Dear Shareholders:

In 2010, we achieved our first year of positive sales growth since fiscal year 2006. Our comp sales increased by 2.9 percent, with total sales up 2.8 percent. Earnings per share from continuing operations were up 29.7 percent from last year, reflecting positive sales growth, continuing benefits from our merchandising transformation efforts and effective expense control.

Our sales growth occurred against a backdrop of continued weakness in the housing market. In the U.S., private fixed residential investment as a percent of GDP reached a new 60 plus year low of 2.24 percent in the third quarter of 2010. Despite this, we had positive comp sales for all four quarters of 2010, and by the end of 2010, we were seeing strength across the U.S., as 49 of the 50 states had positive same store sales for the fourth quarter. We view this as an indicator that our business can stabilize and improve even as the housing market remains under stress.

As we look to 2011, we believe that GDP growth and improving customer sentiment will continue to lift our business in the U.S. On the international front, our Canadian business had negative same store sales in the back half of the year, reflecting the impact of the previous year’s home renovation tax credit. We expect this pressure to continue in the beginning of 2011 but then dissipate later in the year. Our Mexican business posted its twenty-ninth quarter in a row of positive same store sales in the fourth quarter of 2010, and we expect it to continue this trend in 2011. In China, we have reduced our store footprint, and we believe this will provide a more effective platform for future performance and development.

In 2010, we continued to invest in our business. We maintained our focus on customer service, supply chain and merchandising initiatives, as well as the development of our interconnected retail strategy.

Operationally, we made progress with customer service through initiatives such as our FIRST Phone, a hand held device with multiple functions, including inventory management, product location, a phone, a walkie-talkie, and a mobile register. We have completed the rollout of the FIRST Phone, and this helped us end the year with 51 percent of store payroll allocated to customer facing activity. As we continue on the path to achieving a 60/40 ratio between customer service and tasking activities, we can see significant improvements in our customer service surveys.

We opened our nineteenth Rapid Deployment Center or “RDC” in January 2011, marking the completion of our RDC build out, at least for the next several years. Three years ago, we started with a goal of serving 100 percent of our U.S. stores through RDCs by the end of fiscal 2010. We achieved this goal. This was a major undertaking that touched almost every part of the company and required the work and dedication of the entire team. This structural shift in our supply chain will provide ongoing benefits in cost-out, asset efficiency and customer service.

Over the course of 2010, we made significant improvements in our merchandising systems, with foundational work on our data warehouse and improved tools for forecasting and replenishment. We will continue on that path in 2011, and we are also continuing our investments in multi-channel – or interconnected – retailing. Through our mobile applications, website and social media presence, we are creating the capability to serve our customers “when, where and how” they want to be served.

At The Home Depot, our goal is to provide the best customer service and the best product values in our market, with an underlying principle of disciplined capital allocation. Our approach to capital allocation is straightforward: after making the necessary investments in our business, we will return excess cash to our shareholders through dividends and share repurchases. We have a targeted dividend payout of approximately 40 percent of earnings, and we recently announced a 6 percent increase in our annual dividend to $1.00 per share. This is our second consecutive annual increase. We used excess cash to repurchase $2.6 billion in stock during 2010, and we plan to continue repurchasing shares in 2011. We have a goal of achieving a 15 percent return on invested capital, and we have a plan to reach that goal by the end of 2013.

Our “orange-blooded” associates make the difference in our business. We have a Success Sharing bonus program for our hourly associates. Because of their great work in 2010, we were able to issue Success Sharing checks of over $126 million to eligible associates, five times more than we issued in 2006. We are a values-based business, and one of our core values is taking care of our associates.

I hope as you spend time in our stores or on our web site or on our mobile applications, you will see continued improvement in our service and our commitment to our customers.

Frank S. Blake
Chairman & Chief Executive Officer
March 24, 2011