2008 Home Depot Inc. Earnings Conference

The Home Depot, Inc. Q308 Earnings November 18, 2008

MANAGEMENT DISCUSSION SECTION
MANAGEMENT DISCUSSION SECTION
Operator: Good day everyone and welcome to today’s Home Depot Third Quarter Earnings
Conference Call. Today’s call is being recorded. [Operator Instructions]

Beginning today’s discussion is Ms. Diane Dayhoff, Senior Vice President of Investor Relations.
Please go ahead, ma’am.

Diane Dayhoff, Senior Vice President, Investor Relations

Thank you, Augusta, and good morning to everyone; welcome to The Home Depot Third Quarter
Earnings Conference Call. Joining us on our call today are Frank Blake, Chairman and CEO of
The Home Depot; Craig Menear, Executive Vice President, Merchandising; and Carol Tomé,
Chief Financial Officer and Executive Vice President, Corporate Services.

Following our prepared remarks, the call will be open for analyst questions. Questions will be
limited to analysts and investors. And as a reminder, we would appreciate it if the participants
would limit themselves to one question with one follow-up please. If we are unable to get to your
questions during the call, please call our Investor Relations Department at 770-384-2387.

Before I turn the call over to Frank, let me remind you that today’s press release and the
presentations made by our executives include forward-looking statements as defined in the
Private Securities Litigation Reform Act of 1995. These statements are subject to risks and
uncertainties. These risks and uncertainties include but are not limited to those factors identified
in the release and in our filings with the Securities and Exchange Commission.

Now, let me turn the call over to Frank Blake.

Frank Blake, Chairman and Chief Executive Officer

Thank you, Diane, and good morning, everyone. Sales for third quarter were $17.8 billion, down
6.2%. Comp sales were negative 8.3%. As Carol will describe, sales for the quarter were
negatively impacted by approximately $225 million because of the seasonal shift associated with
53 weeks in fiscal 2007. Adjusting for that, comp sales were negative 7.1%. Diluted earnings per
share were $0.45.

You all obviously know that this is a difficult environment in the housing and home improvement
markets. The view we had at the start of the quarter that we might be nearing a bottom, our
August was actually better than we planned, gave way to the financial crisis in September and
beyond. We’ve seen the kinds of pressure you’d expect in this environment. Our big ticket sales
are down significantly, as Craig will describe. Our customers are finding credit harder to come by,
as Carol will discuss, and we’re generally seeing continued softness in tough markets and
erosion in previously strong markets.

Let me give you some specifics. Since the mid-September and forward time period is the most
relevant, we look at the rolling six-week comp performance of our top 40 markets versus Q3
2007. Of those top 40 markets, only 15 are performing better now. So we are not seeing the
improvement that we thought we’d see as we cycled against the soft comparisons from last year.
Where we are seeing better performance, frequently there is only fractional improvement. So for
example, Miami is performing better, but is still mid-teens negative comping. We’ve seen some
improvement in California and New England, but again these markets remain under pressure.


At the same time, previously strong markets have eroded. Last year, the Northwest was a
relatively strong area for us. Now Seattle, Portland, and Spokane have negative double-digit
comps. We expect that these pressures will continue into the fourth quarter and 2009.

In many respects, the difficult market is obscuring the progress that our associates are making.
Our customer service levels as reflected in our voice of customer surveys continue to improve.
Marvin Ellison, our Executive Vice President U.S. Stores, has implemented significant changes in
our store operations, making our approach simpler, more consistent, and more customer focused.

On the merchandising side, you can already see some of the improvements Craig and his team
have accomplished. It’s an enormous challenge to operate a business our size in a declining
market with rapidly changing commodity prices and achieve price leadership, margin stability, and
inventory control.

For the quarter, we launched a strong new lower price campaign, achieved significantly better
markdown control, and lowered per-store inventory by 7.5%. I believe we have better execution in
our business across merchandising, operations, supply chain, and our supporting functions than
we have had in quite a while.

At the end of October, we opened our fourth Rapid Deployment Center, or RDC, in Winchester,
Virginia. RDCs now serve approximately 400 of our stores. We remain committed to enhancing
our supply chain and are pleased to be back on the track of opening facilities. This year, we have
one more facility that we will open in the fourth quarter.

Our international businesses, particularly Canada, have started to feel some of the economic
pressures that we’ve had in the U.S. Canada had mid-single-digit negative comps and saw a
similar pattern of accelerated declining sales in the quarter. In addition, our Canadian team
tackled a major business system implementation with SAP Core Retail, which is now live in all our
Canadian stores, a substantial undertaking in the midst of very difficult market conditions. The
rest of our business will now benefit from the learning’s we can gain from the Canadian effort.
And I’m very excited to have Matt Carey, who has over 20 years of experience with Wal-Mart and
eBay on board as our new EVP and CIO to help is in that effort.

China also reported negative comps, driven in large part by the impact of the Olympics in China
in August. But Mexico continued its strong performance with another quarter of double digit
positive comps.

