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Article by DailyStocks_admin    (04-07-08 02:58 AM)

The Daily Warren Buffett Stock is HD. Berkshire Hathaway owns 4,181,000 shares. As of Dec 31,2007, this represents 0.16% percent of portfolio.

BUSINESS OVERVIEW

Introduction

The Home Depot, Inc. is the world's largest home improvement retailer and the second largest retailer in the United States ("U.S."), based on Net Sales for the fiscal year ended January 28, 2007 ("fiscal 2006"). As of the end of fiscal 2006, we were operating 2,147 stores, most of which are The Home Depot stores.

The Home Depot stores sell a wide assortment of building materials, home improvement and lawn and garden products and provide a number of services. The Home Depot stores average approximately 105,000 square feet of enclosed space, with approximately 23,000 additional square feet of outside garden area. As of the end of fiscal 2006, we had 2,100 The Home Depot stores located throughout the U.S. (including the territories of Puerto Rico and the Virgin Islands), Canada, China and Mexico. In addition, at the end of fiscal 2006, the Company operated 34 EXPO Design Center stores, 11 The Home Depot Landscape Supply stores and two The Home Depot Floor stores.

In addition to our retail stores, our business includes HD Supply, which distributes products and sells installation services primarily to business-to-business customers, including home builders, professional contractors, municipalities and maintenance professionals. HD Supply consists of four major platforms: 1) infrastructure, including waterworks and utilities; 2) construction, including construction supply, lumber and building materials, electrical, plumbing/HVAC and interiors; 3) maintenance, including facilities maintenance and industrial PVF; and 4) repair and remodel.

In February 2007, the Company announced its decision to evaluate strategic alternatives for HD Supply, including a possible sale or initial public offering of the business. There can be no assurance that any transaction will occur or, if one is undertaken, its terms or timing.

The Home Depot, Inc. is a Delaware corporation that was incorporated in 1978. Our Store Support Center (corporate office) is located at 2455 Paces Ferry Road, N.W., Atlanta, Georgia 30339. Our telephone number is (770) 433-8211.

We maintain an Internet website at www.homedepot.com. We make available on our website, free of charge, our Annual Reports to shareholders, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements and Forms 3, 4 and 5 as soon as reasonably practicable after filing such documents with, or furnishing such documents to, the SEC.

We include our website addresses throughout this filing only as textual references. The information contained on our websites is not incorporated by reference into this Form 10-K.

Our Business

We operate in two reportable segments, Retail and HD Supply. You will find information concerning the financial results and the total assets of each segment in Note 12 to the Consolidated Financial Statements. Financial information about our operations outside the United States is also reported in Note 12 to the Consolidated Financial Statements.

Retail Segment

Operating Strategy. Our operating strategy is to offer a broad assortment of high-quality merchandise and services at competitive prices using knowledgeable, service-oriented personnel and strong marketing and credit promotions. We believe that our associates' knowledge of products and home improvement techniques and applications is very important to our marketing approach and our ability to maintain and enhance customer satisfaction.

Customers. The Home Depot stores serve three primary customer groups:

•
Do-It-Yourself ("D-I-Y") Customers: These customers are typically home owners who purchase products and complete their own projects and installations. To complement the expertise of our associates, The Home Depot stores offer "how-to" clinics taught by associates and merchandise vendors.

•
Do-It-For-Me ("D-I-F-M") Customers: These customers are typically home owners who purchase materials themselves and hire third parties to complete the project and/or installation. We arrange for the installation of a variety of The Home Depot products through qualified independent contractors.

•
Professional Customers: These customers are professional remodelers, general contractors, repairmen and tradesmen. In many stores, we offer a variety of programs to these customers, including additional delivery and will-call services, dedicated staff, extensive merchandise selections and expanded credit programs, all of which we believe increase sales to these customers.

To complement and enhance our product selection, we have formed strategic alliances and exclusive relationships with selected suppliers to market products under a variety of well-recognized brand names. During fiscal 2006, we offered a number of proprietary and exclusive brands across a wide range of departments including, but not limited to, Behr Premium Plus® paint, Charmglow® gas grills, Hampton Bay® lighting, Mills Pride® cabinets, Vigoro® lawn care products, Husky® hand tools, RIDGID® and Ryobi® power tools, Pegasus® faucets, Traffic Master® carpet, Glacier Bay® bath fixtures and Veranda® decking products. We may consider additional strategic alliances and relationships with other suppliers and will continue to assess opportunities to expand the range of products available under brand names that are exclusive to The Home Depot.

In fiscal 2006, innovative and distinctive products continued to be a growth driver supporting our merchandising strategy. The following successes helped differentiate The Home Depot in the marketplace:

•
Introduced the most comprehensive lineup of top brand lawn tractors and mowers available nationwide, including Cub Cadet®, Toro®, John Deere® and Honda®;

•
Launched an expanded outdoor living assortment, including Hampton Bay patio and Charmglow grills;

•
Launched an exclusive line-up of lithium-ion power tools from Milwaukee®, RIDGID and Makita®; and

•
Launched the LG® SteamWasher™ and the Maytag® Epic™ washer and dryer.

We maintain a global sourcing merchandise program to source high-quality products directly from manufacturers. Our product development merchants travel internationally to identify opportunities to purchase items directly for our stores. Additionally, we have four sourcing offices located in Shanghai, Shenzhen, Dalian, and Chengdu, China, as well as one office in Gurgaon, India. We also have a quality assurance engineer located in Milan, Italy and we have product development merchants, as well as a sourcing office, in Monterrey, Mexico. We currently source products from more than 800 factories in approximately 35 countries.

