Home Depot, Inc. (HD) - Description of business

Symbol:	HD
Type:	NYSE
State location:	GA
State of Inc:	DE
Phone:	770-433-8211
Fax:	770-431-2685
Web Site:	www.homedepot.com
Full Time Employees:	300000
Business Address:	2455 PACES FERRY ROAD ATLANTA GA 30339-4024 770-433-82
Mailing Address:	2455 PACES FERRY ROAD ATLANTA GA 30339-4024

Introduction

The Home Depot, Inc. is the world's largest home improvement retailer and the second largest retailer in the United States ("U.S."), based on Net Sales for the fiscal year ended January 29, 2006 ("fiscal 2005"). As of the end of fiscal 2005, we were operating 2,042 stores, most of which are The Home Depot® stores. The following is a description of our The Home Depot stores, Home Depot Supply and our other store formats.

The Home Depot stores sell a wide assortment of building materials, home improvement and lawn and garden products and provide a number of services. The Home Depot stores average approximately 105,000 square feet of enclosed space, with approximately 23,000 additional square feet of outside garden area. As of the end of fiscal 2005, we had 1,984 The Home Depot stores located throughout the U.S. (including the territories of Puerto Rico and the Virgin Islands), Canada and Mexico.

In addition to The Home Depot stores, we have a retail store format that sells products and services primarily for home decorating and remodeling projects called EXPO Design Center and two retail store formats focused on professional customers called Home Depot Supply and The Home Depot Landscape Supply. As of the end of fiscal 2005, we were operating 34 EXPO Design Center stores, three Home Depot Supply stores and 11 The Home Depot Landscape Supply stores. We also have two The Home Depot Floor Stores located in Texas and Florida that primarily sell flooring products.

In addition to our retail stores, our business also includes Home Depot Supply. Home Depot Supply distributes products and sells installation services primarily to professional business contractors, businesses and municipalities and generally operates in the following three areas:

Maintenance, Repair and Operations ("MRO")

Builder

Professional Supply

In January 2006, we entered into a definitive merger agreement to acquire Hughes Supply, a leading distributor of construction, repair and maintenance products, for aggregate consideration of approximately $3.5 billion. Upon closing, Hughes Supply will be part of Home Depot Supply.

The Home Depot, Inc. is a Delaware corporation that was incorporated in 1978. Our Store Support Center (corporate office) is located at 2455 Paces Ferry Road, N.W., Atlanta, Georgia 30339. Our telephone number is (770) 433-8211.

We maintain an Internet website at www.homedepot.com. We make available on our website, free of charge, our Annual Reports to shareholders, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements and Forms 3, 4 and 5 as soon as reasonably practicable after filing such documents with, or furnishing such documents to, the Securities and Exchange Commission.

We have included our website addresses throughout this filing only as textual references. The information contained on our websites is not incorporated by reference into this Form 10-K.

Retail Businesses

The Home Depot Stores

Operating Strategy. Our operating strategy is to offer a broad assortment of high-quality merchandise and services at competitive prices using knowledgeable, service-oriented personnel and strong marketing and credit promotions. We believe that our associates' knowledge of products and home improvement techniques and applications is very important to our marketing approach and our ability to maintain and enhance customer satisfaction.

Customers. The Home Depot stores serve three primary customer groups:

Do-It-Yourself ("D-I-Y") Customers:

Do-It-For-Me ("D-I-F-M") Customers:

Professional Customers:

Products. A typical The Home Depot store stocks 35,000 to 45,000 products during the year, including both national brand name and proprietary items. The following table shows the percentage of revenues of each major product group (and related services) for each of the last three fiscal years:

	Percentage of Revenues for Fiscal Year Ended
Product Group	January 29, 2006		January 30, 2005		February 1, 2004
Building materials, lumber and millwork	24.2	%	24.4	%	23.2	%
Plumbing, electrical and kitchen	29.4		29.0		28.9
Hardware and seasonal	27.1		26.9		27.6
Paint, flooring and wall covering	19.3		19.7		20.3

Total	100.0	%	100.0	%	100.0	%

We buy our store merchandise from suppliers located throughout the world and are not dependent on any single supplier. Most of our merchandise is purchased directly from manufacturers, which eliminates "middleman" costs. We believe that competitive sources of supply are readily available for substantially all of the products we sell in The Home Depot stores.