Across our entire business, we are making the adjustments necessary to respond to a tough
market environment. We are carefully controlling our discretionary spending, scrutinizing every
dollar of capital, and most importantly intensifying our focus on our customers. The culture at
Home Depot is our strength and I want to thank our associates for responding well in a tough
time.

Now let me turn the call over to Craig.

Craig Menear, Executive Vice President, Merchandising

Thanks, Frank, and good morning everyone. In the third quarter, we experienced negative comp
sales growth in all departments except building materials, which was driven by strong sales in
roofing and insulation. Both categories increased in the number of units sold, though it should be
noted that some of the comp dollar gain in roofing was driven by higher prices due to increased
petroleum costs. Additional departments that outperformed the company’s average comp were
plumbing, hardware, and garden. The departments that underperformed the company average
comp were kitchen and bath, millwork, electrical, lumber, and flooring. And paint performed at the
company’s average comp.


Average ticket was down $1.62 or $2.8% from last year to $55.86. We saw a decline in two
areas. First, big ticket sales continued to suffer. For example, special order kitchens were down
nearly 30% versus last year. And second, we saw that approximately 40% of the decline in
average ticket was due to lower average spending per basket.

From a regional perspective, areas of the North, particularly the Northern Plains and Ohio Valley,
performed above the company’s average comp in the third quarter. The same is true for parts of
the South like Texas, Oklahoma, and Louisiana. The positive results along the Gulf are attributed
primarily to hurricane related sales. Hurricanes Gustav and Ike added approximately $125 million
in incremental sales in the quarter. However, we did not realize any benefit to the bottom line as
those sales were low margin sales and margin dollars were offset by additional expense such as
freight, store damage, and associated costs. I am proud of the cross-functional team’s efforts
before, during, and after the storms to ensure our products and associates were in place to help
our customers and their communities.

As Frank said, in this challenging environment we need to remain focused on executing and
improving those things that we can control. We have discussed for several quarters the
implementation of our portfolio strategy. And while we have a long ways to go, we’re starting to
see the delivery of results.

One such result was reflected in our transactions. While total company transactions of 315 million
were down 3.4% year over year, we saw an improving trend during the last six weeks of the
quarter. One of our ongoing initiatives has been to reduce promotions and refocus our efforts on
being an everyday value provider as part of our portfolio strategy. By the third quarter, we felt that
we had accomplished enough in this transition to effectively communicate our progress to our
customers. Our marketing campaign supporting our new lower price reinforces the everyday
value message. Our new lower price program increased transactions and drove attachment
sales.

Another metric supporting the initial success of our portfolio strategy and overall merchandising
transformation was our gross margin results. The third quarter presented the most volatile
commodity market I’ve ever seen. However, we worked through it and we saw a 27 basis point
improvement in gross margin over the third quarter last year.

Earlier this year, we introduced new tools to our merchants to better plan, assort, and react to
changes in the market by forecasting at a more granular level. The clarity that these tools
provided drove gross margin and inventory productivity, particularly in our seasonal categories. In
the third quarter alone, we saw a 200 basis point gross margin improvement in our U.S. Garden
category due to lower markdowns.

All the merchandising initiatives that I have described so far are also driving results in market
share. In the U.S., 6 out of 13 departments gained unit share in the third quarter and 10 out of 13
showed share improvements from where they ended the second quarter. Based on independent
third-party tracking of consumer activity, we saw strong share gains in several key merchandising
classes. For example, insulation, carpet, ceramic tile, power tools, toilets, faucets, grills, and
molding all gained share in the quarter, to name a few. Many of these classes received
concentrated merchandising focus and investment, utilizing our portfolio strategy. For example, in
molding we updated the assortments regionally. We refined the merchandising sets, improved the
value proposition, and added point-of-sale information, making it easier for customers to shop
and make a selection.

As we look to the fourth quarter, we expect that we will continue to see relative strength in energy
efficient and basic repair products. We have a compelling selection of value conscious and
energy efficient products. We are positioned well in holiday products, including our expanded
assortment of LED lighting. Our gift centers have strong values in hand tool sets and power tools


across varying price points, and we’re ready to serve the storage and organization needs of our
customers following the holidays.

In this difficult environment, we are focused on things that we can control and executing on them.
We will continue to execute our portfolio strategy, make assortment and pricing adjustments,
implement resets, and drive project sales by the way we position merchandise in our stores. We
believe these actions improve the value proposition for our customers and simplify their shopping
experience.

And now, I’d like to turn the call over to Carol.

Carol Tomé, Chief Financial Officer and Executive Vice President, Corporate Services

Thank you, Craig, and hello everyone. In the third quarter, sales were $17.8 billion, a 6.2%
decrease from last year, reflecting negative same-store sales of 8.3%, offset in part by sales from
new stores. Net earnings $756 million compared to $1.1 billion last year. Earnings per diluted
share from continuing operations were $0.45 versus $0.59 last year. Comp store same-store
sales were negative 8.3% for the quarter, with negative comps of 6.5% in August, negative 7.4%
in September, and negative 10.5% in October. The last three weeks in October were particularly
weak.