Services. The Home Depot and EXPO Design Center stores offer a variety of installation services. These services target D-I-F-M customers who select and purchase products and installation of those products from us. These installation programs include products such as carpeting, flooring, cabinets, countertops and water heaters. In addition, we provide professional installation of a number of products sold through our in-home sales programs, such as generators and furnace and central air systems.

Store Growth

United States . At the end of fiscal 2006, we were operating 1,872 The Home Depot stores in the U.S., including the territories of Puerto Rico and the Virgin Islands. During fiscal 2006, we opened 86 new The Home Depot stores, including eight relocations, in the U.S.

Canada . At the end of fiscal 2006, we were operating 155 The Home Depot stores in ten Canadian provinces. Of these stores, 20 were opened during fiscal 2006, including two relocations.

Mexico . At the end of fiscal 2006, we were operating 61 The Home Depot stores in Mexico. Of these stores, seven were opened during fiscal 2006.

China . In fiscal 2006, we acquired The Home Way, a Chinese home improvement retailer, including 12 stores in six cities.

Credit Services. We offer credit purchase programs through third-party credit providers to professional, D-I-Y and D-I-F-M customers. In fiscal 2006, approximately 4.5 million new The Home Depot credit accounts were opened, bringing the total number of The Home Depot account holders to approximately 17 million. Proprietary credit card sales accounted for approximately 28% of store sales in fiscal 2006. We also offer an unsecured Home Improvement Loan program through third-party credit providers that gives our customers the opportunity to finance the purchase of products and services in our stores. We believe this loan program not only supports large sales, such as kitchen and bath remodels, but also generates incremental sales from our customers.

Logistics. Our logistics programs are designed to ensure excellent product availability for customers, effective use of our investment in inventory and low total supply chain costs. At the end of fiscal 2006, we operated 18 import distribution centers located in the U.S. and Canada. At the end of fiscal 2006, we also operated 30 lumber distribution centers in the U.S. and Canada to support the lumber demands of our stores and 10 transit facilities to receive merchandise from manufacturers for immediate delivery to our stores. At the end of fiscal 2006, approximately 40% of the merchandise shipped to our stores flowed through our network of distribution centers and transit facilities. As our networks evolve, we expect to increase our flow-through. The remaining merchandise will be shipped directly from our suppliers to our stores. In addition to replenishing merchandise supplies at our stores, we also provide delivery services directly to our customers.

Seasonality. Our business is seasonal to a certain extent. Generally, our highest volume of sales occurs in our second fiscal quarter and the lowest volume occurs during our fourth fiscal quarter.

Competition. Our business is highly competitive, based in part on price, store location, customer service and depth of merchandise. In each of the markets we serve, there are a number of other home improvement stores, electrical, plumbing and building materials supply houses and lumber yards. With respect to some products, we also compete with discount stores, local, regional and national hardware stores, mail order firms, warehouse clubs, independent building supply stores and, to a lesser extent, other retailers. In addition to these entities, our EXPO Design Center stores compete with specialty design stores or showrooms, some of which are only open to interior design professionals. Due to the variety of competition we face, we are unable to precisely measure the impact on our sales by our competitors.

HD Supply Segment

Operating Strategy. Our operating strategy is to provide a total solution for every phase of a building project, from infrastructure to construction to lifetime maintenance and repair and remodel. We believe that our broad product and service offering, our highly knowledgeable sales force and our reputation for superior customer service enable us to be a single-source supplier to our customers for the entire project lifecycle.

Customers. We distribute products and offer services primarily to builders, contractors, government entities, industrial businesses and maintenance professionals. Our customers typically select their vendors primarily on the basis of product availability, relationships with and expertise of sales personnel, price and the quality and scope of services offered. Additionally, professional customers generally purchase large volumes, are repeat buyers because of their involvement in longer-term projects and require specialized services. We complement our product offering with customer-driven, value-added services, such as integrated supply, design assistance, kitting, assembly and fabrication services.

Products and Services. Our products and services are focused around the following four major categories that are related to different phases of a building project:

•
Infrastructure: This category covers the products and services to construct and support the public works systems for residential and commercial projects.

•
Construction: This category covers the interior and exterior structural building components for residential and commercial projects.

•
Maintenance: This category covers products and services for the routine maintenance, repair and operations needs of multifamily housing, hospitality, healthcare, government and industrial facilities.

•
Repair and Remodel: This category covers home improvement products and building materials, serving the consumer, professional handyman and light remodeler markets.

Inventories. We maintain extensive inventories to meet the rapid delivery requirements of our customers. Our inventories are based on the needs, delivery schedules and lead times of our customers. We focus on distributing products that leverage our strengths in inventory management, purchasing, specialized sales force, distribution and logistics, credit management and information technology.

Credit Services. Over 90% of our sales volume is facilitated through the extension of credit to our customers. Our businesses offer credit to customers, either through unsecured credit that is based solely upon the creditworthiness of the customer, or secured credit for materials sold for a specific job where the security lies in lien rights associated with the material going into the job. The type of credit offered depends both on the financial strength of the customer and the nature of the business in which the customer is involved. End users, resellers and other non-contractor customers generally purchase more on unsecured credit than secured credit. These lines of credit are granted only after a sufficient review of the creditworthiness of the customer. In addition, on a regular basis, large unsecured credit lines are reviewed to ensure they are still financially sound.

