Financial Accounting

30

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders The Home Depot, Inc.:

We have audited The Home Depot, Inc.’s internal control over financial reporting as of January 29, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Home Depot, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, The Home Depot, Inc. maintained, in all material respects, effective internal control over financial reporting as of January 29, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Consolidated Balance Sheets of The Home Depot, Inc. and subsidiaries as of January 29, 2017 and January 31, 2016, and the related Consolidated Statements of Earnings, Comprehensive Income, Stockholders’ Equity, and Cash Flows for each of the fiscal years in the three-year period ended January 29, 2017, and our report dated March 23, 2017 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

Atlanta, Georgia March 23, 2017

31

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders The Home Depot, Inc.:

We have audited the accompanying Consolidated Balance Sheets of The Home Depot, Inc. and subsidiaries as of January 29, 2017 and January 31, 2016, and the related Consolidated Statements of Earnings, Comprehensive Income, Stockholders’ Equity, and Cash Flows for each of the fiscal years in the three-year period ended January 29, 2017. These Consolidated Financial Statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these Consolidated Financial Statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the Consolidated Financial Statements referred to above present fairly, in all material respects, the financial position of The Home Depot, Inc. and subsidiaries as of January 29, 2017 and January 31, 2016, and the results of their operations and their cash flows for each of the fiscal years in the three-year period ended January 29, 2017, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), The Home Depot, Inc.’s internal control over financial reporting as of January 29, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 23, 2017 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP

Atlanta, Georgia March 23, 2017

32

THE HOME DEPOT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS

amounts in millions, except share and per share data January 29, 2017

January 31, 2016

ASSETS Current Assets:

Cash and Cash Equivalents $ 2,538 $ 2,216 Receivables, net 2,029 1,890 Merchandise Inventories 12,549 11,809 Other Current Assets 608 569

Total Current Assets 17,724 16,484 Property and Equipment, at cost 40,426 39,266 Less Accumulated Depreciation and Amortization 18,512 17,075

Net Property and Equipment 21,914 22,191 Goodwill 2,093 2,102 Other Assets 1,235 1,196

Total Assets $ 42,966 $ 41,973 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities:

Short-Term Debt $ 710 $ 350 Accounts Payable 7,000 6,565 Accrued Salaries and Related Expenses 1,484 1,515 Sales Taxes Payable 508 476 Deferred Revenue 1,669 1,566 Income Taxes Payable 25 34 Current Installments of Long-Term Debt 542 77 Other Accrued Expenses 2,195 1,941

Total Current Liabilities 14,133 12,524 Long-Term Debt, excluding current installments 22,349 20,789 Other Long-Term Liabilities 1,855 1,965 Deferred Income Taxes 296 379

Total Liabilities 38,633 35,657 STOCKHOLDERS’ EQUITY

Common Stock, par value $0.05; authorized: 10 billion shares; issued: 1.776 billion shares at January 29, 2017 and 1.772 billion shares at January 31, 2016; outstanding: 1.203 billion shares at January 29, 2017 and 1.252 billion shares at January 31, 2016 88 88 Paid-In Capital 9,787 9,347 Retained Earnings 35,519 30,973 Accumulated Other Comprehensive Loss (867) (898) Treasury Stock, at cost, 573 million shares at January 29, 2017 and 520 million shares at January 31, 2016 (40,194) (33,194)

Total Stockholders’ Equity 4,333 6,316 Total Liabilities and Stockholders’ Equity $ 42,966 $ 41,973

See accompanying Notes to Consolidated Financial Statements.

33

THE HOME DEPOT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS

Fiscal Year Ended(1)

amounts in millions, except per share data January 29,2017 January 31,

2016 February 1,

2015

NET SALES $ 94,595 $ 88,519 $ 83,176 Cost of Sales 62,282 58,254 54,787

GROSS PROFIT 32,313 30,265 28,389

Operating Expenses: Selling, General and Administrative 17,132 16,801 16,280 Depreciation and Amortization 1,754 1,690 1,640

Total Operating Expenses 18,886 18,491 17,920

OPERATING INCOME 13,427 11,774 10,469

Interest and Other (Income) Expense: Interest and Investment Income (36) (166) (337) Interest Expense 972 919 830

Interest and Other, net 936 753 493

EARNINGS BEFORE PROVISION FOR INCOME TAXES 12,491 11,021 9,976 Provision for Income Taxes 4,534 4,012 3,631

NET EARNINGS $ 7,957 $ 7,009 $ 6,345

Weighted Average Common Shares 1,229 1,277 1,338 BASIC EARNINGS PER SHARE $ 6.47 $ 5.49 $ 4.74

Diluted Weighted Average Common Shares 1,234 1,283 1,346 DILUTED EARNINGS PER SHARE $ 6.45 $ 5.46 $ 4.71

————— (1) Fiscal years ended January 29, 2017, January 31, 2016 and February 1, 2015 include 52 weeks.