In fiscal 2007, we had 53 weeks in the year. This shifted our 2008 fiscal calendar. Because of this
shift and given the seasonal nature of our business, third quarter sales on a like-to-like calendar
basis were negatively impacted by approximately $225 million. Excluding the calendar shift, our
like-for-like comp for the quarter was negative 7.1%.

Roughly 10% of our sales are outside of the United States. Late in the third quarter, we saw
significant strengthening of the U.S. dollar against all currencies. The impact to total sales was
about $40 million. And similarly from an earnings perspective, the strengthening of the U.S. dollar
did not have a material impact in the quarter.

In the third quarter, our gross margin was 33.7%, an increase of 27 basis points from last year
and reflects the benefits arising from our focus based portfolio approach as well as a shift in the
mix of products sold. Specifically, our gross margin expansion was driven by the following factors.
First, lower markdowns coupled with a smarter approach to promotions covered the cost of new
lower price program and drove 23 basis points of margin expansion. Second, a decline in the
penetration of our lower margin kitchen and appliance category drove 14 basis points of margin
expansion. And finally, we experienced a contraction in our gross margin of 10 basis points
resulting from clearance activities taken in connection with the one-time conversion of our
Canadian stores to their SAP Core Retail platform.

In the third quarter, operating expenses increased by 214 basis points to 26.3% of sales. Our
expense deleverage reflects for the most part the impact of negative sales. Generally, we expect
to deleverage expenses by about 20 basis points for every point of negative comp. In the third
quarter, our expense deleverage per point of negative comp was approximately 17 basis points,
for total of 144 basis points of deleverage.

Further as expected, in the quarter we experienced an additional 70 basis points of expense
deleverage due to a higher cost of credit associated with our private label credit card. In the third
quarter, our total cost of credit as a percent of private label credit sales was approximately 2.2%.
Looking forward, our new private label credit card contract with Citi begins in January of 2009;
and at that time, the cost of credit will be capped at 1.5% of private label credit sales.

As you know, a great deal of pressure has been placed on consumers and therefore retail sales
due to tightening of consumer credit. Sales under our private label credit card made up 28% of


our total sales compared to 30% one year ago. Today, over 70% of our new account applications
are granted credit lines but the average approval limit has decreased by 5% from last year.
Further, in some cases existing credit lines have been reduced. So as we look out, continuing
pressure on credit availability could potentially impact sales.

Our operating margin was 7.4% in the third quarter, down 186 basis points from last year. Net
interest expense was $151 million, an increase of $26 million from last year, reflecting a decline in
interest income due to the lower interest rate environment and lower invest able cash balances.

In the third quarter, our income tax provision rate was 35.5%. We expect our tax rate to be
approximately 36.1% for the year.

Diluted shares were 1.69 billion shares compared to 1.82 billion shares last year. The reduction in
outstanding shares is due to our share repurchase program and includes the tender offer we
completed in September of 2007. At the beginning of the third quarter, we repurchased 2.4 million
shares for $70 million. When the financial markets shut down, we put our recapitalization program
back on pause and it will remain on pause until further notice.

Now moving to our operational metrics, during the third quarter we opened 11 net new stores for
an ending store count of 2,268. Today 257 stores, representing approximately 11% of our store
base, operate in Canada, Mexico, and China. At the end of the quarter, selling square footage
was 238 million, a 2.1% increase from last year.

Reflecting the sales environment, total sales per square foot were approximately $296 for the
quarter, down 8.5% from last year. Sales per square foot for our new stores were up 2.1% from
last year.

Now turning to the balance sheet, our balance sheet and our cash position remain strong. At the
end of the quarter we had $874 million in cash and no outstanding commercial paper. As a
reminder, we have a $3.25 billion A2/P2 commercial paper program that is 100% backstopped by
a committed long-term bank line of credit. We do not foresee the need to access the commercial
paper market during the remainder of the fourth quarter. However, if we need to issue commercial
paper, we believe the market is open to us at this time.

We have approximately $11 billion of long-term debt, of which $1.7 billion comes due in 2009.
The average duration of our long-term debt portfolio is approximately 11 years.

We ended the quarter with $44.2 billion in assets. Since the end of the year, our cash position
has increased by approximately $400 million, reflecting cash flow generated by the business of
approximately $4.9 billion, offset by $1.4 billion of capital expenditures, $1.1 billion of dividends
paid, and $2 billion used to repay outstanding commercial paper and an operating lease
obligation.

At the end of the quarter, retail inventory was $11.9 billion, down 5.7% from last year. On a per
store basis, inventory was down 7.5%. Our operators and merchants have done an excellent job
of controlling inventory in this sales environment. The quality of our inventory has never been
better and clearance inventory is at a record low. Further, our in-stock level is at a record high.
Reflecting the sales environment, however, inventory turnover was 4.2 times compared to 4.4
times last year.

