The Home Depot Annual Report 2000

listening

2470HD nar for pdf 4/17/01 3:24 PM Page OFC

Arthur M. Blank

Co-Chairman of the Board

Bernard Marcus

Co-Chairman of the Board

There’s a saying that retailing is not for the faint of heart – that to truly succeed in the business you must be

able to react quickly to changes in everything from consumer trends to the competitive environment. More than

that, it requires the ability to reinvent yourself on a continuous basis – to evolve with the marketplace and

customer demands.

Our ability to embrace change – to reinvent ourselves – is what has made Home Depot so successful. It’s what made

it possible for us to grow from one store on Memorial Drive in Atlanta to 1,134 at year end, serving nearly a

billion customers from Canada to the tip of South America.

In 22 short years, we’ve grown to $46 billion in sales – with a scale, scope and reach that is unparalleled in the

home improvement industry.

We relish the challenge of sustaining that growth and continuing to be among the world’s leading retailers – but

it will take a tremendous effort on the behalf of everyone at Home Depot to make it happen. It will especially

require new ways of thinking and doing – in applying new technologies, building efficiencies, reallocating

resources – all while we continue to listen and respond to our customers every day.

We’re very optimistic Our optimism is built on our associates’ dedication and commitment to our “orange-blooded”

entrepreneurial spirit, which embraces change yet retains our core values of excellent customer service, respect

for all people and giving back to the community.

Our optimism is also built on our ability to bring new leadership into the executive ranks – to seek out new talent,

experience and vision. That’s why we are so excited to be joined by Bob Nardelli, one of the country’s top business

leaders, as President and CEO. His fresh perspective and business insight will take us to the next level.

While going outside the business in recruiting executive talent is not rare in other industries, it is somewhat

rare in retailing. But we’re a unique company seeking a unique successor.

We’ve often said that the people who follow us have to be better than we were. The hard part is not so much

creating a new business, but successfully meeting customers’ and investors’ expectations year after year, decade

after decade.

It’s now time to hand the baton to a new generation of managers to see us through the new millennium. Our

legacy to Bob is the most talented and capable merchandising, operations and support team in the retailing

industry. Working together, they will take this great Company to new heights in customer service, market growth

and stockholder value.

Corporate Profile Founded in 1978, The Home Depot

is the world’s largest home improvement retailer and the second largest retailer in the

United States, with fiscal 2000 sales of $45.7 billion. At the close of fiscal 2000, The Home Depot operated 1,134 retail locations, including 1,029

Home Depot stores in the United States, 67 Home Depot stores in Canada and 7 Home Depot stores in South America. The Company also operated

26 EXPO Design Centers

, 4 Villager’s

Hardware stores and 1 Home Depot Floor Store

. In addition, the Company operated wholly-owned sub-

sidiaries Apex Supply Company, Georgia Lighting

, Maintenance Warehouse

and National Blinds and Wallpaper

. The Company employed approxi-

mately 227,000 associates at the end of fiscal 2000.

The Company has been publicly held since 1981. The Home Depot trades on the New York Stock Exchange under the ticker symbol “HD” and is included

in the Dow Jones Industrial Average and the Standard & Poor’s 500 Index.

founders’ letter

2470HD nar for pdf 4/17/01 3:24 PM Page IFC

Our founders have said it many times. Home Depot has the greatest associates in the

world. Just ask our customers. In a recent study, Home Depot associates ranked 40%

higher than the competition in customer service and product knowledge. We know

that Home Depot service, low prices and quality products result in the best customer

experience in retailing, but we also see countless opportunities to improve. Every day,

we have to earn the trust of our customers, because we understand that each cus-

tomer is on a day-to-day lease, with ever-increasing needs and expectations.

The Home Depot encourages initiative and rewards extraordinary effort. Most every

good thought we’ve had has originated in our stores, where our associates and our

customers meet every day. Those ideas have led to exciting new products for the

do-it-yourselfer, new programs for our professional and installation services

customers, and great new retailing concepts like our EXPO Design Center stores.

Throughout this report, we recognize listening and responding as the keys to our

success and the definition of what sets us apart in the industry. Our commitment is to

continue to listen for new ideas from customers and associates, and then to respond

with programs that make us better than ever in providing home improvement solutions.

Responding

2470HD nar for pdf 4/17/01 3:24 PM Page 1

To our stockholders, customers and associates

It is an honor and a privilege to write this letter for the first time as President and CEO

of The Home Depot. I come to this Company with respect for its past, a deep appreci-

ation of its powerful culture and tremendous enthusiasm for the great opportunities

that are in front of us. I am eager to expand upon our history of unparalleled growth,

enviable trust and brand recognition built on outstanding customer service, broad mer-

chandise assortments and the lowest prices in the industry.

In deciding to join The Home Depot, I looked at this business as would any investor. By

every standard I could find, I joined a runaway winner. Now that I am here and have

met every Home Depot store manager, I am more convinced of that than ever.

This is a company with a proud heritage, powerful track record, strong balance sheet

and unmatched resources. First and foremost, our associates are central to our finan-

cial success and our longstanding relationships with our customers. They operate in a

boundary-less environment, where excitement and new ideas are part of the fabric of

our Company. They are backed by terrific support from Home Depot’s vendors and ser-

vice partners and the strongest balance sheet in retailing.

Our long-term stockholders also appreciate the strength of this Company’s culture,

which encourages entrepreneurship, fosters new ideas and adaptation and relishes com-

petition. These are familiar characteristics of great companies where I’ve had the

opportunity to develop and hone my skills over the past 30 years. At Home Depot, the

foundation is in place and we have an infinite capacity to continue to grow. What

remains is executing on our potential after a relatively difficult year in fiscal 2000.

Results, Achievements, Milestones For the fiscal year, Home Depot posted record earn-

ings and solid sales gains. At some companies, that might be enough. A slowing economy

in the second half of the year pressured sales and margins, resulting in performance that

was inconsistent with historic standards and below our expectations. Twice within the past

decade this Company has rebounded strongly from slower economic conditions, emerging

as a stronger and more formidable competitor. We are committed to doing it again.

Summarizing the fiscal year:

•

Sales totaled $45.7 billion, a 19% increase for the year.

•

We opened 204 new stores, ending the year with 1,134 stores.

•

Net earnings reached $2.6 billion, an 11% increase for the year.

•

Fiscal 2000 diluted earnings per share were $1.10, compared to $1.00 per share

in the previous year.

“we have an infinite capacity to grow

robert l. nardelli, President and chief executive officer

2470HD nar for pdf 4/17/01 3:24 PM Page 2

In addition, The Home Depot reached a number of milestones during the year. Among them:

•

We continued to move up on

Fortune

’s Most Admired Companies list, climbing to sixth from ninth the previous

year and being named the most admired specialty retailer for the eighth consecutive year.

•

We ranked first in social responsibility in the most recent Harris Interactive survey.

•

We opened our 1,000th store in July with a celebration that ran all the way to Wall Street, where we

decorated the New York Stock Exchange with the world’s largest orange apron and several hundred Home

Depot associates built gazebos to benefit local parks.

While fiscal 2000 was a challenging year financially, a broad range of opportunities remains to build on the suc-

cess of the past two decades at The Home Depot during fiscal 2001 and beyond.

Looking ahead, a growth business We continue to be a great growth business, with plans to more than double our

sales over the next few years. The approach is straightforward: our growth will be driven by new stores, com-

parable sales increases in existing stores and through adjacent businesses. Our growth will be both productive

and profitable.

In every market in which we operate, The Home Depot has the ability to increase its presence. Our growth will

not focus simply on the number of stores opened, but on the quality of stores opened. In fiscal 2001, we will

open about 200 stores, continuing a pace of rapid expansion, but we will also open stores earlier in the year,

with “neighborhood friendly” merchandise, lower investments and associates who are fully trained and ready to

serve new customers. We expect this to give us a greater sales benefit in the first year of new store operations.

In addition, we will continue to be innovative and more productive in existing stores. After meeting with every

store manager and thousands of other associates, I am convinced we have the ingenuity and talent to grow sales

and implement best practices from existing stores across the enterprise. This has led us to accelerate the roll-

out of professional customer programs in fiscal 2001, focusing resources on the fastest growing customer

segment in our business. In addition, our Service Performance Improvement program, or SPI, will be in every

Home Depot store by the end of fiscal 2001. Tested during fiscal 2000, SPI shifts most of the handling of inven-

tory to hours after the store is closed. As a result, the store is easier for our customers to shop, products are

more readily available and our associates can focus all of their time on serving customers. SPI improves sales

productivity and customer satisfaction.

Innovative programs to improve store performance are key elements of our growth plans, but a heightened

emphasis on merchandising and store execution is equally critical. New product lines, sharper assortments to

enhance the vitality of our inventory, and a dedication to improving inventory velocity are central to these

efforts. For example, Home Depot’s introduction of major appliances in fiscal 2000 added substantial sales and

profits, while offering our customers a complete kitchen or laundry project package. With incremental support

from product line expansion, advertising and training, we expect to double this business during the coming year.

w and improve upon everything we do.”

2470HD nar for pdf 4/17/01 3:24 PM Page 3

We have the most recognizable brand in home improvement, which gives us the power to extend our Home

Depot success into formats that are complementary to our core business. We grew our EXPO Design Center

concept from 15 to 26 stores during fiscal 2000 and anticipate continued strong expansion in 2001. We are

also testing new store concepts such as Villager’s Hardware, with four stores in New Jersey, and a Home Depot

Floor Store in Plano, Texas, which we launched in mid-year to such success that we had to slow advertising to

keep up with customer response.

Five Business Imperatives for Fiscal 2001 All of our future plans are supported by five key business imperatives:

customer service and loyalty; innovation and entrepreneurship; merchandising and advertising excellence; oper-

ational efficiency and competitive leadership; and talent and leadership development.

All of these imperatives are important, but the last is both critical and too frequently overlooked in the corporate

world. As we grow, the unique Home Depot culture and values must be passed on to an increasing number of

diverse orange-aproned associates. Therefore, we are committed to enhancing training throughout the organi-

zation and developing more focused accountability in clearly defined business units. Sharing ideas through elec-

tronic communication will be important to this process. Our structure, the processes we are putting in place and

our people all support our strategy. Coupled with these imperatives, we have the roadmap for success.

Despite a slower economic environment, all the elements for growth are in place. It is up to us to broaden our

business base so that we are more resistant to economic shifts and to offer a full array of products and services to

a wider range of customers. I am challenging our organization to continue the pace of creativity and change that

has made us so successful to date. We know where we want to go and we are determined to get there.

Even with our rapid growth in the past two decades, we have less than a 10% share of home improvement and

building materials industry sales today. Our strategy for future market share growth begins with a metamarket

view of the business, which includes broadening our reach in the industry, identifying new customer segments,

analyzing their home improvement needs and gaining an increasingly larger percentage of their expenditures.

Whether in opening new stores, adding volume to existing stores or extending the brand globally and through new

platforms, The Home Depot is in the strongest position in the industry for continued growth in the coming years.

Special Thanks I want to express a special thank you to Bernie, Arthur and the Board of Directors for their

support through this initial transition, and particularly to Arthur as he retires as Co-Chairman to pursue new

endeavors. I am grateful for their confidence in my ability to take over the reins of the company they created

and nurtured into a retailing legend, and I am committed to taking The Home Depot to the next level.

