Home Depot Inc (HD) — Q1 2017 Earnings Call Transcript

Well thank you, Catherine, and good morning to everyone. Joining us on our call today are Craig Menear, Chairman, CEO and President; Ted Decker, EVP of Merchandising; and Carol Tomé, Chief Financial Officer and Executive Vice President, Corporate Services. Following our prepared remarks, the call will be open for analyst questions. Questions will be limited to analysts and investors and as a reminder, we would appreciate it if the participants would limit themselves to one question with one follow-up please. If we are unable to get to your question during the call, please call our Investor Relations department at 770-384-2387. Now before I turn the call over to Craig, let me remind you that today's press release and the presentations made by our executives include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to the factors identified in the release and in our filings with the Securities and Exchange Commission. Today's presentations will also include certain non-GAAP measures. Reconciliation of these measures is provided on our website. Now, let me turn the call over to Craig.

Thank you, Diane, and good morning, everyone. Sales for the first quarter were $23.9 billion, up 4.9% from last year. Comp sales were up 5.5% from last year, and our U.S. stores had a positive comp of 6%. Diluted earnings per share were $1.67 in the first quarter. We were pleased with the start of the year as we executed within a more normalized spring environment and navigated a tough weather comparison with weather-driven demand that we saw in the first quarter of last year. All three of our U.S. divisions posted positive comps led by our Southern Division. On the international front, both Canada and Mexico posted another quarter of positive comps in local currency. The power of our interconnected retail strategy continues to gain traction in our international businesses as digital sites in both countries were recently updated driving sales growth and positive response from our customers. Turning back to the U.S., we saw broad-based growth across our stores as both ticket and transactions grew in the quarter and all merchandising departments posted positive comps. Our commitment to new and innovative products continues to be a contributor to our ticket growth. Our merchants collaborate with our supplier partners to bring innovative and exclusive items to market that deliver value for our customers by saving them time and money. As Ted will detail, the extension of Lithium-Ion Battery technology into the outdoor power category is an excellent example of our ongoing focus on innovation and we continue to see great sales in this category. Another engine of growth for our business is the Pro customer. As Pro sales once again outpaced the DIY sales in the quarter, we recognized that Pro customers have needs that go beyond our traditional in-store offerings and we believe that the work we are doing to strengthen our sales support, assortment and fulfillment for this customer base continues to resonate. For example, our in-store tool room business helps our Pros more effectively run their business. In many cases our partnership with the Home Depot can translate into business for our Pros as we can connect them with our do-it-for-me customers through our Pro referral platform. We continue to see significant opportunity to help our Pros manage and grow their business while driving higher product pull-through and strengthening our relationship with our do-it-for-me customer. Another component of our overall Pro strategy centers on Interline in the MRO customer. Use case 1, the rollout of Interline’s catalogue of products to Home Depot stores is now live in over 1500 U.S. stores. We continue to roll out use case 2 which enables Interline customers to shop Home Depot stores using a swipe card that is linked to their Interline account. Interline sales growth outpaced the company average in the quarter and we remain very excited about the opportunity that Interline provides. The power of interconnected retail creates growth opportunities for the Home Depot. As we invest in this area, we are seeing a positive response from our customers in the form of improved customer satisfaction scores and increased sales. In the first quarter, our online traffic growth was robust and our online sales grew approximately 23%. Our supply chain continues to be a source of strength for our business. The flexibility and nimbleness of our supply chain is a competitive advantage. This is particularly evident during our busy spring selling season when regional weather conditions vary resulting in spiky demand patterns. Operationally, nimbleness and flexibility carry over into our stores. This spring, M.E.T., our Merchandising Execution Team, helped us drive productivity by reducing merchandising set times by 25%. In store, associates efficiently manage great flow within the store while remaining focused on providing strong customer service in the aisle. And we hired over 85,000 new associates to ramp up for spring sales with a simplified application process reducing the time it takes to complete an application by up to 80%. The success of our first quarter is a result of each and every one of our associates, and I’d like to thank them for their hard work and dedication to our customers. Looking forward, we plan to continue this momentum. And with that, I’ll turn the call over to Ted.

