Home Depot Inc (HD) — Q2 2017 Earnings Call Transcript

Thank you, Debbie, 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. We had a strong quarter achieving a milestone of the highest quarterly sales and net earnings results in the company's history. Sales for the second quarter were $28.1 billion, up 6.2% from last year. Comp sales were up 6.3% from last year, and our U.S. stores had a positive comp of 6.6%. Diluted earnings per share were $2.25 in the second quarter, up 14.2% versus last year. We continue to see broad-based growth across the store in all geographies. In the U.S. all three of our divisions posted positive comps in the second quarter as did all of our 19 regions and top 40 markets. Internationally, both Mexico and Canada posted another quarter of positive comps in local currency. Our solid performance was driven by the outstanding execution of our store and merchant teams delivering value and service for our customers across multiple events both in-store and online. As Ted will detail both ticket and transactions grew in the quarter and all of our merchandising departments posted positive comps. We saw a healthy balance of growth from both our Pro and DIY categories with Pro sales once again outpacing DIY sales in the quarter. We believe that the work we are doing to enhance the service capabilities for the unique needs of our Pro customers continues to resonate. We are focused on being a valued partner for our Pros by offering solutions both in-store and at the job site that help them to more effectively manage their business. This includes enhancing our leadership position in the tool sector. During the quarter, we closed on the acquisition of Compact Power Equipment, a leading national provider of equipment rental and maintenance services. Compact Power has provided larger job site equipment rentals at more than 1,000 Home Depot stores since 2009. The acquisition is yet another investment to enhance our portfolio service offerings for our Pros and though we have worked closely with the Compact Power team for many years we are delighted to officially welcome them to the Home Depot family. Our investment in Interline and the MRO customer is another avenue to better serve the needs of our Pros. Use case one, the rollout of Interline’s catalog of products to Home Depot stores is now implemented and we are pleased with the early results. We also continue to roll out use case two, which enables Interline customers to shop Home Depot stores using a swipe card linked to their Interline account. Though it is early days, we are seeing an incremental sales lift from accounts who have been given the swipe card. Our deeper level of engagement with the Interline customers has helped to drive sales growth that outpaced the company average in the quarter and we remain very excited about the MRO opportunity going forward. Another growth engine for our business is our focus in interconnected retail. Our dotcom business represented 6.4% of sales and grew approximately 23% in the quarter. Our digital team continues to invest in content, site improvement, and better mobile experiences to take the friction out of the interconnected experience online, while our operations team remains focused on improving the interconnected experience in-store. The result of these combined efforts is continued improvement in sales and customer satisfaction scores across both platforms. This is the power of interconnected retail. As you know we look at productivity as a virtuous cycle here at the Home Depot and our efforts to connect our business end to end continue to pay dividends that enable us to reinvest in the customer experience. We are pleased with the productivity in the business during the quarter as the end-to-end initiatives to improve freight handling in the store continue to drive labor efficiency and optimize product flow from truck to shelf. Beyond the four walls of our stores, we continued to drive productivity throughout our value chain with initiatives like supply chain sync. Sync is live in all of our RDCs but as you know this is a multiyear, multi-phase endeavor as we work to onboard each of our suppliers flowing products through our RDCs. We continue to see great productivity from our supply chain as our investment over the past several years is having a positive impact on logistics costs, inventory productivity and service to our stores and customers. Turning to the macro environment, we continue to see positive signs in the housing data which we believe serve as a tailwind for our business. As Carol will detail, because of our outperformance in the first half versus our plan we are increasing our sales and earnings per share guidance for the year. We now expect fiscal 2017's sales growth of approximately 5.3% and diluted earnings per share of $7.29. The success of our spring selling season is the direct result of our 400,000 plus associates and their passion for our customers that extend well beyond serving them in our aisles. For example, this year we celebrated the 20th anniversary of Home Depot’s in-store kids workshops. Held in our stores on the first Saturday of every month, these workshops have become a source of empowerment, accomplishment and pride for millions of children and their families. We like to think that we are fostering the next generation of do-it-yourselfers with some of the most enthusiastic participants over the years even trading in their many aprons for larger ones by becoming associates in our stores themselves. I want to close by thanking all of our associates for the hard work and continued dedication to our customers, as they once again successfully navigated the increased demands associated with our busiest selling season. Based on the first half results, approximately 99% of our stores qualified for Success Sharing, our profit-sharing program for our hourly associates. We are very proud of their efforts. And with that, let me turn the call over to Ted.