Computed on the average of beginning and ending long-term debt and equity for the trailing four
quarters, return on invested capital for continuing operations was approximately 11.6%. Excluding
the store rationalization charge earlier this year, our return on invested capital was approximately
12.7%.


As we look forward, we continue to project a challenging sales environment. We’ve been
controlling what we can control, but November comps to date are about the same as October.
Based on our year-to-date results, the stronger U.S. dollar, and our view that the consumer could
be very challenged in the fourth quarter, we now believe that fiscal 2008 sales could be down as
much as 8% for the year. We continue to project that our earnings per share from continuing
operations excluding the store rationalization charge will be down approximately 24% from last
year.

We will share our 2009 guidance with you during our fourth quarter earnings conference call,
which is scheduled for February 24.

So thank you for your participation in today’s call. And Augusta, we are now ready for questions.


QUESTION AND ANSWER SECTION
Operator: [Operator Instructions] Our first question will come from Colin McGranahan with
Bernstein.

<Q – Colin McGranahan>: Good morning.

<A – Frank Blake>: Good morning.

<Q – Colin McGranahan>: You said, Craig, that 40% of the decline in ticket was due to lower
spending per basket. I’m assuming the remaining 60% decline in average ticket then was due to
mix, fewer large ticket purchases. Can you comment maybe how that compares over the course
of the last, I don’t know, year or two and what that implies in terms of how the mix impact is
working on the average ticket?

<A – Craig Menear>: Yes, Colin, the balance was in fact the decline in average ticket. We’re
continuing to see pressure in big ticket categories like kitchen and millwork that is impacting the
overall average ticket. And I would tell you that in the third quarter as we looked at those larger
transactions above 500 or $1,000, they took a step down to double digit.

<A – Carol Tomé>: I’ll just jump in on the appliance side because I think this is important. If you
look back in 2007 and 2006, we saw average ticket growth because of an increasing penetration
of our appliances. In the third quarter, we lost $0.17 in our ticket just due to appliances.

<Q – Colin McGranahan>: Okay, okay. And then second question, I don’t know if Matt Carey is
actually on the call, but if he is and if he’s not, maybe somebody else can jump in. In terms of
what are the initial experiences with SAP in Canada, what you have learned, and how you are
thinking about those learning’s in terms of U.S. IT implementation?

<A – Frank Blake>: Colin, Matt is here. Matt, why don’t you address...

<A – Matt Carey>: You know, it’s early days. We are just in the very end of the rollout. The
teams have been focused very hard in completing the rollout. And we’ll be assessing the
performance of those stores and that business in the coming year and learning as much as we
can such that we can help the U.S. business as well. So...

<Q – Colin McGranahan>: Okay, thank you.

<A – Frank Blake>: Yes, and Colin, the one thing I’d say is we entered this with a number of
questions and one of the first questions was could we do it; could we implement this without just a
dramatic impact on the business because frankly you look at other big implementations like this
and there have been some significant – beyond divots, huge potholes. And I give credit to the
Canadian team and to Matt’s team. The implementation as an implementation has gone pretty
well.

<Q – Colin McGranahan>: It seems like you converted all the stores. There were no major
snafus, up and running and you’re probably already seeing some initial benefits I would imagine.

<A – Frank Blake>: I can’t talk, as I outlined, Canada is seeing – if you think about Canada,
they’ve got some of the same issues in terms of impact from the auto industry, oil and gas, so it’s
way too early yet for us to be able to tease out what the benefits are as they wrestle with a tough
market.

<Q – Colin McGranahan>: I understand; thank you.

<A – Frank Blake>: Yes.


Operator: Our next question will come from Peter Benedict with Wachovia.

<Q – Peter Benedict>: Thanks, guys. Again on the average ticket, it has been down the last nine
quarters and I think the third-quarter number puts us basically back to where we were in about
the third quarter of 2004. When you look at the mix of your business in the stores today, what
period would you say it’s most similar to over the last several years? Is it like 2004 or is there
some other year that we can look back to that would be more representative of what you’re
seeing in the stores today?

<A – Craig Menear>: This is Craig. I would tell you that as we look at the current decline in the
big ticket, the change in our business from 2004 to now as it relates to appliances, I don’t think
you can really compare it to – I think the mix is different. So we’ve grown our appliance business
significantly since 2004. And on the flip side, in this current environment the categories like
kitchen cabinets are down significantly. So I’m not sure it’s a...

<A – Frank Blake>: Peter, it really is tough because as both Carol and Craig said, you’ve got to
look at categories. I think of things like countertops that we were barely in in 2004 versus now.

<A – Carol Tomé>: Kitchens, flooring, the whole emphasis on specialty is very different and that
is our business model that’s being impacted by the economic environment.

<A – Frank Blake>: Correct.

<Q – Peter Benedict>: Okay, great, thanks a lot.