I hope you share my excitement for the future prospects of our Company.

Sincerely,

“this is a company with great opportunities to continue to gain market share.”

Robert L. Nardelli

President and Chief Executive Officer

February 19, 2001

2470HD nar for pdf 4/17/01 3:24 PM Page 4

financial summary

amounts in millions, except per share data

2000 increase 1999 increase 1998 increase

Net sales

$ 45,738 19.0%

$ 38,434 27.2% $ 30,219 25.1%

Gross profit

13,681 19.9%

11,411 32.6% 8,605 26.9%

Earnings before income taxes

4,217 10.9%

3,804 43.3% 2,654 32.6%

Net earnings

2,581 11.3%

2,320 43.7% 1,614 31.9%

Diluted earnings per share

1.10 10.0%

1.00 40.8% 0.71 29.1%

net earnings

as a Percent of Sales

Pretax Earnings

as a Percent of Sales

Return on Invested capital

2000

1999

1998

9.2%

9.9%

8.8%

2000

1999

1998

5.6%

6.0%

5.3%

2000

1999

1998

19.6%

22.5%

19.3%

2470HD nar for pdf 4/17/01 3:24 PM Page 5

Do-it-yourself

Wayne Dinse has been a Home Depot associate for Nine months. He works in the décor department in Paramus,

New Jersey.

“I enjoy interacting with customers, understanding the needs they really have. In my

career I’ve run my own business, so I understand why it’s important to be detail-oriented. To me,

time is of the essence. I like everything in its spot, signed and ready. I like perfection. We’re the

eyes and ears of the Company. Associates in the stores hear from the customer what they like, what

they don’t like and what they want. Then it’s up to us to satisfy them.”

Our customers know they’ll get the most knowledgeable sales associates, the best products and the lowest p

2470HD nar for pdf 4/17/01 3:24 PM Page 6

“A customer was moving into a loft apartment in Manhattan and had eight enormous

windows, seven to eight feet high. She didn’t want curtains and was concerned about the

cost of installing custom blinds. We were able to put together a combination of a valance

and two blinds to give her the look she wanted for seven of the windows and helped her

with a custom blind for the eighth. It solved her problem, it fit her budget and she could

do it herself.”

– Wayne Dinse

st prices at The home depot.

At the center of The Home Depot’s success is the trusting relationship between the do-it-yourself customer

and our orange-blooded associates. By emphasizing and teaching customer service, and supplementing with

product knowledge training, we keep our business vital and growing. During fiscal 2000 we enhanced our rela-

tionship with 50,000 customers by building their confidence and skills through Home Depot University classes

that teach the how-to part of many projects. We create customer loyalty with proprietary and exclusive prod-

ucts like Hampton Bay

fans and lighting; Behr Premium Plus

paint; Ralph Lauren

paint, carpet and light-

ing; John Deere

lawn and garden equipment; and Husky

and Ridgid

tools. Subsidiaries such as Georgia

Lighting bring us further product expertise and unique import capabilities. With consistent everyday low

price guarantees, we execute the fundamentals of retailing with a passion.

Innovation is a key to customer satisfaction. The number of tool rental centers in our stores grew to 342 at

year-end. With more than 200 products available to the DIY or professional customer, tool rental services

support the bigger projects that our customers take on and provide strong financial results for our stock-

holders as well.

We always seek to drive our performance to the next level. The Service Performance Improvement (SPI)

initiative launched in our stores this year shifts product receiving to the night hours. The resulting efficien-

cies free up associates to dedicate their time to serving customers. As a result, our stores are easier to shop,

the shelves are fully stocked and the aisles are cleaner.

2470HD nar for pdf 4/17/01 3:24 PM Page 7

“A customer called to ask questions about the price of large quantities of commodity

products. He was just looking for information – not exactly sure how he was going to end

up doing the project. I asked him what he was doing, and he explained that he was trying

to figure out how to convert a warehouse into office and storage space. Clearly, he needed

to create a floor with appropriate load weights. So he faxed over a rough picture of what

he envisioned. I developed a set of specifications for him and we worked out a solution.

Twenty phone calls and eight faxes later, he bought the project from Home Depot and now

we have a life-long customer.”

– Geoff Highfield

The professional contractor represents about 30% of our business today and, with the strength of our Pro

Program, is the fastest-growing customer segment for the Company. At the end of fiscal 2000, 165 stores

were offering pro-specific product assortments, credit programs and enhanced will-call and delivery services

through a pro desk staffed by associates dedicated to the pro customer.

We expect to expand the Pro Program to more than 600 additional stores in fiscal 2001 and 2002, com-

pleting the rollout. As we’ve launched this initiative, we’ve learned how to improve it. We’ve gained effi-

ciencies in the time and investment necessary to get stores ready to concentrate on pro customers. With a

higher average purchase and shopping frequency, the pro customer is a great source of consistent growth,

building sales and margin in existing markets.

Computer-savvy pros in selected markets can also use our new Internet service to fulfill ordering, delivery

and billing from the job site or an office.

pro customers are already sh

PROFESSIONAL

2470HD nar for pdf 4/17/01 3:24 PM Page 8

dy shopping our stores. we can grow their business by better meeting their needs in products, quantities and service levels.

Geoff Highfield has been a Home Depot associate for 13 years. He works the pro desk in Orlando, Florida. “I was chosen to work

the pro desk because I’ve been cross-trained in several departments and I have strong knowledge in products that are

key to the pro business. Service is the most important part of the relationship. Contractors are always asking ques-

tions. We advise, walk them back to the product, and help them get back to their job sites quickly. We get their sales

and loyalty because we earn their confidence every day.”

2470HD nar for pdf 4/17/01 3:24 PM Page 9

Buy-it-yourself

Growth at The Home Depot means finding new ways to meet our customers’ needs. Providing products and

services to the buy-it-yourself (BIY) customer is not only a growth opportunity for our Company, it makes

great sense given this country’s aging population. Our installed sales businesses provided approximately

$2 billion in sales in fiscal 2000, with an annual growth rate of 40%. By offering services from kitchen and

bath installations to flooring, roofing and siding, The Home Depot can tap into new sales opportunities in

the home improvement channel.

The Home Depot offers eight core installation programs in all of our stores. We’re currently the largest

retailer of products in the industry, but we have less than 2% of the product installation market and a sig-

nificant opportunity to continue to grow at a rapid rate.

BIY sales are supported by new product introductions, like our line of Thomasville

cabinets. Our appliance

program offers General Electric

and Maytag

products through every Home Depot store, with quick delivery

and installation service. More than 2,000 major appliances are available either in the store or through an on-

line kiosk. Following a five-fold expansion in fiscal 2000, we expect to double our appliance sales volume

again in fiscal 2001. We are supporting this growth with new products, investment in associate training and

product knowledge, and enhanced signing and advertising.

On the horizon? We are expanding our test of Trane

HVAC product sales in the Southeast. Our acquisi-

tion of Apex Supply Company in fiscal 1999 made this product extension possible.

“A customer's basement flooded after a huge storm. Her flooring was ruined

and it was one-and-a-half weeks before her bridal shower. Friends and rela-

tives were coming to her home and she needed her house to be perfect.

I called the vendor and told them how important it was that this flooring job

be done quickly and properly. One of our people drove up to the mill to per-

sonally pick up the carpet. We installed it the third day after she called. The

customer could not believe we got it done.”

– Vicki Brown

from credit to

2470HD nar for pdf 4/17/01 3:24 PM Page 10

Vicki Brown has been a Home Depot associate for 16 years. She works in the kitchen installation and décor

departments as an expediter in atlanta, Georgia.

“Expediting is a very personal part of the business. In my

role, you deal with so many people, from vendors to installers to customers. These customers have

saved a long time to make big purchases. When we go into customers’ homes to re-do a kitchen or

lay some flooring, it’s a big deal to them. Nothing is more rewarding than helping customers with pro-

jects that can change their lives.”

it to product selection and installation, the home depot provides a complete project solution to the BIY customer.

2470HD nar for pdf 4/17/01 3:24 PM Page 11

EXPO

“A customer visited EXPO to consider updating lighting in her

kitchen. A walk to the kitchen design center to match cabinet

types led to a discussion with a designer, which in turn led to

a complete kitchen design proposal. The customer renovated

her entire kitchen and went on to remodel all of her children’s

rooms.”

– Chris Pepple

Chris Pepple has been a Home Depot associate for five and one-half years and works in the lighting department at the EXPO Design

Center in Union, New Jersey.

“At EXPO we have everything you need for room remodeling. You don’t have to go to five

different stores to get it done. In fact, there are so many choices that making a final decision can take extra time. It’s

not unusual for us to spend several hours with each customer bringing their visions to life. Most don’t make a decision

right away. They go home to think about the possibilities. When they come back to EXPO, we have designers and

installers who can take the project to completion.”

>> > > > > > > > > > >>> > > > > > > > > > > > > >>>> > > > > > > > > > >>> > > > > > > > > >

2470HD nar for pdf 4/17/01 3:24 PM Page 12

EXPO Design Centers offer dozens of showrooms under one roof, including lighting, carpeting, flooring,

décor and kitchen and bath products, all combined with complete design and installation capability. EXPO

designers can take a dream “from inspiration to installation.” Each EXPO project is developed and tracked

through systems that provide on-line product information and work flow management.

Complementing the projects that form the core of EXPO’s success is a broad selection of in-store products

that support the Home Depot philosophy of high quality and low prices. By identifying a new customer niche

and building a business to suit, EXPO has provided access to exciting new products and brands for customers

who previously didn’t consider their dream within reach.

With 26 stores and a growth rate of approximately 70% during fiscal 2001, EXPO Design Center is the

fastest-growing new concept for The Home Depot. EXPO Design Center stores opened to standing room only

crowds in New Jersey, Boston, San Francisco, Chicago and New York during fiscal 2000, and will create

excitement in Denver, St. Louis and other new markets during fiscal 2001.

expo is a place where customers can dream. our job is to make their dreams come true.

> > > > > >>>> > > > > > > > > > >>> > > > > > > > > > > > > >>>> > > > > > > > > > > > >>>> > > >

2470HD nar for pdf 4/17/01 3:25 PM Page 13

giving back

After Reuben Santos dropped out of high school, a counselor

referred him to Casa Verde YouthBuild

, where he has redis-

covered his sense of direction. He enjoyed the construction

work opportunities that YouthBuild offered and quickly

became a leader and peer trainer within the organization.

Associates like Leslee Gooding are working with Reuben and

hundreds of YouthBuild students across the country to pre-

pare them for careers in the home improvement industry. As

Reuben put it, “This is the best thing that could have hap-

pened to me.”

helping others doesn’t end at the four walls of the store.

2470HD nar for pdf 4/17/01 3:25 PM Page 14

Giving back to those in need is one of the core values of The Home Depot. The Casa Verde YouthBuild program

of Austin, Texas, is just one of the thousands of community-based programs The Home Depot supports through

our Team Depot program. Building a Habitat for Humanity house in Minneapolis and constructing a playground

in Seattle are two more examples of the many ways we give back to the communities where we live and work.

It has often been said that The Home Depot is in the business of helping customers solve problems. Team Depot

is focused on doing the same by helping communities solve some of the challenges they face. We do it by using

our resources – product and monetary donations and a lot of hard work by thousands of committed Team Depot

volunteers – to make us part of the communities we serve.

