FOOL CONFERENCE CALL SYNOPSIS*
By Debora Tidwell (TMF Debit)

Home Depot, Inc.
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2455 Paces Ferry Road, N.W.
Atlanta, GA 30339-4024
(770) 433-8211

UNION CITY, CA (May 21, 1997)/FOOLWIRE/ --- The Home Depot released their first quarter 1997 results yesterday morning. They were delighted to report their 45th consecutive quarter of year-over-year record earnings. The results for the first quarter reflect a continuing strong industry environment and The Home Depot's successful efforts to maximize sales opportunities, increase market share, and enhance operational efficiency.

SALES & EARNINGS. Net earnings for the first quarter were $259 million, up 33% from the previous year. Net earnings per share were $0.53, a 29% increase. Sales for the first quarter increased 30% to $5.66 billion. This performance was aided by very strong comparable store sales which were up 11% for the quarter. Excluding the effect of cannibalization, comp store sales were up 14%.

COMP SALES. Comp sales were strong throughout the quarter. Relative to last year, they experienced a more normal Spring season in most regions which contributed to the stronger year-over-year trends. In addition to the strong sales of seasonal products such as lumber and garden, a number of nonseasonal categories including kitchen, bath, and millwork also experienced strong sales increases.

REGIONAL RESULTS. Sales were strong basically throughout the company. Both the Western and Canadian divisions had strong sales in the first quarter after trending below the company average through most of 1996. They are especially pleased that many of the markets with the strongest comp sales performance are some of their more competitive markets such as Detroit, Boston, Washington DC, and the Carolinas. They also continue to experience very strong sales gains in the Pacific Northwest due in part to the demise of a competitor in that region as well as more aggressive marketing programs.

WEATHER IMPACT. With the difference in the timing of Spring sales this year versus last year, their toughest year-over-year comp sales comparisons began in the third week of April and will continue through May. Comps last year were 3% in the first quarter and 9% for the second quarter. Therefore, they can't reasonably expect double-digit comps for the second quarter of 1997 since Spring broke so early this year. However it is reasonable to expect comps in the mid-single digit range.

NEW STORES & ACQUISITION. During the first quarter they opened 24 new stores and relocated one store, bringing their total number of stores to 536. Five opened in February, 8 in March, and 11 in April. In addition they completed the acquisition of Maintenance Warehouse on March 14th. Maintenance Warehouse, which currently operates 13 distribution facilities, is the leading direct mail marketer of maintenance, repair, and operations products to the US building and facilities management market. Because the nature of their operations is different from those of The Home Depot, for comparison purposes they have excluded Maintenance Warehouse results from the store operating statistics that they normally report.

PRODUCTIVITY STATISTICS. Store productivity, as measured by the statistics that follow, increased strongly in the first quarter. Square footage increased 22% to 56.722 million square feet. The average square footage per store was up slightly to 105,800 compared to 105,200 last year. The number of customer transactions was up 25% to 129.7 million for the quarter. Their average customer sale was up 4% to $43.45 for the quarter. Their weighted average weekly store sales for the quarter were up 7% to $834,000 from $782,000 in the first quarter of 1996. Sales per square foot were $409.84 for the quarter, a 6% increase over the first quarter of last year.

GROSS MARGIN. Gross margin was 27.43% for the quarter, a decrease of 54 basis points from last year. The early Spring resulted in higher penetrations in lumber and seasonal merchandise which are lower margin categories.

EXPENSES. Selling and operating expenses were 17.93% for the quarter compared to 18.70% last year, a decrease of 77 basis points. The improvement is due to the following factors. First, outstanding sales performance for the quarter enabled them to leverage fixed operating expenses. They also continued to maintain control over certain variable costs such as payroll and payroll-related expenses. Second, mild weather during the first quarter resulted in lower utilities and facility maintenance expenses. Third, net advertising expenses for the quarter were lower than last year as a percentage of sales due to increased co-op advertising. Their advertising program is more aggressive this year and is designed to drive sales through enhanced brand recognition and promotion of The Home Depot in strategic areas. As they previously disclosed, they are increasing their advertising expenditures this year by approximately 40%. However advertising expenses, net of co-op, should be lower than last year as a percentage of sales for the fiscal year. And fourth, other expenses which include the cost of relocating stores was down 17 basis points. Total relocation costs were approximately $9 million for the quarter versus $14 million during the first quarter of last year. The current year first quarter, because of FASB 121, they expensed estimated unrecoverable costs for two future store relocations and three distribution centers that will close when their import distribution center in Savannah is fully operational later this year.