Thanks, Craig and good morning everyone. We had a great second quarter driven by the strength of both our Pro and do-it-yourself customers. In addition, our online business continued its momentum as online sales grew approximately 23% versus last year. We saw broad-based growth across the store as all of our merchandising departments posted positive comps. Lumber, Electrical, Tools, and Flooring had double-digit comps in the quarter. Building Materials, Appliances, Indoor Garden, and Decor were above the company average. Plumbing, Millwork, Kitchen and Bath, Outdoor Garden, Hardware, Paint, and Lighting were positive but below the company average. In the second quarter, total comp transactions grew by 2.6% and comp average ticket increased 3.6%. Commodity price inflation in Lumber, Building Materials, and Copper positively impacted average ticket growth by approximately 68 basis points. During the quarter, we held Memorial Day, Father’s Day, and Red, White, and Blue events. These events drove excitement in our stores for both customers and associates and we were very pleased with the results. Looking at big ticket sales in the second quarter, transactions over $900, which represent approximately 22% of our U.S. sales, were up 12.4%. A few drivers behind the increasing big-ticket purchases were appliances, flooring, and certain Pro-heavy categories. Transactions for tickets under $50 which now make up approximately 16% of our U.S. sales grew by 1.5% in the quarter, reflecting, among other things, the return of our Outdoor Garden business in certain parts of the country. In the second quarter, Pro sales outpaced the company average driven by both our high spend and low spend pros. We saw strong comps across several lumber and building material categories, as well as categories like pipe and fittings, power tools, and wire. Sales to our DIY customers also showed strength in the quarter, with flooring, storage and organization, and patio all outperforming the company average comp. We strive to balance the art and science of retail as part of our core merchandising strategy. For example, we are using data to help our merchandising execution team, M.E.T., execute more effectively. M.E.T. services based in our stores with primary responsibility for planogram integrity and shelf presentation. Currently, each space serves a space on overall store volume. We are initiating unique service for patients based on category-specific sales and transactions. M.E.T. associates will receive individualized and optimized work assignments through the first phones. This allows for the most efficient use of passing hours and focuses based service where customers shop most. Looking ahead, we will continue to build capabilities and invest in people, processes, and technology in order to leverage our data to better serve our customers. Now let me turn our attention to the third quarter. We strive to be the product authority in home improvement by providing our customers with the best brands at the best value. Our assortments include many exclusive brands and we are excited to be expanding our launch of PPG branded products, a brand that has been trusted by Pros for over 100 years. This quarter we are introducing PPG Timeless Paint. This new product is one-coat coverage available in both interior and exterior paint. PPG’s world-class coating technology improves durability, saving our customers time and money. Product innovation is also at the forefront of our retail strategy. Flooring, both hard and soft, has been an excellent growth driver for our business this year and we continue to see great innovation within the category. New to our assortment is an improved vinyl plank flooring from LifeProof. This innovative product features a highly engineered closed cell foam PDC core that delivers rigidity and strength that is lightweight and easy to handle and install. It is also 100% waterproof and scratch-resistant and is available in over 40 patterns. This new LifeProof vinyl flooring is exclusive to Home Depot. We are excited about our upcoming Labor Day, fall cleanup, and Halloween harvest events. In the third quarter, as always, we will be offering a variety of special buys and values throughout the store and online to help kick off the fall season. With that, I’d like to turn the call over to Carol.