Since our community relations program began in 1989, The Home Depot has contributed over $100 million in

cash and products and millions of volunteer hours to programs in the areas of affordable housing, at-risk youth,

the environment and disaster preparedness and relief. On any day in countless communities across the country,

you will find Team Depot at work. It is one of the common threads that binds our diverse associates together to

make us one company.

Leslee Gooding has been a Home Depot associate for four years in Austin, Texas. Looking for a new direction, in 1997, Leslee

Gooding enrolled in the Casa Verde YouthBuild Americorps Program, an Austin, Texas-based program that allows

young people to earn a high school diploma while learning construction skills. After 12 months of training, Leslee

took her new-found skills, diploma and self-confidence to Home Depot, applying for a job with a Home Depot store

manager who strongly supported the Casa Verde program. Today, Leslee is a valued member of The Home Depot team,

giving back part of her time and experience to other YouthBuild students.

2470HD nar for pdf 4/17/01 3:25 PM Page 15

Management’s Discussion and Analysis of Results of Operations and Financial Condition

The Home Depot, Inc. and Subsidiaries

The data below reflect selected sales data, the percentage relationship between sales and major categories in the Consolidated Statements of

Earnings and the percentage change in the dollar amounts of each of the items.

Selected Consolidated Statements of Earnings Data

Percentage

Increase (Decrease)

Fiscal Year

(1)

In Dollar Amounts

2000 1999 1998 2000 vs. 1999 1999 vs. 1998

Net Sales

100.0%

100.0% 100.0%

19.0%

27.2%

Gross Profit

29.9

29.7 28.5

19.9

32.6

Operating Expenses:

Selling and Store Operating

18.6

17.8 17.7

24.8

27.9

Pre-Opening

0.3

0.3 0.3

25.7

28.4

General and Administrative

1.8

1.7 1.7

24.4

30.3

Total Operating Expenses

20.7

19.8 19.7

24.8

28.1

Operating Income

9.2

9.9 8.8

10.1

42.6

Interest Income (Expense):

Interest and Investment Income

0.1

0.1 0.1

27.0

23.3

Interest Expense

(0.1)

(0.1) (0.1)

(48.8)

(10.9)

Interest, net

–

––

750.0

(75.0)

Earnings Before Income Taxes

9.2

9.9 8.8

10.9

43.3

Income Taxes

3.6

3.9 3.5

10.2

42.7

Net Earnings

5.6%

6.0% 5.3%

11.3%

43.7%

Selected Sales Data

(2)

Number of Transactions (000s)

936,519

797,229 665,125

17.5%

19.9%

Average Sale per Transaction

$ 48.65

$ 47.87 $ 45.05

1.6

6.3

Weighted Average Weekly Sales per Operating Store

$ 864,000

$ 876,000 $ 844,000

(1.4)

3.8

Weighted Average Sales per Square Foot

$ 414.68

$ 422.53 $ 409.79

(1.9)

3.1

(1)

Fiscal years 2000, 1999 and 1998 refer to the fiscal years ended January 28, 2001; January 30, 2000; and January 31, 1999, respectively.

(2)

Excludes wholly-owned subsidiaries: Apex Supply Company, Georgia Lighting, Maintenance Warehouse, and National Blinds and Wallpaper.

Management’s Discussion and Analysis of Results of Operations and Financial Condition (continued)

The Home Depot, Inc. and Subsidiaries

Forward-Looking Statements Certain written and oral statements made

by The Home Depot, Inc. and subsidiaries (the “Company”) or with

the approval of an authorized executive officer of the Company may

constitute “forward-looking statements” as defined under the Private

Securities Litigation Reform Act of 1995. Words or phrases such as

“should result,” “are expected to,” “we anticipate,” “we estimate,”

“we project” or similar expressions are intended to identify forward-

looking statements. These statements are subject to certain risks and

uncertainties that could cause actual results to differ materially from

the Company’s historical experience and its present expectations or

projections. These risks and uncertainties include, but are not limited

to, unanticipated weather conditions; stability of costs and availability

of sourcing channels; the ability to attract, train and retain highly-

qualified associates; conditions affecting the availability, acquisition,

development and ownership of real estate; general economic condi-

tions; the impact of competition; and regulatory and litigation

matters. Caution should be taken not to place undue reliance on any

such forward-looking statements, since such statements speak only as

of the date of the making of such statements. Additional information

concerning these risks and uncertainties is contained in the Company’s

filings with the Securities and Exchange Commission, including the

Company’s Annual Report on Form 10-K.

Results Of Operations For an understanding of the significant factors

that influenced the Company’s 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 finan-

cial statements presented in this annual report.

Fiscal Year ended January 28, 2001 compared to January 30,

2000 Net sales for fiscal 2000 increased 19.0% to $45.7 billion

from $38.4 billion in fiscal 1999. This increase was attributable to,

among other things, full year sales from the 169 new stores opened

during fiscal 1999, a 4% comparable store-for-store sales increase and

204 new store openings.

Gross profit as a percent of sales was 29.9% for fiscal 2000 compared

to 29.7% for fiscal 1999. The rate increase was primarily attributable

to a lower cost of merchandise resulting from product line reviews,

benefits from global sourcing programs and an increase in the number

of tool rental centers from 150 at the end of fiscal 1999 to 342 at the

end of fiscal 2000.

Operating expenses as a percent of sales were 20.7% for fiscal 2000

compared to 19.8% for fiscal 1999. Selling and store operating

expenses as a percent of sales increased to 18.6% in fiscal 2000 from

17.8% in fiscal 1999. The increase was primarily attributable to

higher store selling payroll expenses resulting from market wage pres-

sures and an increase in employee longevity. In addition, medical

costs increased due to higher family enrollment in the Company’s

medical plans, rising health care costs and higher prescription drug

costs. Finally, store occupancy costs, such as property taxes, property

rent, depreciation and utilities, increased due to new store growth and

energy rate increases.

Pre-opening expenses as a percent of sales were 0.3% for both fiscal

2000 and 1999. The Company opened 204 new stores and relocated

8 stores in fiscal 2000, compared to opening 169 new stores and

relocating 6 stores in fiscal 1999. Pre-opening expenses averaged

$671,000 per store in fiscal 2000 compared to $643,000 per store in

fiscal 1999. The higher average expense was primarily due to the open-

ing of more EXPO Design Center stores and expansion of Home Depot

stores into certain new markets including international locations, which

involved longer pre-opening periods and higher training, travel and

relocation costs.

General and administrative expenses as a percent of sales were 1.8%

for fiscal 2000 compared to 1.7% for fiscal 1999. The increase was

primarily due to investments in Internet development and inter-

national operations, as well as a full year of payroll and other costs

associated with operating four new divisional offices, which opened

during the fourth quarter of fiscal 1999.

Interest and investment income as a percent of sales was 0.1% for

both fiscal 2000 and 1999. Interest expense as a percent of sales was

0.1% for both comparable periods.

The Company’s combined federal and state effective income tax

rate decreased to 38.8% for fiscal 2000 from 39.0% for fiscal 1999.

The decrease was attributable to higher tax credits in fiscal 2000

compared to fiscal 1999.

Net earnings as a percent of sales were 5.6% for fiscal 2000

compared to 6.0% for fiscal 1999, reflecting higher selling and store

operating expenses as a percent of sales partially offset by a higher

gross profit rate as described above. Diluted earnings per share were

$1.10 for fiscal 2000 compared to $1.00 for fiscal 1999.

Management’s Discussion and Analysis of Results of Operations and Financial Condition (continued)

The Home Depot, Inc. and Subsidiaries

Fiscal Year ended January 30, 2000 compared to January 31,

1999 Net sales for fiscal 1999 increased 27.2% to $38.4 billion from

$30.2 billion in fiscal 1998. This increase was attributable to, among

other things, full year sales from the 138 new stores opened during

fiscal 1998, a 10% comparable store-for-store sales increase, and 169

new store openings and 6 store relocations during fiscal 1999.

Gross profit as a percent of sales was 29.7% for fiscal 1999 compared

to 28.5% for fiscal 1998. The rate increase was primarily attributable

to a lower cost of merchandise resulting from product line reviews

and increased sales of imported products, and other merchandising

initiatives begun in prior years and continued during fiscal 1999, as

well as to sales mix shifts to higher gross margin product categories

and assortments. In addition, inventory and refund systems improve-

ments and more effective training resulted in better inventory shrink

results and lower product markdowns.

Operating expenses as a percent of sales were 19.8% for fiscal 1999

compared to 19.7% for fiscal 1998. Selling and store operating

expenses as a percent of sales increased to 17.8% in fiscal 1999 from

17.7% in fiscal 1998. The increase was primarily attributable to higher

store selling payroll expenses resulting from market wage pressures

and an increase in employee longevity, as well as by the Company’s

continued investment in new customer service initiatives. In addition,

medical costs increased due to higher family enrollment in the

Company’s medical plans, increased claims and higher prescription

drug costs. The Company’s strong financial performance during fiscal

1999 also resulted in higher bonus expenses as a percent of sales.

Credit card discounts increased as a result of higher penetrations

of credit card sales and increases in non-private label discount rates.

Partially offsetting these increases were lower net advertising

expenses resulting from higher cooperative advertising participation

by vendors and economies realized from the increased use of national

advertising.

Pre-opening expenses as a percent of sales were 0.3% for both fiscal

1999 and 1998. The Company opened 169 new stores and relocated

6 stores in fiscal 1999, compared to 138 new stores and 4 store relo-

cations in fiscal 1998. Pre-opening expenses averaged $643,000 per

store in fiscal 1999 compared to $618,000 per store in fiscal 1998.

The higher average expense was primarily due to the opening of more

EXPO Design Center stores and expansion of Home Depot stores into

certain new markets, which involved longer pre-opening periods and

higher training, travel and relocation costs.

General and administrative expenses as a percent of sales were 1.7%

for both fiscal 1999 and 1998. Incremental expenses related to long-

term growth and business planning initiatives, including Internet

development, international operations and the opening of four new

divisional offices during the fourth quarter of fiscal 1999, were offset

by efficiencies realized from increased sales.

Interest and investment income as a percent of sales was 0.1% for

both fiscal 1999 and 1998. Interest expense as a percent of sales was

0.1% for both comparable periods.

The Company’s combined federal and state effective income tax rate

decreased to 39.0% for fiscal 1999 from 39.2% for fiscal 1998. The

decrease was attributable to higher tax credits in fiscal 1999 compared

to fiscal 1998.

Net earnings as a percent of sales were 6.0% for fiscal 1999

compared to 5.3% for fiscal 1998, reflecting a higher gross profit

rate partially offset by higher operating expenses as a percent of sales

as described above. Diluted earnings per share were $1.00 for fiscal

1999 compared to $0.71 for fiscal 1998.

Liquidity and Capital Resources Cash flow generated from store oper-

ations provides the Company with a significant source of liquidity.

Additionally, a portion of the Company’s inventory is financed under

vendor credit terms.

The Company currently plans to open approximately 200 new stores

and relocate 9 existing stores during fiscal 2001. It is anticipated

that approximately 92% of these locations will be owned, and the

remainder will be leased.