Logistics. Our distribution network consists of over 1,000 combined branches and central distribution centers in the United States. The efficient operation of our distribution network is critical in providing quality service to our customer base. Our central distribution centers and branches use warehouse management technology to optimize receiving, inventory control and picking, packing and shipping functions. In addition, we leverage several of our larger branches as distribution points for certain product lines.

The majority of customer orders are shipped from inventory at our branches. In order to maintain complete control of the delivery process, we use over 4,000 vehicles from our total vehicle fleet to deliver products to our customers. We also accommodate special orders from our customers and facilitate the shipment of certain large volume orders directly from the manufacturer to the customer. Orders for larger construction projects normally require long-term delivery schedules throughout the period of construction, which in some cases may continue for several years.

Seasonality. Our business is seasonal to a certain extent. Generally, our highest volume of sales occurs in our second fiscal quarter and the lowest volume occurs during our fourth fiscal quarter.

Competition. We are one of the largest wholesale distributors of our range of products in the United States, and we believe that no other company competes against us across all of our product lines. However, there is significant competition in each of our individual product lines. Our competition includes other wholesalers, manufacturers that sell products directly to their respective customer base and some of our customers that resell our products. To a limited extent, retailers of plumbing, electrical fixtures and supplies, building materials, maintenance repair and operations supplies and contractors' tools also compete with us. Competition varies depending on product line, customer classification and geographic area. The principal competitive factors in our business include, but are not limited to, availability of materials and supplies; technical product knowledge and expertise as to application and usage; advisory or other service capabilities; ability to build and maintain customer relationships; same-day delivery capabilities in certain product lines; pricing of products and provision of credit.

Support Services

Information Technologies. During fiscal 2006, we continued to make significant information technology investments to support better customer service and provide an improved shopping environment in our stores. We completed the deployment of self-checkout registers to all our U.S. stores and the majority of our stores in Canada and enhanced our coupon processing at all check-outs. We also began implementing in-store call boxes and installed voice over internet phone systems in order to provide customers faster assistance from our associates. To support the continued growth of our appliance business, we upgraded our proprietary Depot Direct appliance fulfillment system.

In addition to significant investments in store technology, we upgraded our order management system, which improves the speed and accuracy of online order processing and provides customers the ability to check special order status on the internet. We also defined a set of common enterprise system platforms for our HD Supply wholesale businesses and began migrating the HD Supply businesses to these platforms, beginning with the payroll and financial functions.

We also began work on the strategic effort to implement a new Retail Systems platform to further improve the performance of our merchandising functions and store operations. We also commenced the effort to add new automation into our supply chain functions focusing on new systems for warehouse distribution, transportation management and enhancements to support greater order penetration through our centralized replenishment systems.

Associates. At the end of fiscal 2006, we employed approximately 364,000 associates, of whom approximately 26,000 were salaried, with the remainder compensated on an hourly or temporary basis. Approximately 68% of our associates are employed on a full-time basis. We believe that our employee relations are very good. To attract and retain qualified personnel, we seek to maintain competitive salary and wage levels in each market we serve.

Intellectual Property. Through our wholly-owned subsidiary, Homer TLC, Inc., we have registered or applied for registration, in a number of countries, for a variety of internet domain names, service marks and trademarks for use in our businesses, including The Home Depot®; HD Supply; Hampton Bay® fans, lighting and accessories; Glacier Bay® toilets, sinks and faucets; Pegasus® faucets and bath accessories; Commercial Electric® lighting fixtures; Workforce® tools, tool boxes and shelving; www.hdsupply.com and www.doitherself.com. Furthermore, we have also obtained and now maintain patent portfolios relating to certain products and services provided by The Home Depot, and continually seek to patent or otherwise protect selected innovations we incorporate into our products and business operations. We regard our intellectual property as having significant value to each business segment and as being an important factor in the marketing of our brand, e-commerce, stores and new areas of business. We are not aware of any facts that could be expected to have a material adverse affect on our intellectual property.

Quality Assurance Program. We have a quality assurance program for our directly imported globally-sourced products. Through this program, we have established criteria for supplier and product performance, which measures factors such as product quality and timeliness of shipments. The performance record is made available to the factories to allow them to strive for improvement. The program addresses quality assurance at the factory, product and packaging levels.

Environmental, Health & Safety ("EH&S"). We are committed to maintaining a safe environment for our customers and associates, and protecting the environment of the communities in which we do business. Our EH&S function in the field is directed by trained associates focused primarily on execution of the EH&S programs. Additionally, we have an Atlanta-based team of dedicated EH&S professionals who evaluate, develop, implement and enforce policies, processes and programs on a Company-wide basis.

COMPENSATION

In order to align the interests of non-employee directors with shareholders, the Company provides 82% of each such director's annual retainer in Company equity. Such equity awards stipulate that shares of Company stock must continue to be held until the director retires from the Board or for one year after Board service ends for any reason other than ordinary Board retirement, death, disability or a change in control of the Company. This approach to director compensation is also set forth in the Company's Corporate Governance Guidelines.

Each director who was a Board member during Fiscal 2006 and who was not employed by the Company received an annual retainer of $280,000, paid in the following manner:

•
$230,000 in the form of deferred shares granted under the 2005 Omnibus Plan; and
•
$50,000 in the form of cash or deferred stock units under the Directors Plan, at the election of the director.