Thank you, Ted and good morning everyone. In the second quarter, sales were $28.1 billion, a 6.2% increase from last year. Our total company comps, or same store sales were positive 6.3% for the quarter with positive comps up 5.8% in May, 5.9% in June and 7.2% in July. Comps for U.S. stores were positive 6.6% for the quarter, with positive comps up 6.6% in May, 6.2% in June and 7% in July, versus last year. A stronger U.S. dollar negatively impacted total sales growth by approximately $64 million or 0.50%. In the second quarter, our gross margin was 33.7%, a decline of 6 basis points from last year. The year-over-year change in our gross margin is explained largely by the following factors. First, we had nine basis points of gross margin expansion in our supply chain, driven primarily by increased productivity. Second, we had approximately 8 basis points to our gross margin contraction due to a change in the mix of products sold. And finally, we had 7 basis points of gross margin contraction due to higher shrink than one year ago. In the second quarter, operating expenses as a percent of sales decreased by 44 basis points to 17.8%. In the quarter, our expenses were $20 million over our plan, due primarily to a true-up of our bonus accrual. Even so, our operating expenses as a percent of sales were better than our plan due to our strong sales deployment. One last comment on expenses. As we told you last quarter, we expect our expense growth factor to vary by quarter giving year-over-year comparisons and the timing of investments. Looking ahead, we expect our expense growth factor to be lower in the back half of the year than it was in the first half. Our operating margin for the second quarter was 15.9%, an increase of 38 basis points from last year. Interest and other expenses for the second quarter grew by $21 million to $249 million, keeping reducing the impact of adding $4 billion to our outstanding long-term debt over the past year. In the second quarter, our effective tax rate was 36.6% compared to 37% in the second quarter of fiscal 2016 reflecting the benefit of a new stock compensation accounting standard that we adopted at the beginning of the year. Our diluted earnings per share for the second quarter were $2.25, an increase of 14.2% from last year. Moving onto some additional highlights, in the first six months of the year, we opened four new stores, including three in the U.S. and one in Mexico. We have now opened a new store in the United States since 2013. Our New York store still shows promise, and we are pleased with their initial sales performance. Total sales per square foot for the second quarter were $464, up 5.9% from last year. Turning to the balance sheet, at the end of the quarter, merchandise inventories were $12.9 billion, up $545 million from last year, and inventory turn was 5.3 times, up one-tenth from last year. In the second quarter, we repurchased $2.6 billion or approximately 17.3 million shares of outstanding stock bringing our year-to-date share repurchases to approximately $3.9 billion. Additionally, during the quarter, we took advantage of an attractive interest rate environment and raised $2 billion of incremental long-term debt. We will use the proceeds of this debt issuance to repurchase outstanding shares, increasing our 2017 share repurchase target from what had been $5 billion to now $7 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%, 300 basis points higher than the second quarter of fiscal 2016. Year-to-date our sales and earnings per share have exceeded our expectations. Turning to our outlook for the remainder of the year, we expect to see continued growth in the repair and remodel market as housing has experienced solid wage growth, faster home price appreciation, and the re-emergence of first-time homebuyers. As a result, we are looking at fiscal 2017 sales and earnings per share growth guidance to reflect our first-half performance and are confident in the back half of the year. Additionally, as Craig mentioned, we recently completed the acquisition of Compact Power equipment and are excited to welcome the Compact Power team to the Home Depot family. As we look to the back half of the year, Compact Power will not have a material impact on our sales or earnings per share forecast, but it will slightly affect our gross margin and expense structure. We now expect fiscal 2017 sales to increase by approximately 5.3% with positive comps of 5.5%. While this suggests our second-half comps will be slightly lower than our first-half comps, our sales guidance is based on our planned foreign exchange rates for the back half of the year. Given the recent performance of the U.S. dollar, there could be some upside to our sales forecast. At the beginning of the year, we expected our fiscal 2017 gross margins to decline by 15 basis points from what we reported in fiscal 2016. Reflecting the impact of Compact Power, we now expect our fiscal 2017 gross margin to decline by approximately 10 basis points. For the year, also reflecting the impact of Compact Power, we now expect our expenses to grow at approximately 46% of the rate of our sales growth. Finally, for the year, we expect our effective tax rate to be approximately 36.3%. For earnings per share, remember that we guide off GAAP. For fiscal 2017, we now expect diluted earnings per share to increase by approximately 13% to $7.29. Our updated earnings per share guidance reflects the points I just mentioned as well as $7 billion of share purchases for the year. So we thank you for your participation in today’s call. And Debbie, we are now ready for questions.