The Company has two operating lease agreements totaling $882 mil-

lion for the purpose of financing construction costs of certain new

stores. Under the operating lease agreements, the lessor purchases the

properties, pays for the construction costs and subsequently leases the

facilities to the Company. The leases provide for substantial residual

value guarantees and include purchase options at original cost on

each property. The Company financed a portion of its new stores

opened from fiscal 1997 through fiscal 2000, as well as office build-

ings in fiscal 1999 and 2000, under the operating lease agreements.

Management’s Discussion and Analysis of Results of Operations and Financial Condition (continued)

The Home Depot, Inc. and Subsidiaries

The cost of new stores to be constructed and owned by the Company

varies widely, principally due to land costs, and is currently estimated

to average approximately $14.1 million per location. The cost to

remodel and/or fixture stores to be leased is expected to average

approximately $4.9 million per store. In addition, each new store will

require approximately $3.5 million to finance inventories, net of

vendor financing.

During fiscal 1999, the Company issued $500 million of 6

⁄2

% Senior

Notes (“Senior Notes”). The Senior Notes are due on September 15,

2004 and pay interest semi-annually. The Senior Notes may be

redeemed by the Company at any time, in whole or in part, at a

defined redemption price plus accrued interest up to the redemption

date. The net proceeds from the offering were used to finance a portion

of the Company’s capital expenditure program, including store expan-

sions and renovations, for working capital needs and for general

corporate purposes.

The Company has a commercial paper program that allows borrow-

ings up to a maximum of $1 billion. As of January 28, 2001, there

were $754 million of borrowings outstanding under the program. In

connection with the program, the Company has a back-up credit facil-

ity with a consortium of banks for up to $800 million. The credit

facility, which expires in September 2004, contains various restric-

tive covenants, none of which is expected to impact the Company’s

liquidity or capital resources.

As of January 28, 2001, the Company had $167 million in cash and

cash equivalents. Management believes that its current cash position,

internally generated funds, funds available from its $1 billion com-

mercial paper program and the ability to obtain alternate sources of

financing should enable the Company to complete its capital expen-

diture programs, including store openings and renovations, through

the next several fiscal years.

Quantitative and Qualitative Disclosures About Market Risk The Company

uses derivative financial instruments at various times to manage the

risk associated with foreign currency and interest rate fluctuations.

These contracts are insignificant to the Company’s operations and

financial position.

Impact of Inflation and Changing Prices Although the Company cannot

accurately determine the precise effect of inflation on its operations,

it does not believe inflation has had a material effect on sales or

results of operations.

Recent Accounting Pronouncements In June 1998, the Financial

Accounting Standards Board issued Statement of Financial Accounting

Standards No. 133 (“SFAS 133”), “Accounting for Derivative

Instruments and Hedging Activities.” SFAS 133 requires all deriva-

tives to be carried on the balance sheet at fair value. Changes in the

fair value of derivatives must be recognized in the Company’s state-

ments of earnings when they occur; however, there is an exception

for derivatives that qualify as hedges as defined by SFAS 133. If a

derivative qualifies as a hedge, a company can elect to use “hedge

accounting” to eliminate or reduce the income statement volatility

that would arise from reporting changes in a derivative’s fair value.

The Company will adopt SFAS 133 in the quarter ending April 29, 2001

and will record its derivatives at fair value. Based on the Company’s

derivative positions at January 28, 2001, the adoption of SFAS 133

will not have a material impact on the Company’s financial results.

In December 1999, the Securities and Exchange Commission

(“SEC”) issued Staff Accounting Bulletin No. 101 (“SAB 101”),

“Revenue Recognition in Financial Statements.” SAB 101 summarizes

certain of the SEC staff’s views in applying generally accepted account-

ing principles to revenue recognition in financial statements. As of

January 28, 2001, the Company was in compliance with SAB 101.

Consolidated Statements of Earnings

The Home Depot, Inc. and Subsidiaries

amounts in millions, except per share data Fiscal Year Ended

January 28, 2001 January 30, 2000 January 31, 1999

Net Sales

$ 45,738

$ 38,434 $ 30,219

Cost of Merchandise Sold

32,057

27,023 21,614

Gross Profit

13,681

11,411 8,605

Operating Expenses:

Selling and Store Operating

8,513

6,819 5,332

Pre-Opening

142

113 88

General and Administrative

835

671 515

Total Operating Expenses

9,490

7,603 5,935

Operating Income

4,191

3,808 2,670

Interest Income (Expense):

Interest and Investment Income

37 30

Interest Expense

(21)

(41) (46)

Interest, net

(4) (16)

Earnings Before Income Taxes

4,217

3,804 2,654

Income Taxes

1,636

1,484 1,040

Net Earnings

$ 2,581

$ 2,320 $ 1,614

Basic Earnings Per Share

$1.11

$ 1.03 $ 0.73

Weighted Average Number of Common Shares Outstanding

2,315

2,244 2,206

Diluted Earnings Per Share

$1.10

$ 1.00 $ 0.71

Weighted Average Number of Common Shares Outstanding Assuming Dilution

2,352

2,342 2,320

See accompanying notes to consolidated financial statements.

Consolidated Balance Sheets

The Home Depot, Inc. and Subsidiaries

amounts in millions, except share data

January 28, 2001 January 30, 2000

Assets

Current Assets:

Cash and Cash Equivalents

$ 167

$ 168

Short-Term Investments, including current maturities of long-term investments

Receivables, net

835

587

Merchandise Inventories

6,556

5,489

Other Current Assets

209

144

Total Current Assets

7,777

6,390

Property and Equipment, at cost:

Land

4,230

3,248

Buildings

6,167

4,834

Furniture, Fixtures and Equipment

2,877

2,279

Leasehold Improvements

665

493

Construction in Progress

1,032

791

Capital Leases

261

245

15,232

11,890

Less Accumulated Depreciation and Amortization

2,164

1,663

Net Property and Equipment

13,068

10,227

Long-Term Investments

Notes Receivable

Cost in Excess of the Fair Value of Net Assets Acquired, net of accumulated amortization

of $41 at January 28, 2001 and $33 at January 30, 2000

314

311

Other

134

$ 21,385

$ 17,081

Liabilities and Stockholders’ Equity

Current Liabilities:

Accounts Payable

$ 1,976

$ 1,993

Accrued Salaries and Related Expenses

627

541

Sales Taxes Payable

298

269

Other Accrued Expenses

1,402

763

Income Taxes Payable

Current Installments of Long-Term Debt

Total Current Liabilities

4,385

3,656

Long-Term Debt, excluding current installments

1,545

750

Other Long-Term Liabilities

245

237

Deferred Income Taxes

195

Minority Interest

Stockholders’ Equity

Common Stock, par value $0.05. Authorized: 10,000,000,000 shares; issued and outstanding –

2,323,747,000 shares at January 28, 2001 and 2,304,317,000 shares at January 30, 2000

116

115

Paid-In Capital

4,810

4,319

Retained Earnings

10,151

7,941

Accumulated Other Comprehensive Income

(67)

(27)

15,010

12,348

Less Shares Purchased for Compensation Plans

Total Stockholders’ Equity

15,004

12,341

$ 21,385

$ 17,081

See accompanying notes to consolidated financial statements.

Consolidated Statements of Stockholders’ Equity and Comprehensive Income

The Home Depot, Inc. and Subsidiaries

Accumulated

Other Total

Common Stock

Paid-In Retained Comprehensive Stockholders’ Comprehensive

amounts in millions, except per share data Shares Amount Capital Earnings Income Other Equity Income

(1)

Balance, February 1, 1998

2,196 $ 110 $ 2,589 $ 4,430 $ (28) $ (3) $ 7,098

Shares Issued Under Employee

Stock Purchase and Option Plans 17 1 165 – – – 166

Tax Effect of Sale of Option Shares

by Employees – – 63 – – – 63

Net Earnings – – – 1,614 – – 1,614 $ 1,614

Translation Adjustments – – – – (33) – (33) (33)

Cash Dividends ($0.077 per share) – – – (168) – – (168)

Comprehensive Income for Fiscal 1998 $ 1,581

Balance, January 31, 1999

2,213 $ 111 $ 2,817 $ 5,876 $ (61) $ (3) $ 8,740

Shares Issued Under Employee

Stock Purchase and Option Plans 19 1 273 – – – 274

Tax Effect of Sale of Option Shares

by Employees – – 132 – – – 132

Conversion of 3

⁄

4 % Convertible

Subordinated Notes, net 72 3 1,097 – – – 1,100

Net Earnings – – – 2,320 – – 2,320 2,320

Translation Adjustments – – – – 34 – 34 34

Shares Purchased for Compensation Plans – – – – – (4) (4)

Cash Dividends ($0.113 per share) – – – (255) – – (255)

Comprehensive Income for Fiscal 1999 $ 2,354

Balance, January 30, 2000

2,304 $ 115 $ 4,319 $ 7,941 $ (27) $ (7) $ 12,341

Shares Issued Under Employee

Stock Purchase and Option Plans

20 1 348 – – – 349

Tax Effect of Sale of Option Shares

by Employees

– – 137 – – – 137

Net Earnings

– – – 2,581 – – 2,581 2,581

Translation Adjustments

– – – – (40) – (40) (40)

Stock Compensation Expense

–– 6 – – – 6

Shares Purchased for Compensation Plans

–– – – – 1 1

Cash Dividends ($0.16 per share)

– – – (371) – – (371)

Comprehensive Income for Fiscal 2000

$ 2,541

Balance, January 28, 2001

2,324 $ 116 $ 4,810 $ 10,151 $ (67) $ (6) $ 15,004

(1)

Components of comprehensive income are reported net of related taxes.

See accompanying notes to consolidated financial statements.

Consolidated Statements of Cash Flows

The Home Depot, Inc. and Subsidiaries

amounts in millions Fiscal Year Ended

January 28, 2001 January 30, 2000 January 31, 1999

Cash Provided from Operations:

Net Earnings

$ 2,581

$ 2,320 $ 1,614

Reconciliation of Net Earnings to Net Cash Provided by Operations:

Depreciation and Amortization

601

463 373

(Increase) Decrease in Receivables, net

(246)

(85) 85

Increase in Merchandise Inventories

(1,075)

(1,142) (698)

Increase in Accounts Payable and Accrued Expenses

754

820 423

Increase in Income Taxes Payable

151

93 59

Other

(23) 61

Net Cash Provided by Operations

2,796

2,446 1,917

Cash Flows from Investing Activities:

Capital Expenditures, net of $16, $37 and $41 of non-cash capital expenditures

in fiscal 2000, 1999 and 1998, respectively

(3,558)

(2,581) (2,053)

Purchase of Remaining Interest in The Home Depot Canada

–

– (261)

Payments for Businesses Acquired, net

(26)

(101) (6)

Proceeds from Sales of Property and Equipment

87 45

Purchases of Investments

(39)

(32) (2)

Proceeds from Maturities of Investments

30 4

Advances Secured by Real Estate, net

(32)

(25) 2

Net Cash Used in Investing Activities

(3,530)

(2,622) (2,271)

Cash Flows from Financing Activities:

Issuance (Repayments) of Commercial Paper Obligations, net

754

(246) 246

Proceeds from Long-Term Borrowings

522 –

Repayments of Long-Term Debt

(29)

(14) (8)

Proceeds from Sale of Common Stock, net

351

267 167

Cash Dividends Paid to Stockholders

(371)

(255) (168)

Minority Interest Contributions to Partnership

–

711

Net Cash Provided by Financing Activities

737

281 248

Effect of Exchange Rate Changes on Cash and Cash Equivalents

(4)

1(4)

(Decrease) Increase in Cash and Cash Equivalents

(1)

106 (110)

Cash and Cash Equivalents at Beginning of Year

168

62 172

Cash and Cash Equivalents at End of Year

$ 167

$ 168 $ 62

Supplemental Disclosure of Cash Payments Made for:

Interest, net of interest capitalized

$16

$26 $36

Income Taxes

$ 1,386

$ 1,396 $ 940

See accompanying notes to consolidated financial statements.

