Fitch Downgrades Home Depot

Chicago, IL, July 13, 2007--Fitch Ratings has downgraded its credit ratings on Home Depot debt from A- to BBB+, affecting approximately $11.7 billion of debt.

The downgrades reflect Home Depot's lower sales and earnings guidance and the impact to the company's credit metrics. The ratings also consider a more aggressive dividend payout and Home Depot's stock repurchase program.

Fitch said its outlook factors the possibility of continued weakness in the operating environment in the medium term and the longer-term effect on the company's sales and operating margins.

Home Depot revised its earnings guidance lower for the second half of 2007, which could extend into the first half of 2008.

Driven by anticipated weaker comparable store sales in the second half of 2007 and seven to 10 fewer store openings than originally planned, Fitch expects the company's retail sales to decline slightly in fiscal 2007.
In addition, Fitch expects operating margin to decline by more than 1 percent, which would constrain the company's profitability.

Additionally, Home Depot has adopted a more aggressive dividend policy with a 90 cent annual dividend payout. Management is adopting a more aggressive share repurchase policy in the form of a $22.5 billion share repurchase program.

The company recently announced a tender offer for the purchase of 250 million shares, the second largest tender offer in the company's history, which is scheduled to expire on Aug. 16. The tender price range is $39 to $44 per share, which represents a value of approximately $9.8 billion to $11 billion.

The share repurchases will be funded with proceeds from the sale of the HD Supply business--estimated to be $9.5 billion-- existing cash, and an additional $12 billion of debt.

Fitch expects credit metrics to weaken in the short term. It cites the company's weaker operating performance, the sale of the HD Supply business to Bain Capital Partners, The Carlyle Group, and Clayton Dubilier & Rice, which is expected to reduce revenues and operating profit by approximately $12 billion and $800 million, respectively, and the company's commitment to debt-financed share repurchases.

Fitch is also concerned that a correction in the housing market may take longer than expected, which would further pressure Home Depot's operating performance. However, Home Depot is he largest home improvement retailer and generates  approximately $1 billion in free cash flow.