The description of the project is in the attachedword document. Please be as detail as possible and include reference as well!

\f10-K 10-K 1 hd-1312016x10xk.htm 10-K Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ________________________________________ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 31, 2016 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-8207 THE HOME DEPOT, INC. (Exact name of registrant as specified in its charter) DELAWARE (State or other jurisdiction of incorporation or organization) 95-3261426 (I.R.S. Employer Identification No.) 2455 PACES FERRY ROAD, ATLANTA, GEORGIA 30339 (Address of principal executive offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (770) 433-8211 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED Common Stock, $0.05 Par Value Per Share New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer Accelerated filer o Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company o Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No The aggregate market value of the common stock of the Registrant held by non-affiliates of the Registrant on August 2, 2015 was $150.1 billion. The number of shares outstanding of the Registrant's common stock as of March 4, 2016 was 1,252,951,007 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's proxy statement for the 2016 Annual Meeting of Shareholders are incorporated by reference in Part III of this Form 10-K to the extent described herein. https://www.sec.gov/Archives/edgar/data/354950/000035495016000060/hd-1312016x10xk.htm[6/28/16, 8:50:35 PM] 10-K Table of Contents THE HOME DEPOT, INC. FISCAL YEAR 2015 FORM 10-K TABLE OF CONTENTS PART I Item 1. Business Item 1A. Risk Factors Item 1B. Unresolved Staff Comments Item 2. Properties Item 3. Legal Proceedings Item 4. Mine Safety Disclosures PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Item 6. Selected Financial Data Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosures About Market Risk Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9A. Controls and Procedures Item 9B. Other Information PART III Item 10. Directors, Executive Officers and Corporate Governance Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13. Certain Relationships and Related Transactions, and Director Independence Item 14. Principal Accountant Fees and Services PART IV Item 15. Exhibits and Financial Statement Schedules Signatures Table of Contents CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 https://www.sec.gov/Archives/edgar/data/354950/000035495016000060/hd-1312016x10xk.htm[6/28/16, 8:50:35 PM] 1 7 13 13 15 15 15 17 18 28 29 58 58 58 59 60 60 60 60 61 65 10-K Table of Contents CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Certain statements contained herein regarding our future performance constitute "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements may relate to, among other things, the demand for our products and services; net sales growth; comparable store sales; effects of competition; state of the economy; state of the residential construction, housing and home improvement markets; state of the credit markets, including mortgages, home equity loans and consumer credit; demand for credit offerings; inventory and instock positions; implementation of store, interconnected retail and supply chain initiatives; management of relationships with our suppliers and vendors; the impact and expected outcome of investigations, inquiries, claims and litigation, including those related to the data breach we discovered in the third quarter of fiscal 2014; issues related to the payment methods we accept; continuation of share repurchase programs; net earnings performance; earnings per share; capital allocation and expenditures; liquidity; return on invested capital; expense leverage; stock-based compensation expense; commodity price inflation and deflation; the ability to issue debt on terms and at rates acceptable to us; the effect of accounting charges; the effect of adopting certain accounting standards; store openings and closures; financial outlook; and the integration of Interline Brands, Inc. into our organization and the ability to recognize the anticipated synergies and benefits of the acquisition. Forward-looking statements are based on currently available information and our current assumptions, expectations and projections about future events. You should not rely on our forward-looking statements. These statements are not guarantees of future performance and are subject to future events, risks and uncertainties - many of which are beyond our control, dependent on actions of third parties, or currently unknown to us - as well as potentially inaccurate assumptions that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, those described in Item 1A, "Risk Factors", and elsewhere in this report. Forward-looking statements speak only as of the date they are made, and we do not undertake to update these statements other than as required by law. You are advised, however, to review any further disclosures we make on related subjects in our periodic filings with the Securities and Exchange Commission ("SEC"). PART I Item 1. Business. Introduction The Home Depot, Inc. is the world's largest home improvement retailer based on Net Sales for the fiscal year ended January 31, 2016 ("fiscal 2015"). The Home Depot sells a wide assortment of building materials, home improvement products and lawn and garden products and provides a number of services. The Home Depot stores average approximately 104,000 square feet of enclosed space, with approximately 24,000 additional square feet of outside garden area. As of the end of fiscal 2015, we had 2,274 The Home Depot stores located throughout the United States, including the Commonwealth of Puerto Rico and the territories of the U.S. Virgin Islands and Guam, Canada and Mexico. When we refer to "The Home Depot", the "Company", "we", "us" or "our" in this report, we are referring to The Home Depot, Inc. and its consolidated subsidiaries. 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, Atlanta, Georgia 30339. Our telephone number is (770) 433-8211. Our internet website is www.homedepot.com. We make available on the Investor Relations section of 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, and amendments to those reports, 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 for reference only. The information contained on our websites is not incorporated by reference into this report. For information on key financial highlights, including historical revenues, profits and total assets, see the "Five-Year Summary of Financial and Operating Results" on page F-1 of this report and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations". 