Notes to Consolidated Financial Statements

The Home Depot, Inc. and Subsidiaries

Note 1. Summary of Significant Accounting Policies

The Company operates Home Depot stores, which are full-service,

warehouse-style stores averaging approximately 108,000 square feet

in size. The stores stock approximately 40,000 to 50,000 different

kinds of building materials, home improvement supplies and lawn and

garden products that are sold primarily to do-it-yourselfers, but also

to home improvement contractors, tradespeople and building main-

tenance professionals. In addition, the Company operates EXPO

Design Center stores, which offer products and services primarily

related to design and renovation projects. The Company is currently

testing Villager’s Hardware with four stores, which offer products and

services for home enhancement and smaller project needs in a conven-

ience hardware store format. Additionally, the Company operates one

Home Depot Floor Store, a test store that offers only flooring products

and installation services. At the end of fiscal 2000, the Company was

operating 1,134 stores, including 1,027 Home Depot stores, 26 EXPO

Design Center stores, 4 Villager’s Hardware stores and 1 Home Depot

Floor Store in the United States; 67 Home Depot stores in Canada;

5 Home Depot stores in Chile; 2 Home Depot stores in Argentina; and

2 Home Depot stores in Puerto Rico. Included in the Company’s

Consolidated Balance Sheet at January 28, 2001 were $871 million

of net assets of the Canada, Chile and Argentina operations.

Fiscal Year The Company’s fiscal year is a 52- or 53-week period

ending on the Sunday nearest to January 31. Fiscal years 2000, 1999

and 1998, which ended January 28, 2001, January 30, 2000 and

January 31, 1999, respectively, consisted of 52 weeks.

Basis of Presentation The consolidated financial statements include

the accounts of the Company, its wholly-owned subsidiaries and its

majority-owned partnership. All significant intercompany transactions

have been eliminated in consolidation.

Stockholders’ equity, share and per share amounts for all periods

presented have been adjusted for a three-for-two stock split effected in

the form of a stock dividend on December 30, 1999 and a two-for-one

stock split effected in the form of a stock dividend on July 2, 1998.

Cash Equivalents The Company considers all highly liquid invest-

ments purchased with a maturity of three months or less to be cash

equivalents. The Company’s cash and cash equivalents are carried at

fair market value and consist primarily of commercial paper, money

market funds, U.S. government agency securities and tax-exempt

notes and bonds.

Merchandise Inventories Inventories are stated at the lower of

cost (first-in, first-out) or market, as determined by the retail

inventory method.

Investments The Company’s investments, consisting primarily of

high-grade debt securities, are recorded at fair value and are classi-

fied as available-for-sale.

Income Taxes The Company provides for federal, state and foreign

income taxes currently payable, as well as for those deferred because

of timing differences between reporting income and expenses for

financial statement purposes versus tax purposes. Federal, state and

foreign incentive tax credits are recorded as a reduction of income

taxes. Deferred tax assets and liabilities are recognized for the future

tax consequences attributable to differences between the financial

statement carrying amounts of existing assets and liabilities and their

respective tax bases. Deferred tax assets and liabilities are measured

using enacted tax rates expected to apply to taxable income in the

years in which those temporary differences are expected to be recov-

ered or settled. The effect of a change in tax rates is recognized as

income or expense in the period that includes the enactment date.

The Company and its eligible subsidiaries file a consolidated U.S.

federal income tax return. Non-U.S. subsidiaries, which are con-

solidated for financial reporting, are not eligible to be included in

consolidated U.S. federal income tax returns, and separate provisions

for income taxes have been determined for these entities. The

Company intends to reinvest the unremitted earnings of its non-U.S.

subsidiaries and postpone their remittance indefinitely. Accordingly,

no provision for U.S. income taxes for non-U.S. subsidiaries was

required for any year presented.

Depreciation and Amortization The Company’s buildings, furni-

ture, fixtures and equipment are depreciated using the straight-line

method over the estimated useful lives of the assets. Improvements to

leased premises are amortized using the straight-line method over the

life of the lease or the useful life of the improvement, whichever is

shorter. The Company’s property and equipment is depreciated using

the following estimated useful lives:

Life

Buildings 10 – 45 years

Furniture, fixtures and equipment 5 – 20 years

Leasehold improvements 5 – 30 years

Computer software 3 – 5 years

Advertising Television and radio advertising production costs are

amortized over the fiscal year in which the advertisements first appear.

All media placement costs are expensed in the month the advertisement

appears. Included in current assets are $20.2 million and $24.4 mil-

lion at the end of fiscal 2000 and 1999, respectively, relating to

prepayments of production costs for print and broadcast advertising.

Notes to Consolidated Financial Statements (continued)

The Home Depot, Inc. and Subsidiaries

Cost in Excess of the Fair Value of Net Assets Acquired Goodwill,

which represents the excess of purchase price over fair value of net

assets acquired, is amortized on a straight-line basis over 40 years.

The Company assesses the recoverability of this intangible asset by

determining whether the amortization of the goodwill balance over its

remaining useful life can be recovered through undiscounted future

operating cash flows of the acquired operation. The amount of good-

will impairment, if any, is measured based on projected discounted

future operating cash flows using a discount rate reflecting the

Company’s average cost of funds.

Impairment of Long-Lived Assets The Company reviews long-lived

assets for impairment when circumstances indicate the carrying

amount of an asset may not be recoverable. Impairment is recognized

to the extent the sum of undiscounted estimated future cash flows

expected to result from the use of the asset is less than the carrying

value. Accordingly, when the Company commits to relocate or close

a store, the estimated unrecoverable costs are charged to selling and

store operating expense. Such costs include the estimated loss on the

sale of land and buildings, the book value of abandoned fixtures,

equipment and leasehold improvements and a provision for the pres-

ent value of future lease obligations, less estimated sub-lease income.

Stock Compensation Statement of Financial Accounting Standards

No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation,”

encourages the use of a fair-value-based method of accounting. As

allowed by SFAS 123, the Company has elected to account for its

stock-based compensation plans under the intrinsic value-based

method of accounting prescribed by Accounting Principles Board

Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to

Employees.” Under APB 25, compensation expense is recorded

on the date of grant if the current market price of the underlying

stock exceeded the exercise price. The Company complies with the

disclosure requirements of SFAS 123.

Comprehensive Income Comprehensive income includes net earn-

ings adjusted for certain revenues, expenses, gains and losses that are

excluded from net earnings under generally accepted accounting prin-

ciples. Examples include foreign currency translation adjustments and

unrealized gains and losses on investments.

Foreign Currency Translation The assets and liabilities denomi-

nated in a foreign currency are translated into U.S. dollars at the

current rate of exchange on the last day of the reporting period,

revenues and expenses are translated at the average monthly

exchange rates, and all other equity transactions are translated using

the actual rate on the day of the transaction.

Use of Estimates Management of the Company has made a number

of estimates and assumptions relating to the reporting of assets and

liabilities and the disclosure of contingent assets and liabilities to pre-

pare these financial statements in conformity with generally accepted

accounting principles. Actual results could differ from these estimates.

Reclassifications Certain amounts in prior fiscal years have been

reclassified to conform with the presentation adopted in the current

fiscal year.

Note 2.

Long-Term Debt

The Company’s long-term debt at the end of fiscal 2000 and 1999

consisted of the following (amounts in millions):

January 28, 2001 January 30, 2000

Commercial Paper; weighted average

interest rate of 6.1% at January 28, 2001

$ 754

$–

⁄

2% Senior Notes; due September 15, 2004;

interest payable semi-annually on

March 15 and September 15

500

Capital Lease Obligations; payable

in varying installments through

January 31, 2027 (see note 5)

230

216

Installment Notes Payable; interest imputed

at rates between 7.2% and 10.0%; payable

in varying installments through 2018

Other

Total long-term debt

1,549

779

Less current installments

Long-term debt, excluding current

installments

$ 1,545

$ 750

In January 2001, the Company replaced its existing commercial

paper program with a new program that increases the maximum

available borrowings to $1 billion. In connection with the program,

the Company has a back-up credit facility with a consortium of banks

for up to $800 million. The credit facility, which expires in September

2004, contains various restrictive covenants, none of which is

expected to materially impact the Company’s liquidity or capital

resources. Commercial paper borrowings of $754 million outstand-

ing at January 28, 2001 were classified as non-current pursuant to

the Company’s intent and ability to continue to finance this obligation

on a long-term basis, as necessary, through the commercial paper

program and the back-up credit facility.

Notes to Consolidated Financial Statements (continued)

The Home Depot, Inc. and Subsidiaries

During fiscal 1999, the Company issued $500 million of 6

⁄2% Senior

Notes (“Senior Notes”). The Senior Notes may be redeemed by the

Company at any time, in whole or in part, at a redemption price plus

accrued interest up to the redemption date. The redemption price is

equal to the greater of (1) 100% of the principal amount of the Senior

Notes to be redeemed or (2) the sum of the present values of the

remaining scheduled payments of principal and interest to maturity.

The Senior Notes are not subject to sinking fund requirements.

During 1999, the Company redeemed its 3

⁄4

% Convertible

Subordinated Notes (“3

⁄4

% Notes”). A total principal amount of

$1.1 billion was converted into 72 million shares of the Company’s

common stock.

Interest expense in the accompanying Consolidated Statements of

Earnings is net of interest capitalized of $73 million in fiscal 2000,

$45 million in fiscal 1999 and $31 million in fiscal 1998.

Maturities of long-term debt are $4 million for fiscal 2001, $42 mil-

lion for fiscal 2002, $5 million for fiscal 2003, $507 million for

fiscal 2004 and $761 million for fiscal 2005.

As of January 28, 2001, the market value of the publicly traded

Senior Notes was approximately $515 million. The estimated fair

value of commercial paper borrowings approximates their carry-

ing value. The estimated fair value of all other long-term borrowings,

excluding capital lease obligations, was approximately $67 million

compared to the carrying value of $65 million. These fair values were

estimated using a discounted cash flow analysis based on the

Company’s incremental borrowing rate for similar liabilities.

Note 3.

Income Taxes

The provision for income taxes consisted of the following (in millions):

Fiscal Year Ended

January 28, 2001 January 30, 2000 January 31, 1999

Current:

U.S.

$ 1,267

$ 1,209 $ 823

State

216

228 150

Foreign

45 20

1,528

1,482 993

Deferred:

U.S.