Historically, directors also received stock options as part of the annual stock retainer. Beginning with the 2006 compensation year, in alignment with prevalent market practice, directors receive the annual stock retainer solely in the form of deferred shares under the 2005 Omnibus Plan. Director compensation is paid for the twelve-month period commencing with each annual meeting of shareholders. A pro rata portion of annual director compensation is paid to directors who become Board members after the annual meeting as follows: 100% for appointments before the sixth month anniversary of the annual meeting, 50% after the sixth month but not later than the ninth month anniversary of the annual meeting, and 25% after the ninth month anniversary of the annual meeting.

In addition to the annual retainer, each non-employee director received $2,000 per Board meeting and $1,500 per Committee meeting attended. Each non-employee director is also entitled to receive $2,000 per annual meeting of shareholders attended. Each non-employee director who served as chair of a Board committee received $10,000, except for the Chair of the Audit Committee, who received $15,000. Board and Committee meeting and chair fees are payable in cash or deferred stock units under the Directors Plan, at the election of the director.

The Company also pays (or provides for reimbursement of) the travel and accommodation expenses of directors and, when requested by the Company, their spouses to attend Board meetings, conduct store visits and participate in other corporate functions, together with any taxes related to such payments.

As part of the Company's overall support of charitable organizations, and in order to preserve its ability to attract directors with outstanding experience and ability, the Company maintains a program through which it will match up to $100,000 of charitable donations made by each director, including the Chairman, during each calendar year. In addition, the program permits each director who was a member of the Board prior to January 18, 2007, including the Chairman, to recommend names of charitable organizations to which the Company may donate on its own behalf up to $1,000,000 upon the director's retirement from the Board at the mandatory age of 72. The directors do not receive any financial benefit from this program because the charitable deductions accrue solely to the Company. Donations under the program are not made to any charity from which the director (or a party related to the director) directly or indirectly receives compensation. Mr. Nardelli's All Other Compensation reported in the Summary Compensation table includes $100,000 in matching contributions made under the program for Fiscal 2006. Mr. Blake did not participate in the program for Fiscal 2006.

(1)
All directors except Mr. Langone defer their cash retainers and meeting fees under the Directors Plan, which are converted to stock units payable in shares of the Company's common stock on termination of Board service. Ms. Hill and Mr. Ridge defer 50% of their annual cash retainer and all of their cash meeting fees under the Directors Plan. Dividend equivalents were credited on stock units in the Directors Plan at the same rate, and at the same time, that dividends are paid to shareholders of the Company.

(2)
Amounts set forth in the Stock Awards column represents the aggregate amount recognized for financial statement reporting purposes with respect to the directors for Fiscal 2006, disregarding the estimate of forfeitures related to service-based vesting conditions, but otherwise computed in accordance with the Statement of Financial Accounting Standards ("SFAS") No. 123, as amended by SFAS No. 123(R), "Share-Based Payment" ("SFAS 123(R)").


The grant date fair value of each deferred share award expensed during Fiscal 2006 is set forth in the following table, computed in accordance with SFAS 123(R) based on the closing stock price on the grant date. There were no stock award forfeitures by the directors during Fiscal 2006, other than 1,332 restricted shares forfeited by Mr. Brown on his termination of Board service during Fiscal 2006.

(3)
Amounts set forth in the Option Awards column represents the aggregate amount recognized for financial statement reporting purposes with respect to the directors for Fiscal 2006, disregarding the estimate of forfeitures related to service-based vesting conditions, but otherwise computed in accordance with SFAS 123(R) based on the assumptions set forth in Note 1 to the Company's consolidated financial statements as filed with the Securities and Exchange Commission on Form 10-K on March 29, 2007, March 29, 2006, April 11, 2005 and April 12, 2004 ("Note 1").


The grant date fair value of each option award expensed during Fiscal 2006 is set forth in the following table and is computed in accordance with SFAS 123(R) based on the assumptions set forth in Note 1. There were no option award forfeitures by the directors during Fiscal 2006, other than 27,063 option awards forfeited by Mr. Brown on his termination of Board service during Fiscal 2006.

(4)
Amounts reported include reimbursement of income tax on gifts and spousal aircraft travel when spousal attendance at a Company event was requested by the Company, and matching charitable contributions that were made in the following amounts: Gregory D. Brenneman – $100,000; Richard H. Brown – $68,000; John L. Clendenin – $50,000; Claudio X. González – $50,000; Milledge A. Hart, III – $100,000; Bonnie G. Hill – $12,500; Laban P. Jackson, Jr. – $100,000; Helen Johnson-Leipold – $20,500; Lawrence R. Johnston – $100,000; Kenneth G. Langone – $100,000; Angelo R. Mozilo – $100,000; Thomas J. Ridge – $63,500. The Company's director charitable contribution program is described in "Director Compensation" under the "How Are Directors Compensated?" section above.

MANAGEMENT DISCUSSION FROM LATEST 10K

Executive Summary and Selected Consolidated Statements of Earnings Data

For fiscal year ended January 28, 2007 ("fiscal 2006"), we reported Net Earnings of $5.8 billion and Diluted Earnings per Share of $2.79 compared to Net Earnings of $5.8 billion and Diluted Earnings per Share of $2.72 for fiscal year ended January 29, 2006 ("fiscal 2005"). Net Sales increased 11.4% to $90.8 billion for fiscal 2006 from $81.5 billion for fiscal 2005. Our gross profit margin was 32.8% and our operating margin was 10.7% for fiscal 2006.

In the face of a slowdown in the housing market, our retail comparable store sales declined 2.8% in fiscal 2006 driven by a decline in comparable store customer transactions. This was partially offset by an increase in our average ticket of 1.6% in fiscal 2006 to $58.90, including increases in 8 of 10 selling departments.