See accompanying Notes to Consolidated Financial Statements.

34

THE HOME DEPOT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Fiscal Year Ended(1)

amounts in millions January 29, 2017

January 31, 2016

February 1, 2015

Net Earnings $ 7,957 $ 7,009 $ 6,345 Other Comprehensive Income (Loss):

Foreign Currency Translation Adjustments (3) (412) (510) Cash Flow Hedges, net of tax 34 (34) 11 Other — — 1

Total Other Comprehensive Income (Loss) 31 (446) (498) COMPREHENSIVE INCOME $ 7,988 $ 6,563 $ 5,847 ————— (1) Fiscal years ended January 29, 2017, January 31, 2016 and February 1, 2015 include 52 weeks.

See accompanying Notes to Consolidated Financial Statements.

35

THE HOME DEPOT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Accumulated Other

Comprehensive Income (Loss)

Common Stock Paid-In Capital

Retained Earnings

Treasury Stock Stockholders’

Equityamounts in millions, except per share data Shares Amount Shares Amount Balance, February 2, 2014 1,761 $ 88 $ 8,402 $ 23,180 $ 46 (381) $ (19,194) $ 12,522 Net Earnings — — — 6,345 — — — 6,345 Shares Issued Under Employee Stock Plans 7 — 122 — — — — 122 Tax Effect of Stock-Based Compensation — — 136 — — — — 136 Foreign Currency Translation Adjustments — — — — (510) — — (510) Cash Flow Hedges, net of tax — — — — 11 — — 11 Stock Options, Awards and Amortization of Restricted Stock — — 225 — — — — 225 Repurchases of Common Stock — — — — — (80) (7,000) (7,000) Cash Dividends ($1.88 per share) — — — (2,530) — — — (2,530) Other — — — — 1 — — 1 Balance, February 1, 2015 1,768 $ 88 $ 8,885 $ 26,995 $ (452) (461) $ (26,194) $ 9,322 Net Earnings — — — 7,009 — — — 7,009 Shares Issued Under Employee Stock Plans 4 — 73 — — — — 73 Tax Effect of Stock-Based Compensation — — 145 — — — — 145 Foreign Currency Translation Adjustments — — — — (412) — — (412) Cash Flow Hedges, net of tax — — — — (34) — — (34) Stock Options, Awards and Amortization of Restricted Stock — — 244 — — — — 244 Repurchases of Common Stock — — — — — (59) (7,000) (7,000) Cash Dividends ($2.36 per share) — — — (3,031) — — — (3,031) Balance, January 31, 2016 1,772 $ 88 $ 9,347 $ 30,973 $ (898) (520) $ (33,194) $ 6,316 Net Earnings — — — 7,957 — — — 7,957 Shares Issued Under Employee Stock Plans 4 — 76 — — — — 76 Tax Effect of Stock-Based Compensation — — 97 — — — — 97 Foreign Currency Translation Adjustments — — — — (3) — — (3) Cash Flow Hedges, net of tax — — — — 34 — — 34 Stock Options, Awards and Amortization of Restricted Stock — — 267 — — — — 267 Repurchases of Common Stock — — — — — (53) (7,000) (7,000) Cash Dividends ($2.76 per share) — — — (3,404) — — — (3,404) Other — — — (7) — — — (7) Balance, January 29, 2017 1,776 $ 88 $ 9,787 $ 35,519 $ (867) (573) $ (40,194) $ 4,333

See accompanying Notes to Consolidated Financial Statements.