Thanks, Craig, and good morning everyone. We had a great first quarter driven by continued strength across the store. Our Pro business was particularly strong and outpaced the company average. We also saw excellent growth in our online business as online sales grew approximately 23%. All of our merchandising departments posted positive comps. Appliances, Lumber, and Flooring had double-digit comps in the quarter. Tools, Electrical, Plumbing, Decor, and Kitchen-Bath were above the company average. Indoor Garden was in line with the company average. Building Materials, Millwork, Hardware, Lighting, Paint, and Outdoor Garden were positive but below the company average. In the first quarter, total comp transactions grew by 1.5% and comp average ticket increased 3.9%. The increase in average ticket was positively impacted by a number of things including customers trading up to new, innovative products. Commodity price inflation in Lumber, Building Materials, and Copper also positively impacted average ticket growth by approximately 75 basis points. Looking at big ticket sales in the first quarter, transactions over $900, which represent approximately 20% of worldwide sales, were up 15.8%. Few drivers behind the increase in big ticket purchases were Appliances, Flooring, and Roofing. In the first quarter, sales with our Pro customers outpaced the company average driven by both our high spend and low spend Pros. We saw strong comps in several Lumber categories, Wire, Commercial Industrial Lighting, and gypsum. In addition, the core of the store performed well and we saw strength in several maintenance and repair categories across the company. Classes that outperformed the company average included several Flooring categories, Tool Storage, Power Tools, and a number of Bath Categories. As Craig mentioned earlier, our customers respond to new and innovative products. A perfect example is the customers’ response when we introduced new lithium-ion battery technology in outdoor power. We’ve partnered with the best suppliers to put together a lineup of tools that offer long-lasting power and runtime to get the job done without the hassle of gas and cords, even with a lawnmower. Our exclusive assortment at Ego and Ryobi Cordless mowers can handle the standard size of a yard with just one charge. In addition, for those customers that prefer gas power, we’ve got a powerful line-up led by Honda and Toro that includes 13 of the top 15 rated self-propelled gas mowers on the market, and all of these are retail exclusives to the Home Depot. Our Spring Black Friday event was a success. Our associates drove excitement around special buys in our stores and online, and our customers responded. We saw increased traffic both in-store and online, and strong comps in categories like Mix & Match Patio, Outdoor Power Tools, Mowers, and Chemicals. We strive to balance the art and design of retail. With our interconnected retail strategy, we are continually improving the customer experience by striving to create frictionless shopping across all channels. For example, our new simplified and expedited online checkout process reduces customers' checkout time by an average of 20%. Additionally, we are leveraging our digital assets and big data to better know our customers and in turn better meet their needs through targeted online offerings and localized online experiences. For example, our refreshed mobile app personalizes the user’s home page based on location, customer segment, and shopping patterns. We are pleased with the customer engagement in response to these enhancements, and we are seeing increased conversion rates. Now let me turn our attention to the second quarter. We continuously introduce innovation and value that save our customers both time and money. A great example of this is the new PPG Timeless Exterior Stain and Sealant. This is the first PPG branded product offered at the Home Depot and is their most advanced and durable line of woodcare on the market, with enhanced oil technology, improved resins, stronger UV absorbers, and better water repellency. This product provides outstanding outdoor protection from the elements. PPG Timeless Exterior Stain and Sealant is exclusive to the Home Depot. Another exciting new product is the Ring Outdoor Cam with motion-activated floodlight. This is the first high-definition security camera with built-in floodlights, two-way talk, automated recording, and a siren alarm. The best part is that this product is easy to install next to your mobile device so you can monitor your property anytime, anywhere. This product launched exclusively at the Home Depot. In addition, all the new product offerings we are gearing up for our upcoming events in the second quarter. We begin to look forward to Thrill of the Grill, Memorial Day, Father's Day, and Fourth of July events where we will be offering more great value and special buys for our customers. With that, I’d like to turn the call over to Carol.