To complement and enhance our product selection, we have formed strategic alliances and exclusive relationships with selected suppliers to market products under a variety of well-recognized brand names. During fiscal 2005, we offered a number of proprietary and exclusive brands across a wide range of departments including, but not limited to, Behr Premium Plus® paint, Charmglow® gas grills, Hampton Bay® lighting, Mills Pride® cabinets, Vigoro® lawn care products, Husky® hand tools, RIDGID® and Ryobi® power tools, Pegasus® faucets, Traffic Master® carpet, Glacier Bay® bath fixtures and Veranda® decking products. We may consider additional strategic alliances and relationships with other suppliers and will continue to assess opportunities to expand the range of products available under brand names that are exclusive to The Home Depot.

In 2005, innovative and distinctive products continued to be a growth driver supporting our merchandising strategy. The following successes helped differentiate The Home Depot in the marketplace:

We maintain a global sourcing merchandise program to source high-quality products directly from manufacturers. This gives our customers a broader selection of innovative products and better value, while enhancing our gross margin. Our product development merchants travel internationally to identify opportunities to purchase items directly for our stores. Additionally, we have two sourcing offices located in Shanghai and Shenzhen, China, and have a quality assurance engineer located in Milan,

Italy. We also have product development merchants, as well as a sourcing office, in Monterrey, Mexico. These initiatives enable us to improve product features and quality, to import products not currently available to our customers and to offer products at a lower price than would otherwise be available if purchased from third-party importers. We currently source products from more than 600 factories in approximately 35 countries.

Services.     The Home Depot and EXPO Design Center stores offer a variety of installation services. These services target D-I-F-M customers who select and purchase products and installation of those products from us. These installation programs include products such as carpeting, flooring, cabinets, countertops and water heaters. In addition, we provide professional installation of a number of products sold through our in-home sales programs, such as generators and furnace and central air systems. Our wholly-owned subsidiaries, THD At-Home Services, Inc. and Home Depot Installation Services, Inc., sell and install our roofing, siding and window programs. With the exception of Home Depot Installation Services, Inc., which employs its own qualified installers, The Home Depot's installation services are provided by qualified independent contractors throughout the U.S. and Canada. We also arrange for the provision of flooring, countertop, cabinet and window covering installation services to production home builders through our Creative Touch Interiors brand. During the fourth quarter of fiscal 2005, we extended our services business by acquiring Chem-Dry, the world's largest carpet and upholstery cleaning franchisor. Chem-Dry has nearly 4,000 franchises worldwide, including 2,500 in the U.S.

Store Growth

United States .    At the end of fiscal 2005, we were operating 1,793 The Home Depot stores in the U.S., including the territories of Puerto Rico and the Virgin Islands. During fiscal 2005, we opened 140 new The Home Depot stores, including four relocations, in the U.S. Although these new store openings occurred primarily in existing markets, we continued our geographic expansion by opening stores in a number of new markets.

To increase customer service levels, gain incremental sales and enhance long-term market penetration, we often open new stores near the edge of market areas served by existing stores. While these openings may initially have a negative impact on comparable store sales growth, we believe this "cannibalization" strategy increases customer satisfaction and our overall market share by reducing delays in shopping, increasing utilization by existing customers and attracting new customers to more convenient locations. During fiscal 2005, we believe that approximately 20% of our stores were cannibalized by certain of our new stores.

Canada .    At the end of fiscal 2005, we were operating 137 The Home Depot stores in ten Canadian provinces. Of these stores, 21 were opened during fiscal 2005, including one relocation.

Mexico .    At the end of fiscal 2005, we were operating 54 stores in Mexico. Of these stores, 10 were opened during fiscal 2005.

China.     At the end of fiscal 2004, we entered into an arrangement to lease commercial office space in Shanghai to support a retail initiative in China. We are currently pursuing our strategy for entry into the China home improvement marketplace.

EXPO Design Center Stores

EXPO Design Center stores are designed to be a complete home decorating and remodeling resource for middle- to upper- income D-I-F-M customers by offering interior design products for kitchens, baths, appliances and flooring, as well as products for lighting, decorating and storage and organization projects, beyond those available in The Home Depot stores. In each of the 34 EXPO Design Center stores, customers are also offered complete project management and installation services through

associates who have expertise in designing, planning and completing decorating and remodeling projects.

