Fitch: No Rating Implications for Home Depot from Acquisition of Interline

CHICAGO--()--Fitch Ratings does not anticipate any rating implications for The Home Depot Inc. (Home Depot) from its planned $1.625 billion acquisition of Interline Brands.

Interline is a direct seller of maintenance, repair and operations (MRO) products to the facilities maintenance end market. The acquisition will expand Home Depot's pro business beyond its current focus on small contractors to include commercial, multi-family and residential facilities. Home Depot will benefit from Interline's ability to deliver directly to job sites within 1-2 days.

Fitch expects Home Depot will finance the acquisition in a manner that allows financial leverage (adjusted debt/EBITDAR) to remain at or under its targeted level of 2x. Financial leverage was 1.8x as of May 2015, in-line with year-end 2014. In addition to periodic acquisitions, Fitch expects free cash flow and some incremental borrowings to be directed to share repurchases as management manages leverage at or under its targeted level.

The acquisition notwithstanding, Home Depot's ratings reflect its strong operating performance over the past five years, and Fitch's expectation that the company will be able to sustain this performance going forward. Compared with its nearest competitor, Home Depot has generated superior operating margins (400 basis-point gap) and consistently stronger comps over the past five years.

Faster growth of seasonal and big ticket items helped to drive healthy 6.1% comp growth in the first quarter of 2015 (1Q15) and 5.3% comp growth in 2014. Fitch expects comp sales will grow at 3%-5% over the next two years, supported by a continued recovery in the housing market and the company's investments in its multi-channel activities. Online sales represented 5.1% of Home Depot's total sales in 1Q15, and grew over 36% in 2014, adding around 2% to top-line growth.

Home Depot has produced strong margin recovery on expense leverage, with EBIT margins (excluding non-cash stock-based comp) improving to 13.1% in the 12 months ended May 2015, from 11.9% in 2013 and 10.9% in 2012. Fitch sees moderate margin upside longer-term from fixed expense leverage and the investments the company is making in technology and its supply chain.

Fitch currently rates Home Depot as follows:

--Long-term Issuer Default Rating (IDR) 'A';

--Senior unsecured notes 'A';

--Bank credit facilities 'A';

--Short-term IDR 'F1';

--Commercial paper 'F1.'

The Rating Outlook is Stable.

Additional information is available on 'www.fitchratings.com.'

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Contacts

Fitch Ratings
Primary Analyst
Philip Zahn, CFA
Senior Director
+1-312-606-2336
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Monica Aggarwal, CFA
Senior Director
+1-212-908-0282
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
Email: alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Philip Zahn, CFA
Senior Director
+1-312-606-2336
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Monica Aggarwal, CFA
Senior Director
+1-212-908-0282
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
Email: alyssa.castelli@fitchratings.com