Home Depot Inc (HD) — Q4 2018 Earnings Call Transcript

Thank you, Isabel, and good morning everyone. Fiscal 2018 was another record year for our business as we achieved the highest sales and net earnings in company history. Fiscal 2018 sales grew $7.3 billion to $108.2 billion, an increase of 7.2% from fiscal 2017, while diluted earnings per share grew 33.5% to $9.73. And although fiscal 2018 was a record year for our business, our fourth quarter comp sales were slightly below our expectations as the quarter experienced some unfavorable weather. Sales for the fourth quarter were $26.5 billion, up 10.9% from last year. Comp sales were up 3.2% from last year, and our U.S. comps were positive 3.7%. Diluted earnings per share were $2.09 in the fourth quarter. Internationally, Mexico posted another quarter of positive comps in local currency while Canada was essentially flat. As we mentioned on the last quarter's call, our fourth quarter faced tough comparisons given the prior year's approximately $400 million hurricane-related sales that would not repeat, and we planned for this in our outlook. But as Carol will detail, what we did not plan for was the extent of the unfavorable weather we experienced in all regions throughout the quarter. It was cold, it was snowy, and perhaps worst of all, it was wet. Wet weather delays projects, and this was evidenced in our sales performance in the quarter. In fact, as Carol will detail, excluding weather, our business performed in line with our expectations. And as Ted will discuss while the ticket and transactions grew in the quarter and we saw growth in both Pro and DIY categories, Pro sales once again outpaced DIY sales in the quarter. The work that our associates are doing to enhance the service capabilities for our Pros continues to resonate. I am very proud of our associates for continuing to do what they do best: serving our customers. Our merchants, store teams, supplier partners, and supply chain teams did an outstanding job of delivering value and service to our customers throughout the quarter both in stores and online. In fact, several key accomplishments took place during the quarter. We set record performances on Black Friday and during Cyber Week. Our holiday décor offering and gift center events set new all-time highs. And during the quarter, we reached a new watermark of approximately $2 billion annual visits on homedepot.com with many of these visitors indicating that their next stop is a Home Depot store. In fiscal 2018, we made progress with regard to the one Home Depot investment plan. But, we are still in the early days of our journey. Our strategic effort to drive and enhance interconnected customer experience through investments in both the physical and digital worlds are yielding solid returns. We also continue to focus on productivity as a virtuous cycle by leveraging technology and improving processes throughout the value chain of our business. Fiscal 2018 provided a lot of great learning and momentum that we will continue to build on in 2019. I am particularly excited about the investments we are making for our Pros. In the quarter, we announced a consolidated go-to-market approach for our Pro customers under the banner Home Depot Pro. And we continue to invest in a more personalized offering for our Pro customers with a new B2B website experience. We have now onboarded over 100,000 Pro customers, and the reception has been positive. Our plans for continuous enhancements with new features and capabilities include the ability for businesses to enhance account management and ordering capabilities with improved tools. Our intent is to roll out this new Pro online experience to over a million Pros in 2019. Beyond B2B personalization, we continue to make great strides in driving our digital experience. This year we invested in our website and mobile applications improving search capabilities, site functionality, and product content. This ongoing investment in our digital properties has increased traffic and conversion. Versus prior year on a like-for-like basis, online sales grew 22.7% in the fourth quarter and 24.1% in fiscal 2018, now representing 7.9% of our total sales. While we are seeing significant growth in our online sales, these online shoppers relevant to our stores has approximately 50% of our online U.S. orders picked up in our stores, a testament to the power of our interconnected retail strategy. We continue to roll out automated lockers in our stores to make picking up an online order easier and more convenient. Today, approximately 1,000 stores have lockers with more to come in 2019. Customer response to lockers has been very positive, as almost 94% of customers rated their locker pickup experience a five out of five stars. We fundamentally believe that when a customer comes to one of our stores, it has to be a great experience. With our investment program, approximately 40% of our U.S. stores now have a new look and feel, and customer response has been very positive. The store investments are not just about the customer response as we're also seeing an increase in social engagement and higher productivity. Another key component of a best-in-class interconnected shopping experience centers on enhancing the delivery and fulfillment options. Fiscal 2018 was the year of the pilot as we made a $1.2 billion investment journey to create the fastest, most efficient delivery network for home improvement goods. We are now live with a number of these pilot facilities. We look to fiscal 2019 as a year to take what we have learned in pilot and begin the rollout that we expect to complete by 2022. At a demonstration of the confidence in the business going forward, today our board announced a 32% increase in our quarterly dividend to $1.36 per share. The board also authorized a new share repurchase program of $15 billion replacing our existing authorization. We remain committed to maintaining disciplined capital allocation to create value for our shareholders. Turning to 2019 and beyond, I’m excited about the opportunities that are ahead of us. Carol will take you through the details, but we expect 2019 to be another year of growth with sales growth of approximately 3.3%, top sales of 5%, and diluted earnings per share of approximately $10.03. Our strong performance in fiscal 2018 also positions us well with respect to our 2020 financial targets, and today we are reaffirming those targets. It's an exciting time to be part of the Home Depot, and we look forward to the work ahead as we continue our journey to create the one Home Depot experience. There's a great deal of change being introduced throughout the business, but as they always do, our associates are rising to the occasion, meeting new challenges head-on, without losing the passion to serve our customers that has made the Home Depot what it is today. I want to close by thanking our associates for their hard work and dedication to our customers in the fourth quarter and throughout the year. For the second half of the year, 100% of our stores will receive success sharing, our bonus program for our hourly associates. We look forward to continuing our momentum in 2019, and with that, let me turn the call over to Ted.

