Fitch Affirms Home Depot's IDR at 'BBB+'; Outlook Negative

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed its ratings on The Home Depot, Inc. (Home Depot) as follows:

--Long-term Issuer Default Rating (IDR) at 'BBB+';

--Bank facility at 'BBB+';

--Senior notes at 'BBB+';

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

Approximately $11.7 billion of debt is affected by these actions. The Rating Outlook is Negative.

The affirmations reflect Home Depot's leading market position as the largest home improvement retailer in the world, management's focus on strengthening the core retail operations, and its strong cash flow generation. The ratings also reflect the weak housing market which has been pressuring the company's operating performance and credit metrics and its aggressive financial policy. The Negative Outlook considers Fitch's expectation of weakness in the housing market over the intermediate term which will continue to pressure operating results and credit metrics, as well as the possibility of the resumption of share repurchases.

Home Depot has the leading market position in the home improvement industry with sales of $75.5 billion in the last twelve months (LTM) ended Aug. 3, 2008. In the past 18 months, management has focused on improving the company's core retail business by making significant investments in operational and merchandising processes as well as improving customer service in the stores. These efforts have started to bear fruit as the company stated that its market share loss rate stabilized in the second quarter of 2008 with the company gaining share in several categories.

Nevertheless, the weakness in the housing market has caused Home Depot's comparable store sales to decline in the range of 6%-8% and operating EBIT margin to contract by approximately 190 basis points to 8.5%, excluding the store rationalization charge, in the first half of 2008. Given the softer operating results, Home Depot's LTM EBITDAR coverage of interest and rent expense decreased to 5.9 times (x) from 6.4x in fiscal 2007. However, LTM leverage, defined as adjusted debt/EBITDAR, remained steady at 2.0x as the company has used cash flow generation to repay debt. Fitch expects Home Depot's cash flow generation to remain strong with approximately $1 billion in free cash flow as a result of a reduction in capital expenditures. Of concern is the possibility that a correction in the housing market may take longer than expected, which would affect the company's longer term sales and operating margins.

The company's $22.5 billion share recapitalization, of which 48% has been completed as of Aug. 3, 2008, is currently on hold until the company's business and the credit market stabilize. However, Fitch expects share repurchases could resume as management has expressed an interest in using excess liquidity to repurchase shares. Fitch views the resumption of share repurchases as an indication of a more aggressive financial policy in light of the challenging operating environment and will monitor the level of future share repurchase activity in the context of Home Depot's credit metrics.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site. The issuer did not participate in the rating process other than through the medium of its public disclosure.

Fitch Ratings
Tiffany Co, 312-368-3185, Chicago
Karen Ghaffari, CFA, CPA, 212-908-0708, New York
or
Media Relations:
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