946

State

(4) (1)

Foreign

(3) 2

108

247

Total

$ 1,636

$ 1,484 $ 1,040

The Company’s combined federal, state and foreign effective tax rates

for fiscal years 2000, 1999 and 1998, net of offsets generated by

federal, state and foreign tax incentive credits, were approximately

38.8%, 39.0% and 39.2%, respectively. A reconciliation of income

tax expense at the federal statutory rate of 35% to actual tax expense

for the applicable fiscal years follows (in millions):

Fiscal Year Ended

January 28, 2001 January 30, 2000 January 31, 1999

Income taxes at U.S.

statutory rate

$ 1,476

$ 1,331 $ 929

State income taxes, net of

federal income tax benefit

146

145 96

Foreign rate differences

2–

Other, net

615

Total

$ 1,636

$ 1,484 $ 1,040

The tax effects of temporary differences that give rise to significant

portions of the deferred tax assets and deferred tax liabilities as of

January 28, 2001 and January 30, 2000 were as follows (in millions):

January 28, 2001 January 30, 2000

Deferred Tax Assets:

Accrued self-insurance liabilities

$ 151

$ 154

Other accrued liabilities

118

142

Total gross deferred tax assets

269

296

Deferred Tax Liabilities:

Accelerated depreciation

(389)

(321)

Other

(75)

(62)

Total gross deferred tax liabilities

(464)

(383)

Net deferred tax liability

$ (195)

$ (87)

No valuation allowance was recorded against the deferred tax assets

at January 28, 2001 and January 30, 2000. Company management

believes the existing net deductible temporary differences comprising

the total gross deferred tax assets will reverse during periods in which

the Company generates net taxable income.

Notes to Consolidated Financial Statements (continued)

The Home Depot, Inc. and Subsidiaries

Note 4. Employee Stock Plans

The 1997 Omnibus Stock Incentive Plan (“1997 Plan”) provides that

incentive stock options, non-qualified stock options, stock apprecia-

tion rights, restricted stock and deferred shares may be issued to

selected associates, officers and directors of the Company. The maxi-

mum number of shares of the Company’s common stock available for

issuance under the 1997 Plan is the lesser of 225 million shares or

the number of shares carried over from prior plans plus one-half

percent of the total number of outstanding shares as of the first day

of each fiscal year. In addition, restricted shares issued under the

1997 Plan may not exceed 22.5 million shares. As of January 28,

2001, there were 130,691,447 shares available for future grants

under the 1997 Plan.

Under the 1997 Plan and prior plans, the Company has granted

incentive and non-qualified options for 126,219,271 shares, net of

cancellations (of which 62,918,031 had been exercised). Incentive

stock options vest at the rate of 25% per year commencing on the

first anniversary date of the grant and expire on the tenth anniversary

date of the grant. The non-qualified options have similar terms; however,

vesting does not generally begin until the second anniversary date

of the grant.

Under the 1997 Plan and prior plans, 92,495 shares of restricted

stock, net of cancellations (of which 2,268 had been exercised) have

been granted. The restricted shares vest over varying terms and are

generally based on the attainment of certain performance goals. The

expected fair value of the restricted shares on the vesting dates will

be charged to expense ratably over the vesting periods unless it is

determined that the performance goals will not be met.

In December 2000, the Company entered into an agreement with a

key officer. Under the Non-Qualified Stock Option and Deferred Stock

Units Plan and Agreement, the Company issued 2,500,000 non-

qualified stock options with an exercise price of $40.75 per share and

also issued 750,000 deferred stock units. Both the non-qualified options

and deferred units vest 20% per year commencing on the grant date.

The non-qualified options expire on the tenth anniversary of the vest-

ing date. Each deferred stock unit entitles the officer to one share of

common stock to be received approximately two years after the vest-

ing date of the deferred stock unit, subject to certain deferral rights

of the officer. The fair value of the 750,000 deferred stock units granted

is being amortized based upon the vesting dates. The Company recorded

stock compensation expense of approximately $6 million in fiscal 2000.

The per share weighted average fair value of stock options granted

during fiscal years 2000, 1999 and 1998 was $31.96, $18.86 and

$9.94, respectively. The fair value of these options was determined at

the date of grant using the Black-Scholes option-pricing model with

the following assumptions:

Stock Options

Granted in Fiscal Year

2000 1999 1998

Risk-free interest rate

6.4%

5.1% 5.6%

Expected volatility of common stock

54.6%

51.6% 45.7%

Dividend yield

0.3%

0.3% 0.4%

Expected option term

7 years

5 years 5 years

The Company applies APB 25 in accounting for its stock plans and,

accordingly, no compensation costs have been recognized in the

Company’s financial statements for incentive or non-qualified stock

options granted. If, under SFAS 123, the Company determined com-

pensation costs based on the fair value at the grant date for its stock

options, net earnings and earnings per share would have been reduced

to the pro forma amounts below (in millions, except per share data):

Fiscal Year Ended

January 28, 2001 January 30, 2000 January 31, 1999

Net Earnings

As reported

$ 2,581

$ 2,320 $ 1,614

Pro forma

$ 2,364

$ 2,186 $ 1,527

Basic Earnings per Share

As reported

$1.11

$ 1.03 $ 0.73

Pro forma

$1.02

$ 0.97 $ 0.69

Diluted Earnings per Share

As reported

$1.10

$ 1.00 $ 0.71

Pro forma

$1.01

$ 0.94 $ 0.67

Notes to Consolidated Financial Statements (continued)

The Home Depot, Inc. and Subsidiaries

The following table summarizes options outstanding under the

various stock option plans at January 28, 2001, January 30, 2000

and January 31, 1999 and changes during the fiscal years ended on

these dates (shares in thousands):

Weighted

Number Average

of Shares Option Price

Outstanding at February 1, 1998 65,727 $ 10.08

Granted 21,041 21.63

Exercised (11,640) 9.07

Cancelled (3,536) 13.89

Outstanding at January 31, 1999 71,592 13.45

Granted 14,006 37.81

Exercised (13,884) 10.88

Cancelled (3,295) 18.88

Outstanding at January 30, 2000 68,419 18.79

Granted 14,869 49.78

Exercised (14,689) 13.15

Cancelled (2,798) 30.51

Outstanding at January 28, 2001

65,801 $ 26.46

Exercisable 27,856 $ 15.80

The following table summarizes information regarding stock options

outstanding as of January 28, 2001 (shares in thousands):

Weighted Weighted Weighted

Average Average Average

Range of Options Remaining Outstanding Options Exercisable

Exercise Prices Outstanding Life (Years) Option Price Exercisable Option Price

$ 6.00 to 10.00 12,814 3.9 $ 8.80 12,073 $ 8.80

10.00 to 16.00 10,919 6.0 11.50 5,876 11.50

16.00 to 24.00 15,170 7.0 21.00 6,329 20.40

24.00 to 40.00 12,457 8.1 37.30 2,021 36.90

40.00 to 60.00 14,441 9.6 49.80 1,557 41.20

65,801 7.0 $ 26.46 27,856 $ 15.80

In addition, the Company had 30,856,904 shares available for future

grants under the Employee Stock Purchase Plan (“ESPP”) at

January 28, 2001. The ESPP enables the Company to grant substan-

tially all full-time associates options to purchase up to 129,618,750

shares of common stock, of which 98,761,846 shares have been exer-

cised from inception of the plan, at a price equal to the lower of 85%

of the stock’s fair market value on the first day or the last day of the

purchase period. Shares purchased may not exceed the lesser of 20%

of the associate’s annual compensation, as defined, or $25,000 of

common stock at its fair market value (determined at the time such

option is granted) for any one calendar year. Associates pay for the

shares ratably over a period of one year (the purchase period) through

payroll deductions, and cannot exercise their option to purchase any

of the shares until the conclusion of the purchase period. In the event

an associate elects not to exercise such options, the full amount

withheld is refundable. During fiscal 2000, options for 5,395,900

shares were exercised at an average price of $34.33 per share. At

January 28, 2001, there were 2,924,541 options outstanding, net of

cancellations, at an average price of $42.57 per share.

Note 5.

Leases

The Company leases certain retail locations, office space, warehouse

and distribution space, equipment and vehicles. While the majority of

the leases are operating leases, certain retail locations are leased

under capital leases. As leases expire, it can be expected that in the

normal course of business, leases will be renewed or replaced.

The Company has two operating lease agreements totaling $882 mil-

lion comprised of an initial lease agreement of $600 million and a

follow-on agreement of $282 million. The Company financed a portion

of its new stores opened from fiscal 1997 through 2000, as well as

office buildings in fiscal 1999 and 2000, under the operating lease

agreements. Under both agreements, the lessor purchases the prop-

erties, pays for the construction costs and subsequently leases the facil-

ities to the Company. The lease term for the $600 million agreement

expires in 2004 and includes four 2-year renewal options. The lease for

the $282 million agreement expires in 2008 with no renewal options.

Both lease agreements provide for substantial residual value guar-

antees and include purchase options at original cost on each property.

The Company also leases an import distribution facility, including its

related equipment, under an operating lease arrangement. The lease

for the import distribution facility expires in 2005 and has four

5-year renewal options. The lease agreement provides for substantial

residual value guarantees and includes purchase options at the higher

of the cost or fair market value of the assets.

The maximum amount of the residual value guarantees relative to

the assets under the lease agreements described above is projected

to be $799 million. As the leased assets are placed into service, the

Company estimates its liability under the residual value guarantees

and records additional rent expense on a straight-line basis over the

remaining lease terms.

Total rent expense, net of minor sublease income for the fiscal years

ended January 28, 2001, January 30, 2000 and January 31, 1999

was $479 million, $389 million and $321 million, respectively. Real

estate taxes, insurance, maintenance and operating expenses appli-

cable to the leased property are obligations of the Company under the

building leases. Certain of the store leases provide for contingent

rentals based on percentages of sales in excess of specified mini-

mums. Contingent rentals for the fiscal years ended January 28,

2001, January 30, 2000 and January 31, 1999 were approximately

$9 million, $11 million and $11 million, respectively.

Notes to Consolidated Financial Statements (continued)

The Home Depot, Inc. and Subsidiaries

The approximate future minimum lease payments under capital and

operating leases at January 28, 2001 were as follows (in millions):

Capital Operating

Fiscal Year Leases Leases

2001 $ 38 $ 512

2002 38 512

2003 38 478

2004 38 440

2005 39 411

Thereafter 519 5,132

710 $ 7,485

Less imputed interest 480

Net present value of capital lease obligations 230

Less current installments 3

Long-term capital lease obligations,

excluding current installments $ 227

Short-term and long-term obligations for capital leases are included

in the Company’s Consolidated Balance Sheets in Current Installments

of Long-Term Debt and Long-Term Debt, respectively. The assets under

capital leases recorded in Net Property and Equipment, net of amor-

tization, totaled $213 million and $208 million at January 28, 2001

and January 30, 2000, respectively.

Note 6.

Employee Benefit Plans

The Company maintains a defined contribution plan (“401(k)”) that

covers substantially all associates meeting certain service requirements.

The Company makes weekly matching cash contributions to purchase

shares of the Company’s common stock, up to specified percentages of

associates’ contributions as approved by the Board of Directors.

The Company also maintains a 401(k) Restoration Plan to provide

certain associates deferred compensation that they would have received

under the 401(k) matching contribution if not for the maximum

compensation limits under the Internal Revenue Code. The Company

funds the 401(k) Restoration Plan through contributions made to a

“rabbi trust,” which are then used to purchase shares of the Company’s

common stock in the open market. Compensation expense related to

this plan for fiscal years 2000, 1999 and 1998 was not material.

