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.


												    Percentage
												Increase (Decrease)
												 of Dollar Amounts

Selected Consolidated					        Fiscal Year(1)		        1996		1995
Statements of Earnings Data			    1996	     1995	    1994      vs. 1995	      vs. 1994
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Net Sales					   100.0%	    100.0%	   100.0%	26.3%		24.0%
Gross Profit					    27.8	     27.7	    27.9	26.8		23.0
Operating Expenses:
	Selling and Store Operating		    18.0	     18.0	    17.8	26.5		25.6
	Pre-Opening				     0.3	      0.4	     0.4	 4.5		 2.0
	General and Administrative		     1.7	      1.7	     1.8	20.3		16.9
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		Total Operating Expenses	    20.0	     20.1	    20.0	25.6		24.3
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		Operating Income		     7.8	     7.6	     7.9	30.0		19.6


Interest Income (Expense):
	Interest and Investment Income		     0.1	     0.1	     0.2	30.5	       (31.3)
	Interest Expense			       -	       -	    (0.3)      287.8	       (88.5)
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		Interest, Net			     0.1	     0.1	    (0.1)      (38.6)		NM(2)

Minority Interest				       -	       -	       -	NM(2)	       (92.1)
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	Earnings Before Income Taxes		     7.9             7.7	     7.8	28.4		22.0
Income Taxes					     3.1	     3.0	     3.0	28.7		23.6
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	Net Earnings				     4.8%	     4.7%	     4.8%	28.2%		21.0%
======================================================================================================================

Selected Consolidated Sales Data
Number of Transactions (000s)			 464,089	 370,317	 302,181	25.3%		22.5%
Average Sale Per Transaction			  $42.09	  $41.78	  $41.29	 0.7		 1.2
Weighted Avg. Weekly Sales Per Operating Store	$803,000	$787,000	$802,000 	 2.0		(1.9)
Weighted Avg. Sales Per Square Foot		 $398.29(3)	 $390.32	  $404.0	42.0		(3.4)
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(1)Fiscal years 1996, 1995 and 1994 refer to the fiscal years ended February 2, 1997; January 28, 1996; and January 29, 1995, respectively.

(2)Not meaningful.

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

Forward-Looking Statements: Certain written and oral statements made by 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, conditions affecting the acquisition, development and ownership of real estate, and the impact of competition. 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.

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 presented in this annual report.

Fiscal Year Ended February 2, 1997 Compared To January 28, 1996
Fiscal 1996 consisted of 53 weeks compared to 52 weeks in fiscal 1995. Sales for fiscal 1996 increased 26% to $19,535,503,000 from $15,470,358,000 in fiscal 1995. This increase was attributable to, among other things, full year sales from the 83 new stores opened during fiscal 1995, a 7% comparable store-for-store sales increase, and 89 new store openings and 7 store relocations during fiscal 1996.

A portion of this increase was also attributable to the additional week of sales in fiscal 1996. Gross profit as a percent of sales was 27.8% for fiscal 1996 compared to 27.7% for fiscal 1995. The improvement resulted primarily from more effective buying practices, which resulted in lowering the cost of merchandise, and to changes in merchandise mix.

Operating expenses as a percent of sales were 20.0% for fiscal 1996 compared to 20.1% for fiscal 1995. Selling and store operating expenses as a percent of sales were 18.0% for both fiscal 1996 and 1995. Net advertising expenses decreased from fiscal 1995 primarily due to economies realized from increased national advertising. In addition, fixed occupancy expenses as a percent of sales were slightly lower than last year due to higher sales volumes related to the extra week in fiscal 1996. These decreases in selling and store operating expenses were offset by higher expenses, as a percent of sales, related to store management bonuses and the employee stock ownership plan. In addition, expenses associated with store relocations were higher as a percent of sales than fiscal 1995 primarily due to the adoption in fiscal 1996 of a new accounting standard which changed the timing of recognition of these expenses. Pre-opening expenses as a percent of sales decreased to 0.3% in fiscal 1996 from 0.4% in fiscal 1995 due to efficiencies achieved in the new store opening process in fiscal 1996.