Thank you, Ted, and good morning, everyone. In the first quarter, sales were $23.9 billion, a 4.9% increase from last year. Our total company comps, or same-store sales, were positive 5.5% for the quarter with positive comps of 5.8% in February, 4.3% in March, and 6.2% in April. Comps for U.S. stores were positive 6% for the quarter, with positive comps up 6.3% in February, 4.6% in March, and 6.8% in April. The cadence of our monthly comps was impacted a bit by weather and by the timing of Easter this year versus last year. Adjusting for Easter, on a like-for-like basis, our U.S. comps were 2.9% in March and 8% in April. Two more comments about our first quarter sales growth. First, for activity purposes, we record comp sales when the tender is accepted and we report sales revenue when the transaction is completed. The difference is known as deferred sales. Compared to last year, our deferred sales grew by $116 million. As a result, our reported sales growth was less than our comp sales growth. Second, versus last year, fluctuating foreign currency exchange rates negatively impacted total sales growth by approximately $71 million. Our total company gross margin was 34.1% for the quarter, a decrease of 9 basis points from last year. As expected, the modest decline in our gross margin was primarily driven by a change in the mix of products sold. For fiscal 2017, we continue to expect our gross margin to decline by approximately 15 basis points from what we reported in fiscal 2016. In the first quarter, operating expense as a percent of sales decreased by 59 basis points to 20.1%. Our expense leverage reflects the impact of positive comp sales growth along with continued expense control. In the quarter, our expenses were roughly $18 million under our plan, albeit some of the variance was due to timing. While our expenses grew at approximately 39% of our sales growth rate in the first quarter, for fiscal 2017 we now expect our expenses to grow at approximately 43% of our sales growth rate. Our operating margin for the first quarter was 14%, an increase of 50 basis points from last year. Interest and other expenses for the first quarter were $241 million, up slightly from last year. In the first quarter, our effective tax rate was 35.2% compared to 36.5% in the first quarter of fiscal 2016. The year-over-year change in our effective tax rate was driven largely by a new FASB stock compensation accounting standard that we adopted at the beginning of fiscal 2017. For the year, we expect our effective tax rate to be approximately 36.3%. Our diluted earnings per share for the first quarter were $1.67, an increase of 16% from last year. Now moving to some additional highlights. During the first quarter, we opened two new stores in the U.S. and one new store in Mexico, bringing our total store count to 2,281 and selling square footage to 238 million square feet. Total sales per square foot for the first quarter was $394, up 4.6% from last year. Turning to the balance sheet, at the end of the quarter, merchandised inventories were $13.6 billion, up $390 million from last year, and inventory turns were 4.8 times flat to last year. Accounts payable grew by $427 million year-over-year. In the first quarter, we repurchased $1.25 billion or approximately 8.5 million shares of outstanding stock. For the remainder of the fiscal year, we intend to repurchase approximately $3.75 billion of outstanding stock using excess cash, bringing total anticipated 2017 share repurchases to $5 billion. Computed on the average of beginning and ending long-term debt and equity for the trailing 12 months, return on invested capital was approximately 32.3%, 310 basis points higher than the first quarter of fiscal 2016. To wrap up the commentary on our first quarter financial results, we were pleased as sales and earnings were better than we planned. Looking ahead while U.S. GDP forecasts are mixed, housing continues to be a growing asset class, and our sales thus far in May have been very good. But relative to our plan, we do anticipate some foreign exchange pressure. So today we are reaffirming the sales growth guidance we laid out on our fourth quarter earnings call. For fiscal 2017, we expect sales to increase by approximately 4.6% with positive comps of approximately 4.6%. For earnings per share, remember that we guide off of GAAP. Given our first quarter expense performance, we are lifting our earnings per share growth guidance. For fiscal 2017, we now expect diluted earnings per share to increase by approximately 11% to $7.15. So, we thank you for your participation in today's call and Catherine, we are now ready for questions.

Thanks. Good morning. Looking at different markets across the country, can you tell us if you’re seeing a broadening across markets, meaning, if there were some of the laggards out there, are they speeding up? And then, are you seeing any moderation in some of the faster improving markets?

We actually look at the variability of our markets and in the quarter our variability narrowed about 40 basis points year-over-year, which was pretty consistent with what we saw in Q4.

And that narrowing, I guess, can you elaborate if that’s a function of the fast going – getting slower or some of the slower improving getting faster?

It’s really – we’re not seeing a big change in the regional sales other than where we have some weather impacts.

Okay. And then my follow-up on flow-through which has been pretty strong and consistent. Thinking really towards the end of this year into next year, anything sort of good guys or bad guys we should think about that impacts going forward?

Simeon, good morning. So, nothing at this point, and as you know we have an investor conference coming up in December, we’ll give you a lot more color about our point of view for fiscal 2018, 2019, and 2020.

Okay. Appreciate it. Nice quarter.

Thank you.

Good morning. Thanks for taking my questions.

Good morning.