During February 1999, the Company made its final contribution

to the Employee Stock Ownership Plan and Trust (“ESOP”), which

was originally established during fiscal 1988. The ESOP covered

substantially all full-time associates and purchased shares of the

Company’s common stock in the open market through a combination

of contributions and loans made by the Company. All loans made

from the Company have been repaid.

The Company’s combined contributions to the 401(k) and ESOP were

$84 million, $57 million and $41 million for fiscal years 2000, 1999

and 1998, respectively. At January 28, 2001, the 401(k) and the

ESOP held a total of 33,144,570 shares of the Company’s common

stock in trust for plan participants.

Note 7.

Basic and Diluted Earnings Per Share

The calculations of basic and diluted earnings per share for fiscal

years 2000, 1999 and 1998 were as follows (amounts in millions,

except per share data):

Fiscal Year Ended

January 28, 2001 January 30, 2000 January 31, 1999

Calculation of Basic

Earnings Per Share:

Net earnings

$ 2,581

$ 2,320 $ 1,614

Weighted average number of

common shares outstanding

2,315

2,244 2,206

Basic Earnings Per Share

$1.11

$ 1.03 $ 0.73

Calculation of Diluted

Earnings Per Share:

Net earnings

$ 2,581

$ 2,320 $ 1,614

Tax-effected interest expense

attributable to 3

⁄

4% Notes – 17 23

Net earnings assuming dilution

$ 2,581

$ 2,337 $ 1,637

Weighted average number of

common shares outstanding

2,315

2,244 2,206

Effect of potentially

dilutive securities:

⁄4

% Notes

–

51 72

Employee stock plans

47 42

Weighted average number of

common shares outstanding

assuming dilution

2,352

2,342 2,320

Diluted Earnings Per Share

$1.10

$ 1.00 $ 0.71

Employee stock plans represent shares granted under the Company’s

employee stock purchase plan and stock option plans, as well as

shares issued for deferred compensation stock plans. For fiscal years

1999 and 1998, shares issuable upon conversion of the Company’s

⁄4% Notes, issued in October 1996, were included in weighted

average shares assuming dilution for purposes of calculating diluted

earnings per share. To calculate diluted earnings per share, net earn-

ings are adjusted for tax-effected net interest and issue costs on the

⁄4

% Notes (prior to conversion to equity in October 1999) and divided

by weighted average shares assuming dilution.

Notes to Consolidated Financial Statements (continued)

The Home Depot, Inc. and Subsidiaries

Note 10.

Quarterly Financial Data (Unaudited)

The following is a summary of the quarterly results of operations for the fiscal years ended January 28, 2001 and January 30, 2000 (dollars

in millions, except per share data):

Increase Basic Diluted

In Comparable Gross Net Earnings Earnings

Net Sales Store Sales Profit Earnings Per Share Per Share

Fiscal year ended January 28, 2001:

First quarter

$ 11,112 7% $ 3,274 $ 629 $ 0.27 $ 0.27

Second quarter

12,618 6% 3,739 838 0.36 0.36

Third quarter

11,545 4% 3,450 650 0.28 0.28

Fourth quarter

10,463 0% 3,217 465 0.20 0.20

Fiscal year

$ 45,738 4% $ 13,681 $ 2,581 $ 1.11 $ 1.10

Fiscal year ended January 30, 2000:

First quarter $ 8,952 9% $ 2,566 $ 489 $ 0.22 $ 0.21

Second quarter 10,431 11% 3,029 679 0.30 0.29

Third quarter 9,877 10% 2,894 573 0.26 0.25

Fourth quarter 9,174 9% 2,922 579 0.25 0.25

Fiscal year $ 38,434 10% $ 11,411 $ 2,320 $ 1.03 $ 1.00

Note: The quarterly data may not sum to fiscal year totals due to rounding.

Note 8. Commitments and Contingencies

At January 28, 2001, the Company was contingently liable for

approximately $442 million under outstanding letters of credit issued

in connection with purchase commitments.

The Company is involved in litigation arising from the normal course

of business. In management’s opinion, this litigation is not expected

to materially impact the Company’s consolidated results of operations

or financial condition.

Note 9. Acquisitions

During fiscal 2000, Maintenance Warehouse, a wholly-owned sub-

sidiary of The Home Depot, acquired N-E Thing Supply Company, Inc.

The Company acquired Apex Supply Company, Inc. and Georgia

Lighting, Inc. in fiscal 1999. These acquisitions were recorded under

the purchase method of accounting. Pro forma results of operations

for fiscal years 2000, 1999 and 1998 would not be materially differ-

ent as a result of the acquisitions of N-E Thing Supply Company, Inc.,

Apex Supply Company, Inc. and Georgia Lighting, Inc. and are there-

fore not presented.

During the first quarter of fiscal 1998, the Company purchased, for

$261 million, the remaining 25% partnership interest in The Home

Depot Canada held by The Molson Companies. The excess purchase

price over the estimated fair value of net assets of $117 million as of

the acquisition date was recorded as goodwill and is being amortized

over 40 years.

The Home Depot, Inc. and Subsidiaries

Management’s Responsibility for Financial Statements

The financial statements presented in this Annual Report have been

prepared with integrity and objectivity and are the responsibility of

the management of The Home Depot, Inc. These financial statements

have been prepared in conformity with generally accepted accounting

principles and properly reflect certain estimates and judgments based

upon the best available information.

The Company maintains a system of internal accounting controls,

which is supported by an internal audit program and is designed to

provide reasonable assurance, at an appropriate cost, that the

Company’s assets are safeguarded and transactions are properly

recorded. This system is continually reviewed and modified in

response to changing business conditions and operations and as a

result of recommendations by the external and internal auditors. In

addition, the Company has distributed to associates its policies for

conducting business affairs in a lawful and ethical manner.

The financial statements of the Company have been audited by

KPMG LLP, independent auditors. Their accompanying report is based

upon an audit conducted in accordance with auditing standards gener-

ally accepted in the United States of America, including the related

review of internal accounting controls and financial reporting matters.

The Audit Committee of the Board of Directors, consisting solely of

outside directors, meets quarterly with the independent auditors, the

internal auditors and representatives of management to discuss audit-

ing and financial reporting matters. The Audit Committee, acting on

behalf of the stockholders, maintains an ongoing appraisal of the

internal accounting controls, the activities of the outside auditors and

internal auditors and the financial condition of the Company. Both the

Company’s independent auditors and the internal auditors have free

access to the Audit Committee.

Dennis J. Carey Carol B. Tomé

Executive Vice President and Senior Vice President,

Chief Financial Officer Finance and Accounting

Independent Auditors’ Report

The Board of Directors and Stockholders

The Home Depot, Inc.:

We have audited the accompanying consolidated balance sheets of

The Home Depot, Inc. and subsidiaries as of January 28, 2001 and

January 30, 2000 and the related consolidated statements of earn-

ings, stockholders’ equity and comprehensive income, and cash flows

for each of the years in the three-year period ended January 28, 2001.

These consolidated financial statements are the responsibility of the

Company’s management. Our responsibility is to express an opinion

on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards gener-

ally accepted in the United States of America. Those standards require

that we plan and perform the audit to obtain reasonable assurance

about whether the financial statements are free of material misstate-

ment. An audit includes examining, on a test basis, evidence support-

ing the amounts and disclosures in the financial statements. An audit

also includes assessing the accounting principles used and significant

estimates made by management, as well as evaluating the overall

financial statement presentation. We believe that our audits provide

a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to

above present fairly, in all material respects, the financial position of

The Home Depot, Inc. and subsidiaries as of January 28, 2001 and

January 30, 2000, and the results of their operations and their cash

flows for each of the years in the three-year period ended January 28,

2001 in conformity with accounting principles generally accepted in

the United States of America.

Atlanta, Georgia

February 19, 2001

10-Year Summary of Financial and Operating Results

The Home Depot, Inc. and Subsidiaries

5 -Ye ar 1 0-Ye a r

Compound Annual Compound Annual

amounts in millions, except where noted Growth Rate Growth Rate 2000

Statement of Earnings Data

Net sales 24.2% 28.2%

$ 45,738

Net sales increase (%) ––

19.0

Earnings before income taxes

(2)

28.7 32.1

4,217

Net earnings

(2)

28.7 31.8

2,581

Net earnings increase (%)

(2)

––

11.3

Diluted earnings per share ($)

(2,3)

26.5 27.1

1.10

Diluted earnings per share increase (%)

(2)

––

10.0

Weighted average number of common shares outstanding assuming dilution 1.8 2.6

2,352

Gross margin – % of sales – –

29.9

Store selling and operating expense – % of sales – –

18.6

Pre-opening expense – % of sales – –

0.3

General and administrative expense – % of sales – –

1.8

Net interest income (expense) – % of sales – –

–

Earnings before income taxes – % of sales

(2)

––

9.2

Net earnings – % of sales

(2)

––

5.6

Balance Sheet Data and Financial Ratios

Total assets 23.8% 29.3%

$ 21,385

Working capital 22.0 27.4

3,392

Merchandise inventories 24.6 29.1

6,556

Net property and equipment 24.0 31.0

13,068

Long-term debt 16.5 11.3

1,545

Stockholders’ equity 24.6 36.2

15,004

Book value per share ($) 22.7 31.1

6.46

Long-term debt to equity (%) – –

10.3

Current ratio ––

1.77:1

Inventory turnover ––

5.1x

Return on invested capital (%)

(2)

––

19.6

Statement of Cash Flows Data

Depreciation and amortization 27.1% 33.3%

$ 601

Capital expenditures 22.3 24.5

3,574

Cash dividends per share ($) 32.0 32.0

0.16

Store Data

(4)

Number of stores 21.8% 22.8%

1,134

Square footage at year-end 22.8 25.2

123

Increase in square footage (%) – –

22.6

Average square footage per store (in thousands) 0.6 1.6

108

Store Sales and Other Data

(4)

Comparable store sales increase (%)

(5)

––

Weighted average weekly sales per operating store (in thousands) 1.9% 4.3%

$ 864

Weighted average sales per square foot ($)

(5)

1.3 2.6

415

Number of customer transactions 20.4 23.7

937

Average sale per transaction ($) 3.1 3.7

48.65

Number of associates at year-end (actual) 23.0 26.6

227,300

(1)

Fiscal year 1996 consisted of 53 weeks; all other fiscal years reported consisted of 52 weeks.

(2)

Excludes the effect of a $104 million non-recurring charge in fiscal 1997.

(3)

Diluted earnings per share for fiscal 1997, including a $104 million non-recurring charge, were $0.52.