Interest and investment income was 0.1% of sales in fiscal 1996 and 1995. Investment income in fiscal 1996 was primarily generated from the net proceeds of the $1,104,000,000 3-1/4% Convertible Subordinated Notes ("3-1/4% Notes") issued in October 1996. A portion of the proceeds from the 3-1/4% Notes was used to repay commercial paper obligations (see Liquidity and Capital Resources). Interest expense also increased due to the higher borrowings associated with the 3-1/4% Notes.

The Company's combined federal and state effective income tax rate was 38.9% for fiscal 1996 compared to 38.8% in fiscal 1995. This increase was principally attributable to lower tax-advantaged investments and a higher effective state income tax rate, partially offset by various federal and state tax credits.

Net earnings as a percent of sales was 4.8% for fiscal 1996 compared to 4.7% for fiscal 1995, reflecting higher gross profit and lower operating expenses partially offset by a higher effective income tax rate, as described above. Earnings per share was $1.94 for fiscal 1996 compared to $1.54 for fiscal 1995.

Fiscal Year Ended January 28, 1996 Compared To January 29, 1995
Sales for fiscal year 1995 increased 24% to $15,470,358,000 from $12,476,697,000 in fiscal 1994. This increase was attributable to, among other things, full year sales from the 69 new stores opened during fiscal 1994, a 3% comparable store-for-store sales increase, and 83 new store openings and 5 store relocations during fiscal 1995.

Gross profit as a percent of sales was 27.7% for fiscal 1995 compared to 27.9% for fiscal 1994. The lower gross profit percentage resulted primarily from maintaining competitive pressure in many markets as well as changes in merchandise mix.

Operating expenses as a percent of sales increased to 20.1% in fiscal 1995 compared to 20.0% in fiscal 1994. Selling and store operating expenses as a percent of sales increased to 18.0% in fiscal 1995 compared to 17.8% in fiscal 1994. This increase was attributable to, among other things, higher store payroll expenses due to higher average hourly wage rates resulting from a greater percentage of long-term versus newly-hired associates, and higher credit card costs due to an increased percentage of credit sales. The increase in selling and store operating expenses as a percent of sales was partially offset by lower general and administrative expenses as a percent of sales due to continued emphasis on controlling costs.

Interest and investment income as a percent of sales decreased to 0.1% in fiscal 1995 compared to 0.2% in fiscal 1994. This decrease was attributable to a lower investment base due to the utilization of funds for capital expansion, partially offset by higher yields. Interest expense as a percent of sales decreased to less than 0.1% for fiscal 1995 compared to 0.3% for fiscal 1994. This decrease was attributable to the conversion to common stock of the 4-1/2% Convertible Subordinated Notes on March 31, 1995, and higher capitalized interest.

The Company's combined federal and state effective income tax rate was 38.8% for fiscal 1995 compared to 38.3% for fiscal 1994. This increase was attributable to lower tax-advantaged investments, a higher effective state income tax rate and the expiration of targeted jobs tax credits.

Net earnings as a percent of sales was 4.7% for fiscal 1995 compared to 4.8% for fiscal 1994, reflecting lower gross profit, higher operating expenses and a higher effective income tax rate, partially offset by lower interest expense, as described above. Earnings per share was $1.54 for fiscal 1995 compared to $1.32 for fiscal 1994.

Liquidity And Capital Resources: Cash flow generated from store operations provides the Company with a significant source of liquidity. Additionally, a significant portion of the Company's inventory is financed under vendor credit terms.

The Company plans to open approximately 111 new stores and relocate 7 existing stores during fiscal 1997. It is anticipated that approximately 71% of these locations will be owned and the remainder will be leased. The Company also plans to open approximately 140 stores, including relocations, in fiscal 1998. In June 1996, the Company entered into a $300,000,000 operating lease agreement for the purpose of financing construction costs of new stores. Under the agreement, the lessor will purchase the properties, pay for the construction costs and subsequently lease the facilities to the Company. The lease provides for substantial residual value guarantees to the lessor and includes purchase options at original cost on each property. This agreement will primarily cover selected new stores planned to open in fiscal 1997. In addition, some planned locations for fiscal 1997 will be leased individually, and it is expected that many locations may be obtained through the purchase of pre-existing leasehold interests, the acquisition of land parcels and the construction or purchase of buildings. While the cost of new stores to be constructed and owned by the Company varies widely, principally due to land costs, new store costs are currently estimated to average approximately $13,300,000 per location. The Company may purchase leasehold interests at varying amounts depending upon the value of such properties. The cost to remodel and fixture stores to be leased is expected to average approximately $2,400,000 per store. In addition, each new store will require approximately $3,100,000 to finance inventories, net of vendor financing.