36

THE HOME DEPOT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS

Fiscal Year Ended(1)

amounts in millions January 29, 2017

January 31, 2016

February 1, 2015

CASH FLOWS FROM OPERATING ACTIVITIES: Net Earnings $ 7,957 $ 7,009 $ 6,345 Reconciliation of Net Earnings to Net Cash Provided by Operating Activities:

Depreciation and Amortization 1,973 1,863 1,786 Stock-Based Compensation Expense 267 244 225 Gain on Sales of Investments — (144) (323) Changes in Assets and Liabilities, net of the effects of acquisitions:

Receivables, net (138) (181) (81) Merchandise Inventories (769) (546) (124) Other Current Assets (48) (5) (199) Accounts Payable and Accrued Expenses 446 888 244 Deferred Revenue 99 109 146 Income Taxes Payable 109 154 168 Deferred Income Taxes (117) 15 159 Other 4 (33) (104)

Net Cash Provided by Operating Activities 9,783 9,373 8,242 CASH FLOWS FROM INVESTING ACTIVITIES: Capital Expenditures, net of $179, $165 and $217 of non-cash capital expenditures in fiscal 2016, 2015 and 2014, respectively (1,621) (1,503) (1,442) Proceeds from Sales of Investments — 144 323 Payments for Businesses Acquired, net — (1,666) (200) Proceeds from Sales of Property and Equipment 38 43 48

Net Cash Used in Investing Activities (1,583) (2,982) (1,271) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from Short-Term Borrowings, net 360 60 290 Proceeds from Long-Term Borrowings, net of discounts 4,959 3,991 1,981 Repayments of Long-Term Debt (3,045) (39) (39) Repurchases of Common Stock (6,880) (7,000) (7,000) Proceeds from Sales of Common Stock 218 228 252 Cash Dividends Paid to Stockholders (3,404) (3,031) (2,530) Other Financing Activities (78) 4 (25)

Net Cash Used in Financing Activities (7,870) (5,787) (7,071) Change in Cash and Cash Equivalents 330 604 (100) Effect of Exchange Rate Changes on Cash and Cash Equivalents (8) (111) (106) Cash and Cash Equivalents at Beginning of Year 2,216 1,723 1,929 Cash and Cash Equivalents at End of Year $ 2,538 $ 2,216 $ 1,723 SUPPLEMENTAL DISCLOSURE OF CASH PAYMENTS MADE FOR: Interest, net of interest capitalized $ 924 $ 874 $ 782 Income Taxes $ 4,623 $ 3,853 $ 3,435

————— (1) Fiscal years ended January 29, 2017, January 31, 2016 and February 1, 2015 include 52 weeks.

See accompanying Notes to Consolidated Financial Statements.

37

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business, Consolidation and Presentation The Home Depot, Inc., together with its subsidiaries (the "Company"), is a home improvement retailer that sells a wide assortment of building materials, home improvement products and lawn and garden products and provides a number of services. The Home Depot stores, which are full-service, warehouse-style stores averaging approximately 104,000 square feet of enclosed space, with approximately 24,000 additional square feet of outside garden area, stock approximately 30,000 to 40,000 different kinds of products that are sold to do-it-yourself customers, do-it-for-me customers and professional customers. The Company also offers a significantly broader product assortment through its websites. At the end of fiscal 2016, the Company was operating 2,278 The Home Depot stores, which included 1,977 stores in the United States, including the Commonwealth of Puerto Rico and the territories of the U.S. Virgin Islands and Guam ("U.S."), 182 stores in Canada and 119 stores in Mexico. The Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation.

Fiscal Year The Company’s fiscal year is a 52- or 53-week period ending on the Sunday nearest to January 31. Fiscal years ended January 29, 2017 ("fiscal 2016"), January 31, 2016 ("fiscal 2015") and February 1, 2015 ("fiscal 2014") include 52 weeks.

Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities, and reported amounts of revenues and expenses in preparing these financial statements in conformity with U.S. generally accepted accounting principles ("U.S. GAAP"). Actual results could differ from these estimates.

Fair Value of Financial Instruments The carrying amounts of Cash and Cash Equivalents, Receivables, Short-Term Debt and Accounts Payable approximate fair value due to the short-term maturities of these financial instruments. The fair value of the Company’s Long-Term Debt is discussed in Note 11.

Cash Equivalents The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. The Company’s cash equivalents are carried at fair market value and consist primarily of money market funds.