The Home Depot, Inc. and Subsidiaries

1999 1998 1997 1996

(1)

1995 1994 1993 1992 1991

$ 38,434 $ 30,219 $ 24,156 $ 19,535 $ 15,470 $ 12,477 $ 9,239 $ 7,148 $ 5,137

27.2 25.1 23.7 26.3 24.0 35.0 29.2 39.2 34.6

3,804 2,654 2,002 1,535 1,195 980 737 576 396

2,320 1,614 1,224 938 732 605 457 363 249

43.7 31.9 30.5 28.2 21.0 32.2 26.1 45.6 52.5

1.00 0.71 0.55 0.43 0.34 0.29 0.22 0.18 0.13

40.8 29.1 27.9 26.5 17.2 31.8 22.2 38.5 30.0

2,342 2,320 2,287 2,195 2,151 2,142 2,132 2,096 1,985

29.7 28.5 28.1 27.8 27.7 27.9 27.7 27.6 28.1

17.8 17.7 17.8 18.0 18.0 17.8 17.6 17.4 18.1

0.3 0.3 0.3 0.3 0.4 0.4 0.4 0.4 0.3

1.7 1.7 1.7 1.7 1.7 1.8 2.0 2.1 2.3

– – – 0.1 0.1 (0.1) 0.3 0.4 0.3

9.9 8.8 8.3 7.9 7.7 7.8 8.0 8.1 7.7

6.0 5.3 5.1 4.8 4.7 4.8 5.0 5.1 4.8

$ 17,081 $ 13,465 $ 11,229 $ 9,342 $ 7,354 $ 5,778 $ 4,701 $ 3,932 $ 2,510

2,734 2,076 2,004 1,867 1,255 919 994 807 624

5,489 4,293 3,602 2,708 2,180 1,749 1,293 940 662

10,227 8,160 6,509 5,437 4,461 3,397 2,371 1,608 1,255

750 1,566 1,303 1,247 720 983 874 844 271

12,341 8,740 7,098 5,955 4,988 3,442 2,814 2,304 1,691

5.36 3.95 3.23 2.75 2.32 1.69 1.39 1.15 0.89

6.1 17.9 18.4 20.9 14.4 28.6 31.1 36.6 16.0

1.75:1 1.73:1 1.82:1 2.01:1 1.89:1 1.76:1 2.02:1 2.07:1 2.17:1

5.4x 5.4x 5.4x 5.6x 5.5x 5.7x 5.9x 6.3x 6.1x

22.5 19.3 17.0 16.3 16.3 16.5 13.9 17.6 19.8

$ 463 $ 373 $ 283 $ 232 $ 181 $ 130 $ 90 $ 70 $ 52

2,618 2,094 1,464 1,248 1,308 1,220 900 437 432

0.11 0.08 0.06 0.05 0.04 0.03 0.02 0.02 0.01

930 761 624 512 423 340 264 214 174

100 81 66 54 44 35 26 21 16

23.5 22.8 23.1 21.6 26.3 33.2 26.3 26.8 24.1

108 107 106 105 105 103 100 98 95

1077738715 11

$ 876 $ 844 $ 829 $ 803 $ 787 $ 802 $ 764 $ 724 $ 633

423 410 406 398 390 404 398 387 348

797 665 550 464 370 302 236 189 146

47.87 45.05 43.63 42.09 41.78 41.29 39.13 37.72 35.13

201,400 156,700 124,400 98,100 80,800 67,300 50,600 38,900 28,000

(4)

Excludes Apex Supply Company, Georgia Lighting, Maintenance Warehouse, and National Blinds and Wallpaper.

(5)

Adjusted to reflect the first 52 weeks of the 53-week fiscal year in 1996.

Directors

The Home Depot, Inc. and Subsidiaries

Arthur M. Blank

1, 3

Co-Chairman of the Board,

The Home Depot, Inc.

Gregory D. Brenneman

President,

Continental Airlines, Inc.,

international airline

Frank Borman

2, 4

Retired Chairman of the Board

and Chief Executive Officer,

Eastern Airlines, Inc.;

Chairman of the Board,

DBT Online Inc.,

online data services

John L. Clendenin

4*, 5

Retired Chairman, President

and Chief Executive Officer,

BellSouth Corporation,

communications

William S. Davila

2, 4

President Emeritus,

Vons Companies, Inc.,

retailing

Milledge A. Hart, III

1, 2, 5

Chairman of the Board,

Hart Group, Inc.,

private management services

Berry R. Cox

1, 2*, 4

Chairman,

Berry R. Cox, Inc.,

private investment

Kenneth G. Langone

1, 3, 5*,6

Lead Director; Chairman of

the Board, Chief Executive

Officer and President,

Invemed Associates, Inc.,

investment banking

Bonnie G. Hill

5, 6*

Vice President,

The Times Mirror Company,

a newspaper and

publishing company;

President and

Chief Executive Officer,

The Times Mirror Foundation

Robert L. Nardelli

1, 3

President and

Chief Executive Officer,

The Home Depot, Inc.

M. Faye Wilson

Senior Vice President –

Risk Management,

The Home Depot, Inc.

Bernard Marcus

1*, 3*

Co-Chairman of the Board,

The Home Depot, Inc.

Committee membership:

1 Executive

2 Audit

3 Stock option

4 Compensation

5 Nominating and

corporate governance

6 Human resources

* Chair

>>> > > > > > > > > > >>> > > > > > > > > > > > > >>>> > > > > > > > > > >>> > > > > > > > >

Richard H. Brown

Chairman and

Chief Executive Officer,

Electronic Data Systems

Corporation,

information technology

2470HD nar for pdf 4/17/01 3:25 PM Page 34

Executive Officers

Arthur M. Blank

Co-Chairman of the Board

Bernard Marcus

Co-Chairman of the Board

Robert L. Nardelli

President and

Chief Executive Officer

Mark R. Baker

Executive Vice President,

Chief Merchandising Officer

Dennis J. Carey

Executive Vice President,

Chief Financial Officer

Dennis M. Donovan

Executive Vice President,

Human Resources

Frank L. Fernandez

Executive Vice President,

Secretary and General Counsel

Larry M. Mercer

Executive Vice President,

Operations

Division President

Anthony C. Brown

Southern

Jeffrey W. Cohen

Service Business

Joe C. Izganics

Southwest

Vern D. Joslyn

Midwest

Dan R. Kneip

New England

Lynn Martineau

New Growth Businesses

Bruce A. Merino

Western

Anders C. Moberg

International

Barry L. Silverman

EXPO Design Center

Thomas V. Taylor, Jr.

Northwest

Gregory H. Turner

Mid-South

John R. Wicks

Mid-Atlantic

regional and subsidiary presidents

Jerry Edwards

Argentina & Chile

John Herbert

EXPO Design Center – West

Bryant Scott

EXPO Design Center – East

Annette Verschuren

Canada

Harry L. Gilham, Jr.

Georgia Lighting

Lawrence J. Marmon

Maintenance Warehouse

Clyde A. Rodbell

Apex Supply Company

senior vice presidents

Laurence B. Appel

Legal

Bryan J. Fields

Real Estate

Wayne Gibson

Global Sourcing and Logistics

Ramon K. Gregory

Customer Service Operations

Ronald B. Griffin

Information Services

Steven L. Mahurin

Merchandising

Dennis J. Ryan

Merchandising

Lawrence A. Smith

Executive Services

Steven O. Smith

Merchandising –

EXPO Design Center

Richard L. Sullivan

Marketing

Carol B. Tomé

Finance and Accounting

Kenneth W. Ubertino

Merchandising

M. Faye Wilson

Risk Management

Robert J. Wittman

Business Development –

Villager’s Hardware

executive and senior officers

The Home Depot, Inc. and Subsidiaries

> > > > > >>>> > > > > > > > > > >>> > > > > > > > > > > > > >>>> > > > > > > > > > > > >>>> > > >

2470HD nar for pdf 4/17/01 3:25 PM Page 35

Store Support Center

The Home Depot, Inc.

2455 Paces Ferry Road, NW

Atlanta, GA 30339-4024

Telephone: 770-433-8211

The Home Depot Web Site

www.homedepot.com

Transfer Agent and Registrar

Fleet National Bank

c/o EquiServe Limited Partnership

P.O. Box 43010

Providence, RI 02940-3010

Telephone:

1-800-577-0177 (Voice)

1-800-952-9245 (TTY/TDD)

Internet address: www.equiserve.com

Independent Auditors

KPMG LLP

Suite 2000

303 Peachtree Street, NE

Atlanta, GA 30308

Stock Exchange Listing

New York Stock Exchange

Trading Symbol – HD

Annual Meeting

The Annual Meeting of Stockholders will be held at 10:00 a.m.,

May 30, 2001, at Cobb Galleria Centre, 2 Galleria Parkway, Atlanta,

Georgia 30339.

Number of Stockholders

As of March 29,2001, there were approximately 212,077 stockholders

of record. This number excludes individual stockholders holding stock

under nominee security position listings.

Dividends per Common Share

First Quarter Second Quarter Third Quarter Fourth Quarter

Fiscal 2000 $0.040 $0.040 $0.040 $0.040

Fiscal 1999 $0.020 $0.027 $0.027 $0.040

Direct Stock Purchase/Dividend Reinvestment Plan

New investors may make an initial investment and stockholders of

record may acquire additional shares of The Home Depot common

stock through the Company’s direct stock purchase and dividend

reinvestment plan. Subject to certain requirements, initial cash

investments, cash dividends and/or additional optional cash pur-

chases may be invested through this plan.

To obtain enrollment materials, including the prospectus, access the

Company’s Web site, or call 1-877-HD-SHARE. For all other

communications regarding these services, contact the Transfer Agent

and Registrar.

Financial and Other Company Information

A copy of the Company’s Annual Report on Form 10-K for the fiscal

year ended January 28, 2001, as filed with the Securities and

Exchange Commission, will be mailed upon request to:

The Home Depot, Inc.

Investor Relations

2455 Paces Ferry Road, NW

Atlanta, GA 30339-4024

Telephone: 770-384-4388

In addition, financial reports, recent filings with the Securities

and Exchange Commission (including Form 10-K), store locations,

news releases and other Company information are available on

The Home Depot Web site.

For a copy of the 2000 Home Depot Corporate Social Responsibility

Report, which also includes guidelines for applying for philanthropic

grants, contact the Community Affairs Department at the Store

Support Center, or access the Company’s Web site.

Quarterly Stock Price Range

First Quarter Second Quarter Third Quarter Fourth Quarter

Fiscal 2000

High $68.50 $58.06 $59.00 $51.69

Low $52.31 $46.00 $34.88 $36.25

Fiscal 1999

High $45.29 $46.63 $52.33 $69.75

Low $35.88 $36.75 $35.75 $49.92

corporate and stockholder information

The Home Depot, Inc. and Subsidiaries

2470HD nar for pdf 4/17/01 3:25 PM Page 36

ABOUT THIS REPORT Consistent with The Home Depot’s commitment to preserving the environment, this annual report is printed on paper

made from 100% post-consumer waste, otherwise known as recycled content. Of course, the most environmentally friendly solution is

not to print this report at all, and our stockholders can demonstrate their support of this concept by electing to receive all stockholder

materials electronically over the Internet. To receive future materials on-line, visit the financial section of our Web site. By stepping out

to create new solutions, we can all lead the marketplace to a better world.

on the cover Among the new ideas we are pursuing at The Home Depot in fiscal 2001

is our Service Performance Improvement initiative, or SPI, which will be implemented

in all Home Depot stores this year. By changing the way our stores receive and handle

inventory, we are able to enhance the shopping environment, offer better customer ser-

vice and improve efficiency. The Home Depot associates on our cover include store

associates, store managers and district managers who successfully launched our SPI

program in the Atlanta market in January 2001.

innovating

Design: Critt Graham + Associates, Atlanta/NYC/Boston Photography: Tom Feiler Photography, Toronto Printing: QuebecorWorld Acme Printing, Boston

2470HD nar for pdf 4/17/01 3:25 PM Page 37

The Home Depot

2455 Paces Ferry Road, NW Atlanta, GA 30339-4024 USA 770-433-8211 www.homedepot.com

2470HD nar for pdf 4/17/01 3:25 PM Page OBC