Thanks, good morning. Quick question I guess on the recovery. The longer the recovery persists, I mean just naturally it seems like the market is getting some angst, that there is eventually going to be a shoe drop. How do you get comfortable with the tenure of the recovery, clearly the business is performing great, and if there are yellow flags, how do you know what you are looking for?

I mean, I’d say Simeon that we’ve had obviously a protracted recovery here, and it has been clearly driven from housing which has been a steady but slow recovery in the market. You know we continually look at months of supply, there is 4.3 months of supply in the market of housing availability against a historical norm of six; that clearly is helping to drive improvement in home value appreciation, but housing starts haven’t returned to their norm yet either. The only thing that’s kind of run on historical averages is housing turnover. So, we see this housing favorability continuing as we look forward. And I think the watch out for us is, you wouldn’t want to see affordability become an issue, but that at this point doesn't seem to be a concern for us at all.

As we examine the affordability index, it currently stands at 153%, indicating we have a significant distance to cover before it becomes a concern for us. Recovery is challenging to quantify, but if we simply look at PFRI dollars, they've only recouped 70% of the losses. To illustrate this in simpler terms, it's akin to being in the fourth inning. Another noteworthy point is the age of the housing stock; we have mentioned that 66% of the housing stock is over 30 years old. Interestingly, 51% of the housing stock is older than 40 years. As homes age, they require more repairs.

Okay. That’s helpful. My follow-up is one e-commerce and I’m sure this will be topical. I just want to ask one angle of it. So, in using the power tool category as an analog for how to think of appliances, the pushback that we've been getting is that look Home Depot has done a great job in powered tools, but they have a lot of exclusive brands and labels which is different than appliances, and ultimately appliances will be harder to control given some of the large national brands. Can you share some thoughts on that comment?

Look, what I would say is, we have a lot of categories of goods in our stores, over 200 plus categories of goods. And we compete with lots of folks across all of those categories. And candidly by category the strategy is different because the categories are different. And so, our job is to create the strategies that allow us to be the customers’ advocate for value across the categories and compete accordingly. And it varies by category what our approach is.

Good morning. Thanks for taking my question. I have two questions on market share. First, it looks like your total sales increased slightly less than the category according to the Census Bureau. So where do you think you might have lost some share during the quarter? And then I have a follow-up on that.

Actually based on the NAICS 441, it actually looks that we gained share in the quarter. We don't believe we lost share in the quarter.

No. We’re up 20 basis points.

20 basis points to 28.12.

Okay. And then the second part of the question is on e-commerce, the e-commerce channel within home improvement overall. Do you think that you're gaining share within that channel within the category? And what rate of growth do you think the home-improvement category is growing online?

So, we actually have an interconnected retail approach and our customers are blending the physical and the digital world together. And we look at share in totality as it relates to Home Depot's gain in the market against what the market is growing.

And we’re pleased with the share gains. It’s important to remember that over 43% of our online transactions are picked up inside of a store. This is One Home Depot. Not an online or in-store business, but it’s One Home Depot.

Thank you. As you just mentioned different strategies for different categories online, obviously appliances have been in the news recently. I know you do some of your appliance business online. I was wondering if you could just talk a little bit about the complexity of that transaction, how the customers shopping it in the store even if they're ordering it online and where you think your competitive advantages are if you start to see that category become more available online at other competitors?