Operator: Next to David Strasser with Deutsche Bank (sic) [Banc of America]

<Q – David Strasser>: Hello?

<A – Frank Blake>: Hi, David.

<Q – David Strasser>: It’s Banc of America, but no problem. So quickly when you look at the mix
of stores around the country, the Northeast now is about 17% of stores, and the order Midwest
10% of stores. It is pretty – you can make a good argument that those areas based on what’s
happening in the economy are going to get worse. When you look at some of the mistakes or
some of the things, positive things you were able to do in areas like Southern California, Nevada,
Florida, what have you learned about that you can use to anticipate slowdowns as some of the
things that are going on in those areas start to materialize?

<A – Frank Blake>: David, I’d say – and this is more anticipation than direct experience at this
point. I would expect that the dynamics are going to be different. So when you look at California,
Florida, Nevada, you had just a lot of speculative homebuilding. You had strong employment,
strong underlying GDP growth, but a housing bubble that had a direct impact on us as that bubble
collapsed. I suspect we’re going to be seeing a different dynamic play out going forward where
it’s less a housing bubble unwinding than it is a region dealing with basic difficulties on economic
growth and employment. So just on your premise, we’re not anticipating that it will be same-same
and we can have hypotheses on how that will play out in our stores, but I think we’re going to see
a very different unfolding.

<Q – David Strasser>: And I guess – I’m sorry.

<A – Frank Blake>: No.


<Q – David Strasser>: Just as a follow-up, at the beginning of the call, you had said the
Northeast – could you repeat what you had mentioned how the business had trended there?

<A – Frank Blake>: Yes, the comment on New England was that it’s better than it was, which is
good, but I want to be very cautious in saying better is truly a relative term and that it’s still under
pressure.

<Q – David Strasser>: All right; thanks a lot. I appreciate it.

<A – Frank Blake>: Thanks, David.

Operator: And I do apologize; from Deutsche Bank, we have Michael Baker.

<Q – Michael Baker>: Hi, thanks. So you said November was about where it was in October. Is
that that 10.5 that you said for October or it sounds like the end of October was worse than the
total October 10.5? I just wanted to clarify where November was relative to that.

<A – Carol Tomé>: It’s around the negative 10.5 area.

<Q – Michael Baker>: Okay, good. My follow-up is I think the sales guidance, the full year sales
guidance down 8%, seems to imply down 18 for the fourth quarter. You have one fewer week, so
you adjust for that, maybe down 12 or 13. You get a percent or two from square footage, so it
sounds like the guidance for the comp at least is a little bit worse than down 10 if my math is even
close to right. Is that just being conservative thinking things might drop off or is my math just
completely off?

<A – Carol Tomé>: Your math is right. What’s included in our guidance is our view of the U.S.
dollar impact to our fourth quarter sales. The U.S. dollar strengthened at the end of the third
quarter, so it didn’t have a big impact to our third quarter. But we assume that the dollar will
remain strong in the fourth quarter and that will have an impact to our sales outside the United
States.

<Q – Michael Baker>: By a percent or two or something along those lines?

<A – Carol Tomé>: I’m thinking almost a couple percent.

<Q – Michael Baker>: Okay. Okay, thank you.

<A – Carol Tomé>: You’re welcome.

Operator: Our next question will come from Scot Ciccarelli with RBC.

<Q – Scot Ciccarelli>: Hi, guys, Scot Ciccarelli. What has been the big change in terms of the
sales trends in October and November? I’m sure it’s just a continuation, but are we seeing
incremental pressure on traffic or is it incremental pressure on ticket or is it both?

<A – Frank Blake>: I think I will turn it to Craig, but as Craig was outlining, we actually feel like
we are gaining some traction on the transactions, but just seeing continued pressure on ticket.

<A – Craig Menear>: Yes, that is correct. We look at transactions actually in October. We
actually saw a significant change or improvement in transactions. But when you look at ticket in
the month of October, that fell significantly. Ticket above $500 was double digit off.

<Q – Scot Ciccarelli>: Okay, that’s what I was looking for. Thanks, guys.



Operator: Next to Deborah Winnowing with Citigroup.

<A – Carol Tomé>: Debra?

Operator: Apparently, she has left the queue. We will go next to Chris Hovers with J.P. Morgan.

<Q – Chris Hovers>: Good morning everybody. I want to understand maybe how we should read
the stack trend or the trend in the business as you’re entering the fourth quarter and try to get our
arms around how do we: a) how do compares ease as you go from November to January; and b)
how much should we read into or ascribe the shift down in comps to the fact that the seasonal
and the maintenance categories just don’t do as well whenever it’s holed up in the winter with the
windows shut and the heat on?

<A – Carol Tomé>: Let me answer the first part of your question if I could. In terms of
comparisons looking at last year, and remember it’s a calendar shift that distorts some of this. But
last year, our comps were negative 6.6 in November, negative 7.2 in December, and negative
10.8 in January. From a comparison, it would appear that January is the easiest compare.