Other Businesses

Home Depot Supply

Apex Supply Company

Apex Supply Company is a wholesale distributor of plumbing, HVAC, appliances and other related products primarily to trade and mechanical contractors. Apex Supply employs approximately 580 associates through 25 locations in the Southeast.

Contractors' Warehouse

Contractors' Warehouse, acquired in June 2005, offers over 10,000 items of building materials and construction supplies to small contractors and remodeling tradesmen through eight retail stores located in California. Contractors' Warehouse employs approximately 500 associates.

Creative Touch Interiors

Creative Touch Interiors ("CTI") provides builder design center services for production home builders with solutions for flooring, countertops, cabinets, window coverings and other interior products. CTI has relationships with 18 of the top 20 home builders in the U.S., as well as other regional and local home builders. Through these operations, CTI manages the complete process, from helping customers make design choices to purchasing, scheduling and installation of its products for entire housing communities. CTI currently conducts operations from 37 facilities in 14 states and employs approximately 2,900 associates.

Home Depot Supply Stores

Home Depot Supply stores offer personal service to contractors and other professional customers by providing experienced account managers, expanded lumber and building material assortments, greater quantities of merchandise and expanded delivery services. At the end of fiscal 2005, we were operating three Home Depot Supply retail stores in two states and employed approximately 150 associates.

Home Depot Supply (formerly Maintenance Warehouse)

Home Depot Supply is a leading distributor of maintenance, repair and operating supplies to the multi-family housing, hospitality and institutional industries. Through its catalogs, direct mail and field sales representatives, Home Depot Supply offers approximately 16,000 items. Home Depot Supply, which employs approximately 2,200 associates, is a multi-channel business with a nationwide field sales organization, broad line catalog and user friendly website at www.hdsupply.com. Orders are fulfilled through one of Home Depot Supply's 20 distribution centers and are shipped for same-day or next-day delivery to customers across the U.S.

National Waterworks

National Waterworks, acquired in August 2005, is a leading distributor of a wide range of water and wastewater transmission products, including pipes, fittings, valves, meters, fire hydrants, service and repair products and related components. Through its network of 137 branches in 36 states, National Waterworks sells directly to municipalities and to contractors who serve municipalities and perform residential, commercial and industrial waterworks projects. National Waterworks employs approximately 1,500 associates.

White Cap Construction

White Cap Construction is a leading supplier of specialty hardware, tools and materials throughout the U.S. White Cap employs approximately 2,900 associates and offers a broad range of products through a network of 103 branch locations in 23 states. White Cap markets its products to large- and medium-sized professional contractors who utilize these products in a wide range of commercial, industrial, residential and infrastructure construction projects. White Cap supplies building materials and structural hardware, as well as power and hand tools.

Williams Bros. Lumber Company

Williams Bros. Lumber Company, acquired in June 2005, is a leading supplier of lumber and building materials to professional, residential and commercial builders. Williams Bros. operates through 16 branches located throughout Georgia and employs 1,600 associates.

Home Depot Direct

Home Depot Direct offers customers expanded merchandise selection and extra time convenience through website and catalog shopping, with direct product delivery to the home, office or job site. It also provides customers with valuable online information about home improvement topics and merchandise for sale in local The Home Depot stores.

Its primary website is located at www.homedepot.com. This site offers an assortment of products available for sale, information about its products and projects, calculators to estimate the amount and kinds of materials needed to complete a project, as well as information about The Home Depot (including store locations and hours of operation) and links to other Home Depot Direct on-line businesses. The focus of this website is on providing products, information and customer service. We believe our Internet site provides us with an opportunity to build relationships with, and educate, our customers, improve service, and provide convenient shopping from home and increase store sales.

Through www.homedepot.com, Home Depot Direct offers an assortment of over 30,000 items for sale. These items are selected based on their potential for on-line sales. Managing product selection and pricing nationally allows it to promote the same product and price to all visitors to its websites and allows Home Depot Direct to leverage certain on-line marketing channels that reach across many or all The Home Depot store pricing markets.

During fiscal 2005, Home Depot Direct continued to enhance the content of www.homedepot.com to describe each of the installation services The Home Depot offers and the capability to allow potential customers to conveniently sign up on-line for in-home consultations. We anticipate continuing to improve the quality and quantity of services-related content on-line.