Dan, if you consider the interconnected experience, particularly for appliances, there are many other categories involved. In numerous categories, the shopping journey begins in the digital realm, even though it may conclude in a physical location or, in some instances, entirely online. Today, it is truly a blended experience where the entrance to our store is not just at the physical location for many product categories. Customers often start their search online, researching products, and then, especially for high-ticket items, they may come in to speak with one of our associates before making a purchase. In fact, we sell in both physical stores and online for these big-ticket categories.

And then, if I can just ask one other question related to delivery. Can you give us an update on how many of the stores are able to deliver to the Pro within two hours now?

Yes. We've actually rolled out the delivery program at the end of fiscal 2016. Mark Holifield is here. I’ll let Mark…

Yes. Hey, Dan. Our buy online delivery from store and our delivery from store capabilities were fully rolled out at the end of last year and we offer the two and four-hour window options at all of them at this point.

And Mark, certainly we’ve seen sequential growth in our delivery business every week in the quarter. So our customers are responding very well to this offer.

Great. Thanks.

Thanks. Good morning. Can you talk about, Carol, last quarter you talked about Pro being up two times DIY. Does that trend continue? And can you talk about the growth that you’re seeing in the Pro versus DIY. What does that make you all think about what's going on in the market now and in terms of the duration of the growth going forward?

Sure. So, yes, our Pro’s grew twice as fast as the DIY, actually expanded that gap a bit in the second quarter. And Chris, I can recall talking to you last August about our sales, our Pro’s going out on vacation. Well, based on what we’re seeing in the stores today our Pros are not on vacation. The stores are busy and our sales are quite good.

Nice. And then, I think one of the questions that was asked on our last call that was really interesting, and I wanted to put out there. You have companies like Wayfair spending a lot in advertising, and Amazon reported to be more interested in the category. So, obviously as you saw these companies get rewarded with sales growth and not necessarily profitability, clear in Amazon's last report. So do you think that given this increased interest in greater advertising spend, do you need to flex some muscles here and maybe deleverage advertising a little bit to defend the Home Depot brand in the home-related categories?

Chris, I’d say, one of things, I’m very proud of the team. They have worked really hard over the past several years to drive dramatic improvement in terms of the effectiveness of our marketing dollars to reach a customer in a space where they have a high level of interest. So, we have been on a path to balance our approach in terms of marketing both in traditional media and in digital media, and the team has been able to drive incredibly effective returns on our marketing spend.

We spent more on digital in the second quarter than we did TV and radio combined. So the team is doing an awesome job at getting more eyeballs, higher return on that spend.

Yes. Our overall advertising spend is up, lower single digits, but as we’ve essentially made more significant pivot to digital marketing, it's over half our marketing right now. That's a medium that you can get good insight on the return on your spend and as Craig said, the team has just done a great job continuing to increase the return on that spend, so leveraging that low single digit to a much more productive return on overall ad spend.

I’m sure you do a lot of key search terms and so forth there. Is that becoming more expensive to you as Wayfair and Amazon focus more on the category?

I mean, it varies by category by day candidly.

Hi. Good morning.

Good morning.

Nice quarter.

Thank you.

So my first question, I guess is follow-up on some of the other e-commerce type questions, but maybe to exactly what Chris was saying a minute ago. Other e-retailers are online-only channels, if they may at least indicate some interest gain into this category. But from your vantage point, are you seeing anything suggest that anyone’s coming out with a much, much more price aggressive effort in one that you would have to match or you're choosing to match?

I mean, Brian, we’ve invested obviously in tools and capabilities to inform our merchants in terms of the overall competitive position in the marketplace both in the digital and in the physical world. And this quite candidly has been something that the company has been focused on since its inception in terms of making sure that we’re driving value. Core belief that I have is as merchants, we are the customer’s advocate for value, period. And that's the job of the Home Depot and the Home Depot merchandising team every single day. So we must stay focused on a competitive offering and quite candidly value is defined by what the customer is willing to pay for it.