PRE-OPENING EXPENSES. Pre-opening expenses for the quarter were $13 million versus $12.8 million last year, down 6 basis points. Expenses were for 24 new stores and one store relocation this quarter versus 18 stores and 4 relocations last year. Pre-opening expenses averaged $522,000 per store in the first quarter this year compared to $584,000 in 1996. Lower pre-opening costs resulted primarily from efficiencies achieved in their new store opening process and from a higher proportion of store openings in markets with lower labor costs in the first quarter relative to the rest of the year. They anticipate pre-opening expenses per store to be higher and to average approximately $560,000 for the remainder of 1997.

GENERAL & ADMINISTRATIVE EXPENSES. General and administrative expenses for the quarter were 1.73% versus 1.65% last year. G&A is up due to one-time expenses related to the acquisition of Maintenance Warehouse and expenses related to projects and initiatives that are expected to provide future benefits. Excluding these costs, G&A expense would have been 1.62%.

INTEREST EXPENSES. Net interest expense was $861,000 for the quarter compared to net interest income of $1.8 million last year. Interest expense increased 14 basis points to $10.8 million due to two factors -- the issuance of $1.1 billion of 3.25% convertible notes during the third quarter last year and lower capitalized interest which was $4 million this year versus $6.8 million last year. Capitalized interest is lower primarily due to their average borrowing rate which has decreased because of the low coupon rate on the convertible notes. They expect capitalized interest for the year to be approximately $19 million versus $23.3 million last year. Interest income increased 9 basis points to $10 million related to the investment of the proceeds from the sale of the convertible notes.

TAXES & NET EARNINGS. Pre-tax income as a percent of sales for the quarter was 7.49% versus 7.35% last year, up 32%. The effective tax rate for the quarter was 38.9% compared to 39.2% last year. During the fourth quarter last year the effective tax rate was adjusted to get the annual rate to 38.9%. They expect the rate to be 38.9% for fiscal year 1997. Net earnings for the quarter were 4.58% versus 4.47% last year, up 33%. Earnings per share for the quarter were $0.53 versus $0.41 last year, a 29% increase. The weighted average shares for the quarter were 503,218,000 shares which includes 4,488,000 shares pro-rated to 2,565,000 shares for the acquisition on March 14th of Maintenance Warehouse.

EPS CALCULATION. To calculate earnings per share, the tax-affected interest expense on the convertible notes, including issuance cost and net of capitalized interest must be added back to net earnings. This total for the quarter was $5.8 million. They expect the interest add-back to earnings to be approximately $5.8 million for each of the remaining quarters of 1997 and $23.2 million for the year.

SHARE ESTIMATES. Their estimates for weighted average shares to be used for primary earnings per share calculations for the rest of 1997 are as follows. For the second quarter 506.5 million shares, for the third quarter 507 million shares, for the fourth quarter 507.9 million shares, and for the fiscal year 506 billion shares.

ASSETS, EQUITY, DEBT. On the balance sheet, for the first time in the history of the company, total assets exceeded $10 billion and stockholder's equity surpassed $6 billion. Stockholders equity topped the $6 billion mark ending the quarter at $6,230,223,000. Debt-to-equity was 20%. Cash and short-term investments amounted to $1,041,540,000, which includes the proceeds from the issuance of $1.1 billion of 3.25% convertible notes. Long-term debt was $1,259,534,000 including $1.104 billion of convertible notes as well as capital leases and industrial revenue bonds.

INVENTORY. Inventory turnover which is calculated based on quarterly ending inventories improved for the quarter to 5.5 this year compared to 5.3 last year, maintaining the improvement that began in the second quarter of 1996. Average inventory per store was up 5.1% to $6,030,000. They wanted to remind people that comp sales were 11% for the quarter and weighted average weekly store sales were up 6.7%.

ACCOUNTS PAYABLE. Trade accounts payable were $1.8 billion or 55% of inventory compared to 49% last year. The increase is attributable to the increase in inventory turnover.

CURRENT RATIO. The current ratio was 1.73-to-1 versus 1.43-to-1 last year. The increase was due to the remaining proceeds from the issuance of the convertible notes.

CAPITAL EXPENDITURES. Capital expenditures were $273.2 million for the quarter. They now own 404 of their stores or 75%. They expect to spend approximately $1.7 billion in 1997, almost 90% for new stores with most of the balance for renovations, additions, and computers. The percentage increase in capital expenditures is due to opening more stores in 1997 versus 1996 and their goal of opening 1998 stores earlier in the year which results in additional construction costs in 1997.