Deferred revenue was bigger this quarter than it's been in the past, recognized that next quarter. To what degree is that a leading indicator of the business given the nature of the sales that are better in that number?

Yes. There were three big drivers of the deferred revenue growth year-on-year. One you’ve heard commentary about our dot-com sales growth, up 23% year-on-year, not all those sales are completed at the time we take the tender. Our dot-com sales now make up 6.6% of our total sales. We also saw growth in our services business. Our services business grew faster than our company average and Ted called out flooring as an example. Those were the two biggest drivers of the deferred sales increase.

It is a leading indicator for the next few quarters given what’s going into those numbers?

We would anticipate continued strong growth in those categories.

Okay. And then my follow-up questions are on the e-commerce business; obviously, you’re doing really well through that channel. To what extent is it validating that consumers increasingly want to buy home improvement products through the online channel and subsequently going to expose you to greater and greater levels of competition?

I think the interesting thing for us is over 45% of our orders on homedepot.com, the customer is actually choosing to pick up in our stores. So they are finding it incredibly convenient to blend the channels and utilize all the assets that we have.

Is that percentage changing at all, Craig?

It’s been growing over the past 12 months.

Okay. Thank you so much.

Yep.

Thanks a lot, and good morning, and great quarter.

Good morning.

I had a question on big-ticket comps in the quarter. It seems to be one of the key bright spots here where it accelerated up 15.8%. I think you said, you mentioned a couple of categories. Do you think that reflects an acceleration in market share and maybe some of the benefits from the company’s specific initiatives in the Pro focus or how do you balance that with also maybe an acceleration in demand trends overall?

I’ll start and let Ted comment on this. I do think it's an acceleration of the customer's willingness to spend on big-ticket projects. We’ve seen strong remodel business with our Pro, but then it's also categories that we've invested in as well.

Yes. I’d add to that. It’s really all of the above; the customers are responding to the product and the innovation. Certainly, there are some very big-ticket items like appliances where we had double-digit comps again. But across the portfolio, as I’d mentioned before, we track the purchase patterns from OPP up the line structure, and we continue to see a willingness and response from the consumer when we’re showing great value on innovative products at higher price points. And then services are going quite well, those obviously are bigger-ticket items. In our Pro customer, which here, get much larger items per basket where you’re driving a project, and that's been very healthy as well.

Okay. That's helpful. And then to follow up on gross margin, mix has been the primary driver of the slight decline. Can you maybe speak to some of the other underlying drivers that you talked about in the past, whether it's the productivity and supply chain work and then the partial offset from investments in price. Are you seeing a change in the pace for either of those items?

Well, let’s talk about supply chain first. Supply chain did contribute one basis point with gross margin expansion in the first quarter. That’s after three basis points of pressure coming from higher fuel costs. Again, like the demand that we had in the first quarter, we were very pleased with our supply chain performance. In the first quarter, in fact, expenses were out of plan, so that’s a good story. And some of the other drivers, it’s all part of the portfolio that Ted and the Merchants run and is working just the way we want it.

Okay. Thank you.

Thank you. Question on some of the categories, the double-digit categories specifically flooring, could you just highlight what appears to be well above the industry? Could you talk about what's working there? What’s allowing you to gain share?

We have a nice mix there. The hard surface flooring has been much stronger over the past couple of years, and we’ve done a lot of work in our showrooms with hard surface flooring particularly with tile and laminate. Recently, luxury vinyl plank has been taking off; manufacturers are now putting a solid core in the products, so you can get much greater use cases about final product. The efficacy of it and the look is getting better and better and that selling very well. And then soft flooring, soft flooring is not dead, and we simplify and go to market.

Long, long process.

And we’re seeing terrific strength with our soft flooring categories.

And you’re referring to the whole house installation price; is that what you’re referring to in soft flooring?

Yes.

Okay. Second question, regarding big-ticket in general, as referred to, very good in the quarter, how much did the lumber inflation play into the big number you reported there?

Lumber was a little more than half of that 75 basis points.

Yes. Little more than half. Okay. That 75 basis points, does that on the whole year comp or just down the growth of the – I guess it would be the same actually on the full year comp or the growth of big ticket?

That was only on the average ticket growth for the company. In terms of performance of big ticket categories, that is more driven by appliances and flooring.

Okay. Thank you very much.

Hi. Good morning.