We grew our numerous installation and home maintenance programs serving our do-it-for-me customers through our stores. Our retail services revenue increased 8.3% to $3.8 billion for fiscal 2006. We experienced sustained growth in categories such as countertops, exterior patios, solar, windows and HVAC.

We continued to introduce innovative and distinctive merchandise that reflects emerging consumer trends, supported by continued investments in store modernization and technology. We invested $3.5 billion in capital expenditures during fiscal 2006 primarily for new store construction, store modernization and technology. We began an accelerated store reinvestment program whereby we increased our investment in existing stores by $350 million more than our plan in the second half of fiscal 2006 to enhance the customer experience. This investment included capital and expense dollars to reset 100 merchandise bays in 540 stores, incorporate a richer staffing model and support our "Orange Juiced" program, a customer service incentive program for our store associates.

We added 125 new stores in fiscal 2006, including 12 stores through our acquisition of The Home Way, a Chinese home improvement retailer, and 10 relocations, bringing our total store count at the end of fiscal 2006 to 2,147. As of the end of fiscal 2006, 228, or approximately 11%, of our stores were located in Canada, Mexico or China compared to 191, or approximately 9%, at the end of fiscal 2005.

We have expanded our business by capturing a growing share of the professional residential, commercial and heavy construction markets through the growth of HD Supply. HD Supply experienced 162% Net Sales growth in fiscal 2006 and accounted for approximately 13% of our total Net Sales in fiscal 2006. We completed 12 acquisitions in fiscal 2006 that were integrated into HD Supply, including Hughes Supply, Inc., a leading distributor of construction and repair products. Organic Net Sales growth for the HD Supply segment was 5.6% in fiscal 2006.

In February 2007, we announced our decision to evaluate strategic alternatives for HD Supply. In order to maximize the value of HD Supply, we would need to further integrate it with our Retail business. We are currently evaluating whether this integration or other strategic alternatives, such as a sale or initial public offering of the business, would create the most shareholder value.

We generated $7.7 billion of cash flow from operations in fiscal 2006. We used this cash flow, along with the net proceeds of additional borrowings of $7.6 billion, to fund $8.1 billion of share repurchases and dividends, $4.3 billion in acquisitions and $3.5 billion in capital expenditures. At the end of fiscal 2006, our long-term debt-to-equity ratio was 47%. Our return on invested capital (computed on beginning long-term debt and equity for the trailing four quarters) was 20.5% at the end of fiscal 2006 compared to 22.4% for fiscal 2005.

Results of Operations

For an understanding of the significant factors that influenced our performance during the past three fiscal years, the following discussion should be read in conjunction with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements presented in this report.

We operate in two reportable business segments: Retail and HD Supply. The Retail segment is principally engaged in the operation of retail stores located in the United States, Canada, Mexico and our recently acquired stores in China. The HD Supply segment distributes products and sells installation services to business-to-business customers, including home builders, professional contractors, municipalities and maintenance professionals. We identify segments based on how management makes operating decisions, assesses performance and allocates resources. The first quarter of fiscal 2006 was the first period in which we began to report our results of operations in two segments. This change was a result of the purchase of Hughes Supply, which significantly increased the size of HD Supply and resulted in changes in our internal reporting and management structure.

The Retail segment includes The Home Depot stores, EXPO Design Center stores ("EXPO") and other retail formats. The Retail segment also includes our retail services business and our catalog and on-line sales businesses.

The HD Supply segment consists of four major platforms: 1) infrastructure, including waterworks and utilities; 2) construction, including construction supply, lumber and building materials, electrical, plumbing/HVAC and interiors; 3) maintenance, including facilities maintenance and industrial PVF; and 4) repair and remodel.

Fiscal 2006 Compared to Fiscal 2005

Net Sales

Total Net Sales for fiscal 2006 increased 11.4%, or $9.3 billion, to $90.8 billion from $81.5 billion for fiscal 2005. Of the $9.3 billion increase, $7.3 billion, net of intercompany sales, came from our HD Supply segment and $2.0 billion came from our Retail segment.

Net Sales for our Retail segment were $79.0 billion for fiscal 2006, a 2.6% increase over fiscal 2005. Fiscal 2006 Retail segment Net Sales growth was primarily driven by sales from new stores. Retail comparable store sales decreased 2.8% for fiscal 2006 compared to an increase of 3.1% for fiscal 2005. The decline in retail comparable store sales was driven by a 4.6% decline in comparable store customer transactions offset in part by a 1.6% increase in average ticket. Our average ticket increased to $58.90 for fiscal 2006 and increased in 8 of 10 selling departments. The decrease in retail comparable store sales for fiscal 2006 was due to the significant slowdown in the U.S. retail home improvement market as well as difficult year-over-year comparisons due to sales arising from hurricane activity in fiscal 2005. Both Canada and Mexico, however, experienced positive retail comparable store sales for fiscal 2006. Additionally, our retail comparable store sales results reflect in part the impact of cannibalization. In order to meet our customer service objectives, we strategically open stores near market areas served by existing stores ("cannibalize") to enhance service levels, gain incremental sales and increase market penetration. Our new stores cannibalized approximately 13.5% of our existing stores during fiscal 2006, which had a negative impact to retail comparable store sales of approximately 1.9%.

Despite the difficult U.S. retail home improvement market, we continued to expand our retail services revenue, which increased 8.3% to $3.8 billion for fiscal 2006 from $3.5 billion for fiscal 2005. The growth in retail services revenue was driven by strength in a number of areas including countertops, exterior patios, solar, windows and HVAC. Our retail services programs focus primarily on providing products and services to our do-it-for-me customers. Our services revenue is expected to benefit from the growing percentage of aging "baby-boomers" as they rely more heavily on installation services.