Accounts Receivable The Company has agreements with third-party service providers who directly extend credit to customers, manage the Company’s private label credit card program ("PLCC program") and own the related receivables. The Company evaluated the third-party entities holding the receivables under the program and concluded that they should not be consolidated by the Company. The agreement with the primary third-party service provider for the Company’s PLCC program expires in 2028, with the Company having the option, but no obligation, to purchase the receivables at the end of the agreement. The deferred interest charges incurred by the Company for its deferred financing programs offered to its customers are included in Cost of Sales. The interchange fees charged to the Company for the customers’ use of the cards and any profit sharing with the third- party service providers are included in Selling, General and Administrative expenses ("SG&A"). The sum of these three components is referred to by the Company as "the cost of credit" of the PLCC program.

In addition, certain subsidiaries of the Company, including Interline Brands, Inc. ("Interline"), extend credit directly to customers in the ordinary course of business. The receivables due from customers were $216 million and $253 million as of January 29, 2017 and January 31, 2016, respectively. The Company’s valuation reserve related to accounts receivable was not material to the Consolidated Financial Statements of the Company as of the end of fiscal 2016 or 2015.

Merchandise Inventories The majority of the Company’s Merchandise Inventories are stated at the lower of cost (first-in, first-out) or market, as determined by the retail inventory method. As the inventory retail value is adjusted regularly to reflect market conditions, the inventory valued using the retail method approximates the lower of cost or market. Certain subsidiaries, including retail operations in Canada and Mexico, distribution centers and Interline, record Merchandise Inventories at the lower of cost or

38

market, as determined by a cost method. These Merchandise Inventories represent approximately 30% of the total Merchandise Inventories balance. The Company evaluates the inventory valued using a cost method at the end of each quarter to ensure that it is carried at the lower of cost or market. The valuation allowance for Merchandise Inventories valued under a cost method was not material to the Consolidated Financial Statements of the Company as of the end of fiscal 2016 or 2015.

Independent physical inventory counts or cycle counts are taken on a regular basis in each store and distribution center to ensure that amounts reflected in the accompanying Consolidated Financial Statements for Merchandise Inventories are properly stated. During the period between physical inventory counts in stores, the Company accrues for estimated losses related to shrink on a store-by-store basis based on recent shrink results and current trends in the business. Shrink (or in the case of excess inventory, "swell") is the difference between the recorded amount of inventory and the physical inventory. Shrink may occur due to theft, loss, inaccurate records for the receipt of inventory or deterioration of goods, among other things.

Income Taxes Income taxes are accounted for under the asset and liability method. The Company provides for federal, state and foreign income taxes currently payable, as well as for those deferred due to timing differences between reporting income and expenses for financial statement purposes versus tax purposes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in income tax rates is recognized as income or expense in the period that includes the enactment date.

The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

The Company and its eligible subsidiaries file a consolidated U.S. federal income tax return. Non-U.S. subsidiaries and certain U.S. subsidiaries, which are consolidated for financial reporting purposes, are not eligible to be included in the Company’s consolidated U.S. federal income tax return. Separate provisions for income taxes have been determined for these entities. The Company intends to reinvest substantially all of the unremitted earnings of its non-U.S. subsidiaries and postpone their remittance indefinitely. Accordingly, no provision for U.S. income taxes on these earnings was recorded in the accompanying Consolidated Statements of Earnings.

Depreciation and Amortization The Company’s Buildings, Furniture, Fixtures and Equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets. Leasehold Improvements are amortized using the straight-line method over the original term of the lease or the useful life of the improvement, whichever is shorter. The Company’s Property and Equipment is depreciated using the following estimated useful lives:

Life

Buildings 5 – 45 years Furniture, Fixtures and Equipment 2 – 20 years Leasehold Improvements 5 – 45 years

Capitalized Software Costs The Company capitalizes certain costs related to the acquisition and development of software and amortizes these costs using the straight-line method over the estimated useful life of the software, which is three to six years. Certain development costs not meeting the criteria for capitalization are expensed as incurred.

Revenues The Company recognizes revenue, net of estimated returns and sales tax, at the time the customer takes possession of merchandise or receives services. The liability for sales returns is estimated based on historical return levels. When the Company receives payment from customers before the customer has taken possession of the merchandise or the service has been performed, the amount received is recorded as Deferred Revenue in the accompanying Consolidated Balance Sheets until the sale or service is complete. The Company also records Deferred Revenue for the sale of gift cards and recognizes

39

this revenue upon the redemption of gift cards in Net Sales. Gift card breakage income is recognized based upon historical redemption patterns and represents the balance of gift cards for which the Company believes the likelihood of redemption by the customer is remote. During fiscal 2016, 2015 and 2014, the Company recognized $34 million, $27 million and $32 million, respectively, of gift card breakage income. This income is included in the accompanying Consolidated Statements of Earnings as a reduction in SG&A.

