Interest and Other, net. Interest and other, net was$980 million for the first nine months of fiscal 2021 compared to$973 million for the first nine months of fiscal 2020. As a percentage of net sales, interest and other, net was 17 -------------------------------------------------------------------------------- Table of Contents 0.8% for the first nine months of fiscal 2021 and 1.0% for the first nine months of fiscal 2020, primarily reflecting leverage resulting from a positive comparable sales environment. Provision for Income Taxes. Our combined effective income tax rate was 24.1% for the first nine months of fiscal 2021 compared to 24.3% for the first nine months of fiscal 2020. Diluted Earnings per Share. Diluted earnings per share were$12.31 for the first nine months of fiscal 2021, compared to$9.28 for the first nine months of fiscal 2020. The increase in diluted earnings per share was primarily driven by the factors discussed above. Non-GAAP Financial Measures To provide clarity about our operating performance, we supplement our reporting with certain non-GAAP financial measures. However, this supplemental information should not be considered in isolation or as a substitute for the related GAAP measures. Non-GAAP financial measures presented herein may differ from similar measures used by other companies. Return onInvested Capital . We believe ROIC is meaningful for investors and management because it measures how effectively we deploy our capital base. We define ROIC as NOPAT, a non-GAAP financial measure, for the most recent twelve-month period, divided by average debt and equity. We define average debt and equity as the average of beginning and ending long-term debt (including current installments) and equity for the most recent twelve-month period. The following table presents the calculation of ROIC, together with a reconciliation of NOPAT to net earnings (the most comparable GAAP measure): Twelve Months Ended October 31, November 1, dollars in millions 2021 2020 Net earnings$ 15,938 $ 12,490 Interest and other, net 1,307 1,265 Provision for income taxes 5,053 3,843 Operating income 22,298 17,598 Income tax adjustment (1) (5,378) (4,252) NOPAT$ 16,920 $ 13,346 Average debt and equity$ 38,519 $ 32,095 ROIC 43.9 % 41.6 % ----- (1)Income tax adjustment is defined as operating income multiplied by our effective tax rate for the trailing twelve months. Additional Information For information on accounting pronouncements that have impacted or are expected to materially impact our consolidated financial condition, results of operations or cash flows, see Note 1 to our consolidated financial statements. Liquidity and Capital Resources Cash and Cash Equivalents AtOctober 31, 2021 , we had$5.1 billion in cash and cash equivalents, of which$1.4 billion was held by our foreign subsidiaries. We believe that our current cash position, cash flow generated from operations, funds available from our commercial paper programs, and access to the long-term debt capital markets should be sufficient not only for our operating requirements but also to enable us to complete our capital expenditure programs, fund dividend payments, fund any share repurchases, and make any required debt payments through the next several fiscal years. In addition, we believe that we have the ability to obtain alternative sources of financing, if necessary. For fiscal 2021, we will continue to follow our disciplined approach to capital allocation. We anticipate capital expenditures of approximately two percent of net sales on an annual basis. However, we may adjust our capital expenditures to support the operations of the business, to enhance long-term strategic positioning, or in response to the economic environment, as necessary or appropriate. 18 -------------------------------------------------------------------------------- Table of Contents Debt and Derivative Instruments We have commercial paper programs that allow for borrowings of up to$3.0 billion . All of our short-term borrowings in the first nine months of fiscal 2021 were under these commercial paper programs, and the maximum amount outstanding at any time was$11 million . In connection with these programs, we have back-up credit facilities with a consortium of banks for borrowings up to$3.0 billion , which consist of a five-year$2.0 billion credit facility scheduled to expire inDecember 2023 and a 364-day$1.0 billion credit facility scheduled to expire inDecember 2021 that we plan to renew. AtOctober 31, 2021 , we were in compliance with all of the covenants contained in the credit facilities, none of which are expected to impact our liquidity or capital resources. AtOctober 31, 2021 andJanuary 31, 2021 , there were no outstanding borrowings under our commercial paper programs. We also issue senior notes from time to time as part of our capital management strategy. InSeptember 2021 , we issued$3.0 billion of senior notes. The net proceeds from this issuance are being used for general corporate purposes, including repurchases of shares of our common stock, subject to market conditions and other business considerations. InMarch 2021 , we also repaid our$1.35 billion 2.00% senior notes that had a maturity date ofApril 2021 . See Note 4 to our consolidated financial statements for further discussion of our senior notes. We use derivative and nonderivative instruments as part of our normal business operations in the management of our exposure to fluctuations in foreign currency exchange rates and interest rates on certain long-term debt. Share Repurchases InMay 2021 , our Board of Directors approved a$20.0 billion share repurchase authorization that replaced the previous authorization. This new authorization does not have a prescribed expiration date. As ofOctober 31, 2021 , approximately$14.1 billion of the$20.0 billion share repurchase authorization remained available. InMarch 2020 , we suspended our share repurchases to enhance our liquidity position during the COVID-19 pandemic. We resumed share repurchases in the first quarter of fiscal 2021, the amount and continuation of which will be influenced by the evolving economic environment as well as business conditions. In the first nine months of fiscal 2021, we had cash payments of$10.4 billion for repurchases of our common stock through open market purchases. Cash Flows Summary Operating Activities. Cash flow generated from operations provides us with a significant source of liquidity. Our operating cash flows result primarily from cash received from our customers, offset by cash payments we make for products and services, associate compensation, operations, and occupancy costs. Cash provided by or used in operating activities is also subject to changes in working capital. Working capital at any point in time is subject to many variables, including seasonality, inventory management and category expansion, the timing of cash receipts and payments, vendor payment terms, and fluctuations in foreign exchange rates. Net cash provided by operating activities decreased by$4.0 billion in the first nine months of fiscal 2021 compared to the first nine months of fiscal 2020 and was primarily driven by changes in working capital, partially offset by an increase in net earnings. Working capital was impacted by timing of vendor payments, along with higher merchandise inventories to continue to support increased demand. Investing Activities. Cash used in investing activities increased by$681 million in the first nine months of fiscal 2021 compared to the first nine months of fiscal 2020, primarily as a result of cash paid for an acquired business during fiscal 2021 and increased capital expenditures. Financing Activities. Cash used in financing activities in the first nine months of fiscal 2021 primarily reflected$10.4 billion of share repurchases,$5.3 billion of cash dividends paid, and$1.5 billion of repayments of long-term debt, partially offset by$3.0 billion of net proceeds from long-term debt. Cash used in financing activities in the first nine months of fiscal 2020 primarily reflected$4.8 billion of cash dividends paid,$1.8 billion of repayments of long-term debt,$974 million of net repayments of short-term debt, and$791 million of share repurchases prior to our suspension of share repurchases inMarch 2020 , partially offset by$5.0 billion of net proceeds from long-term debt. Critical Accounting Policies During the first nine months of fiscal 2021, there were no changes to our critical accounting policies as disclosed in the 2020 Form 10-K. Our significant accounting policies are disclosed in Note 1 to our consolidated financial statements. 19
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