HD Supply Announces 3Q Earnings

ATLANTA — HD Supply Holdings, Inc. today reported Net sales of $1.6 billion for the third quarter of fiscal 2018 ended October 28, 2018, an increase of $242 million, or 17.7 percent, as compared to the third quarter of fiscal 2017. Organic sales growth for the third quarter of fiscal 2018 was 9.4 percent, as compared to the third quarter of fiscal 2017.

“I couldn’t be more proud of the team’s performance in the third quarter. We continued to see both businesses deliver impressive sales growth and have successfully enhanced our capital structure through strategic refinancing and opportunistic share repurchases,” stated Joe DeAngelo, Chairman and CEO of HD Supply (HDS). “I am also delighted to announce that on November 30, 2018, the Board of Directors authorized a new $500 million share repurchase program, bringing our total authorization to $1.5 billion since 2017.”

Gross profit increased $87 million, or 16.1 percent, to $629 million for the third quarter of fiscal 2018, as compared to $542 million for the third quarter of fiscal 2017. Gross profit was 39.0 percent of Net sales for the third quarter of fiscal 2018, down approximately 60 basis points from 39.6 percent for the third quarter of fiscal 2017.

Operating income increased $31 million, or 17.0 percent, to $213 million for the third quarter of fiscal 2018, as compared to $182 million for the third quarter of fiscal 2017. Operating income was 13.2 percent of Net sales for the third quarter of fiscal 2018, down approximately 10 basis points from 13.3 percent for the third quarter of fiscal 2017.

Income from continuing operations increased $36 million, or 78.3 percent, to $82 million for the third quarter of fiscal 2018, as compared to $46 million for the third quarter of fiscal 2017.

Net income decreased $370 million, or 81.9 percent, to $82 million for the third quarter of fiscal 2018, as compared to $452 million for the third quarter of fiscal 2017. Net income in the third quarter of fiscal 2017 included $406 million of Income from discontinued operations, net of tax.

Adjusted EBITDA increased $34 million, or 15.9 percent, to $248 million for the third quarter of fiscal 2018, as compared to $214 million for the third quarter of fiscal 2017. Adjusted EBITDA was 15.4 percent of Net sales for the third quarter of fiscal 2018, down approximately 20 basis points from 15.6 percent for the third quarter of fiscal 2017.

Adjusted net income increased $35 million, or 23.5 percent, to $184 million for the third quarter of fiscal 2018, as compared to $149 million for the third quarter of fiscal 2017. Adjusted net income per diluted share was $1.00 in the third quarter of fiscal 2018, as compared to $0.80 in the third quarter of fiscal 2017.

As of October 28, 2018, HD Supply’s combined liquidity of $920 million was comprised of $52 million in cash and cash equivalents and $868 million of additional available borrowings (excluding $175 million of borrowings on available cash balances) under HD Supply, Inc.’s senior asset-based lending facility, based on qualifying inventory and receivables.

Business Unit Performance

Facilities Maintenance
Net sales increased $56 million, or 7.4 percent, to $810 million in the third quarter of fiscal 2018, as compared to $754 million for the third quarter of fiscal 2017. Adjusted EBITDA increased $5 million, or 3.5 percent, to $149 million for the third quarter of fiscal 2018, as compared to $144 million for the third quarter of fiscal 2017. Adjusted EBITDA was 18.4 percent of Net sales for the third quarter of fiscal 2018, down approximately 70 basis points from 19.1 percent for the third quarter of fiscal 2017.

Construction & Industrial
Net sales increased $186 million, or 30.1 percent, to $803 million in the third quarter of fiscal 2018, as compared to $617 million for the third quarter of fiscal 2017. Organic sales growth was approximately 11.8 percent in the third quarter of fiscal 2018 as compared to the third quarter of fiscal 2017. Adjusted EBITDA increased $29 million, or 41.4 percent, to $99 million for the third quarter of fiscal 2018, as compared to $70 million for the third quarter of fiscal 2017. Adjusted EBITDA was 12.3 percent of Net sales for the third quarter of fiscal 2018, up approximately 100 basis points from 11.3 percent for the third quarter of fiscal 2017.

