WE CAN
DO THIS

Video

Craig Menear
Chairman, CEO and President

The Power of
The Home Depot

Stool
  1. What Are We Passionate About? Customer Experience
  2. What Are We Best in the World At? Product Authority for Home Improvement
  3. What Drives Our Economic Engine? Productivity and Efficiency Driven by Effective Capital Allocation
  4. Interconnecting Retail Delivering a Seamless Customer Experience.

LETTER TO SHAREHOLDERS

Fiscal 2015 was another record setting year for The Home Depot. Our sales, net earnings and customer satisfaction scores were the highest in Company history. Sales grew $5.3 billion to $88.5 billion, an increase of 6.4 percent from fiscal 2014, with comparable store sales up 5.6 percent for the Company and 7.1 percent in the U.S. We saw positive comparable store sales in all three U.S. Divisions and positive comparable store sales in local currency in Canada and Mexico. With the close of our fourth quarter, this marks 17 quarters in a row of positive comparable store sales for our Canadian business and 49 quarters in a row of positive comparable store sales for our Mexican business. In addition, our interconnected business continues to be a competitive advantage and online sales grew profitably by $1 billion in fiscal 2015 to $4.7 billion in sales, representing growth of 25.4 percent from the prior year.

During the year we purchased Interline Brands, a leading national distributor and direct marketer of broad-line maintenance, repair and operations (“MRO”) products. This opens up a new $50 billion market opportunity in the multi-family, hospitality and institutional spaces. We are very excited to have Interline's associates join The Home Depot family, and we believe that together, we will enhance our ability to serve our Pro customers.

In fiscal 2015, we recorded the highest net earnings in Company history. Diluted earnings per share grew 15.9 percent to $5.46 and our return on invested capital grew 310 basis points to 28.0 percent. Over the course of the year, we returned over $10 billion dollars to our shareholders in the form of dividends and share repurchases. We delivered these results by staying true to our values and true to our strategy.

Our strategy has been anchored to our three-legged stool strategic platform. As we go forward, our strategy will not be changing, but it will evolve as we continue to lean into an interconnected retail experience to better meet our customers' needs. In 2015, we restructured our annual strategic planning process by addressing three main work streams. First, we identified potential disruptors to our business — what we referred to as our “War Games”. Second, we held discussions on ideas that would expand our sales growth over the next several years. And third, we spent a considerable amount of time on productivity ideas.

This process, which we undertook with the oversight of our Board of Directors, solidified our focus on growth and productivity under our three-legged stool strategic platform. In addition, we identified various actions to reduce the effect of many of the potential disruptor activities. The three legs of our stool represent:

  1. What we are passionate about: the Customer Experience;
  2. What we are best in the world at: Product Authority; and
  3. What drives our economic engine: Productivity and Efficiency Driven by Effective Capital Allocation.

We tie the “legs of the stool” together at the seat by what we call interconnected retail - One Home Depot serving our customers the way they want to be served. Our strategy, along with our orange-blooded associates, has and will continue to enable us to be the number one home improvement retailer in the world.

CUSTOMER EXPERIENCE

Customer experience is much more than just customer service …it is about providing a seamless and frictionless experience no matter where our customers shop … be it in the digital world, our brick and mortar stores, at home or on the job site. Our customers are changing the way they shop and how they engage with us. For example, with our Buy Online, Pick-up In Store and Buy Online, Ship to Store programs, over 40 percent of all of our online orders are now picked up inside of a Home Depot store. For those orders that are shipped to a home or job site, we expanded our direct fulfillment capabilities and recently began shipping from our third new Direct Fulfillment Center (“DFC”). Our three new U.S. DFCs help deliver a better customer experience by allowing us to reach most of our U.S. customers in two business days or less with parcel shipping.

And because we want our customers' experience to be as frictionless and seamless as possible, we have been working on a delivery option from each of our U.S. stores. This program will allow our customers to order product in-store or online and have it delivered to their home or to the job site within a defined time slot. We are excited to be rolling this program out in 2016.