Good morning.

Nice quarter. Congrats.

Thank you.

So, couple of questions here. First off, do not to be nitpicky here, but just a question on the cadence of comps in the quarters. So, Carol when you called out in the U.S. business, I guess, adjusted for Easter, March was 2.9% and then April was 8%. So as we think about that I assume that eight reflects picking up some of the business that maybe even lost or didn't happen in March because of weather? And how should we think about then maybe a run rate – more normalized run rate there?

Right. So, Brian, it was a little choppy in terms of the cadence, and we do think that was weather. If you look at our transactions in March, there were actually under 1% growth year-on-year and that was all weather-related. When the weather improved in April, the sales came back. So, we always talk to you about a bathtub of that first half, but we had a bathtub effect in the first quarter, we did. And so we think now about the first half, we would think that the first quarter will be slightly stronger than that second quarter, and the comps for the first half will be about the same as the comps for the back half.

Got it. It’s helpful. Then the second question I had is probably a follow-up to your prior question. With regard to online sales, we have seen a nice tick up here. Craig, you called that you said 45% of the online sales are Buy Online, Pick Up In Store.

Right.

The other point, just remaining 55%, is there any color you can give on what people are actually buying online? Has it surprised you in any way and maybe then there’s a common on the profitability of those sales versus in-store sales?

Let me address the last part and then Kevin Hofmann is here who runs our online business. So let him comment on the sales patterns. When it comes to the profitability, it's actually this whole customer engagement that's becoming a blended element between online and in-store, and the customer is choosing in some cases, they start the shopping experience online, they finish in-store or they might vice-versa, start in the store and actually finish online. And so with 45% of the orders being picked up, it is truly a blended effort and we look at that way, our merchants manage it as a total portfolio. So they see an entire blended mix of sales for the business. And that’s actually how we run the business. So we don’t focus on it individually by itself.

And then, Brian, just from a sales perspective, certainly we see strength across the store. Our bath business has been doing very well. Our flooring business has been doing very well. Plumbing, power tools all doing very well, and not to ignore the core building materials products, we see great traction of Pro’s shopping online, looking for inventory levels, looking at pricing, and that’s been working very, very well for us as well.

Got it. Thank you.

Thanks. Good morning. Following up on just how you think about guidance. So, there was a swoon in the late summer last year, I was curious if you had any retrospect on what drove that and as you just think about modeling the business, is the growth in the market, the growth rate and sort of compares don't necessarily matter? Or do you think maybe as we lap through that that pause, like it seemed to happen in late summer where you would expect to pick up some extra this year as we approach there?

I think we've discussed this extensively, and we believe the professionals took a vacation. That's great for them; they were busy with more work than they could handle, and they decided to take some time off before returning to their tasks. Regarding your point, I don't believe we should overlook comparisons. However, it's evident that the current housing market is generating strong demand. Home prices have increased by over 5% year-over-year, housing turnover is above 4%, and we are facing an aging housing stock along with household formation. We observe consistent growth in private fixed residential investment each quarter. There's still a significant way to go before we reach the mean of 4% to 4.5% of GDP, so there's a lot of positive momentum in our business.

So, I guess at that point, I mean, the compares do ease. We talked about a pretty normal spring, it doesn't sound like there’s any pull forward into 1Q out of 2Q on the spring business. So why isn’t this a 5% to 6% growth business through the balance of the year?

So a few things. First, as I mentioned, we have some currency pressure coming our way. We estimate that current pressure to be $250 million. Second, it is the middle of May and it’s a little early to start thinking about looking for the full year, but as I said, sales thus far in May have been very good.

I think one of the comments would be, Chris, that, while we had a great indoor garden business with power equipment, the outdoor garden business in the first quarter really had come alive, then you saw that in the flatness of our ticket $50 and under. There were parts of the country where it was pretty wet for people to be out, preparing their landscape for planting. So I think that was a factor as well.

And then my follow-up is there is anything to, as you think about different cycles that you've all seen in this business, seen the traffic number for this quarter, ticket continues to lead which is very encouraging, but at the same time traffic matters. How are you thinking about that in the context of the cycle? Thank you.

Ted has some really great data on traffic. You might want to share that.