Thanks, Craig, and good morning everyone. When we look through the unfavorable weather we experienced in the fourth quarter we were pleased with how the business performed. Looking at our departments, comps in tools, appliances, indoor garden, building materials, outdoor garden, hardware, and paint were above the company average. Electrical, plumbing, flooring, millwork, and kitchen and bath were positive but below the company average due primarily to price deflation, whereas lighting and lumber recorded low to mid-single-digit negative comps. In the fourth quarter, average ticket increased 2.3%, and comp transactions increased 0.9%. The fourth quarter finished what was a volatile year in many commodity markets, particularly lumber. For example, during the second quarter, prices were more than 40% higher than they were in the year prior. These prices fell significantly during the third and fourth quarter and now sit approximately 25% below last year's prices. While this deflation has pressured sales, we've seen strong unit growth as prices have come down, and this unit productivity drives activity across the store. During the fourth quarter, deflation in lumber negatively impacted average ticket growth by approximately 41 basis points. However, this deflation was largely offset by inflation in other core commodity categories, impacting the average ticket from core commodities by negative 8 basis points. During the fourth quarter, big ticket comp transactions for those over $1,000, which represent approximately 20% of U.S. sales, were up 4.8%. A number of factors served as headwinds to big ticket sales in the fourth quarter, notably unexpected late weather across the U.S. and lapping last year's hurricane-related sales. Excluding hurricane-affected markets, we see that January's big-ticket comp was up almost double digits in line with what we saw throughout 2018. Big ticket categories like vinyl plank flooring, roofing, and appliances all had comps above the company average in the fourth quarter. We saw growth with both our pro and do-it-yourself customers in the fourth quarter, with pro sales growing faster than the company's average comp. We continue to see strong performance in pro-heavy categories like power tools, water heaters, and commercial and industrial lighting. Sales to our DIY customers grew year-over-year as our customers completed a variety of interior projects. Categories like window coverings, safety and security, and cleaning all posted strong growth in the quarter. We also saw record performance for our annual gift center and holiday sets. Additionally, the combination of outstanding values from our suppliers, the right assortments from our merchants, and phenomenal execution in our stores led to the single highest sales day in our company's history on Black Friday. As part of our journey to enhance the one Home Depot experience, we are significantly investing in our digital assets to provide a frictionless interconnected shopping experience. Earlier this year, we formed approximately 50 cross-functional teams focused on agile development to improve our online customer experience. These teams have accomplished a great deal in a short period and are driving results. In 2018, we had a milestone of approximately 2 billion online visits, and our ongoing efforts to improve the interconnected customer experience have led to a consistent improvement in our conversion rates throughout the year. However, our work is not done. In 2019, we will continue to rollout enhancements across our digital assets. As you heard from Craig, we're excited to be rolling out a new B2B online experience for our pro customers to provide a more tailored, personalized offering and for consumers, we will continue to focus on improving the way we bring our service to life in the digital world. As we look at 2019, we are excited to build on our momentum. We are the number one retailer for product authority in home improvement, and together with our supplier partners, we will work to offer the best products at the best value for our customers every day. A great example of our strong partnerships is in our paint business. Our exclusive partners bear and PPG brings the two highest-rated consumer paint and stain brands to the Home Depot. These strong brands, along with great execution in our stores, help drive paint comps above the company average in the fourth quarter. We are particularly pleased with our sales to our pro painters as our investments and initiatives are gaining traction. In addition to having the best products, we are investing to improve the in-store paint experience for our customers. In 2019, we plan to rollout a new color solution center to all stores and will do a full reset in exterior states. We are thrilled with the results we are driving in our paint business and look forward to building on our momentum in 2019. Product innovation is resonating with our customers as we see them trade up to new features and innovation across the store. One example we are seeing this is with Traeger in our grill category. Traeger is one of the fastest growing brands in the grilling category. Their innovative pellet grills offer the versatility and convenience of being able to grill, smoke, bake, roast, and braise for barbecue all in the same grill. Given the strong sales, we are introducing Traeger's new lineup of live fire grills, which connects to your smartphone, allowing you to monitor or adjust the temperature remotely. We are excited to be Traeger's exclusive partner in the big box Home Improvement Channel. Another example of innovation is in our pro-heavy roofing category. Over the last several years, we have seen both residential and commercial roofers trade up for innovative products that save them time and money. In the residential space, we've seen a significant shift from strip shingles to laminate architectural shingles. These laminate shingles last longer, have a lifetime warranty, are easier to install, and offer dramatic color contrast in dimension, which is important from a decorative perspective. In the commercial segment, the trend has shifted from asphalt and aluminum roof coatings to roof coatings that are more water and dirt resistant. A great example of this is Henry Tropi-Cool Silicone, an exclusive to the Home Depot and Home Improvement Channel. No primer coat is needed, so the one coat application saves time and money. We're excited about the year ahead, particularly with the spring selling season right around the corner. Our investments in localized assortment and innovative products with everyday low prices will continue to position us as the product authority in home improvement. With that, I'd like to turn the call over to Carol.