As Craig said, it's a great point. We compete over 220 categories. Flooring is a very big category and there are actually a lot of competitors have been and will be. We see consumer demand very strong and the consumer is responding to the Home Depot value proposition. So we have innovative product. We have exclusive product. We have new technology and exclusive launches at Home Depot. And we've worked very hard on her in-store selling model and Ann and her team are just doing a great job communicating that value to the customer in both hard and soft flooring and they’re both doing extremely well as I called out double-digit comps for the category.

Good morning. Thanks for taking my question. I was curious about your comment with regards to the reemergence of the first-time home buyers. Is this the first time we’re seeing this and if this were emerging would this be enough to offset any slowing of price appreciation if there were to occur?

Well, it’s really interesting to see what happens with the first-time home buyers in the second quarter. The highest number of first-time home buyers since 2005, about 424,000 first-time home buyers making up 38% of all home buyers and up 11% year-on-year, so that’s good news. Why? Because first-time home buyers tend to buy homes that need repair and remodel. So, as we see and we anticipated this happening with millennials coming into an age where they start to form families, children or pets or whatever their family unit might look like they're moving into homes which bodes very well for us and to your point it extends the recovery.

Thanks. Great. Thank you. And then, Ted had mentioned that the three events you conducted during the quarter. Just wondered if that deferred in any way versus last year and does that help explain some of the acceleration into July?

They were similar events in duration as last year, Kate.

Thanks a lot and good morning. My question relates to your discussion of sales trends by ticket. Can you just remind us whether that store-only, whether that's inclusive of online? And then I have a quick follow-up.

Yes. It’s all in.

It’s all in.

I guess, is there anything about the way consumers are shopping based on the project or basket that would change the composition of that sales performance by ticket, just thinking about the outsize, extended outsize growth of the big-ticket piece and the fact that the small ticket piece has been growing at a slower rate for kind of equally consistent period of time.

The biggest driver behind that has been the recovery of our Pro customer and the growth that we've had in categories like appliances and flooring. Those are big-ticket purchases in and of themselves, so an appliance is clearly much larger than our average ticket. Our flooring job is significantly larger than our average ticket. And our Pro customer spends dramatically more than the average DIY customer. So those have clearly helped to drive the growth in tickets above $900. And then, we did see the recovery in the smaller ticket, Matt, as a result of the garden business coming back to a more normal state in the second quarter.

Hi, good morning and thanks.

Good morning.

One more question just going back to appliances and online, I think you said, 6% of sales are online now for the total store. Can you just maybe just frame appliances relative to that number and just give a little bit more detail on how you mentioned, Craig, the buying experience in some cases starting digitally and ending digitally? What percentage of those big-ticket transactions and appliances are executed online? Just kind of give some frame of reference to the categories as a whole already being an online category?

We don’t break that data. I mean, for competitive reasons we would not share that data. Thanks.

Okay. I won’t count that as my question. And so my question is will shift to non-online. When you look at outdoor garden I guess for the first half of the year it’s a below-average category, so I guess the weather comps year-to-year didn't really get the typical bathtub affect? Carol, when you look at the back half of the year, do you expect that some of that could come back and the full year would balance out or is that lost demand at this point?

Some of the softness was – and softness is relative to the category grew, so I wouldn’t think we get much of that.

No. I think some of the uptick we saw in July was that extended season all in, it was a reasonably good season, I wouldn’t say great, certainly colder and wetter early and it was really wet into the end of June, so some late garden, but I think we’ve seen that and it just isn’t that big until you get into fall and then hopefully you’ll get a seed season and some planning season.

Thank you very much for taking my question. Carol, you mentioned that the expense factor in the second half should be lower than in the first half. Given the fact that typically second half revenues and aggregate are less than the first half and you said that you forecasted comps to be a little bit lower in the second half versus the first half. Is the reason for a lower expense factor in the second half entirely due to compact power or are there other things going on there?