Home Depot Direct manages other websites in support of the various The Home Depot brands and businesses. The Canadian website, www.homedepot.ca, provides an assortment of products available for sale online in Canada, a store locator, and information on The Home Depot and its Canadian services. The Canadian website is bilingual to service The Home Depot customers in Canada's two official languages, English and French. The Contractor Services Site, www.contractorservices.homedepot.com, allows contractors to browse and purchase store products that can be picked up in The Home Depot stores or delivered to their home. Customers may obtain store information and locations on EXPO Design Center stores at www.expo.com.

Home Depot Direct's 10 Crescent Lane site, www.10CrescentLane.com, and Paces Trading Company site, www.PacesTrading.com, offer their products for sale online using similar photography and content as found in their respective catalogs to provide a consistent brand experience.

Your Other Warehouse

Your Other Warehouse, which is also a part of Home Depot Direct, is a distributor of special order faucet and plumbing fixtures, lighting, fan and hardware products for The Home Depot and EXPO Design Center stores and a variety of other third-party resellers. Your Other Warehouse carries over 60,000 products from over 130 suppliers, including Kohler®, American Standard® and other major manufacturers. Your Other Warehouse operates five distribution facilities and a call center and employs approximately 900 associates.

Store Support Services

Information Technologies.     During fiscal 2005, we continued to improve our technology capabilities by opening a second technology center, located in Austin, Texas. In addition to providing redundancy, the center allows for growth and expansion. The center currently houses engineers, software developers and computer operation staff.

In fiscal 2005, we completed the rollout of back-end scanned receiving to all U.S. and Canadian stores, which allows us to simplify, standardize and automate how we receive product. We commenced vendor certification for certified receiving. We continued installation of self-checkout registers, which, as of the end of fiscal 2005, were in 1,272 stores and we grew centralized automatic replenishment to 20% of store sales. We also implemented a Special Order Services Initiative pilot in 285 stores and we introduced new mobile cart functionality in all stores.

While our technology investments have been primarily focused in our stores, we invested in technology improvements in other areas. During fiscal 2005, we implemented new financial systems for our Mexico retail operations, upgraded our call centers, improved our websites and launched several new direct-to-consumer brands.

Associate Development.     At the end of fiscal 2005, we employed approximately 345,000 associates, of whom approximately 26,000 were salaried, with the remainder compensated on an hourly or temporary basis. Approximately 68% of our associates are employed on a full-time basis. We believe that our employee relations are very good. To attract and retain qualified personnel, we seek to maintain competitive salary and wage levels in each market we serve.

We develop our training programs in a continuing effort to service the needs of our customers and associates. These programs, including mandatory product knowledge training classes, are designed to increase associates' knowledge of merchandising departments and products, and to educate, develop and test the skills of our associates. Because we primarily promote or relocate current associates to serve as managers and assistant managers for new stores, training and assessment of our associates is essential to our growth. Our district managers and store managers typically meet with our human resources managers to discuss the development of assistant managers and department heads.

We have implemented programs in our stores and divisional offices to ensure that we hire and promote the most qualified associates in a non-discriminatory way. One of the most significant programs we have is our annual Human Resources Review process, which assesses and reviews leaders and teams, succession planning and executive pipeline, high potential associates, staffing, retention, diversity, training and compliance. The program is closely linked to our Performance Management Process, which evaluates the performance, leadership and potential of all associates. We also maintain a list of qualified associates who are interested in new assignments and of qualified outside applicants that can be reviewed when positions become available.

Marketing.     We are one of the nation's largest retail advertisers, and utilize a broad range of mass media and targeted media. We also incorporate major sponsorships into our marketing plan, such as NASCAR®, the U.S. Olympic® team, The Home Depot Center, ESPN College Game Day®, and a number of home and garden shows. We also utilize marketing arrangements with television shows of

strategic importance, such as Trading Spaces®, While You Were Out® and This Old House®. We extend our reach and educate our customers through proprietary publications, such as the 1-2-3 ® home improvement book series.

We execute our marketing campaigns on both a national and local basis. Because our stores are located throughout the U.S., Canada and Mexico, we can achieve greater efficiencies than smaller retailers by using national advertising. At the same time, we tailor our advertising locally to respond to market differences, both in terms of products and the competitive environment. We produce advertisements in English, Spanish and French-Canadian.