Yes. So we look at the contributors to our transactions by obviously all the different price breaks. And it is as Craig just said; it is an outdoor garden story on the transaction, so that’s why we’d be a little conservative. You obviously have to get some good weather into Q2 to drive that outdoor business. Q1 wasn’t particularly good or bad. It was a more normal spring that we were not concerned that there was much of anything pulled forward. So we are expecting that outdoor garden business to come in. And when you talk about the bigger trends, we’ve often mentioned the 40 classes that we track from the prior peak in 2006 and we still have 12 of those 40 top classes of goods that have not recovered to the peak. Those tend to be much bigger projects involving a lot of millwork and building materials. While we’re seeing a lot of strength in that business and very robust growth, I called out roofing as a double-digit driver, but that whole portfolio you’re generally looking at adding square footage to get big projects, and we’re looking forward to that commentary.

That sales opportunity, by the way, is $1.3 billion.

Understood. Thanks very much, guys.

Thanks so much and good morning everyone. So your online business seemed to reaccelerate from the trend that you saw all of last year. I'm interested in what you think drove that business whether it was a tilt towards big ticket or changes that you made? And also for the past couple of years online growth has been strongest in the first quarter. It seems almost like the seasonality is changing. And if you could talk about if there's any rhyme or reason to that, it would be helpful to understand that.

Matt, as you know. This is an area that we’ve been investing in. And so I think the investments that we’re making is improving the customer experience. And I’ll let Kevin talk about this specifically.

Yes. We’ve been refocused on improving the experience across the whole shopping funnel and we’ve made really large savvy designs. Last fall we upgraded our mobile app substantially, and those have paid nice dividends for us. From a seasonality perspective, I just think you’re seeing core categories that we tend to be strong in online, penetrate well in the first quarter and that’s what’s driving the growth.

Matt, if I could add a couple of numbers. The visits were up 15% year-on-year. Our conversion rate increased 30 basis points year-on-year, so if your visits are up and your conversion is up, your sales are going to grow. And a lot of that is because of the site experience improvements that Kevin and the team has made.

That’s terrific. If we think about that, I’m sure you have data on customer age and you could probably tell from the kinds of products that you’re purchasing and the kind of products they’re engaging in. If you can provide online transaction data, is there a sign that the millennial customers disproportionately patronizing the enterprise online or is it more evenly distributed across age groups?

We actually see it more evenly distributed.

Got it. Thank you so much. And then one piece of cleanup if I could, you gave the comp growth for the biggest ticket basket. Can you give us the comp growth for the small ticket basket?

It was flat.

Thank you so much, guys.

Thank you. Good morning. My question is centered around any potential bankruptcies in the space. If bankruptcy were to happen, how does it play up to your business and how would it change what you’re already experiencing in appliances, if anything?

We clearly have invested to disproportionately take share in categories that we overlap with key competitors who have been having their challenges. And we’re going to continue to focus on trying to capture as much business as we can. It’s in categories like appliances, tools, and hand tool storage. There's multiple categories that we overlap in businesses where we think we can continue to grow share.

There’s an appliance retailer that recently announced store closings and basically going out of business, and we’re seeing sales coming our way, and in an environment where they’re liquidating the stores.

That’s really interesting actually.

Yes, very interesting.

Thank you. And then if I could just follow-up on a bit granular, but I know you’ve highlighted that millwork is an opportunity, but it still trending below the company comp average. What is holding that category back? And do you have any expectations on when that comp could accelerate and what could drive it?

As I mentioned, these are much larger projects. You can replace an exterior door to refresh your look or wear and tear, but if you’re going to be getting into a number of interior doors, add windows, et cetera to your house, you’re generally doing much larger remodels and one that would likely add square footage to the house. We’re confident that while that business hasn’t come roaring back just yet, it’s healthy. But price appreciation, as Carol mentioned, in housing, this is where people can be much more confident to invest in their home with the confidence that that investment will be rewarded with a higher home value. So they’re very bullish on the state of housing and the likelihood of these much larger projects getting underway.

This is really nothing statistic to me. There are 76 million owned households in the United States and of those, there are only 3.2 million that have negative equity in their home. If you go back to 2011, 11 million of those households had negative equity in their home. Homeowners have enjoyed a 130% increase in wealth since 2011, coming from home price appreciation, on average $50,000 per household. You can imagine at some point, to Ted’s point, they’ll take that down out and do a bigger millwork or total remodel job.