1 Our Business Operating Strategy Since 2009, we have been guided by a consistent strategic framework organized around our customers, our products and our disciplined use of capital, tied together through our interconnected retail initiative. In fiscal 2015, we announced an evolution of this strategy to reflect the changing needs of our customers and our business. The fundamental aspects remain the same, but we are now focused more than ever on connecting various https://www.sec.gov/Archives/edgar/data/354950/000035495016000060/hd-1312016x10xk.htm[6/28/16, 8:50:35 PM] 10-K Table of Contents Our Business Operating Strategy Since 2009, we have been guided by a consistent strategic framework organized around our customers, our products and our disciplined use of capital, tied together through our interconnected retail initiative. In fiscal 2015, we announced an evolution of this strategy to reflect the changing needs of our customers and our business. The fundamental aspects remain the same, but we are now focused more than ever on connecting various aspects of our business to drive value for our customers, our associates, our suppliers and our shareholders. Our current strategic framework is comprised of three key initiatives - Customer Experience, Product Authority, and Productivity and Efficiency Driven by Capital Allocation - tied together by our interconnecting retail initiative. As customers increasingly expect to be able to buy how, when and where they want, we believe that providing a seamless and frictionless shopping experience across multiple channels, featuring innovative and expanded product choices delivered in a fast and cost-efficient manner, will be a key enabler for future success. Becoming a best-in-class interconnected retailer is growing in importance as the line between online and in-store shopping continues to blur and customers demand increased value and convenience. Interconnecting retail is woven through each of our other three initiatives, as discussed in more detail below. For example, under our customer experience initiative, we are focused on connecting our stores to our online experience and connecting service to customer needs. Under our product authority initiative, we are focused on connecting our product assortment to local needs and connecting our customers with product information to inspire and empower them. Under our productivity and efficiency initiative, we are focused on connecting our merchandise from our suppliers to our customers by optimizing our supply chain. Overall, we are collaborating more closely, both internally and externally, through deeper crossfunctional work and a more integrated, longer-term approach with our suppliers and other business partners, to build complete end-to-end solutions. Customer Experience Our customer experience initiative is anchored on the principles of putting customers first and taking care of our associates. Our commitment to customer service is a key part of this initiative, and in fiscal 2015, to underscore the importance of customer service, we re-trained our store associates on our Customer FIRST program. We recognize that the customer experience includes more than just customer service, and we have taken a number of steps to enhance this initiative to provide our customers with a seamless and frictionless shopping experience in our stores, online, on the job site or in their homes. Our Customers. We serve three primary customer groups, and we have different approaches to meet their particular needs: Do-It-Yourself ("DIY") Customers. These customers are typically home owners who purchase products and complete their own projects and installations. Our associates assist these customers with specific product and installation questions both in our stores and through online resources and other media designed to provide product and project knowledge. We also offer a variety of clinics and workshops both to impart this knowledge and to build an emotional connection with our DIY customers. Do-It-For-Me ("DIFM") Customers. These customers are typically home owners who purchase materials and hire third parties to complete the project or installation. Our stores offer a variety of installation services targeted at DIFM customers who purchase products and installation of those products from us in our stores, online or in their homes through in-home consultations. Our installation programs include many categories, such as flooring, cabinets, countertops, water heaters and sheds. In addition, we provide third-party professional installation in a number of categories sold through our in-home sales programs, such as roofing, siding, windows, cabinet refacing, furnaces and central air systems. This customer group is growing due to changing demographics, which we believe will increase demand for our installation services. Further, our focus on serving the professional customers, or "Pros", who perform these services for our DIFM customers will help us drive higher product sales. Professional Customers. These customers are primarily professional renovators/remodelers, general contractors, repairmen, installers, small business owners and tradesmen. With our acquisition of Interline Brands, Inc. ("Interline") in August 2015, we expanded our service to the maintenance, repair and operations ("MRO") Pro. We recognize the unique service needs of the Pro customer and use our expertise to facilitate their buying experience. We offer a variety of special programs to these customers, including delivery and will-call services, dedicated staff, expanded credit programs, designated parking spaces close to store entrances and bulk pricing programs for both online and in-store purchases. In addition, we maintain a loyalty program, Pro Xtra, that provides our Pros with discounts on useful business services, exclusive product offers and a purchase tracking tool to enable receipt lookup 2 online and job tracking of purchases across all forms of payment. This program, introduced in fiscal 2013, has continued to gain traction, with almost 4 million customers enrolled by the end of fiscal 2015. We also recognize that our Pros have differing needs depending on the type of work they perform. Our goal is to develop a wide spectrum of solutions for all of our professional customers, such as supplying both recurring MRO needs and core building materials to large-scale property managers and providing inventory management solutions for our traditional Pro customers. We believe developing a unified approach to service all the needs of our Pros will differentiate us from competitors who are solely traditional retail, installation or MRO companies. https://www.sec.gov/Archives/edgar/data/354950/000035495016000060/hd-1312016x10xk.htm[6/28/16, 8:50:35 PM] 10-K Table of Contents online and job tracking of purchases across all forms of payment. This program, introduced in fiscal 2013, has continued to gain traction, with almost 4 million customers enrolled by the end of fiscal 2015. We also recognize that our Pros have differing needs depending on the type of work they perform. Our goal is to develop a wide spectrum of solutions for all of our professional customers, such as supplying both recurring MRO needs and core building materials to large-scale property managers and providing inventory management solutions for our traditional Pro customers. We believe developing a unified approach to service all the needs of our Pros will differentiate us from competitors who are solely traditional retail, installation or MRO companies. We help our DIY, DIFM and Pro customers finance their projects by offering private label credit products in our stores through third-party credit providers. We also help certain of our Pros through our own programs. In fiscal 2015, our customers opened approximately 3.2 million new The Home Depot private label credit accounts, and at fiscal year end the total number of The Home Depot active account holders was approximately 12 million. Private label credit card sales accounted for approximately 23% of sales in fiscal 2015. In addition, in the U.S. we re-launched our private label credit program at the end of fiscal 2015 with additional benefits, including a 365-day return policy for all of our customers and commercial fuel rewards and extended payment terms for our Pros. Our Associates. Our associates are key to our customer experience initiative. As noted above, we empower our associates to deliver excellent customer service through our Customer FIRST training program, and we strive to remove complexity and inefficient