Our single greatest asset is our more than 385,000 orange-blooded associates. As our customers' needs and expectations change, our associates remain committed to helping our customers by providing an excellent customer experience. As a result of these efforts, we have seen consistent improvement in our customer satisfaction scores.

PRODUCT AUTHORITY

We are committed to being the number one retailer in product authority for home improvement. We believe we offer the most comprehensive assortment of brands at compelling values. Previously, our stores gave us an advantage due to their large size. Today's digital world somewhat takes away the store size advantage, but it does allow for a level of product customization that is just not efficient in a store setting. We continue to work towards offering our customers the products they want through the most appropriate channel. Our merchants are focused on curating the right assortments for our customers, both in-store and online. By leveraging data, our merchants are better able to understand our customers' preferences so that we can put the right product, on the right shelf, in the right store and online. We will do this while driving a deeper collaboration with our suppliers in a way that we never have before. From product innovation and development to marketing and fulfillment, we are working with our suppliers to bring innovative and exclusive products to our customers at great everyday values.

DISCIPLINED CAPITAL ALLOCATION

Our capital allocation policy is straightforward and firmly in place. First, we will continue to invest in our business to make sure that we're driving growth as well as productivity and efficiency. We will push ourselves to be the low-cost providers in the marketplace. This means much deeper cross-functional internal work, as well as a completely different approach with our external suppliers, one that requires deeper, more integrated, and longer-term planning. Further, our stores and our interconnected platform are significant assets, and we will continue to reinvest in them to ensure they remain relevant to our customers.

For our shareholders, we also intend to increase our dividend every year, targeting a payout ratio of 50 percent of net earnings. In February 2016, we announced a 17 percent increase in our quarterly dividend to $0.69 per share, or an annual dividend of $2.76 per share, the seventh consecutive increase in our annual dividend.

We will return excess cash to our shareholders through share repurchases. In fiscal 2015, we repurchased a total of $7 billion, or 59 million shares, of our outstanding stock. This leaves us with $11 billion remaining in our current share repurchase authorization. Since 2002 we have repurchased approximately 1.3 billion shares for a total of $60 billion, representing an average price of approximately $48 per share.

LOOKING AHEAD

In December of 2015, we set forth our new long-term financial targets. By the end of fiscal 2018, we expect to grow sales to $101 billion while achieving a 14.5 percent operating margin and a 35 percent return on invested capital.

OUR CULTURE

The Home Depot continues to be a business driven by a commitment to its values and strong culture. In fiscal 2015, our associates volunteered over 224,000 hours with Team Depot, our associate-led volunteer force. Eleven hundred projects were completed to serve veterans in our communities. Through The Home Depot Foundation, we have invested more than $130 million to support the needs of veterans over the past five years.

And along with giving back comes thinking about how we impact the environment. This is good for our customers, our partners, our shareholders, and our environment. We are committed to providing sustainability leadership through greenhouse gas reduction efforts. We recently were named a 2015 Industry Leader by the Carbon Disclosure Project, an independent organization working with businesses to reduce greenhouse gases and drive sustainable water use. Through our continued focus on this effort, we have made significant progress in becoming a more sustainable company. In 2010 we set a five year goal to reduce the energy use in our stores by 20 percent over 2004 levels. We not only met this goal in 2014, but exceeded it, reducing store energy use by over 30 percent. We recently set a new goal to further reduce the total energy use in our stores by another 20 percent over 2010 levels by 2020.

The Home Depot has plenty of opportunities ahead. We believe that by executing against our three-legged stool strategy, we will drive even more growth and productivity for the Company. This strategy will ensure that our customers are more satisfied. Our associates will have better career opportunities. Our vendor partners will have higher growth, and our shareholders will have higher returns. We will focus on connecting our strategy and our business more closely with our suppliers and business partners to create a culture of collaboration.

Peter Drucker once said, “Culture eats strategy for breakfast.” We will deliver this staying true to our values, and that is the best strategy of all.

Craig Menear

Craig Menear
Chairman, CEO and President
March 24, 2016