Net Sales for our HD Supply segment for fiscal 2006 were $12.1 billion, an increase of 162% over fiscal 2005. The increase was primarily a result of recent acquisitions. Organic Net Sales growth for the HD Supply segment was 5.6% in fiscal 2006, which includes the impact of commodity price inflation and market share gains.

We believe that our sales performance has been, and could continue to be, negatively impacted by the level of competition that we encounter in various markets. Due to the highly-fragmented U.S. home improvement and professional supply industry, in which we estimate our market share is approximately 10%, measuring the impact on our sales by our competitors is difficult.

Gross Profit

Total Gross Profit increased 9.0% to $29.8 billion for fiscal 2006 from $27.3 billion for fiscal 2005. Gross Profit as a percent of Net Sales decreased 73 basis points to 32.8% for fiscal 2006 compared to 33.5% for fiscal 2005. The decline in total Gross Profit as a percent of Net Sales was primarily due to a higher penetration of the lower margin HD Supply segment. In fiscal 2006, 65 basis points of the total Gross Profit decline was a result of a higher penetration of HD Supply businesses as well as a drop in HD Supply's Gross Profit rate due to a change in the mix of businesses owned.

Operating Expenses

Operating Expenses increased 12.0% to $20.1 billion for fiscal 2006 from $18.0 billion for fiscal 2005. Operating Expenses as a percent of Net Sales were 22.1% for fiscal 2006 compared to 22.0% for fiscal 2005.

Selling, General and Administrative Expenses ("SG&A") increased 11.3% to $18.3 billion for fiscal 2006 from $16.5 billion for fiscal 2005. As a percent of Net Sales, SG&A was 20.2% for fiscal 2006 and fiscal 2005. The increase in SG&A during fiscal 2006 was due to added associate labor hours on the floor of our stores, increased spending on store maintenance programs and the expansion of merchandise display resets. This increase was partially offset by reduced self-insurance costs as we continue to realize benefits from safety programs and other initiatives. Fiscal 2006 SG&A also reflects benefits from our private label credit card, which carries a lower discount rate than other forms of credit, like bank cards. Through our private label credit card we offer no interest/no payment programs. The cost of deferred interest associated with these programs is included in Cost of Sales. We believe these programs deliver long-term benefits, including higher average ticket and customer loyalty. For fiscal 2006, the penetration of our private label credit sales was 28.0% compared to 25.6% for fiscal 2005.

Also impacting our SG&A in fiscal 2006 is expense associated with executive severance of $129 million and the adoption of Statement of Financial Accounting Standards ("SFAS") No. 123(R), "Share-Based Payment" ("SFAS 123(R)"), whereby we recorded approximately $40 million of stock compensation expense related to the continued vesting of options granted prior to fiscal 2003. Partially offsetting the increase in SG&A was $91 million of impairment charges and expense related to lease obligations associated with the closing of 20 EXPO stores in fiscal 2005.

Depreciation and Amortization increased 19.7% to $1.8 billion for fiscal 2006 from $1.5 billion for fiscal 2005. Depreciation and Amortization as a percent of Net Sales was 1.9% for fiscal 2006 and 1.8% for fiscal 2005. The increase as a percent of Net Sales was primarily due to the amortization of intangible assets acquired as part of our recent acquisitions and the depreciation of our investments in store modernization and technology.

Interest, net

In fiscal 2006, we recognized $365 million of net Interest Expense compared to $81 million in fiscal 2005. Net Interest Expense as a percent of Net Sales was 0.4% for fiscal 2006 compared to 0.1% for fiscal 2005. The increase was primarily due to additional interest incurred related to the March 2006 issuance of $1.0 billion of 5.20% Senior Notes and $3.0 billion of 5.40% Senior Notes and the December 2006 issuance of $750 million of floating rate Senior Notes, $1.25 billion of 5.25% Senior Notes and $3.0 billion of 5.875% Senior Notes.

Provision for Income Taxes

Our combined federal, state and foreign effective income tax rate increased to 38.1% for fiscal 2006 from 37.1% for fiscal 2005. The increase in our effective income tax rate for fiscal 2006 was primarily due to the impact of a retroactive tax assessment from the Canadian province of Quebec. During the second quarter of fiscal 2006, the Quebec National Assembly passed legislation that retroactively changed certain tax laws that subjected us to additional tax and interest. As a result, we received an assessment from Quebec for $57 million in retroactive tax and $12 million in related interest for the 2002 through 2005 taxable years.

Diluted Earnings per Share

Diluted Earnings per Share were $2.79 for fiscal 2006 and $2.72 for fiscal 2005. Diluted Earnings per Share were favorably impacted in both fiscal 2006 and fiscal 2005 by the repurchase of shares of our common stock under our $17.5 billion repurchase authorization. Since the inception of the program in 2002, we have repurchased 451 million shares of our common stock for a total of $16.4 billion, including $5 billion through accelerated share repurchases in fiscal 2006. As of January 28, 2007, we had $1.1 billion remaining under our authorized share repurchase program.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

RESULTS OF OPERATIONS



Net Sales for the third quarter of fiscal 2007 decreased 3.5%, or $687 million, to $19.0 billion from $19.6 billion for the third quarter of fiscal 2006. For the first nine months of fiscal 2007, Net Sales decreased 3.1%, or $1.9 billion, to $59.7 billion from $61.6 billion for the comparable period in fiscal 2006.