Let me give you a little bit more color on our expenses that I put in place. As you know we stepped up our capital spending program this year taking our total spending up to $2 billion, including $359 of capital to invest in our stores, and certain of our stores are getting new wayfinding packages, new flooring and lighting, new restrooms, break rooms, and so forth. That capital comes with the next step. Now, we didn’t plan for the activity over every quarter and in fact, a lot of that activity took place in the second quarter. And so I look at our expense performance in the second quarter, but it was planned, expenses related to our store investment which would include old write-offs with old fixtures and reset expenses and that sort of thing. Year-on-year it was up $19 million. So it was pretty lumpy in the second quarter. That won’t be as lumpy in the back half of the year and that’s really the driver of expense growth factor first half versus second half.

Okay. Thank you very much. Appreciate that. And then follow-up, with respect to Compact Power either Craig or Carol, could maybe just talk about the margin structure for that business. Would it be correct to assume that it’s a lower gross margin, as well as lower SG&A business and what effect on a full-time basis to EBIT margin does the acquisition of Compact Power in and of itself have?

Happy to talk about it. First, the Compact Power, the revenues for Compact Power are recognized on a net and not a gross basis. So you have gross margin associated with that business, it’s highly margin accretive. And Alan, that’s one reason why our gross margin guidance for the year has changed from what had been down 15 basis points to now down 10 basis points. Because the revenues are recognized on a net basis and because there are expenses in Compact Power it puts some pressure on our expense growth factor for the year. We had guided that the expenses would grow at 43% of our sales growth. We’re now suggesting 46% of our sales growth, that’s because there are no revenues we will report on net basis, but they are expensive. If you look at EBIT of Compact Power, it is very accretive. In the back half of the year, this is a small business, strategically very important. But in the back half of the year, Compact Power should contribute a penny of EPS accretion.

Good morning, everyone. Carol, you’ve already pointed out how the housing inventory in the U.S. continues to age, which has significantly impacted you over the past couple of years. Have you gathered any data on home improvement spending by vintage, or do you know if there’s an average percentage spent in relation to an average home price?

Yes. A couple of data points. Homes built before 1980, the average annual home improvement spend is $3,500 a year. Homes built after 2000, the average annual home improvement spend is $1,500 a year. So there’s a pretty nice delta as the homes age. The other interesting data points and we haven’t proven this analytically in our own research, but I’ll share with you anyway because I think it gets very interesting. We look at John Burns Real Estate Consulting Group a lot. We’ve got some really interesting data in housing. And they say, that for average every percentage point improvement in real wages and real wages are up this year after inflation 2.2%. They say for every percentage points increase, there’s a 1% increase in the repair and remodel spend. Interesting, we haven’t proven that, but it stands to reason. You got more money in your pocket, you’re going to spend some more money on your home.

Thank you. You mentioned several times earlier in the call that your Pro is up well in excess of the DIY. Can you give us any insight on product categories that did particularly well with the Pro in the quarter?

Well, certainly our building material categories did very well. Our electrical did very well, tools, consumers, consumers love our power tools, but the Pro’s are really the heavy users of that. Lumber is very strong, our lumber prices are nearer at all-time highs, our unit productivity is you know, the commodity prices we know will go up and down, we watch the units very carefully in lumber and building materials, and those have been very strong as well.

Hey, guys. Thanks for taking my questions. So, I guess I wanted to take a step back and ask some broader questions. A lot has been asked on the call. I mean, as you guys look at your business, because obviously just performing terrifically and obviously a big tailwind from what’s going on macro, but also a lot of the great things you guys are doing. What do you worry about?

So, I’d say there are two things that are up there on the list. And one is we’re investing in the One Home Depot experience, that’s how the customer views us, not exactly how we’re built. So we have to do some things to get there completely. And second worry, I’d say, is the customer and their associate experience in our high-volume stores. Clearly, with the growth that we've had that puts pressure on in those stores disproportionately. And so, we’re going to have to invest to solve that situation and we’re working to put that in place, but those are certainly two worries that we have in the business.