Services Revenue Net Sales include services revenue generated through a variety of installation, home maintenance and professional service programs. In these programs, the customer selects and purchases material for a project, and the Company provides or arranges professional installation. These programs are offered through the Company’s stores and in-home sales programs. Under certain programs, when the Company provides or arranges the installation of a project and the subcontractor provides material as part of the installation, both the material and labor are included in services revenue. The Company recognizes this revenue when the service for the customer is complete.

All payments received prior to the completion of services are recorded in Deferred Revenue in the accompanying Consolidated Balance Sheets. Services revenue was $4.0 billion, $4.0 billion and $3.8 billion for fiscal 2016, 2015 and 2014, respectively.

Self-Insurance The Company is self-insured for certain losses related to general liability (including product liability), workers’ compensation, employee group medical and automobile claims. The expected ultimate cost for claims incurred as of the balance sheet date is not discounted and is recognized as a liability. The expected ultimate cost of claims is estimated based upon analysis of historical data and actuarial estimates. The Company maintains network security and privacy liability insurance coverage to limit the Company’s exposure to losses such as those that may be caused by a significant compromise or breach of the Company’s data security. This coverage is discussed further in Note 13.

Prepaid Advertising Television and radio advertising production costs, along with media placement costs, are expensed when the advertisement first appears. Amounts included in Other Current Assets in the accompanying Consolidated Balance Sheets relating to prepayments of production costs for print and broadcast advertising as well as sponsorship promotions were not material at the end of fiscal 2016 and 2015.

Vendor Allowances Vendor allowances primarily consist of volume rebates that are earned as a result of attaining certain purchase levels and advertising co-op allowances for the promotion of vendors’ products that are typically based on guaranteed minimum amounts with additional amounts being earned for attaining certain purchase levels. These vendor allowances are accrued as earned, with those allowances received as a result of attaining certain purchase levels accrued over the incentive period based on estimates of purchases.

Volume rebates and certain advertising co-op allowances earned are initially recorded as a reduction in Merchandise Inventories and a subsequent reduction in Cost of Sales when the related product is sold. Certain advertising co-op allowances that are reimbursements of specific, incremental and identifiable costs incurred to promote vendors’ products are recorded as an offset against advertising expense. In fiscal 2016, 2015 and 2014, gross advertising expense was $955 million, $868 million and $884 million, respectively, and is included in SG&A. Specific, incremental and identifiable advertising co- op allowances were $166 million, $129 million and $125 million for fiscal 2016, 2015 and 2014, respectively, and are recorded as an offset to advertising expense in SG&A.

Cost of Sales Cost of Sales includes the actual cost of merchandise sold and services performed, the cost of transportation of merchandise from vendors to the Company’s stores, locations or customers, shipping and handling costs from the Company’s stores, locations or distribution centers to customers, the operating cost of the Company’s sourcing and distribution network, online fulfillment center costs and the cost of deferred interest programs offered through the Company’s private label credit card programs.

40

Impairment of Long-Lived Assets The Company evaluates its long-lived assets each quarter for indicators of potential impairment. Indicators of impairment include current period losses combined with a history of losses, management’s decision to relocate or close a store or other location before the end of its previously estimated useful life or when changes in other circumstances indicate the carrying amount of an asset may not be recoverable. The evaluation for long-lived assets is performed at the lowest level of identifiable cash flows, which is generally the individual store level.

The assets of a store with indicators of impairment are evaluated by comparing its undiscounted cash flows with its carrying value. The estimate of cash flows includes management’s assumptions of cash inflows and outflows directly resulting from the use of those assets in operations, including gross margin on Net Sales, payroll and related items, occupancy costs, insurance allocations and other costs to operate a store. If the carrying value is greater than the undiscounted cash flows, an impairment loss is recognized for the difference between the carrying value and the estimated fair market value. Impairment losses are recorded as a component of SG&A in the accompanying Consolidated Statements of Earnings. When a leased location closes, the Company also recognizes in SG&A the net present value of future lease obligations less estimated sublease income. The Company recorded impairments and lease obligation costs on closings and relocations in the ordinary course of business, which were not material to the Consolidated Financial Statements in fiscal 2016, 2015 or 2014.