The decrease in Net Sales for the third quarter and first nine months of fiscal 2007 reflects the impact of negative comparable store sales, partially offset by Net Sales of $2.2 billion for the first nine months of fiscal 2007 from new stores and stores open less than one year. Comparable store sales decreased 6.2% for the third quarter of fiscal 2007 compared to a decrease of 5.1% for the third quarter of fiscal 2006. For the first nine months of fiscal 2007, comparable store sales decreased 6.3% and decreased 1.7% for the same period of fiscal 2006. O ur average ticket decreased 1.5% to $57.48 for the third quarter of fiscal 2007 and decreased 2.4% to $58.26 for the first nine months of fiscal 2007.



There were a number of factors that contributed to our comparable store sales decline. The residential construction and home improvement markets continued to be soft, especially in some of our traditionally strong markets such as Florida and California. We saw relative strength in Plumbing, Garden, Kitchen/Bath and Paint as comparable store sales in these areas were above the Company average for the third quarter and first nine months of fiscal 2007. Comparable store sales in hardware were also above the Company average for the third quarter of fiscal 2007. We gained market share in power tools and equipment, due in part to our launch of Ryobi One+ lithium products in the third quarter of fiscal 2007. Flooring performed at the Company average for the third quarter of fiscal 2007. Comparable store sales for Lumber, Building Materials, Lighting, and Millwork were below the Company average for the third quarter and first nine months of fiscal 2007.



Our Mexican stores posted a double digit comparable store sales increase in both the third quarter and first nine months of fiscal 2007, and Canada’s comparable store sales were also positive for those periods.



In order to meet our customer service objectives, we strategically open stores near market areas served by existing stores (“cannibalize”) to enhance service levels, gain incremental sales and increase market penetration. Our new stores cannibalized approximately 9% of our existing stores as of the third quarter of fiscal 2007, which had a negative impact to comparable store sales of approximately 1%.



Gross Profit decreased 4.0% to $6.3 billion for the third quarter of fiscal 2007 from $6.6 billion for the third quarter of fiscal 2006. Gross Profit decreased 3.6% to $19.9 billion for the first nine months of fiscal 2007 from $20.7 billion for the first nine months of fiscal 2006. Gross Profit as a percent of Net Sales decreased 18 basis points to 33.4% for the third quarter of fiscal 2007 compared to 33.6% for the third quarter of fiscal 2006. For the first nine months of fiscal 2007, Gross Profit as a percent of Net Sales was 33.4% compared with 33.6% for the comparable period of fiscal 2006, a decrease of 18 basis points . In the third quarter of fiscal 2007, Gross Profit as a percent of Net Sales was negatively impacted by approximately 54 basis points due to a higher penetration of lower margin products such as appliances and markdowns taken to clear-through some seasonal items, such as outdoor power equipment and grills, to allow us to transition into new products, such as assembled cabinets and kitchen accessories. These decreases were offset in part by a benefit of 36 basis points of gross profit margin expansion arising from lower financing costs associated with our private label credit card financing programs. Through our private label credit card we offer no interest/no payment programs and the cost of these programs was reduced beginning in fiscal 2007. For the third quarter and first nine months of fiscal 2007, the penetration of our private label and co-branded credit sales was 30% and 29%, respectively for both periods, as compared to 29% and 28% for the third quarter and first nine months of fiscal 2006, respectively.



Operating Expenses increased 4.4% to $4.6 billion for the third quarter of fiscal 2007 from $4.4 billion for the third quarter of fiscal 2006. For the first nine months of fiscal 2007, Operating Expenses increased 5.0% to $14.0 billion from $13.3 billion for the comparable period of fiscal 2006. Operating Expenses as a percent of Net Sales were 24.1% for the third quarter of fiscal

2007 compared to 22.3% for the third quarter of fiscal 2006, an increase of 183 basis points. Operating Expenses as a percent of Net Sales were 23.4 % for the first nine months of fiscal 2007 compared to 21.6 % for the first nine months of fiscal 2006.



Selling, General and Administrative Expense (“SG&A”) increased 4.1% to $4.1 billion for the third quarter of fiscal 2007 from $4.0 billion for the third quarter of fiscal 2006. For the first nine months of fiscal 2007, SG&A increased 4.9% to $12.7 billion from $12.1 billion for the first nine months of fiscal 2006. As a percent of Net Sales, SG&A was 21.9% for the third quarter of fiscal 2007 compared to 20.3% for the third quarter of fiscal 2006. For the first nine months of fiscal 2007, SG&A as a percent of Net Sales was 21.3% compared to 19.7% for the same period last year. Our deleverage in SG&A reflects the impact of negative comparable store sales, where for every one percentage point of negative comparable store sales, we expect to deleverage expenses by about 20 basis points. We also recognized $25 million of expense associated with our decision to close our 11 Home Depot Landscape Supply stores in the third quarter of fiscal 2007. The remaining deleverage was the result of an $82 million decrease in our profit sharing arrangement with the underwriter of our private label credit card portfolio. SG&A also reflects investments we are making in support of our five key priorities. As a percentage of Net Sales, total payroll increased by 51 basis points for the third quarter of fiscal 2007 over the same period last year. This reflects investments in store labor and Master Trade Specialists program, as well as the impact of our success sharing bonus plans.