Credit Services.     We offer credit purchase programs through third-party credit providers to professional, D-I-Y and D-I-F-M customers. In fiscal 2005, approximately 4 million new The Home Depot credit accounts were opened, bringing the total number of The Home Depot account holders to approximately 16 million. Proprietary credit card sales accounted for approximately 26% of store sales in fiscal 2005. We also offer an unsecured Home Improvement Loan that gives our customers the opportunity to finance the purchase of products and services in our stores. We believe that this loan program not only supports large sales, such as kitchen and bath remodels, but also generates incremental sales from our customers.

Intellectual Property.     Through our wholly-owned subsidiary, Homer TLC, Inc., we have registered or applied for registration, in a number of countries, for a variety of internet domain names, service marks and trademarks for use in our businesses, including The Home Depot®; Home Depot Direct; Hampton Bay® fans, lighting and accessories; Glacier Bay® toilets, sinks and faucets; Pegasus® faucets and bath accessories; Commercial Electric® lighting fixtures; Workforce® tools, tool boxes and shelving; www.10CrescentLane.com and www.PacesTrading.com. Furthermore, through various acquisitions and filings, we have also obtained and now maintain patent portfolios relating to certain products and services provided by The Home Depot, and continually seek to patent or otherwise protect selected innovations we incorporate into our products and business operations. We regard our intellectual property as having significant value and as being an important factor in the marketing of our brand, e-commerce, stores and new areas of business. We are not aware of any facts that could be expected to have a material adverse affect on our intellectual property.

Quality Assurance Program.     We have a quality assurance program for our directly imported globally-sourced products. Through this program, we have established criteria for supplier and product performance, which measures factors such as product quality and timeliness of shipments. The performance record is made available to the factories to allow them to strive for improvement. The quality assurance program addresses the following three main components:

Logistics.     We use several mechanisms to lower distribution costs and increase our efficiencies. Import distribution centers process our globally-sourced merchandise. At the end of fiscal 2005, we had 16 import distribution centers located in the U.S. and Canada. At the end of fiscal 2005, we also had 30 lumber distribution centers in the U.S. and Canada to support the lumber demands of our stores and

10 transit facilities. At our transit facilities, we receive merchandise from manufacturers and immediately provide transfer onto trucks for delivery to our stores. We believe that the transit facility network will provide service to approximately 80% of our stores in the continental U.S. by the end of fiscal 2006. We also operate other specialty distribution centers for specific merchandise needs. The distribution centers and transit facilities allow us to provide high service levels to our stores at relatively low costs. At the end of fiscal 2005, approximately 40% of the merchandise shipped to our stores was processed through our network of distribution centers and transit facilities. As our networks evolve, we expect to increase the percentage of merchandise processed by our facilities. The remaining merchandise will be shipped directly from our suppliers to our stores.

In addition to replenishing merchandise supplies at our stores, we also provide delivery services directly to our customers. We continually assess opportunities to improve our distribution network to better satisfy the needs of our stores and our customers and to lower costs.

Environmental, Health & Safety ("EH&S").     We are committed to maintaining a safe environment for our customers and associates, and protecting the environment of the communities in which we do business. Our EH&S function in the field is directed by trained associates focused primarily on execution of the EH&S programs. Additionally, we have an Atlanta-based team of dedicated EH&S professionals who evaluate, develop, implement and enforce policies, processes and programs on a Company-wide basis. Our EH&S professionals are responsible for managing our Global EH&S program, which is implemented in partnership with store level associates, store and division management, and the Human Resources and Merchandising Departments. The primary elements of our EH&S program are (1) establishment of EH&S standards and processes for all aspects of store operations and merchandising, (2) effective training of appropriate associates on all applicable standards and (3) verifying compliance with established EH&S standards.

Seasonality.     Our business is seasonal to a certain extent. Generally, our highest volume of sales occurs in our second fiscal quarter and the lowest volume occurs during our fourth fiscal quarter.

Competition.     Our business is highly competitive, based in part on price, store location, customer service and depth of merchandise. In each of the markets we serve, there are a number of other home improvement stores, electrical, plumbing and building materials supply houses and lumber yards. With respect to some products, we also compete with discount stores, local, regional and national hardware stores, mail order firms, warehouse clubs, independent building supply stores and, to a lesser extent, other retailers. In addition to these entities, our EXPO Design Center stores compete with specialty design stores or showrooms, some of which are only open to interior design professionals. Moreover, our Home Depot Supply businesses compete with local and regional distributors and wholesalers and manufacturers that sell products directly to their customer bases. Due to the variety of competition we face, we are unable to precisely measure the impact on our sales by our competitors. We estimate that our share of the U.S. home improvement and professional supply market is approximately 11% and we believe that we are an effective and significant competitor in our markets.