During fiscal 1996, the Company issued, through a public offering, $1,104,000,000 of 3-1/4% Convertible Subordinated Notes due October 1, 2001. The 3-1/4% Notes were issued at par and are convertible into shares of the Company's common stock at any time prior to maturity, unless previously redeemed, at a conversion price of $69.125 per share, subject to adjustment under certain conditions. The 3-1/4% Notes may be redeemed at any time on or after October 2, 1999, at the option of the Company, in whole or in part, at a redemption price of 100.813% of their principal amount and after October 1, 2000, at 100% of their principal amount. The Company used a portion of the net proceeds from the offering to repay outstanding commercial paper obligations, to finance a portion of the Company's capital expenditure program, including planned store expansions and renovations, and for general corporate purposes. The remaining proceeds were primarily invested in short-term securities and are planned to be used for future capital expenditures and general corporate purposes.

During fiscal 1995, the Company increased its commercial paper program to a maximum of $800,000,000. As of February 2, 1997, there was no commercial paper outstanding under the program. In connection with the commercial paper program, the Company has a back-up credit facility with a consortium of banks for $800,000,000. The facility expires in December 2000. The facility contains various restrictive covenants, none of which is expected to impact the Company's liquidity or capital resources.

As of February 2, 1997, the Company had $558,436,000 in cash and cash equivalents and short-term investments, as well as $8,480,000 in long-term investments. Management believes that its current cash position, the proceeds from short-term and long-term investments, internally generated funds, funds available from its $800,000,000 commercial paper program, funds available from the $300,000,000 operating lease agreement, and/or the ability to obtain alternate sources of financing should enable the Company to complete its capital expenditure programs, including store expansion and renovation, through the next several fiscal years.

Recent Developments: On January 16, 1997, the Company entered into a definitive agreement with Maintenance Warehouse/America Corp. ("Maintenance Warehouse") to acquire Maintenance Warehouse through the exchange of all the common stock of Maintenance Warehouse for shares of The Home Depot common stock. Maintenance Warehouse, which had sales of approximately $130 million in 1996, is the leading direct-mail marketer of maintenance, repair and operations products serving the U.S. building and facilities management market. The San Diego-based company will continue to operate under its own name as a subsidiary of The Home Depot. This transaction will be accounted for as a pooling of interests. The all-stock transaction was completed on March 14, 1997.

On January 28, 1997, the Company signed a letter of intent to form a joint venture with S.A.C.I. Falabella, a leading department store retailer in Chile, to facilitate The Home Depot's entry into the Chilean market. The first Home Depot store in Chile is expected to open in the first half of fiscal 1998. The Home Depot's controlling share of the joint venture will be 66.67%. The alliance with S.A.C.I. Falabella is expected to enhance Home Depot's presence in the Chilean market, offer attractive real estate opportunities and provide assistance with, among other things, systems, credit marketing and distribution logistics.

Recent Accounting Pronouncements: In March 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share." SFAS 128 requires companies with complex capital structures that have publicly held common stock or common stock equivalents to present both basic and diluted earnings per share ("EPS") on the face of the income statement. The presentation of basic EPS replaces the presentation of primary EPS currently required by Accounting Principles Board Opinion No. 15 ("APB No. 15"), "Earnings Per Share." Basic EPS is calculated as income available to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted EPS (previously referred to as fully diluted EPS) is calculated using the "if converted" method for convertible securities and the treasury stock method for options and warrants as prescribed by APB No. 15. This statement is effective for financial statements issued for interim and annual periods ending after December 15, 1997. The Company does not believe the adoption of SFAS 128 in fiscal 1997 will have a significant impact on the Company's reported EPS.

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.


1996 Annual Report Table of Contents