Third-Quarter Monthly Sales Performance
Net sales for August, September and October of fiscal 2018 were $513 million, $481 million and $618 million, respectively. There were 20 selling days in August, 19 selling days in September and 25 selling days in October in both 2018 and 2017. Average year-over-year daily sales growth for August, September and October was 17.7 percent, 19.4 percent and 16.3 percent, respectively. On an organic basis, average year-over-year daily sales growth for August, September and October was 9.9 percent, 10.9 percent and 7.7 percent, respectively.

Preliminary November Sales Results
Preliminary Net sales in November 2018 were approximately $426 million, which represents year-over-year average daily sales growth of approximately 14.6 percent (6.8 percent on an organic basis). Preliminary November year-over-year average daily sales growth by business segment was approximately 7.0 percent for Facilities Maintenance and approximately 23.1 percent (6.6 percent on an organic basis) for Construction & Industrial. There were 18 selling days in both November 2018 and November 2017.

Capital Structure Activities

Redemption of the April 2016 Senior Unsecured Notes and Issuance of the October 2018 Senior Unsecured Notes
On October 11, 2018, HD Supply issued $750 million of 5.375% Senior Unsecured Notes due 2026 (“the October 2018 Senior Unsecured Notes”) at par. The Company used the net proceeds from the October 2018 Senior Unsecured Notes issuance, together with available cash and borrowings on our revolving credit facility, to redeem all of the outstanding $1,000 million aggregate principal of the 5.75% Senior Unsecured Notes due 2024.

Amendment of the Term Loan Facility and New Interest Rate Swap
On October 22, 2018, HD Supply entered into an amendment to the existing Term Loan Facility, which allowed for the refinancing of all the outstanding term loans totaling $1,070 million with a new tranche of term loans (the “Term B-5 Loans”) in the amount of $1,070 million, at an interest rate of LIBOR plus 1.75% or base rate plus 0.75%, maturing on October 17, 2023. On October 24, 2018, the Company entered into an interest rate swap agreement, which effectively converts $750 million of the Company’s Term B-5 Loans from a rate of LIBOR plus 1.75% to a 4.82% fixed rate. With this transaction, the interest on more than 75% of our debt has effectively been fixed.

Share Repurchase Program
On November 30, 2018, the Company’s Board of Directors authorized a new share repurchase program for the repurchase of up to an aggregate $500 million of its common stock. The Company will conduct repurchases under the share repurchase program in the open market and through broker negotiated purchases in compliance with Rule 10b5-1 and Rule 10b-18 of the Securities Exchange Act of 1934, as amended, and subject to market conditions, restrictive covenants contained in existing debt agreements, applicable legal requirements and other relevant factors. This share repurchase program does not obligate the Company to acquire any particular amount of its common stock, and it may be terminated at any time at the Company’s discretion. As of November 30, 2018, the Company has $656 million remaining under its new and previous share repurchase authorizations.

Fourth-Quarter and Full Year 2018 Outlook

For the fourth quarter of fiscal 2018, Net sales are anticipated to be in the range of $1,375 million and $1,425 million, Adjusted EBITDA1 in the range of $173 million and $183 million and Adjusted net income per diluted share1 in the range of $0.63 and $0.68. The Adjusted net income per diluted share range assumes a fully diluted weighted average share count of approximately 180 million. At the mid-point of the ranges, our fourth-quarter 2018 Net sales and Adjusted EBITDA translate into approximately 18 percent growth and 17 percent growth, respectively, versus prior year.

For the full year fiscal 2018, Net sales are anticipated to be in the range of $5,976 million and $6,026 million, Adjusted EBITDA1 in the range of $857 million and $867 million and Adjusted net income per diluted share1 in the range of $3.33 and $3.38. The Adjusted net income per diluted share range assumes a fully diluted weighted average share count of approximately 183 million. At the mid-point of the ranges, our full year 2018 Net sales and Adjusted EBITDA translate into approximately 17 percent growth and 18 percent growth, respectively, versus prior year.