Item 1A. Risk Factors.

The risks described below could materially and adversely affect our business, financial condition and results of operations. These risks could cause our actual results to differ materially from our historical experience and from results predicted by forward-looking statements made by us related to conditions or events that we anticipate may occur in the future. Those statements may relate to such matters as Net Sales growth, increases in comparable store sales, impact of cannibalization, commodity price inflation and deflation, implementation of store initiatives, protection of intellectual property rights, Net Earnings performance, earnings per share, stock-based compensation expense, store openings and closures, payments on commercial paper borrowings, the effect of adopting certain accounting standards, future financial reporting, financing, margins, return on invested capital, operations after the

closing of the merger with Hughes Supply, the timing and certainty of closing of the merger with Hughes Supply, the accounting and financial impact of the merger with Hughes Supply, strategic direction and the demand for our products and services. All forward-looking statements by us are qualified by the risks described below. These risks are not the only risks we face. Our operations could also be affected by additional factors that are not presently known to us or by factors that we currently consider immaterial to our business.

Rising costs, a reduction in the availability of consumer credit, weather and other conditions in North America could adversely affect our costs of doing business, demand for our products and services and our average ticket price.

Interest rates, fuel and other energy costs, labor and healthcare costs, consumer credit availability, weather, natural disasters, terrorism and other conditions that adversely affect consumer demand for our products and services could adversely affect our financial performance. These and other similar factors could:

We rely on third party suppliers, and if we fail to identify and develop relationships with a sufficient number of qualified suppliers, our ability to timely and efficiently access products that meet our high standards for quality could be adversely affected.

We buy our store merchandise from suppliers located throughout the world. Our ability to continue to identify and develop relationships with qualified suppliers who can satisfy our high standards for quality and our need to access products in a timely and efficient manner is a significant challenge. Our ability to access products also can be adversely affected by political instability, the financial instability of suppliers, suppliers' noncompliance with applicable laws, trade restrictions, tariffs, currency exchange rates, transport capacity and cost and other factors beyond our control.

If we are unable to effectively manage and expand our alliances and relationships with selected suppliers of brand name products, we may be unable to effectively execute our strategy to differentiate us from our competitors.

As part of our strategy of differentiation, we have formed strategic alliances and exclusive relationships with selected suppliers to market products under a variety of well-recognized brand names. If we are unable to manage and expand these alliances and relationships or identify alternative sources for comparable products, we may not be able to effectively execute our strategy of differentiation.

Any inability to open new stores on schedule will delay the contribution of these new stores to our financial performance.

We expect to increase our presence in existing markets and enter new markets. Our ability to open new stores will depend primarily on our ability to:

Our ability to open new stores also will be affected by environmental regulations, local zoning issues and other laws related to land use. Failure to effectively manage these and other similar factors will affect our ability to open stores on schedule, which will delay the impact of these new stores on our financial performance.

The implementation of our technology initiatives could disrupt our operations in the near term, and our technology initiatives might not provide the anticipated benefits or might fail.

We have made and will continue to make significant technology investments both in our stores and in our administrative functions. Our technology initiatives are designed to streamline our operations to allow our associates to continue to provide high quality service to our customers and to provide our customers a better in-store experience. The cost and potential problems and interruptions associated with the implementation of our technology initiatives could disrupt or reduce the efficiency of our operations in the near term. In addition, our new or upgraded technology might not provide the anticipated benefits, it might take longer than expected to realize the anticipated benefits or the technology might fail altogether.

We may not timely identify or effectively respond to consumer trends, which could adversely affect our relationship with our customers, the demand for our products and services and our market share.

It is difficult to successfully predict the products and services our customers will demand. The success of our business depends in part on our ability to identify and respond to evolving trends in demographics and consumer preferences. Failure to timely identify or effectively respond to changing consumer tastes, preferences, spending patterns and home improvement needs could adversely affect our relationship with our customers, the demand for our products and services and our market share.

The inflation or deflation of commodity prices could affect our prices, demand for our products, sales and profit margins.