Goodwill and Other Intangible Assets Goodwill represents the excess of purchase price over the fair value of net assets acquired. The Company does not amortize goodwill but does assess the recoverability of goodwill in the third quarter of each fiscal year, or more often if indicators warrant, by determining whether the fair value of each reporting unit supports its carrying value. Each year the Company may assess qualitative factors to determine whether it is more likely than not that the fair value of each reporting unit is less than its carrying amount as a basis for determining whether it is necessary to complete quantitative impairment assessments, with a quantitative assessment completed at least once every three years. The Company completed a quantitative assessment in fiscal 2016.

In fiscal 2016, the Company completed its annual assessment of the recoverability of goodwill for its U.S., Canada and Mexico reporting units. The fair values of these reporting units were estimated using the present value of expected future discounted cash flows, and the fair value exceeded the carrying value for each respective reporting unit. There were no impairment charges related to goodwill for fiscal 2016, 2015 or 2014.

The Company amortizes the cost of other intangible assets over their estimated useful lives, which range up to 12 years, unless such lives are deemed indefinite. Intangible assets with indefinite lives are tested in the third quarter of each fiscal year for impairment, or more often if indicators warrant. There were no impairment charges related to other intangible assets for fiscal 2016, 2015 or 2014.

Stock-Based Compensation The per share weighted average fair value of stock options granted during fiscal 2016, 2015 and 2014 was $20.26, $18.54 and $14.13, respectively. The fair value of these options was determined at the date of grant using the Black-Scholes option- pricing model with the following assumptions:

Fiscal Year Ended January 29,

2017 January 31,

2016 February 1,

2015

Risk-free interest rate 1.4% 1.4% 1.7% Assumed volatility 20.7% 20.8% 22.7% Assumed dividend yield 2.1% 2.0% 2.3% Assumed lives of options 5 years 5 years 5 years

Derivatives The Company uses derivative financial instruments from time to time in the management of its interest rate exposure on long-term debt and its exposure on foreign currency fluctuations. The Company accounts for its derivative financial instruments in accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Subtopic 815-10, "Derivatives and Hedging". The fair value of the Company’s derivative financial instruments is discussed in Note 11.

41

Comprehensive Income Comprehensive Income includes Net Earnings adjusted for certain gains and losses that are excluded from Net Earnings under U.S. GAAP. Adjustments to Net Earnings and Accumulated Other Comprehensive Loss consist primarily of foreign currency translation adjustments.

Foreign Currency Translation Assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the current rate of exchange on the last day of the reporting period. Revenues and expenses are generally translated using average exchange rates for the period, and equity transactions are translated using the actual rate on the day of the transaction.

Segment Information The Company operates within a single reportable segment primarily within North America. Net Sales inside the U.S. were $86.6 billion, $80.5 billion and $74.7 billion for fiscal 2016, 2015 and 2014, respectively. Net Sales outside the U.S. were $8.0 billion, $8.0 billion and $8.5 billion for fiscal 2016, 2015 and 2014, respectively. Long-lived assets, which consist of net property and equipment, inside the U.S. totaled $19.5 billion and $19.9 billion as of January 29, 2017 and January 31, 2016, respectively. Long-lived assets outside the U.S. totaled $2.4 billion and $2.3 billion as of January 29, 2017 and January 31, 2016, respectively.

The following table presents the Net Sales of each major product category (and related services) for each of the last three fiscal years (dollar amounts in millions):

Product Category

Fiscal Year Ended

January 29, 2017 January 31, 2016 February 1, 2015

Net Sales % of Net

Sales Net Sales % of Net

Sales Net Sales % of Net

Sales

Indoor Garden $ 9,204 9.7% $ 8,227 9.3% $ 7,486 9.0% Paint 7,666 8.1 7,497 8.5 7,342 8.8 Appliances 7,362 7.8 6,539 7.4 5,718 6.9 Kitchen and Bath 7,184 7.6 6,909 7.8 6,639 8.0 Plumbing 6,985 7.4 6,364 7.2 5,755 6.9 Lumber 6,828 7.2 6,284 7.1 6,054 7.3 Outdoor Garden 6,789 7.2 6,505 7.3 6,319 7.6 Building Materials 6,774 7.2 6,416 7.2 6,068 7.3 Tools 6,668 7.0 6,060 6.8 5,388 6.5 Flooring 6,477 6.8 6,215 7.0 6,011 7.2 Electrical 6,090 6.4 5,837 6.6 5,656 6.8 Hardware 5,629 6.0 5,296 6.0 4,975 6.0 Millwork 5,139 5.4 4,937 5.6 4,707 5.7 Décor 2,906 3.1 2,730 3.1 2,554 3.1 Lighting 2,894 3.1 2,703 3.1 2,504 3.0 Total $ 94,595 100.0% $ 88,519 100.0% $ 83,176 100.0%

————— Note: Certain percentages may not sum to totals due to rounding.