EXPANSION PLANS. Looking ahead in fiscal 1997 they plan to open approximately 111 new stores and relocate 4 others for a unit growth rate of 21-22%. During the second quarter they plan to open 24 stores with no relocations. The majority of their new store openings in fiscal 1997 will continue to be in existing markets. Based on current store opening plans they expect the 1997 impact of cannibalization to be approximately 2-3%.

NEW STRATEGIES. They are excited about the first quarter results and their prospects for a strong fiscal 1997. At the same time, however, they continue to develop their new strategies for ensuring consistently strong, long-term earnings growth. These strategies include broadening their view of the overall home improvement market and identifying and targeting opportunities. In their last conference call they discussed the first of a number of growth initiatives that will be studied during 1997. Two of these initiatives focused on the professional customer and new product opportunities such as appliances.

PROFESSIONAL MARKET. As far as the pro customer, they are still analyzing the various segments of the professional customer business to identify growth opportunities that fit within their core business. One of the most exciting developments so far is the realization that the total market opportunity is bigger than most would expect. This is resulting in a redefinition of the overall home improvement market size. By traditional measures, most people look at home improvement as an approximate $135 billion market. However, the $135 billion excludes a lot of the professional market as well as some product categories that they find in their stores and other home improvement retailers. If you add in pro segments such as tradespeople, general contractors, and property maintenance and products such as flooring, their estimate is that the total potential market size is actually closer to $360 billion, which significantly broadens their opportunities for future growth. Within this broadened definition of the market, they are in the process of narrowing their scope to the most practical areas for their company. As they make decisions and implement them they will release updates.

APPLIANCES. As far as the products go, in January they also kicked off a growth initiative focused on new product opportunities with an initial focus on studying the possibility of developing a major presence in appliances. They currently sell built-in appliances in all of their stores, primarily in conjunction with the sale of kitchen cabinets. A number of their stores also offer varying assortments of freestanding appliances, primarily the result of local merchandising decisions. After developing and reviewing opportunities and business models, they have determined that at this time their best strategic and most profitable opportunities are in the built-in appliances area. Therefore, they plan to grow their competitive presence, sales, and earnings in that segment of the market. They also plan to continue to monitor opportunities in the overall appliance market. However, they have decided at this time not to develop a nationwide presence in freestanding appliances for a number of reasons, most importantly of which is because of the opportunities they expect to have in other product areas more closely related to their core business. They did not want to commit the space required for a full-scale appliance department in their existing stores. They felt that in order to do it properly, they would need approximately 3000 square feet in their stores and the other potential uses of that space were just more important. Home Depot's successful formula is partly due to their entrepreneurial spirit and decentralized management structure. Therefore, some stores may continue to sell freestanding appliances in markets where they see opportunities to respond to their customer needs.

SUPPLY CHAIN MANAGEMENT. Their supply chain initiative is proceeding and they are learning a great deal about the prospects for cross-stocking more merchandise to their stores. Recent systems developments will make this a smoother process for them. They are also making decisions about the types of merchandise that are most appropriate for this distribution method. There are up-front costs associated with this and other initiatives. However, their estimate of the magnitude of the benefits of cross-stocking which should begin to materialize in 1998 justify the investment they are making now.

NEW IMPORT DISTRIBUTION CENTER. They have completed systems testing at their import distribution center in Savannah and they will begin shipping merchandise to their test stores this week. A larger scale rollout will begin in several weeks and they expect the IDC to be handling over 360 stores in the Eastern US by October. There are a number of benefits that will be realized through the import distribution center. One of the most important benefits is that it will increase their assortment and reduce their cost of imported merchandise. Their import merchandising team also plans to identify and bring to their customers new products not currently available to them. Over time they expect to increase direct imports from 3% of their sales to eventually 10% of the merchandise they sell.

PAYROLL HOURS MANAGEMENT. Some initiatives that they developed to better match their payroll hours to their customer traffic has been rolled out and they expect to see the results in the form of better customer service. They are also working on the development and testing of a new software package which will help automate the scheduling of individuals based on Home Depot's needs and the workers' availability. This will also help customer service.

EXPANSION TO CHILE. They have hired several Chileans for their venture in Latin America and are training them in the US stores today so that they can send them back and export their high customer service culture to that country. They still expect to open their first store in Chile in 1998.

SUMMARY AND EXPECTATIONS. Fiscal 1997 is off to a strong start and they are optimistic about the remainder of the year. The outlook for the industry is good, their marketshare is growing at a strong pace, and the initiatives they are undertaking throughout the company will generate positive results in future years. For these reasons, they remain comfortable with their estimates to achieve annual earnings per share growth in the 23-25% range for the next 3 years.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.