processes from the stores to allow our associates to focus on our customers. In fiscal 2015, we began to roll out a number of new initiatives to improve freight handling in the stores, as well as Project Sync, which is discussed in more detail below under "Logistics". All of these programs are designed to make our freight handling process more efficient, which allows our associates to devote more time to the customer experience and makes working at The Home Depot a better experience for them. We also have a number of programs to recognize stores and individual associates for exceptional customer and community service. At the end of fiscal 2015, we employed approximately 385,000 associates, of whom approximately 24,000 were salaried, with the remainder compensated on an hourly or temporary basis. To attract and retain qualified personnel, we seek to maintain competitive salary and wage levels in each market we serve. We measure associate satisfaction regularly, and we believe that our employee relations are very good. Interconnecting Retail. In fiscal 2015, we continued to enhance our customers' interconnected shopping experiences through a variety of initiatives. Our associates used second generation FIRST phones, our web-enabled handheld devices, to help customers complete online sales in the aisle, expedite the checkout process for customers during peak traffic periods, locate products in the aisles and online, and check inventory on hand. We have also empowered our customers with improved product location and inventory availability tools through enhancements to our website and mobile app, and we have invested heavily in content improvements such as videos, ratings and reviews, and more detailed product information. These enhancements are critical for our increasingly interconnected customers who research products online and then go into one of our stores to view the products in person or talk to an associate before making the purchase. While in the store, customers may also go online to access ratings and reviews, compare prices, view our extended assortment and purchase products. We continued to make enhancements to our special order process in fiscal 2015 with our new Customer Order Management platform ("COM"), which was introduced in fiscal 2014. This platform is designed to provide greater visibility into and improved execution of special orders by our associates and a more seamless and frictionless experience for our customers. After COM is rolled out to all U.S. stores, which we expect to occur by the end of fiscal 2016, store associates, suppliers and customers will be able to access relevant special order information online, regardless of where the order was placed. In addition, we have three online contact centers to service our online customers' needs. We also recognize that customers desire greater flexibility and convenience when it comes to receiving their products and services. In fiscal 2015, we began to roll out Buy Online, Deliver From Store ("BODFS"), which complements our existing interconnecting retail programs: Buy Online, Pick-up In Store ("BOPIS"), Buy Online, Ship to Store ("BOSS") and Buy Online, Return In Store ("BORIS"). We expect to complete the roll out of BODFS by the end of fiscal 2016. We will continue to blend our physical and digital assets in a seamless and frictionless way to enhance the end-to-end customer experience. 3 Product Authority Our product authority initiative is facilitated by our merchandising transformation and portfolio strategy, which is focused on delivering product innovation, assortment and value. In fiscal 2015, we continued to introduce a wide range of innovative new products to our DIY, DIFM and Pro customers, while remaining focused on offering everyday values in our stores and online. Our Products. In fiscal 2015, we introduced a number of innovative and distinctive products to our customers at attractive values. Examples of these new products include EGO 58-volt cordless outdoor power tools (string trimmer, hedge trimmer, blower, chainsaw and lawn mower); the Husky 100 platform of mechanics tools; LifeProof Carpet; Milwaukee Cobalt Red Helix drill bits; and Feit Electric HomeBrite Bluetooth Smart LED light bulbs. During fiscal 2015, we continued to offer value to our customers through our proprietary and exclusive brands across a wide range of departments. https://www.sec.gov/Archives/edgar/data/354950/000035495016000060/hd-1312016x10xk.htm[6/28/16, 8:50:35 PM] 10-K Table of Contents Product Authority Our product authority initiative is facilitated by our merchandising transformation and portfolio strategy, which is focused on delivering product innovation, assortment and value. In fiscal 2015, we continued to introduce a wide range of innovative new products to our DIY, DIFM and Pro customers, while remaining focused on offering everyday values in our stores and online. Our Products. In fiscal 2015, we introduced a number of innovative and distinctive products to our customers at attractive values. Examples of these new products include EGO 58-volt cordless outdoor power tools (string trimmer, hedge trimmer, blower, chainsaw and lawn mower); the Husky 100 platform of mechanics tools; LifeProof Carpet; Milwaukee Cobalt Red Helix drill bits; and Feit Electric HomeBrite Bluetooth Smart LED light bulbs. During fiscal 2015, we continued to offer value to our customers through our proprietary and exclusive brands across a wide range of departments. Highlights of these offerings include Husky hand tools and tool storage; Everbilt hardware and fasteners; Hampton Bay lighting, ceiling fans and patio furniture; Vigoro lawn care products; RIDGID and Ryobi power tools; Glacier Bay bath fixtures; HDX storage and cleaning products; and Home Decorators Collection furniture and home dcor. We will continue to assess departments and categories, both online and instore, for opportunities to expand the assortment of products offered within The Home Depot's portfolio of proprietary and exclusive brands. We maintain a global sourcing program to obtain high-quality and innovative products directly from manufacturers around the world. In fiscal 2015, in addition to our U.S. sourcing operations, we maintained sourcing offices in China, Taiwan, India, Italy, Mexico and Canada. With our acquisition of Interline, we also acquired additional sourcing offices in China, Thailand and Indonesia. The percentage of Net Sales of each of our major product categories (and related services) for each of the last three fiscal years is presented in Note 1 to the Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data". Net Sales outside the U.S. were $8.0 billion, $8.5 billion and $8.5 billion for fiscal 2015, 2014 and 2013, respectively. Long-lived assets outside the U.S. totaled $2.3 billion, $2.5 billion and $2.9 billion as of January 31, 2016, February 1, 2015 and February 2, 2014, respectively. Quality Assurance. Our suppliers are obligated to ensure that their products comply with applicable international, federal, state and local laws. In addition, we have both quality assurance and engineering resources dedicated to establishing criteria and overseeing compliance with safety, quality and performance standards for our proprietary branded products. We also have a global Supplier Social and Environmental Responsibility Program designed to ensure that all suppliers adhere to the highest standards of social and environmental responsibility. Environmentally-Friendly Products and Programs. The Home Depot is committed to sustainable business practices - from the environmental impact of our operations, to our sourcing activities, to our