Prices of certain commodity products, including lumber and other raw materials, are historically volatile and are subject to fluctuations arising from changes in domestic and international supply and demand, labor costs, competition, market speculation, government regulations and periodic delays in delivery. Rapid and significant changes in commodity prices may affect our sales and profit margins.

If we cannot successfully identify and complete acquisition opportunities and integrate the acquired businesses, we may be unable to successfully execute our expansion strategy.

The success of our expansion strategy depends, in part, on our ability to identify attractive acquisition opportunities, complete acquisitions on financially attractive terms and integrate them with our other businesses. Integration of our acquisitions presents significant challenges and risks to our business, including:

There is no assurance that we will be able to successfully manage the risks associated with acquiring and integrating other businesses.

If we cannot successfully manage the unique challenges presented by international markets, we may not be successful in expanding our international operations.

Our expansion strategy includes expansion of our operations in existing and new international markets by selective acquisitions, strategic alliances and the opening of new stores. Our ability to successfully execute our expansion strategy in international markets is affected by many of the same operational risks we face in expanding our U.S. operations. In addition, our international expansion may be adversely affected by our ability to identify and gain access to local suppliers as well as by local laws and customs, legal and regulatory constraints, political and economic conditions and currency regulations of the countries or regions in which we currently operate or intend to operate in the future. Risks inherent in our international operations also include, among others, the costs and difficulties of managing international operations, adverse tax consequences and greater difficulty in enforcing intellectual property rights. Additionally, foreign currency exchange rates and fluctuations may have an impact on our future costs or on future cash flows from our international operations.

Our success depends upon our ability to attract, train and retain highly qualified associates.

To be successful, we must attract, train and retain a large and growing number of highly qualified associates while controlling related labor costs. Our ability to control labor costs is subject to numerous external factors, including prevailing wage rates and health and other insurance costs. In addition, many of our associates are in hourly positions with historically high turnover rates. We compete with other retail and non-retail businesses for these associates and invest significant resources in training and motivating them. We also depend on our executives and other key associates for our success. There is no assurance that we will be able to attract or retain highly qualified associates in the future.

Changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters could significantly affect our financial results.

Generally accepted accounting principles and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of matters that are relevant to our business, such as revenue recognition, asset impairment, inventories, self-insurance and litigation, are highly complex and involve many subjective assumptions, estimates and judgments by our management. Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judgments by our management could significantly change our reported or expected financial performance.

Increased competition could adversely affect prices and demand for our products and services and could decrease our market share.

Our business is highly competitive, based principally on price, store location, customer service and depth of merchandise. In each of the markets we serve, there are a number of other home improvement stores, electrical, plumbing and building materials supply houses and lumber yards. With respect to some products, we also compete with discount stores, local, regional and national hardware stores, mail order firms, warehouse clubs, independent building supply stores and other retailers. In addition, we compete with specialty design stores or showrooms, some of which are only open to interior design professionals, local and regional distributors, and wholesalers and manufacturers that sell products directly to their customer bases. Moreover, our Home Depot Supply businesses compete with local and regional distributors and wholesalers and manufacturers that sell products directly to their customer bases. Intense competitive pressures from one or more of our competitors could affect prices or demand for our products and services. If we are unable to timely and appropriately respond to these pressures, our financial performance and our market share could be adversely affected.

We are involved in a number of legal proceedings, and while we cannot predict the outcomes of such proceedings and other contingencies with certainty, some of these outcomes may adversely affect our operations or increase our costs .

We are involved in a number of legal proceedings, including consumer, employment, tort and other litigation. We cannot predict the outcomes of these legal proceedings and other contingencies, including environmental remediation and other proceedings commenced by government authorities, with certainty. The outcome of some of these legal proceedings and other contingencies could require us to take or refrain from taking actions which could adversely affect our operations or could require us to pay substantial amounts of money. Additionally, defending against these lawsuits and proceedings may involve significant expense and diversion of management's attention and resources from other matters.

Our costs of doing business could increase as a result of changes in federal, state or local regulations.

Changes in the federal, state or local minimum wage or living wage requirements or changes in other wage or workplace regulations could increase our costs of doing business. In addition, changes in federal, state or local regulations governing the sale of some of our products could increase our costs of doing business.

Item 1B. Unresolved Staff Comments.

Not applicable.