And I think the other part is where there’s 3.8 months of supply of inventory and housing on the market compared to the historical norm of six. Like that actually leans into people thinking about remodel versus move as well.

Thank you.

Thanks a lot and good morning.

Good morning.

My question is around the Pro business. Maybe you could provide some color on the degree of outperformance relative to DIY this quarter relative to recent quarters. That would be helpful?

Should I jump in? I’ll be happy to jump in. So our Pro business grew twice as fast as our DIY customer in the first quarter.

It was pretty balanced between our big-ticket Pro and our small spend Pro as well.

That’s helpful. And as it relates to Interline specifically, you talked about some improvements with the use cases and those starting to roll up and get some traction. As you anticipate the balance of the year from those use cases and others you’re working on, would you expect a further acceleration in Interline growth?

We are very pleased with the growth that we’re seeing in Interline. And in use case one, for example, I mentioned that we’re at 1500 plus U.S. stores now, and actual sees sales ahead of what we anticipated with that. So yes, we’re excited about the opportunity with Interline as we go forward.

Yes, the sales growth rate was higher than the company average in the first quarter. It’s less than 2% of our sales that we can’t see that in the top line yet, but we will see it as these use cases gain traction.

Thank you very much.

Hi. Yes. Good morning. I was wondering if we could talk about the power of innovation driving both ticket and total sales. What product categories would you say over-index on innovation or what you would call the benefit of innovation to those product categories?

Well, there’s actually a ton. I’ll call out the – maybe some most exciting and technologically savvy. But when you look across the entire store, we get a distributable monthly report of all the great new innovative products. It’s fascinating to go through it. This is a 200–300 page report of product released every month. It's calling out, it could be lightweight drywall, it could be something as simple as cutting plywood into 4x4 panels to have that pre-cut item for a project, but certainly on the more tacky innovative side the lithium-ion battery technology has to be one of the largest – we have a full riding tractor, RYOBI tractor available for sale that I've ridden. You can cut your lawn on battery-powered tractor. Craig mentioned the outdoor power. We have the power that the run time of gas on blowers and trimmers and hedge trimmers. We’ve seen it in portable power for many years now and it's now accelerating in outdoor power. And then the second one is LED lighting technology in not just individual A-line bulbs, but you’re now seeing integrated LED in your ceiling fans, in your light fixtures, and that’s really what’s driving our commercial and industrial lighting that I called out as having such strong comps. Is how you’re getting that integrated fixture, getting all sorts of little bit attractive design elements powered by that incredibly thin lighting form factor. But it goes on. Our LifeProof carpet and our PetProof carpet were technology-enabled us to offer lifetime stain guarantees on the product. So, really across the whole storage, it’s super exciting, great innovative products that customers are responding to.

Thanks for that. And, Carol, if I could ask one follow-up, just inventory turns for the quarter were flattish year-over-year. How should we think about inventory as we progress through the remainder of the year? Thanks.

Yes. Well, on an unrounded basis, inventory turns were slightly better than last year. And for the full year, we’re expecting inventory turns to be up year-on-year by a few tenths.

Hi. Thanks guys. Just one more e-commerce question. Have you guys – I’m sure you have – it’s probably been asked. Just to go over again. What percent, what categories in your store do you think lend themselves best to online? And in particular, I'm curious about how the appliance business does online, is that something that you think can work through that channel? Thanks.

Yes. I think we shared numbers years back that we looked at all of our categories and had segments of the business that we felt would lean more towards the digital world. Those products would be smaller cube, more dense, and higher value that would lend themselves to that type of business. And so, things like faucets and power tools for example. What's interesting is that we've been in a position to be able to not only grow that business online, but we’ve also been able to grow those categories in store at the same time, and so that something that we see as a real advantage in our business. And then other categories that maybe the customer actually starts online, but they may finish in the physical world would be things like flooring and kitchens, so the research has been done there, but many times the customer still wants to come in and talk to one of our associates and maybe go through some product and questions that they may have about the process. So it’s really something that we have been watching carefully, but we’ve been incredibly fortunate that we’ve been able to grow both channels really across categories that we think lend themselves to the online business. As customers look a lot online before they actually come into the store and shop.

So just a follow up there, are you seeing the people actually transact for appliances online? And the second follow-up is, have you ever quantified the percentage of your products that are in that first bucket of lend themselves well to online?