involvement within the communities in which we do business. We believe these efforts continue to be successful in creating value for our customers and shareholders. For example, we offer a growing selection of environmentallypreferred products, which supports sustainability and helps our customers save energy, water and money. Through our Eco Options Program introduced in 2007, we have created product categories that allow customers to easily identify products that meet specifications for energy efficiency, water conservation, healthy home, clean air and sustainable forestry. As of the end of fiscal 2015, our Eco Options Program included over 10,000 products. Through this program, we sell ENERGY STAR certified appliances, LED light bulbs, tankless water heaters and other products that enable our customers to save on their utility bills. We estimate that in fiscal 2015 we helped customers save over $700 million in electricity costs through sales of ENERGY STAR certified products and over $300 million in product costs through ENERGY STAR rebate programs. We also estimate our customers saved over 70 billion gallons of water resulting in over $590 million in water bill savings in fiscal 2015 through the sales of our WaterSense-labeled bath faucets, showerheads, aerators, toilets and irrigation controllers. We continue to offer store recycling programs nationwide, such as an in-store compact fluorescent light ("CFL") bulb recycling program launched in 2008. This service is offered to customers free of charge and is available in all U.S. stores. We also maintain an in-store rechargeable battery recycling program. Launched in 2001 and currently done in partnership with Call2Recycle, this program is also available to customers free of charge in all stores throughout the U.S. Through these recycling programs, in fiscal 2015 we helped recycle over 680,000 pounds of CFL bulbs and over 930,000 pounds of rechargeable batteries collected from our customers. In fiscal 2015, we also recycled over 170,000 lead acid batteries collected from our customers under our lead acid battery exchange program, as well as over 200,000 tons of cardboard through a nationwide cardboard recycling program across our U.S. stores. We believe our Eco Options Program and our recycling efforts drive sales, which in turn benefits our shareholders, in addition to our customers and the environment. 4 Interconnecting Retail. A typical The Home Depot store stocks approximately 30,000 to 40,000 products during the year, including both national brand name and proprietary items. To enhance our merchandising capabilities, we continued to make improvements to our information technology tools in fiscal 2015 to better understand our customers, provide more localized assortments to fit customer demand and optimize space to dedicate the right square footage to the right products in the right location. We also continued to use the resources of BlackLocus, Inc., a data analytics and pricing firm we acquired in fiscal 2012, to help us make focused merchandising decisions based on large, complex data sets. Our online product offerings complement our stores by serving as an extended aisle, and we offer a significantly broader product assortment through our Home Depot, Home Decorators Collection and Blinds.com websites. We continue to enhance our websites and mobile experience by https://www.sec.gov/Archives/edgar/data/354950/000035495016000060/hd-1312016x10xk.htm[6/28/16, 8:50:35 PM] 10-K Table of Contents Interconnecting Retail. A typical The Home Depot store stocks approximately 30,000 to 40,000 products during the year, including both national brand name and proprietary items. To enhance our merchandising capabilities, we continued to make improvements to our information technology tools in fiscal 2015 to better understand our customers, provide more localized assortments to fit customer demand and optimize space to dedicate the right square footage to the right products in the right location. We also continued to use the resources of BlackLocus, Inc., a data analytics and pricing firm we acquired in fiscal 2012, to help us make focused merchandising decisions based on large, complex data sets. Our online product offerings complement our stores by serving as an extended aisle, and we offer a significantly broader product assortment through our Home Depot, Home Decorators Collection and Blinds.com websites. We continue to enhance our websites and mobile experience by improving navigation and search functionalities to allow customers to more easily find and purchase an expanded array of products and provide our customers with flexibility and convenience for their purchases, for example, through our BOPIS, BOSS, BORIS and BODFS programs. In addition, we invest in content, such as videos, room scenes, buying guides and how-to information, and we routinely assess our online assortment to balance choice with curation so that we provide value to our customers. As a result of these efforts, in fiscal 2015 we enhanced the customer experience and saw increased traffic to our websites, improved online sales conversion rates, and a larger percentage of orders being picked up in our stores. For fiscal 2015, we had over 1.4 billion visits to our online properties; sales from our online channels increased over 25% compared to fiscal 2014; and over 40% of our online orders were picked up in a store. Seasonality. Our business is subject to seasonal influences. Generally, our highest volume of sales occurs in our second fiscal quarter, and the lowest volume occurs either during our first or fourth fiscal quarter. Competition. Our industry is highly competitive, with competition based primarily on customer service, price, store location and appearance, and quality, availability and assortment of merchandise. Although we are currently the world's largest home improvement retailer, 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 and services, we also compete with specialty design stores, showrooms, discount stores, local, regional and national hardware stores, paint stores, mail order firms, warehouse clubs, independent building supply stores, MRO companies and, to a lesser extent, other retailers, as well as with installers of home improvement products. In addition, we face growing competition from online and multichannel retailers, some of whom may have a lower cost structure than ours, as our customers increasingly use computers, tablets, smartphones and other mobile devices to shop online and compare prices and products. Intellectual Property. Our business has one of the most recognized brands in North America. As a result, we believe that The Home Depot trademark has significant value and is an important factor in the marketing of our products, e-commerce, stores and business. We have registered or applied for registration of trademarks, service marks, copyrights and internet domain names, both domestically and internationally, for use in our business, including our expanding proprietary brands such as HDX, Husky, Hampton Bay, Home Decorators Collection, Glacier Bay and Vigoro. We also maintain patent portfolios relating to some of our products and services and seek to patent or otherwise protect innovations we incorporate into our products or business operations. Productivity and Efficiency Driven by Capital Allocation We have advanced this initiative by building best-in-class competitive advantages in our information technology and supply chain to better ensure product availability to our customers while managing our costs, which results in higher returns for our shareholders. During fiscal 2015, we continued to focus on optimizing