Quarterly Message From the CEO

To Our Shareholders, Customers, Associates, Communities and Suppliers:

The second quarter presented us with some real challenges, but we responded to them by staying focused on our customers. Let me share with you the following highlights of our performance*:

• Sales of $26 billion, a 16.7 percent increase

• Net earnings of $1.86 billion, a 5.3 percent increase

• Earnings per share of 90 cents, a 9.8 percent increase

• Earnings per share of 93 cents, a 13.4 percent increase, excluding a one-time retroactive tax assessment from the government of Canada

*Compared to second-quarter results in fiscal 2005

We see a challenging second half ahead of us. More importantly, in  times of downward pressure in the economy, great companies invest to win. We will build on the strength of our balance sheet and increase our investments so that we can improve our in-store customer experience and gain a competitive edge in the marketplace. For us, the end game is about doing what it takes to create the best possible shopping experience for our customers. Looking forward, here’s our plan.

Accelerated Reinvestment Initiatives

We have launched several aggressive, customer-facing initiatives – at a cost of $350 million – to touch the heart and core of our retail business. 

Labor reinvestment. Customers will see more of our hard-working, orange-blooded associates in the aisles and at the Front End, as we add 5.5 million more hours to stores this fall/winter season vs. last year’s. We are taking this step rather than adjusting payroll down in the second half, as we traditionally do coming off busy spring and summer seasons. Our investment in labor hours is intended to improve the in-store experience, increase conversion, add customer transactions and gain share.

Store revitalization. Having easy-to-navigate, checkout-friendly, clean shopping environments remain ongoing priorities. With that, self-checkout will be completed in all stores, and customers service call boxes and belted check stands will be added to select stores. This equipment will ensure that our customers get help and check out faster. In addition, maintenance spending will be accelerated over the next several months to enhance store lighting, visual merchandise and signage, and storefront and overall appearance.

Rapid Refresh program. Everyone knows The Home Depot carries the broadest selection of innovative and quality products and services. We also want to make sure customers have a pleasant place to shop. By year end, we will reset 100 bays in our top 540 sales volume stores. In addition, we have invested in several big-hit merchandising initiatives, including upgrading hand tools and special order ceramic tiles, and adding appliance mezzanines in several stores. In the months ahead, we will roll out innovative products at compelling values and introduce energy-efficiency clinics, programs and products for our customers.

Orange Juiced program. In the second quarter, we launched a $30 million financial reward program for stores and associates that demonstrate a true passion for serving customers. I am particularly delighted about the level of intensity and enthusiasm I have seen in our associates’ response. In the second quarter, we invested $10 million in Orange Juiced payouts, and by the end of the year, $20 million more will be won by stores and associates. This is in addition to Success Sharing bonuses.

Technology and logistics. We are also devoting resources to initiatives that will streamline the installation process. For example, Special Order Services Initiative (SOSI) is expected to be in the Flooring department in all of our U.S. stores in the first quarter of next year.

Following is a more detailed review of our second-quarter results.

Retail Segment

• Last quarter, in our retail platform, we grew sales by 5.1 percent to $22.6 billion, reflecting new stores and comparable store sales of negative 0.2 percent. 

• We grew average ticket across our merchandise categories – overall, by 4.2 percent to $59.98 – and gained market share in appliances (10.1 percent), lawn power equipment (24.4 percent) and grills (17.5 percent).

• We introduced three exclusive product lines: Thomasville brand hardwood flooring, American Standard faucets with new features and the RIDGID lithium-ion power tool system.

• We will also add seven new products to our exclusive Ryobi One+ family, increasing the number of tools that can be operated through the Ryobi 18-volt platform to an impressive collection of more than 30 items. 

• Included in our retail segment is home installation services, which grew nearly 10 percent to more than $1 billion, with solid growth in windows, roofing and exterior patios.

• We are pleased that our direct-to-customer platform – e-commerce and catalogs – is still tracking to be a $1 billion business by year end.

• We continue to be the market leader both in the United States and internationally, in Canada and Mexico, where 10 percent of our store base operates.

HD Supply Segment

• The performance in our wholesale supply platform again exceeded expectations. We grew sales by 325 percent to $3.5 billion, driven by recent acquisitions as well as organic growth of 12 percent in the second quarter.

• We welcomed associates from several acquired companies: Western Fasteners, Texas Contractors Supply, Rice Planter Carpets and Forest Products Supply.

• With its diverse offering, HD Supply represented 13 percent of overall sales for the quarter. Its continued success places The Home Depot enterprise in a better position against economic headwinds, as HD Supply links heavily to infrastructure, maintenance, repair and remodel.

Return to Shareholders

During the quarter, we continued our focus on returning value to our shareholders. The Company repurchased 58 million shares, including the shares repurchased under an accelerated share repurchase program. Since our share repurchase program began in 2002, we have bought back almost 350 million, or approximately 17 percent, of our outstanding shares. That amounts to $12.5 billion under the $14 billion authorized by the board of directors.

Our Communities

I consider myself fortunate to work alongside 355,000 individuals, who are promoters of The Home Depot brand. Given the nature of our business, it is no surprise that our associates are often called to build – playgrounds, affordable housing, parks and more. Because of their expertise, we believe in providing hands-on, ground-engaged community support. In the second quarter, associates took part in more than 900 Team Depot service projects, a wonderful precursor to our Corporate Month of Service, which kicks off on August 31, when we join forces with other companies on 1,000-plus community service projects. As part of that effort, during the anniversary of Hurricane Katrina, 10 service projects have been designated to helping residents in Gulf Coast communities.

Having great merchandise and great stores is certainly a mainstay of The Home Depot, but it is our associates who bring everything to life. Their passion gives me tremendous confidence in our team’s ability to execute and to deliver in the months ahead. 

Sincerely,

Bob Nardelli

Chairman, President & CEO