Depreciation and Amortization increased 7.5% to $431 million for the third quarter of fiscal 2007 from $401 million for the third quarter of fiscal 2006. For the first nine months of fiscal 2007, Depreciation and Amortization increased 5.8% to $1.3 billion from $1.2 billion for the same period of fiscal 2006. Depreciation and Amortization as a percent of Net Sales was 2.3% for the third quarter of fiscal 2007 compared to 2.0% for the third quarter of fiscal 2006, and was 2.1% for the first nine months of fiscal 2007 compared to 1.9% for the same period in fiscal 2006. The increase as a percentage of Net Sales in both periods was primarily due to the depreciation of our investments in store modernization and technology.



Operating Income decreased 20.6% to $1.8 billion for the third quarter of fiscal 2007 from $2.2 billion for the third quarter of fiscal 2006. Operating Income decreased 19.1% to $6.0 billion for the first nine months of fiscal 2007 from $7.4 billion for the first nine months of fiscal 2006. Operating Income as a percent of Net Sales was 9.3% for the third quarter of fiscal 2007 compared to 11.3% for the third quarter of fiscal 2006, and was 10.0% for the first nine months of fiscal 2007 compared to 12.0% for the first nine months of fiscal 2006.



In the third quarter of fiscal 2007, we recognized $125 million of net Interest Expense compared to $92 million in the third quarter of fiscal 2006. Net Interest Expense as a percentage of Net Sales was 0.7% for the third quarter of fiscal 2007 and 0.5% for the third quarter of 2006. This increase was primarily due to additional interest incurred related to the December 2006 issuance of $750 million of floating rate Senior Notes, $1.25 billion of 5.25% Senior Notes and $3.0 billion of 5.875% Senior Notes.



Our combined federal and state effective income tax rate for continuing operations decreased to 36.4% for the first nine months o f fiscal 2007 from 38.3% for the comparable period of fiscal 2006. The decrease in our effective income tax rate for the first nine months of fiscal 2007 reflects the impact of a one-time tax assessment received from the province of Quebec in the second quarter of fiscal 2006 and $35 million of tax benefits recognized upon settlement of several state audits and completion of the federal tax audit in the third quarter of fiscal 2007.



Diluted Earnings per Share from Continuing Operations were $0.59 and $1.85 for the third quarter and first nine months of fiscal 2007 compared to $0.65 and $2.13 for the third quarter and first nine months of fiscal 2006, respectively.

Discontinued operations consist of the results of operations through August 30, 2007 and loss on the sale of HD Supply. Net Sales from discontinued operations were $1.2 billion and $7.4 billion for the third quarter and first nine months of fiscal 2007, respectively, compared to $3.4 billion and $9.0 billion for the third quarter and first nine months of fiscal 2006, respectively. Earnings from Discontinued Operations were $20 million and $185 million for the third quarter and first nine months of fiscal 2007, respectively, compared to $157 million and $411 million for the same periods of last year. Earnings from Discontinued Operations for the third quarter and first nine months of fiscal 2007 include a $4 million loss recognized on the sale of the business , subject to the finalization of working capital adjustments . The sale of HD Supply also resulted in reductions in Goodwill and other intangible assets.



LIQUIDITY AND CAPITAL RESOURCES



Cash flow generated from operations provides us with a significant source of liquidity. During the first nine months of fiscal 2007, Net Cash Provided by Operating Activities was $5.2 billion compared to $6.2 billion for the same period of fiscal 2006. This change was primarily a result of decreased Net Earnings.



Investing activities for the first nine months of fiscal 2007 provided $5.6 billion compared to $6.6 billion used in investing activities for the same period of fiscal 2006. The increase in Net Cash Provided by Investing Activities was primarily the result of $8.3 billion of net proceeds from the sale of HD Supply in the third quarter of fiscal 2007.



During the first nine months of fiscal 2007, $10.8 billion was used in financing activities compared with $152 million provided by financing activities for the same period of fiscal 2006. The increase in Net Cash Used in Financing Activities was primarily due to the repurchase of 289 million shares of our common stock for $10.7 billion in connection with our recent tender offer.



As of the end of the third quarter of fiscal 2007, our long-term debt-to-equity ratio was 65.0% reflecting the December 2006 issuance of $750 million of floating rate Senior Notes, $1.25 billion of 5.25% Senior Notes and $3.0 billion of 5.875% Senior Notes .



In the second quarter of fiscal 2007, we increased the maximum capacity for borrowing under our commercial paper program to $3.0 billion from $2.5 billion, as well as increased the related back-up credit facility with a consortium of banks to $3.0 billion from $2.0 billion. As of October 28, 2007, there was $748 million outstanding under the commercial paper program and there were no borrowings outstanding under the related credit facility. The credit facility, which expires in December 2010, contains various restrictive covenants, none of which is expected to impact our liquidity or capital resources.



As of October 28, 2007, we had $550 million in Cash and Short-Term Investments. We believe that our current cash position and cash flow generated from operations should be sufficient to enable us to complete our capital expenditure programs and any required long-term debt payments through the next several fiscal years. In addition, we have funds available from the $3.0 billion commercial paper program and the ability to obtain alternative sources of financing for other requirements.



On June 18, 2007, the Board of Directors authorized an additional $22.5 billion in common stock repurchases for a total authorization of $40.0 billion. We closed the sale of HD Supply on August 30, 2007 and used the proceeds from the sale and cash on hand to repurchase 289 million shares of our common stock for $10.7 billion, or $37 per share, in settlement of the related tender offer. Since the inception of our share repurchase program in 2002, we have repurchased 743 million shares of our common stock for a total of $27.2 billion as of the end of the third quarter of fiscal 2007. As of October 28, 2007, $12.8 billion remained under our share repurchase authorization.

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