our supply chain network and improving our inventory, transportation and distribution productivity. Logistics. Our supply chain operations are focused on creating a competitive advantage through ensuring product availability for our customers, effectively using our investment in inventory, and managing total supply chain costs. One of our principal 2015 initiatives has been to further optimize and efficiently operate our network by beginning initial work on a multi-year program called Supply Chain Synchronization, or "Project Sync". Our distribution strategy is to provide the optimal flow path for a given product. Rapid Deployment Centers ("RDCs") play a key role in optimizing our network as they allow for aggregation of product needs for multiple stores to a single purchase order and then rapid allocation and deployment of inventory to individual stores upon arrival at the RDC. This results in a simplified ordering process and improved transportation and inventory management. We have 18 mechanized RDCs in the U.S. and two recently opened mechanized RDCs in Canada. Through Project Sync, which is being rolled out gradually to suppliers in several U.S. RDCs, we can significantly reduce our average lead time from supplier to shelf. Project Sync requires deep collaboration among our suppliers, transportation providers, RDCs and stores, as well as rigorous planning and information technology development to create an engineered flow schedule that shortens and stabilizes lead time, resulting in 5 more predictable and consistent freight flow. As we continue to roll out Project Sync throughout our supply chain over the next several years, we plan to create an end-to-end solution that benefits all participants in our supply chain, from our suppliers to our transportation providers to our RDC and store associates to our customers. Over the past several years, we have centralized our inventory planning and replenishment function and continuously improved our forecasting and replenishment technology. This has helped us improve our product availability and our inventory productivity at the same time. At the end of fiscal https://www.sec.gov/Archives/edgar/data/354950/000035495016000060/hd-1312016x10xk.htm[6/28/16, 8:50:35 PM] 10-K Table of Contents more predictable and consistent freight flow. As we continue to roll out Project Sync throughout our supply chain over the next several years, we plan to create an end-to-end solution that benefits all participants in our supply chain, from our suppliers to our transportation providers to our RDC and store associates to our customers. Over the past several years, we have centralized our inventory planning and replenishment function and continuously improved our forecasting and replenishment technology. This has helped us improve our product availability and our inventory productivity at the same time. At the end of fiscal 2015, over 95% of our U.S. store products were ordered through central inventory management. In addition to our RDCs, at the end of fiscal 2015, we operated 34 bulk distribution centers, which handle products distributed optimally on flat bed trucks, in the U.S. and Canada; 22 stocking distribution centers in the U.S., Canada and Mexico; and ten specialty distribution centers, which include offshore consolidation and return logistics centers, in the U.S. and Canada. We also utilize four U.S. transload facilities, operated by third parties near ocean ports, for our imported product. These facilities allow us to improve our import logistics costs and inventory management by postponing final inventory deployment decisions until product arrives at destination ports. We remain committed to leveraging our supply chain capabilities to fully utilize and optimize our improved logistics network. Interconnecting Retail. To support our online growth, in fiscal 2015 we opened the third of our three new direct fulfillment centers ("DFCs"). We expect these facilities to enable us to reach 90% of our U.S. customers in two business days or less with parcel shipping, which provides our customers with a balance of cost efficiency and speed in shipping online orders. For non-parcel orders originating from our DFCs, we have fully implemented BOSS via RDC delivery to provide our customers with a less expensive store pick-up alternative. With our acquisition of Interline, we have also added more than 90 distribution points with fast delivery of a broad assortment of MRO products. In addition to the distribution and fulfillment centers described above, we leverage our almost 2,000 U.S. stores as a network of convenient customer pick-up, return and delivery fulfillment locations. For customers who shop online and wish to pick-up or return merchandise at our U.S. stores, we have fully implemented our BOPIS, BOSS and BORIS programs, which we believe provide us with a competitive advantage. For customers who would like the option to have store-based orders delivered directly to their home or job site, we pick, pack and ship orders to customers from our stores. We will continue our roll out of BODFS during fiscal 2016, allowing online customers to select their preferred delivery date and time windows for store-based deliveries. Our supply chain and logistics strategies will continue to be focused on providing our customers high product availability with convenient and low cost fulfillment options. Commitment to Sustainability and Environmentally Responsible Operations. The Home Depot focuses on sustainable operations and is committed to conducting business in an environmentally responsible manner. This commitment impacts all areas of our business, including energy usage, supply chain, store construction and maintenance, and, as noted above under "Environmentally-Friendly Products and Programs", product selection and recycling programs for our customers. In our 2015 Sustainability Report, available on our corporate website under "Corporate Responsibility > THD and the Environment", we reported that we had significantly surpassed our energy and carbon reduction goals set in 2010 and announced two new sustainability goals for 2020. Our 2010 goals were to reduce our kilowatt hours (kWh) per square foot in our U.S. stores by 20% over 2004 levels and to reduce our supply chain carbon emissions by 20% over 2010 levels by 2015. We estimate that we have reduced those levels by over 30% and over 35%, respectively, as of the end of fiscal 2015. From 2014 to 2015 alone, we reduced our kWh per square foot by approximately 3.6%. Our new 2020 sustainability commitments are to reduce our U.S. stores' energy use by 20% over 2010 levels and to produce and procure, on an annual basis, 135 megawatts of energy for our stores through renewable or alternate energy sources, such as wind, solar and fuel cell technology. We are committed to implementing strict operational standards that establish energy efficient operations in all of our U.S. facilities and continuing to invest in renewable energy. Our 2015 Sustainability Report also uses the Global Reporting Initiative (GRI) framework for sustainability reporting. Additionally, we implemented a rainwater reclamation project in our stores in 2010. As of the end of fiscal 2015, 145 of our stores used reclamation tanks to collect rainwater and condensation from HVAC units and garden center roofs, which is in turn used to water plants in our outside garden centers. We estimate our annual water savings from these units to be approximately 500,000 gallons per store for total water savings of over 68 million gallons in fiscal 2015. Our commitment to corporate sustainability has resulted in a number of environmental awards