Recent Accounting Pronouncements

In January 2017, the FASB issued Accounting Standards Update ("ASU") No. 2017-04, "Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment", which simplifies how an entity is required to test goodwill for impairment. The amendments in ASU No. 2017-04 require that goodwill impairment will be measured using the difference between the carrying amount and the fair value of the reporting unit and the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendments in ASU No. 2017-04 should be applied on a prospective basis and is effective for annual or any interim goodwill impairment tests in annual reporting periods beginning after

42

December 15, 2019, and early adoption is permitted. The Company is evaluating the effect that ASU No. 2017-04 will have on its Consolidated Financial Statements and related disclosures.

In October 2016, the FASB issued ASU No. 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory", which requires an entity to recognize the income tax consequences of an intercompany transfer of assets other than inventory when the transfer occurs. An entity will continue to recognize the income tax consequences of an intercompany transfer of inventory when the inventory is sold to a third party. ASU No. 2016-16 is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those annual periods, using a modified retrospective approach, and early adoption is permitted. The Company is evaluating the effect that ASU No. 2016-16 will have on its Consolidated Financial Statements and related disclosures.

In March 2016, the FASB issued ASU No. 2016-09, "Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting", which makes several modifications to the accounting for employee share- based payment transactions, including the requirement to recognize the income tax effects of awards that vest or settle as income tax expense. The amendments in ASU No. 2016-09 also clarify the presentation of certain components of share-based awards in the statement of cash flows. ASU No. 2016-09 is effective for annual reporting periods beginning after December 15, 2016. The Company plans to adopt ASU No. 2016-09 in the first quarter of fiscal 2017, and does not believe it will have a material impact on its Consolidated Financial Statements and related disclosures.

In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)", which requires an entity that is a lessee to recognize the assets and liabilities arising from leases on the balance sheet. The amendments in ASU No. 2016-02 also require disclosures about the amount, timing and uncertainty of cash flows arising from leases. ASU No. 2016-02 is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those annual periods, using a modified retrospective approach, and early adoption is permitted.

The Company is evaluating and planning for the adoption and implementation of ASU No. 2016-02. The Company believes that ASU No. 2016-02 will have a material impact on its financial position, as a result of the requirement to recognize right- of-use assets and lease liabilities on the Company’s Consolidated Balance Sheets. The impact to the Company’s results of operations is being evaluated, and the Company does not believe there will be a material impact to its cash flows upon adoption of ASU No. 2016-02.

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)", which requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. In addition, ASU No. 2014-09 requires disclosures of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. ASU No. 2014-09 supersedes most existing U.S. GAAP revenue recognition principles, and it permits the use of either the retrospective or cumulative effect transition method. ASU No. 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual periods.

The Company is evaluating the effect that ASU No. 2014-09 will have on its Consolidated Financial Statements and related disclosures, as well as the expected method of adoption. Based on the Company’s preliminary assessment, the Company has determined that the adoption of ASU No. 2014-09 could impact the timing of revenue recognition through its services, gift card and various incentive programs. ASU No. 2014-09 will impact the Company’s method of recognizing gift card breakage income, which is currently recognized based upon historical redemption patterns. ASU No. 2014-09 requires gift card breakage income to be recognized in proportion to the pattern of rights exercised by the customer when the Company expects to be entitled to breakage. The Company is also evaluating the principal versus agent considerations as it relates to certain arrangements with third parties that could impact the presentation of gross or net revenue reporting. Other areas which could be impacted may be identified as the Company continues its evaluation of ASU No. 2014-09. The Company plans to adopt ASU No. 2014-09 on January 29, 2018 and is evaluating the available transition methods.

Reclassifications Certain amounts in prior fiscal years have been reclassified to conform with the presentation adopted in the current fiscal year. See Note 2 to the Consolidated Financial Statements included in this report.