<A – Frank Blake>: In terms of your comment on the product assortment and what sells, the mix,
it’s going to be roughly the same year over year, that same shift away. Obviously there are a lot
of things like kitchen remodels and new flooring and the like that really slow down pretty
significantly once you’re past frankly this period, once you’re past the Thanksgiving Day period.

<A – Craig Menear>: Yes, and when you look at seasonal impact of like the garden department,
the big shift obviously comes from Q2 to Q3. It’s much less significant Q3 to Q4.

<Q – Chris Hovers>: Maybe coming at it from a different angle, how much would you say
because of this because of that mix shift away from outdoor and from seasonal, how much of this
is just a dip down because we’re entering that time of year and how much might maybe we
recover in the first half next year when you get into a better seasonal period?

<A – Frank Blake>: Again on the comp perspective, you’re comparing same dip to same dip.
And then obviously our business does pick up. This is – January is our lowest month.

<A – Carol Tomé>: If you look at just total sales dollars, you should expect this to be a weak
quarter for us just because of the seasonal nature and it picks right back up when spring comes.

<Q – Chris Hovers>: Okay.

<A – Carol Tomé>: Does that help?

<Q – Chris Horvers>: That helps. And a follow-up question on SG&A trends, you have been
basically keeping SG&A per foot flattish here in the first three quarters of 2008. How should we
think about your ability to keep it flattish into 2009 either from a maintenance SG&A spend
perspective or from a stores on minimum staffing level?

<A – Carol Tomé>: Let me first talk about the fourth quarter. For the fourth quarter, we expect
our expenses per average store to be down from what they were a year ago. Two reasons for
that; primarily lower advertising spending in the fourth quarter this year versus last year; and then
last fourth quarter, you may recall that we had some write-offs associated with stores that we
elected not to open. There was a big write-off for a store in San Francisco. You need to
remember that. We won’t be repeating that in the fourth quarter. So expenses should be down on
per square foot basis. As we come back to you at the end of the fourth quarter, we’ll give you
guidance for 2009 and let you know what we think about expenses on per store basis, but clearly
this is an area of real focus.


<Q – Chris Horvers>: Thank you.

<A – Carol Tomé>: Thanks, Chris.

Operator: Our next question will come from Deborah Weinswig of Citi.

<Q – Deborah Weinswig>: I apologize for the technical difficulties earlier. So Carol, originally or
last quarter you had given guidance of sales to decline for 5% for fiscal ‘08. Now you’re saying
potentially an 8% decline, but we’re keeping earnings guidance down 24%. Is the major
difference on the gross margin side or how should we think through that?

<A – Carol Tomé>: We had a good earnings quarter in third quarter. Earnings were better than
our plan, so we’re able to take that into fourth quarter. As we look at the fourth quarter, Craig has
talked to you about the new tools that we’re using that allow us to forecast sales, margin, and
inventory now for 200 classes on a weekly basis. That has given us better visibility on what we
think the margin will do in the fourth quarter and that’s giving us comfort for the guidance that we
gave.

<Q – Deborah Weinswig>: Okay and then also, can you talk about your inventory performance
in the quarter, certainly very impressive especially in light of the environment?

<A – Frank Blake>: Yes, really this is a joint effort of everybody on the team. It starts with Craig
and his merchandising team and Carol and her finance team and working with them on the
planning process and Marvin on the store execution side and supply chain. It really is just – it’s
connecting, connecting a lot of – I mean this isn’t a very fancy answer, but it’s just connecting a
lot of dots within the business in a more effective way.

<A – Craig Menear>: Really the new tools are giving us great visibility and has changed how we
manage the business. And quite honestly when we look at the inventory overall, it was
widespread. It wasn’t concentrated in a significant – or one area. It was widespread across all our
merchandising departments.

<Q – Deborah Weinswig>: Frank, would you say it’s a much more collaborative effort?

<A – Frank Blake>: Again, yes. I think there are lots of opportunities for us to improve our
operations and these are the kinds of time periods that force us to get those and, as Craig said,
develop the new tools that help us communicate better within the organization.

<Q – Deborah Weinswig>: Okay. Last question, what are you seeing with regards to stores that
are being serviced by the RDC network? In terms of the RDC network, how should we think about
2009?

<A – Frank Blake>: One of our – Mark is here and he can address that as well. But when we put
this on pause, we had a series of benchmarks that we wanted to hit before we would start again,
and one of them was how are we performing with the stores in terms of accuracy of shipments
and how are the stores perform in terms of out-of-stocks. And we hit those targets, which is what
gave us confidence to restart the rollout process. And our plan is to continue through 2009 and
2010. Mark, if you want to...

<A – Mark Holifield>: Yes, just we had opened our Winchester facility. We’re in our fourth week
of operations there. We’re experiencing no significant issues and we’re pleased with the progress
there. As Frank said, the main thing we’re looking at from a store perspective is the in-stock in the
store and our RDC stores perform better than our other stores. We’re looking at our ability to
service the stores with very accurate loads and timely delivery. So we believe on track to achieve
our ultimate targeted levels over time. So we’re pleased with that progress.