and recognitions. In 2015, we received three significant awards from the U.S. Environmental Protection Agency ("EPA"). The ENERGY STAR division named us "Retail Partner of the Year - Sustained Excellence" for our overall excellence in energy efficiency, and we received the 2015 WaterSense Sustained Excellence Award for our overall excellence in water efficiency. We also received the EPA's 6 "SmartWay Excellence Award", which recognizes The Home Depot as an industry leader in freight supply chain environmental performance and energy efficiency. We also participate in the CDP (formerly known as the Carbon Disclosure Project) reporting process. CDP is an independent, international, not-for-profit organization providing a global system for companies and cities to measure, disclose, manage and share environmental information. In 2015, we scored 99 out of 100 from the CDP for our disclosure, placing us among the highest scoring companies in the Index and near the top of our sector. We also were named as an industry leader by the CDP and received a performance band ranking of A- (out of a range from A to E), reflecting a high level of action on climate change mitigation, adaptation and transparency. https://www.sec.gov/Archives/edgar/data/354950/000035495016000060/hd-1312016x10xk.htm[6/28/16, 8:50:35 PM] 10-K Table of Contents "SmartWay Excellence Award", which recognizes The Home Depot as an industry leader in freight supply chain environmental performance and energy efficiency. We also participate in the CDP (formerly known as the Carbon Disclosure Project) reporting process. CDP is an independent, international, not-for-profit organization providing a global system for companies and cities to measure, disclose, manage and share environmental information. In 2015, we scored 99 out of 100 from the CDP for our disclosure, placing us among the highest scoring companies in the Index and near the top of our sector. We also were named as an industry leader by the CDP and received a performance band ranking of A- (out of a range from A to E), reflecting a high level of action on climate change mitigation, adaptation and transparency. We are strongly committed to maintaining a safe shopping and working environment for our customers and associates and protecting the environment of the communities in which we do business. Our Environmental, Health & Safety ("EH&S") function is dedicated to ensuring the health and safety of our customers and associates, with trained associates who evaluate, develop, implement and enforce policies, processes and programs on a Company-wide basis. Our EH&S policies are woven into our everyday operations and are part of The Home Depot culture. Some common program elements include: daily store inspection checklists (by department); routine follow-up audits from our store-based safety team members and regional, district and store operations field teams; equipment enhancements and preventative maintenance programs to promote physical safety; departmental merchandising safety standards; training and education programs for all associates, with varying degrees of training provided based on an associate's role and responsibilities; and awareness, communication and recognition programs designed to drive operational awareness and understanding of EH&S issues. Returning Value to Shareholders. As noted above, we drive productivity and efficiency through our capital allocation decisions, with a focus on expense control. This discipline drove higher returns on invested capital and allowed us to return value to shareholders through $7.0 billion in share repurchases and $3.0 billion in dividends in fiscal 2015, as discussed in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations". Data Breach In the third quarter of fiscal 2014, we confirmed that our payment data systems were breached, which impacted customers who used payment cards at our U.S. and Canadian stores (the "Data Breach"). For a description of matters related to the Data Breach, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 13 to the Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data". Item 1A. Risk Factors. The risks and uncertainties described below could materially and adversely affect our business, financial condition and results of operations and could cause actual results to differ materially from our expectations and projections. You should read these Risk Factors in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 and our Consolidated Financial Statements and related notes in Item 8. There also may be other factors that we cannot anticipate or that are not described in this report generally because we do not currently perceive them to be material. Those factors could cause results to differ materially from our expectations. Strong competition could adversely affect prices and demand for our products and services and could decrease our market share. We operate in markets that are highly competitive. We compete principally based on customer service, price, store location and appearance, and quality, availability and assortment of merchandise. In each market 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 and services, we also compete with specialty design stores, showrooms, discount stores, local, regional and national hardware stores, paint stores, mail order firms, warehouse clubs, independent building supply stores, MRO companies and, to a lesser extent, other retailers, as well as with installers of home improvement products. In addition, we face growing competition from online and multichannel retailers, some of whom may have a lower cost structure than ours, as our customers increasingly use computers, tablets, smartphones and other mobile devices to shop online and compare prices and products in real time. Intense competitive pressures from one or more of our competitors or our inability to adapt effectively and quickly to a changing competitive landscape could affect our prices, our margins or demand for our products and services. If we are unable to timely and appropriately respond to these competitive pressures, including through maintenance of customer service and customer relationships to deliver a superior customer experience, our market share and our financial performance could be adversely affected. 7 We may not timely identify or effectively respond to consumer needs, expectations or trends, which could adversely affect our relationship with customers, our reputation, the demand for our products and services, and our market share. The success of our business depends in part on our ability to identify and respond promptly to evolving trends in demographics; consumer preferences, expectations and needs; and unexpected weather conditions, while also managing appropriate inventory levels and maintaining an excellent customer experience. It is difficult to successfully predict the products and services our customers will demand. As the housing and home improvement market continues to recover, resulting changes in demand will put further pressure on our ability to meet customer needs and expectations and maintain high service levels. In addition, each of our primary customer groups - DIY, DIFM and Pro - have different needs and https://www.sec.gov/Archives/edgar/data/354950/000035495016000060/hd-1312016x10xk.htm[6/28/16, 8:50:35 PM] 10-K Table of Contents We may not timely identify or effectively respond to consumer needs, expectations or trends, which could adversely affect our relationship with customers, our reputation, the demand for our products and services, and our market share. The success of our business depends in part on our ability to identify