43

2. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

On February 1, 2016, the Company adopted ASU No. 2015-03, "Interest–Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs". Under ASU No. 2015-03, debt issuance costs related to a recognized debt liability are presented as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The adoption of ASU No. 2015-03 has been applied retrospectively, and accordingly, the Company’s Consolidated Balance Sheet as of January 31, 2016 has been reclassified to reflect this adoption. The impact of this reclassification was a decrease of $99 million to Other Assets, and a corresponding decrease to Long-Term Debt, excluding current installments, as of January 31, 2016.

Also on February 1, 2016, the Company early adopted ASU No. 2015-17, "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes". Under ASU No. 2015-17, deferred tax assets and deferred tax liabilities are presented as noncurrent in a classified balance sheet. The adoption of ASU No. 2015-17 has been applied retrospectively and accordingly, the Company’s Consolidated Balance Sheet as of January 31, 2016 has been reclassified to reflect this adoption. The impact of this reclassification was a decrease of $509 million to Other Current Assets, an increase of $32 million to Other Assets, a decrease of $2 million to Other Accrued Expenses and a $475 million decrease to Deferred Income Taxes as of January 31, 2016. All future deferred tax assets and liabilities will be presented as noncurrent.

3. PROPERTY AND LEASES

Property and Equipment as of January 29, 2017 and January 31, 2016 consisted of the following (amounts in millions):

January 29, 2017

January 31, 2016

Property and Equipment, at cost: Land $ 8,207 $ 8,149 Buildings 17,772 17,667 Furniture, Fixtures and Equipment 11,020 10,279 Leasehold Improvements 1,519 1,481 Construction in Progress 739 670 Capital Leases 1,169 1,020

40,426 39,266 Less Accumulated Depreciation and Amortization 18,512 17,075

Net Property and Equipment $ 21,914 $ 22,191

The Company leases certain retail locations, office space, warehouse and distribution space, equipment and vehicles. While most of the leases are operating leases, certain locations and equipment are leased under capital leases. As leases expire, it can be expected that in the normal course of business certain leases will be renewed or replaced.

Certain lease agreements include escalating rents over the lease terms. The Company expenses rent on a straight-line basis over the lease term, which commences on the date the Company has the right to control the property. The cumulative expense recognized on a straight-line basis in excess of the cumulative payments is included in Other Accrued Expenses and Other Long-Term Liabilities in the accompanying Consolidated Balance Sheets.

Total rent expense, net of minor sublease income, for fiscal 2016, 2015 and 2014 was $984 million, $922 million and $918 million, respectively. Certain store leases also provide for contingent rent payments based on percentages of sales in excess of specified minimums. Contingent rent expense for fiscal 2016, 2015 and 2014 was approximately $9 million, $7 million and $7 million, respectively. Real estate taxes, insurance, maintenance and operating expenses applicable to the leased property are obligations of the Company under the lease agreements.

44

The approximate future minimum lease payments under capital and all other leases at January 29, 2017 were as follows (amounts in millions):

Fiscal Year Capital Leases

Operating Leases

2017 $ 130 $ 907 2018 127 826 2019 124 746 2020 141 661 2021 118 586 Thereafter through 2097 996 3,727

1,636 $ 7,453 Less imputed interest 758

Net present value of capital lease obligations 878 Less current installments 42

Long-term capital lease obligations, excluding current installments $ 836

Short-term and long-term obligations for capital leases are included in the accompanying Consolidated Balance Sheets in Current Installments of Long-Term Debt and Long-Term Debt, respectively. The assets under capital leases recorded in Property and Equipment, net of amortization, totaled $730 million and $629 million at January 29, 2017 and January 31, 2016, respectively.

4. DEBT

The Company has commercial paper programs that allow for borrowings up to $2.0 billion. All of the Company’s short-term borrowings in fiscal 2016 and 2015 were under these commercial paper programs. In connection with these programs, the Company has a back-up credit facility with a consortium of banks for borrowings up to $2.0 billion. The credit facility expires in December 2019 and contains various restrictive covenants.

Short-Term Debt under the commercial paper programs was as follows (amounts in millions):

Fiscal Year Ended January 29,

2017 January 31,

2016

Balance outstanding at fiscal year-end $ 710 $ 350 Maximum amount outstanding at any month-end $ 710 $ 350 Average daily short-term borrowings $ 51 $ 69 Weighted average interest rate 0.63% 0.34%