CRAIG MENEAR

Chairman, CEO and President

THE POWER OF
THE HOME DEPOT

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

LETTER TO SHAREHOLDERS

In fiscal 2016, our sales grew $6.1 billion to a record $94.6 billion, an increase of 6.9 percent from fiscal 2015, with comparable store sales up 5.6 percent for the Company and 6.2 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 both Canada and Mexico. For the year, our sales growth was aided by the acquisition of Interline Brands. This year marked the one-year anniversary of the Interline acquisition and we are proud of the team’s efforts. With the acquisition of Interline, we entered a new $50 billion opportunity in the maintenance, repair and operations (“MRO”) market. We exceeded our year one integration goals, and in 2017 we will continue our focus on migrating the customer experience to what we are calling “One Home Depot” – a seamless experience for our customers serving them when, where and how they want to be served.

In fiscal 2016, we recorded net earnings of $8.0 billion, the highest in Company history. Diluted earnings per share grew 18.1 percent to $6.45 and our return on invested capital (“ROIC”) grew 330 basis points to 31.4 percent1. 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 in a rapidly changing retail environment. Many people have asked us how we did it. The answer is: By focusing on our continued commitment to delivering convenience and value for our customers.

During the year, we continued to drive growth and productivity in alignment with who we are as defined by our three-legged stool framework. 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.

Customer Experience

Our customers expect to be able to shop with us wherever and whenever they want, and they expect product to be fulfilled in whatever manner is best for them. The customer experience is not only about providing a great transaction, it is about the whole process, from inspiration and know-how, to purchase, fulfillment, aftercare and support. We deliver this experience through an interconnected platform.

During fiscal 2016, we launched a redesign of our homedepot.com site and upgraded our mobile app. We also enabled a dynamic ETA (estimated time of arrival) feature, which provides customers with a faster and more accurate delivery date based on their location. As a result of these changes, we saw increased traffic and conversion rates across our online platforms.While we are seeing significant growth in our online business, our stores have never been more relevant. As a testament to this, our online sales now make up 5.9 percent of our total sales but 45 percent of our online U.S. orders are picked up in our stores.

Continuing with our strategy to blend the physical and digital channels into a seamless customer experience, we completed the rollout of COM, our new customer order management system, to all of our U.S stores. In addition to improving the customer and associate experience, COM provides the foundation for our enhanced delivery offering, something we call Buy Online, Deliver From Store (BODFS). We completed the rollout of BODFS in our U.S. stores during fiscal 2016, giving customers the ability to choose two or four-hour delivery windows in most locations.

Our more than 400,000 orange-blooded associates have always taken pride in putting customers first. These associates are our greatest asset and competitive advantage. To reward them, we have paid out over $1 billion in Success Sharing bonuses over the last five years.

Product Authority

We are the product authority for home improvement retail. Every day, our merchants are focused on balancing the art and science of retail. The art of merchandising centers around having the best products at the best values for our customers. We know our customers respond to innovative product that saves them time and money. Over the last several years, we have collaborated with our supplier partners to drive innovation in LED technology and water savings, as well as lithium-ion technology to improve efficiency in power tools. Now we are on the forefront of bringing this technology and innovation to outdoor power equipment like blowers, chainsaws and even lawnmowers. We will continue to be our customers’ advocate by working with our supplier partners at every stage of the value chain to drive innovation and efficiency to ensure we are providing the best possible values for our customers.

Product authority also means having localized and customized assortments to meet the unique needs of our different communities. It also means being in-stock and having the depth of inventory to get the job done, no matter what the job size. This is where the science of merchandising becomes critical. In an ever-changing retail environment, we are leveraging data and building capabilities to better understand our customers and provide more localized assortments to fit customer demand. We will ensure the right product is exactly where it needs to be, online or in our stores.

Capital Allocation

Our capital allocation philosophy is straightforward and focuses on three principles.

First, we will invest in our business so that we can continue to drive growth and productivity, and maintain a high return on invested capital. One way we will do this is through our Supply Chain Sync initiative, or Project Sync, which we started rolling out in fiscal 2016. While Project Sync is still in the early days of a multi-year rollout, we are excited about the initial results. Through increased coordination with our supplier partners, we have reduced supply chain costs by optimizing truck loads, effectively reducing the number of trucks on the road. Additionally, Project Sync will allow us to further optimize labor productivity in our stores and distribution centers, and it will decrease replenishment time, leading to higher in-stock levels.

Second, we are committed to returning a meaningful percentage of our net earnings to our shareholders in the form of dividends and just raised our targeted dividend payout ratio from 50 percent to 55 percent. In February 2017, we announced a 29 percent increase in our quarterly dividend to $0.89 per share, which equates to an annual dividend of $3.56 per share. It is our intent to raise the dividend every year.

Finally, we will return excess cash to our shareholders through share repurchases. In fiscal 2016, we repurchased a total of $7 billion, or 53 million shares, of our outstanding stock. Additionally, in February 2017 our Board of Directors authorized a new $15 billion share repurchase program.

Looking Ahead

As we look ahead to fiscal 2017, we will drive growth through the following five strategies:

Customer Experience
  • Connect associates to customer needs: Empower associates to provide industry-leading customer service with differentiated staffing models, tools and organizational support to meet the needs of our do-it-yourself and Pro customers.
  • Interconnected experience; stores to online, and online to stores: Offer an interconnected shopping experience for customers, leveraging our stores, online platform and mobile app.
Product Authority
  • Connect products and services to customer needs: Help our customers tackle any project with compelling assortments at the right prices and services delivered by trusted Pros.
  • Connect product to shelf, site and customer: Continue to build an efficient end-to-end supply chain that delivers product to customers when and where they want – and set the standard for “last mile” delivery in home improvement.
Capital Allocation
  • Innovate our business model and value chain: Seek ways to operate more efficiently to support growth opportunities across our business.

Our Culture

Our business is driven by a commitment to our values and strong culture. In partnership with The Home Depot Foundation, we work to improve the homes and lives of U.S. military veterans and their families and also aid communities affected by natural disasters. During the year, more than 6,000 units of veteran housing were positively impacted by the Foundation and by volunteers from Team Depot, our associate-led volunteer force. Additionally, in fiscal 2016 The Home Depot Foundation increased its commitment to veteran-related causes to a quarter of a billion dollars by 2020.

As a Company, we are focused on the social and environmental impacts of our industry. One way we are doing this is through our renewable energy initiative. The Home Depot’s goal is to procure 135 megawatts of renewable energy from various sources by the end of 2020. During fiscal 2016, we announced an investment in wind-powered renewable energy that will provide us with 50 megawatts of energy annually. This alone will be enough energy to power 100 Home Depot stores throughout the year.

Our culture is extremely important to our business. We believe it is the greatest gift we received from our founders. Our success is only possible because of our orange-blooded associates and their entrepreneurial spirit. We look forward to continuing to grow our business while taking care of our people and protecting our culture.

Craig Menear Signature

Craig Menear
Chairman, CEO and President
March 23, 2017

1ROIC is defined as net operating profit after tax, a non-GAAP financial measure, for the most recent twelve-month period, divided by the average of beginning and ending long-term debt, including current installments, and equity for the most recent twelve-month period. For a reconciliation of net operating profit after tax to net earnings, the most comparable GAAP financial measure, and our calculation of ROIC, see “Non-GAAP Financial Measures” on page 23 of the Form 10-K.