No, I mean customers do go online and some customers buy online. Just like some customers buy patio online. They are comfortable doing that without sitting in it. But again, the majority of our business in those kinds of categories are in store and we haven’t spent a lot of time trying to quantify.

Okay. Thank you. Very helpful.

You bet.

Thank you very much. You said that your average ticket growth of 3.9% was boosted in part by new product introduction. Curious, like for a given product, what is the duration of that can help contribute to average ticket, and what does the pipeline look like for new products in the future? And I do have a follow up.

I mean it really varies by category on what the cycle is in terms of product innovation. Historically you could think about a product in a 36-month kind of timeframe. Today, those categories or that cycle are way shorter than that. So it varies quite a bit.

Okay, thank you. And then certainly you got very solid expense growth in the first quarter, which led you to take a full year ratio from 49% down to 43% after getting 39% expense growth in Q1 which is one of your lower revenue quarters. If you take that together with the fact that comps ease going forward, it would appear that the expense leverage in the following three quarters could even be better than what we saw in Q1, which would maybe lead to a number that’s even below 43%. Is that a correct line of thinking on my part?

Alan, as you know, we put out guidance based on our point of view on the business and we always try to do better. If I look at the next three quarters, I would say the expense growth factor will be slightly higher in the second quarter and then lower in the third and fourth quarter principally because of year-over-year comparisons. But we do like to put out numbers that we can beat.

Okay, thanks. Had a couple of questions, kind of follow-ups. Carol, you mentioned that May was very, very good.

Yes.

And I know last May there were some, I guess, Memorial Day shifts that matured on sort of a 3 or 4 depending on how you look at it. When you say very good, is that a two-year or three-year stack, how should we think about that in terms of very good and exit rate?

I just look at our – versus our plan.

Always versus the plan.

Always versus the plan.

Correct.

And then the second question, and maybe sort of a follow-up broader speaking. There is a lot going on in the industry, a lot of change and Craig, I think you answered being positioned to help the customer and take that share. Could you talk a little bit maybe about the position in terms of how you work with vendors? It seems like you are getting a lot of innovation in products, maybe from some of those vendors that might be thinking differently about other ways of getting product to market. Could you help us understand that side of the equation, and maybe Ted, as well, especially given online growth, etcetera, as to how the vendors are working with you?

I mean, I’ll start with a comment and turn it over to Ted. I mean, this is an area that we have focused hard on for the past eight to nine years. During the downturn, one of the things that we clearly saw was that if the customer was going to spend money in 2008, 2009, 2010, it was going to be largely around new and innovative products, and if that product can help them save time or money, they would definitely step in even in those tough economic times. So this has been a focus that Ted and the merchants have had in a big way. And we have a huge focus on collaboration with our supplier partners and we appreciate that we have to win together. Two things we always want our partners to know is that when they are looking for volume, there is no better place than the Home Depot that no one is going to drive their volume and their productivity at their production facilities like the Home Depot. The second thing, and you notice all the exclusive items I called out in my prepared remarks, no one can launch a product like the Home Depot, and we want to continue working and collaborating with our partners driving their volume and introducing their innovations.

Okay. And then I have one follow-up with the housekeeping what was private label credit penetration in the quarter and you’ve talked a lot about the strength to consumer from housing, I’m just curious how the credit dynamics are looking to gas?

Yes, we were very pleased with our performance in our private label credit card. The penetration grew year-over-year by 20 basis points, now stands at 22.6%, and we see that the sales on our private label card for our Pro the growth rate was faster than the company average.

Great. Thanks.

Thank you.

Catherine, we have time for one more question.

Thank you. Congratulations on a nice quarter. Most of my questions are answered, but I was curious on the Southern division comment being the strongest, is that due to weather compare or demographics or both?

Well, the southern division did have the benefit of the $70 million in storm sales year-over-year in Louisiana and there is still some recovery benefit going there, so that was part of the driver for the southern division’s outperformance.

And any weather or excuse me calendar issues to be aware of Carol for the coming quarter or the year? Thank you.

No, not that I can think of the timing of the Memorial Day maybe of year-over-year we may have a shift to a different fiscal market. I can’t think it better does; we’ll clarify that at the end of the second quarter but no quarter-to-quarter differences, no.

Great. Thank you, good luck.

Okay, thank you.

Well thank you everyone for joining us today and we look forward to speaking with you on our second quarter earnings conference call in August.