and respond promptly to evolving trends in demographics; consumer preferences, expectations and needs; and unexpected weather conditions, while also managing appropriate inventory levels and maintaining an excellent customer experience. It is difficult to successfully predict the products and services our customers will demand. As the housing and home improvement market continues to recover, resulting changes in demand will put further pressure on our ability to meet customer needs and expectations and maintain high service levels. In addition, each of our primary customer groups - DIY, DIFM and Pro - have different needs and expectations, many of which evolve as the demographics in a particular customer group change. If we do not successfully differentiate the shopping experience to meet the individual needs and expectations of a customer group, we may lose market share with respect to those customers. Customer expectations about the methods by which they purchase and receive products or services are also becoming more demanding. Customers are increasingly using technology and mobile devices to rapidly compare products and prices, determine real-time product availability and purchase products. Once products are purchased, customers are seeking alternate options for delivery of those products, and they often expect quick and lowcost delivery. We must continually anticipate and adapt to these changes in the purchasing process. We have implemented programs like BOSS, BOPIS and direct fulfillment, and are rolling out BODFS, but we cannot guarantee that these programs or others we may implement will be implemented successfully or will meet customers' needs and expectations. Customers are also using social media to provide feedback and information about our Company and products and services in a manner that can be quickly and broadly disseminated. To the extent a customer has a negative experience and shares it over social media, it may impact our brand and reputation. Further, we have an aging store base that requires maintenance and space reallocation initiatives to deliver the shopping environment that our customers desire. Failure to maintain our stores and utilize our store space effectively, to provide a compelling online presence, to timely identify or respond to changing consumer preferences, expectations and home improvement needs and to differentiate the customer experience for our three primary customer groups could adversely affect our relationship with customers, our reputation, the demand for our products and services, and our market share. Our success depends upon our ability to attract, develop and retain highly qualified associates while also controlling our labor costs. Our customers expect a high level of customer service and product knowledge from our associates. To meet the needs and expectations of our customers, we must attract, develop and retain a large number of highly qualified associates while at the same time controlling labor costs. Our ability to control labor costs is subject to numerous external factors, including prevailing wage rates and health and other insurance costs, as well as the impact of legislation or regulations governing labor relations, minimum wage, or healthcare benefits. An inability to provide wages and/or benefits that are competitive within the markets in which we operate could adversely affect our ability to retain and attract employees. In addition, we compete with other retail businesses for many of our associates in hourly positions, and we invest significant resources in training and motivating them to maintain a high level of job satisfaction. These positions have historically had high turnover rates, which can lead to increased training and retention costs, particularly if the economy continues to improve and employment opportunities increase. There is no assurance that we will be able to attract or retain highly qualified associates in the future. We have incurred losses related to our Data Breach, and we are still in the process of determining the full impact of related government investigations and civil litigation on our results of operations, which could have an adverse impact on our operations, financial results and reputation. The Data Breach involved the theft of certain payment card information and customer email addresses through unauthorized access to our systems. Since the Data Breach occurred, we have recorded $161 million of pretax expenses, net of expected insurance recoveries, in connection with the Data Breach, as described in more detail in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operation" and Note 13 to the Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data". We are facing putative class actions filed in the U.S. and Canada and a consolidated shareholder derivative action brought by two purported shareholders in the U.S., and other claims have been and may be asserted on behalf of customers, payment card issuing banks, shareholders, or others seeking damages or other related relief, allegedly arising out of the Data Breach. We are also facing investigations by a number of state and federal agencies. These claims and investigations may adversely affect how we operate our business, divert the attention of management from the operation of the business, have an adverse effect on our reputation, and result in additional costs and fines. In addition, the governmental agencies investigating the Data Breach may seek to impose injunctive relief, which could 8 materially increase our data security costs, adversely impact how we operate our systems and collect and use customer information, and put us at a competitive disadvantage with other retailers. If our efforts to maintain the privacy and security of customer, associate, supplier and Company information are not successful, we could incur substantial additional costs and reputational damage, and could become subject to further litigation and enforcement actions. Our business, like that of most retailers, involves the receipt, storage and transmission of customers' personal information, consumer preferences https://www.sec.gov/Archives/edgar/data/354950/000035495016000060/hd-1312016x10xk.htm[6/28/16, 8:50:35 PM] 10-K Table of Contents materially increase our data security costs, adversely impact how we operate our systems and collect and use customer information, and put us at a competitive disadvantage with other retailers. If our efforts to maintain the privacy and security of customer, associate, supplier and Company information are not successful, we could incur substantial additional costs and reputational damage, and could become subject to further litigation and enforcement actions. Our business, like that of most retailers, involves the receipt, storage and transmission of customers' personal information, consumer preferences and payment card information, as well as confidential information about our associates, our suppliers and our Company, some of which is entrusted to third-party service providers and vendors. We also work with third-party service providers and vendors that provide technology, systems and services that we use in connection with the receipt, storage and transmission of this information. Our information systems, and those of our thirdparty service providers and vendors, are vulnerable to an increasing threat of continually evolving cybersecurity risks. Unauthorized parties may attempt to gain access to these systems or our information through fraud or other means of deceiving our associates, third-party service providers or vendors. Hardware, software or applications we develop or obtain