In terms of 2009, we want to continue until we can serve 100% of our stores and we’re targeting
2010 for that completion. You will see openings in 2009 against that target.

<Q – Deborah Weinswig>: Great. Thanks so much and best of luck.

<A – Carol Tomé>: Thank you.

<A – Frank Blake>: Thanks, Deborah.

Operator: Our next question will come from Alan Rifkin with Merrill Lynch.

<Q – Alan Rifkin>: Yes, thank you. It certainly sounds like the price rationalization program has
been pretty successful in driving transactions and units and revenues. My question is though,
taken together with the incremental marketing spend, has it been accretive to net income; and if
so, what is your proclivity going forward to expand the program?

<A – Craig Menear>: First of all, there wasn’t an incremental marketing spend per se. It was a
shift of how we were using our dollars to communicate to the customer. And overall, I think that
as we look at the program, part of our portfolio strategy is to drive to an everyday great value for
our customer. We’ve been doing that by eliminating promotional activity that was non-nutritive.
We see this as an ongoing program. It’s focused on our customer. It’s focused on driving value to
our customer every day. And as we look at this program, it’s built in our guidance as we move
forward.

<Q – Alan Rifkin>: Okay, when you say it’s an ongoing program, will it maintain the same level
or will it be intensified?

<A – Craig Menear>: As we look at the market and we look at implementation of our portfolio
strategy, I certainly would not see it going backwards. As the market bears, we will look at
whether or not that intensifies.

<Q – Alan Rifkin>: Okay and one follow-up if I may. Where are you, Carol, with respect to
minimum staffing levels at the store level? And going forward if we continue to see a decelerating
revenue environment, what is the opportunity to further reduce payroll at the store level?

<A – Carol Tomé>: Alan, we staff by department, not by store. Marvin Ellison is here, our
Executive Vice President of stores, and I’ll let him address your question.

<A – Marvin Ellison>: Alan, this is Marvin. As Carol said, we staff by department, not by total
store, and really it’s based on the rate of sales in a department. So if we have a department like
plumbing where sales are increasing, we will beef up staffing. If a department has sales declining,
we’ll pull back staffing. The other thing we’ve done is that we looked at customer shopping traffic
patterns and we focus our service during those timeframes. We’ve been able to take the same
number of associates and increase our service levels just based on when customers shop. We
think that works for us and we’re going to continue to strive with that model for the rest of the
year.

<Q – Alan Rifkin>: Okay, but at the departmental level, for departments that going forward let’s
say come in below your plan, is there opportunity to further reduce labor within those departments
or are you pretty much at the lowest staffing levels today?

<A – Marvin Ellison>: We look at it case by case. As it stands right now, we’re not at any
minimum staffing levels. We just try to maintain certain level of service in our stores and we
manage – the reason why departments work is because it allows us to be granular, and we can


look at it department by department and make sure that we are flexing the necessary resources
in areas where we need to provide service.

<Q – Alan Rifkin>: Okay, great. Thank you very much.


Operator: We’ll go next to Budd Bugatch with Raymond James.

<Q – TJ McConville>: Good morning, thanks for taking the question. This is actually TJ
McConville filling in for Budd, who is traveling today. The first question I had was a follow-up to a
previous question on the call. Craig, I think you said that ticket above $500 was off double digit in
October. I was wondering if maybe we could get a sense for where that was, in the beginning
parts of the quarter or maybe where it was last year.

<A – Craig Menear>: In the beginning parts of the quarter, it was mid-single digit. We believe
that there was some impact of that, particularly in September, as a result of hurricane sales and
the repair that was happening in those particular parts of the country, but mid-single digits. And
prior to that, it ranged pretty much double digit negative.

<Q – TJ McConville>: Okay, got you. The second question I had was on the geographical
regions. I know Frank gave us a pretty nice update at the beginning of the call on how things
were looking. I was wondering if we could get a sense for the progression of declines throughout
the quarter. Maybe a better way to ask would be did the bad markets flatten out as things got
worse and the good markets just got that much more bad or it was just an across the board
deterioration for you?

<A – Frank Blake>: I’ll be honest, TJ. I don’t have the time lapse photography on that to tell you
exactly how it played out, so I’d be guessing if I gave you an answer on that. Again, you’d see a
lot of variation from within the markets; some markets impacted more dramatically through the
quarter than others. But honestly, I just don’t have that in my head.

<Q – TJ McConville>: Okay. That works for me, guys; thanks and best of luck.

<A – Frank Blake>: Thank you.


Operator: We’ll go next to Matthew Fassler with Goldman Sachs.

<Q – Matthew Fassler>: Thanks a lot and good morning to you, a couple questions at this point,
largely clean-up. As you disclose the monthly comp numbers, are those impacted by the calendar
shift as well or are those monthly progressions distorted or are they pretty clean?