Right. That’s really good insight. But I was just wondering if you could talk about kind of how things are going so far this quarter. I mean, we had the retail sales numbers out today. They were good. We experience sometimes a third-quarter lull, because DIY is not as strong as Pro. I was just wondering any thoughts as we look into third quarter, anything we should consider?

Yes. Scott, as we mentioned just a little bit earlier, we are quite pleased with our sales in August thus far.

Hi, yes. Good morning, everyone.

Good morning.

It’s been a little over a quarter since you now had access to Interline inventory and your stores. And I was wondering conceptually how should we think about the benefit from that access, building and having an impact on your sales? How do you build awareness of that? Is that really what we’re waiting on to see an acceleration in the business form that or just how to think about that benefit layering in over the coming years? Thanks.

I mean, I’ll start and Bill is here who runs our Pro and Services business. But as I call out my comments, we’re actually very pleased with the use case one and use case two response from our customers and with that as well as the operative the team at Interline, Interline actually grew above the company average growth in the quarter or so.

Yes. Craig, thanks, quick comment. We’re now live in 1,958 stores, so we basically have finished the rollout. We have 1,500 stores that have access to Interline’s products next day and an additional 458 stores that are a two-day delivery. And we’re seeing great activity on a broad base of goods primarily servicing the trades from plumbing, electrical hardware, and also strengthening the HVAC business. So it's doing a nice job of extending our product reach, giving us access to deeper inventories for Pro that are coming in and looking for project-based purchases. And then, overall, average ticket on par ramping up sequentially week-over-week and pleased with progress on the MRO business.

And then, Carol if I could have a follow-up just – and I’m sorry if I missed this, but the seven basis points of pressure from higher shrink. I have to ask about it because it almost offset the benefit from the supply chain. Could you just talk about what you are seeing there, what’s driving that? Thanks.

As you know there are many drivers of shrink including higher staff and changes in operational processes and new systems. We have a cross-functional team that is addressing this. We are hearing from other retailers that shrink is up across the board. But we really focused on what have we changed in front of our store that will have to cost some of this. And in fact, the cross-functional team has identified a few defects that we are correcting. And we will continue to work on this going forward.

Hey guys, thanks for taking the question. First, it was just kind of the labor market and wages and availability workers. I mean, what are you guys seeing on that front, whether it be with the seasonal folks that you hire or some of the specialty or full-time folks? That’s my first question.

So Peter, we hired seasonally this year over 90,000 people, and one of the great things that happened in this season was we enhanced our application process through an improved mobile experience; it actually doubled our applicant pool. So we were pleased with that as a better experience for the applicants themselves and was pretty effective on our end as well. We are certainly seeing wage pressure and that varies market by market, but that’s something that we anticipated and planned for, and it’s actually built into our guidance for 2017.

Okay, thank you. And then, Carol just curious on the FX, just to make sure I understand you correctly your guidance right now still assumes, I think it was the $250 million headwind from FX for the years, is that right?

In the back half, it’s actually $250 million. That’s right. So if you were to add that back, you would calculate the comp to be about the same as what we reported in the first half.

Great, thank you. And one more thing is just on the store refreshes that you’ve alluded to, remind us how many you are getting done this year, how many you think you could maybe do in 2018. And Craig, anything specific, I mean you talked about trying to alleviate some of the customer experience and associates experience friction that may occur in these high-volume stores. Anything in particular that you are focused on that you are seeing some improvement from as you kind of work to re-engineer the stores a little bit? Thank you.

The first part of the question in terms of how many this year or approximately 500 stores will get the updates that Carol referenced earlier as it relates to signage, navigational signage, lighting, floor, break room, rest rooms, and so on. And then in the high-volume stores, you know, we have to work to continue to improve the experience for the customer on the front end, in particular, and get the customer through the registers with greater speed and then likewise those stores feel more pressure from the office and bus pick up, and we’re working to solve that for them as well. And that will be a different scenario by different type of stores, but those are the areas of focus.

And Peter, you know we’ve got an investor conference in December and so we’ll lay out our plans for 2018 and beyond at that conference.