from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise information security. The methods used to obtain unauthorized access, disable or degrade service or sabotage systems are also constantly changing and evolving and may be difficult to anticipate or detect for long periods of time. We have implemented and regularly review and update processes and procedures to protect against unauthorized access to or use of secured data and to prevent data loss. However, the ever-evolving threats mean we and our third-party service providers and vendors must continually evaluate and adapt our respective systems and processes, and there is no guarantee that they will be adequate to safeguard against all data security breaches or misuses of data. Any future significant compromise or breach of our data security, whether external or internal, or misuse of customer, associate, supplier or Company data, could result in additional significant costs, lost sales, fines, lawsuits, and damage to our reputation. In addition, as the regulatory environment related to information security, data collection and use, and privacy becomes increasingly rigorous, with new and constantly changing requirements applicable to our business, compliance with those requirements could also result in additional costs. We are subject to payment-related risks that could increase our operating costs, expose us to fraud or theft, subject us to potential liability and potentially disrupt our business. We accept payments using a variety of methods, including cash, checks, credit and debit cards, PayPal, our private label credit cards and installment loan program, and gift cards, and we may offer new payment options over time. Acceptance of these payment options subjects us to rules, regulations, contractual obligations and compliance requirements, including payment network rules and operating guidelines, data security standards and certification requirements, and rules governing electronic funds transfers. These requirements may change over time or be reinterpreted, making compliance more difficult or costly. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs. We rely on third parties to provide payment processing services, including the processing of credit cards, debit cards, and other forms of electronic payment. If these companies become unable to provide these services to us, or if their systems are compromised, it could potentially disrupt our business. The payment methods that we offer also subject us to potential fraud and theft by criminals, who are becoming increasingly more sophisticated, seeking to obtain unauthorized access to or exploit weaknesses that may exist in the payment systems, as reflected in our recent Data Breach. If we fail to comply with applicable rules or requirements for the payment methods we accept, or if payment-related data is compromised due to a breach or misuse of data, we may be liable for costs incurred by payment card issuing banks and other third parties or subject to fines and higher transaction fees, or our ability to accept or facilitate certain types of payments may be impaired. In addition, our customers could lose confidence in certain payment types, which may result in a shift to other payment types or potential changes to our payment systems that may result in higher costs. As a result, our business and operating results could be adversely affected. Uncertainty regarding the housing market, economic conditions and other factors beyond our control could adversely affect demand for our products and services, our costs of doing business and our financial performance. Our financial performance depends significantly on the stability of the housing, residential construction and home improvement markets, as well as general economic conditions, including changes in gross domestic product. Adverse conditions in or uncertainty about these markets or the economy could adversely impact our customers' confidence or financial condition, causing them to determine not to purchase home improvement products and services or delay purchasing or payment for those products and services. Other factors beyond our control - including high levels of unemployment and foreclosures; interest rate fluctuations; fuel and other energy costs; labor and healthcare costs; the availability of financing; the state of the credit markets, including mortgages, home equity loans and consumer credit; weather; natural disasters and 9 other conditions beyond our control - could further adversely affect demand for our products and services, our costs of doing business and our financial performance. A failure of a key information technology system or process could adversely affect our business. We rely extensively on information technology systems, some of which are managed or provided by third-party service providers, to analyze, process, store, manage and protect transactions and data. We also rely heavily on the integrity of, security of and consistent access to this data in managing our business. For these systems and processes to operate effectively, we or our service providers must periodically maintain and update https://www.sec.gov/Archives/edgar/data/354950/000035495016000060/hd-1312016x10xk.htm[6/28/16, 8:50:35 PM] 10-K Table of Contents other conditions beyond our control - could further adversely affect demand for our products and services, our costs of doing business and our financial performance. A failure of a key information technology system or process could adversely affect our business. We rely extensively on information technology systems, some of which are managed or provided by third-party service providers, to analyze, process, store, manage and protect transactions and data. We also rely heavily on the integrity of, security of and consistent access to this data in managing our business. For these systems and processes to operate effectively, we or our service providers must periodically maintain and update them. Our systems and the third-party systems on which we rely are subject to damage or interruption from a number of causes, including power outages; computer and telecommunications failures; computer viruses; security breaches; cyber-attacks; catastrophic events such as fires, floods, earthquakes, tornadoes, or hurricanes; acts of war or terrorism; and design or usage errors by our associates, contractors or third-party service providers. Although we and our third-party service providers seek to maintain our respective systems effectively and to successfully address the risk of compromise of the integrity, security and consistent operations of these systems, we may not be successful in doing so. As a result, we or our service providers could experience errors, interruptions, delays or cessations of service in key portions of our information technology infrastructure, which could significantly disrupt our operations and be costly, time consuming and resource-intensive to remedy. Disruptions in our customer-facing technology systems could impair our interconnected retail strategy and give rise to negative customer experiences. Through our information technology developments, we are able to provide an improved overall shopping and multichannel experience that empowers our customers to shop and interact with us from computers, tablets, smartphones and other mobile devices. We use our website both as a sales channel for our products and also as a method of providing product, project and other relevant information to our customers to drive both instore and online sales. We have multiple online communities and knowledge centers that allow us to inform, assist and interact with our customers. Mul