<A – Carol Tomé>: The monthly comps that we gave you were the reported comps. I’d be happy
to give you the like-for-like comps.

<Q – Matthew Fassler>: That would be great.

<A – Carol Tomé>: Okay, we reported a negative 6.5 for August; the like-for-like was negative
6.2. We recorded a negative 7.4 for September; the like-for-like was negative 5.3. And we
reported a negative 10.5 for October; the like-for-like was negative 9.4.

<Q – Matthew Fassler>: Got you, so negative 9.4’d kind of be the comparable number as you
left the quarter.


<A – Carol Tomé>: Yes, right.

<Q – Matthew Fassler>: Great. Secondly, can you try to quantify the impact that international
had on the business and maybe put that in context of what you had seen year to date, I guess
both overall? And then I think currency probably hurt you at least a little bit in the third quarter,
having helped prior to that, so if you could help us understand that as well.

<A – Carol Tomé>: Yes, our reported comp for the quarter was negative 8.3. Our U.S. comp was
negative 8.4. So that gives you some sense of the positive impact that we have seen from non-
U.S. businesses has diminished.

<Q – Matthew Fassler>: Got you, and then obviously make the calendar adjustments
comparably.

<A – Carol Tomé>: That’s right.

<Q – Matthew Fassler>: Okay, then the comment you made at the outset, Frank, on 15 of 40
markets having gotten better. Just to make sure I understand, you are actually seeing some
sequential improvement in a number of markets. It’s just not as many markets as you thought you
might as the compares get easier and probably by a lesser magnitude where you saw that
improvement.

<A – Frank Blake>: That is correct, both statements. It’s fewer than we thought and not as much
as we thought.

<Q – Matthew Fassler>: Got you. And then finally, the payables ratio looked like it was down a
little bit year on year, if you could share with us whether there is any rhyme or reason to that
movement and what we should look for over the course of the year?

<A – Carol Tomé>: Yes, our payables ratio was 57% compared to 60% a year ago. Last year,
you may recall we outsourced all of our payables processing to India and candidly, we had some
disruption. The 57% is where we think we should be. Now remember that at the end of each year,
it’s always a low point in that ratio. So in the fourth quarter, I would expect it to be around call it
49% or something like that. Then it will build back up.

<Q – Matthew Fassler>: Got you, and finally by way of clean up since these are going so
quickly, your aggregate market share number, you talked about having gained share in a number
of categories. As you look at that third-party source, is there an aggregate share gain or loss that
they gave you; and if they did, how does that move versus the year-to-date trend?

<A – Frank Blake>: I don’t think they do an aggregate.

<A – Craig Menear>: They don’t do an aggregate.

<Q – Matthew Fassler>: Got you, thanks so much.


<A – Diane Dayhoff>: Augusta, we have time for one more question.

Operator: Thank you. That question will come from Michael Lasser with Barclays Capital.

<Q – Michael Lasser>: Thanks for sneaking me in here, I appreciate it. Frank, at the outset you
said you expect these pressures will continue into the fourth quarter of 2009. Maybe you could
expand a little bit more on that comment. And if that is the case, will it necessitate a greater store
rationalization program than occurred earlier this year?


<A – Frank Blake>: Yes, we expect it to be through the fourth quarter and into 2009, as I said.
Look, we look every quarter at our stores and try to make sure we’re doing the right thing in terms
of the stores that we have open. I would say as we look at our orange box stores, we don’t see a
dramatic change from what we saw in the first quarter in terms of the long-term value of those
stores.

<Q – Michael Lasser>: Okay, and a follow-up for Carol. You mentioned that the leverage or
deleverage per point of comp is now down to about 17 basis points. Will there be an asymmetric
leverage profile such that you’ll get much better leverage once the comp turns positive and how
are you thinking about that?

<A – Carol Tomé>: I’m looking for the day when that comp turns positive. Yes, there is an
asymmetrical relationship as things start to move up.

<Q – Michael Lasser>: But it is hard to quantify at this point?

<A – Carol Tomé>: It is. We are working through that right now. And as you can appreciate,
Michael, all our focus has been on running the business in this very challenging sales
environment. As we look out planning for positive comps and that day will come, we’ll come back
and tell you what the leverage looks like.

<Q – Michael Lasser>: What has caused the downshift from the 20 basis points to the 17 basis
points?

<A – Carol Tomé>: Our 20 basis point rule is a rule of thumb. It’s going to be around 20. I don’t
think it will ever be exactly 20.

<Q – Michael Lasser>: Okay, thank you very much.


Diane Dayhoff, Senior Vice President, Investor Relations

Thank you everyone for joining us today. We look forward to talking to you when we release our
fourth quarter earnings on February 24.

Operator: Thank you, this does conclude our call. We’d like to thank everyone for their
participation. Have a great day.

2008 Home Depot Inc. Earnings Conference

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