Thank you, Ted, and good morning everyone. In the fourth quarter, total sales were $26.5 billion, a 10.9% increase from last year. For the year, our sales totaled a record $108.2 billion, a 7.2% increase from last year. Fiscal 2018 included a 53rd week which added approximately $1.7 billion in sales to the fourth quarter and the year. The extra week is not included in our comp sales calculation. Our fourth quarter results also included the impact of a new revenue recognition standard that we adopted at the beginning of the year. In the fourth quarter, the change in revenue recognition positively affected sales growth by $86 million. Our total company comps were positive 3.2% for the quarter, with positive comps of 3.1% in November, 3.1% in December, and 3.3% in January. Comps in the U.S. were positive 3.7% for the quarter, with positive comps of 3.4% in November, 3.5% in December, and 4.1% in January. There were a few notable factors that affected our comp performance in the quarter. First, a stronger U.S. dollar negatively impacted total company comp sales growth in the quarter by approximately $96 million or 0.4%. Second, the commodity price inflation we experienced in the first three quarters of the year disappeared in the fourth quarter. Finally, as you know, we were up against nearly $400 million of hurricane-related sales. We expected that, but we did not expect such a wet winter. Sometimes weather-driven demand can help sales growth and sometimes hurt. Relative to our expectations, we estimate that weather-driven demand negatively impacted fourth quarter comp sales by roughly 85 basis points. In the fourth quarter, our gross margin was 34.1%, an increase of 19 basis points from last year. The year-over-year change in our gross margin reflects the following factors. First, the new accounting standard drove $168 million of gross profit, or 53 basis points of gross margin expansion. Second, higher supply chain and fulfillment expenses caused approximately 19 basis points of gross margin contraction. Third, higher shrink in one year ago resulted in 10 basis points of contraction. And finally, changes in the mix of products sold drove 5 basis points of contraction. For the year, we experienced 29 basis points of gross margin expansion. In the fourth quarter, operating expenses as a percent of sales increased by 79 basis points to 21.3% due to the following factors: First, we experienced 152 basis points of expense leverage in BAU, or Business As Usual Expenses. The strong leverage in the core of our business was driven by solid expense control but also reflects certain expense items that did not repeat this year, most notably a one-time bonus of $117 million that was granted to our associates last year. Our BAU expense leverage was offset by the following: First, as we called out in our press release, as we move forward with our B2B experience, we recognized an impairment loss of $247 million or 93 basis points of expense de-leverage related to the write-off of several trade names associated with Interline brands. Second, the new accounting standard resulted in a $168 million increase to our operating expenses, causing 63 basis points of operating expense de-leverage. Third, expenses related to our strategic investment plan of roughly $198 million resulted in approximately 75 basis points of operating expense de-leverage. Fiscal 2018 operating expenses as a percent of sales were 20%, an increase of 49 basis points from last year. Our fiscal 2018 expense performance was better than our initial expectations driven by productivity in BAU. For the year, we incurred almost $700 million of expenses related to our strategic initiatives in line with our plan. Our operating margin for the fourth quarter was 12.8%, and for the year, it was 14.4%. Interest and other expenses for the fourth quarter grew by $19 million to $265 million, reflecting for the most part a loss on the sale of a non-strategic asset. In the fourth quarter, our effective tax rate was 24.7%, and for fiscal 2018, it was 23.6%. Our effective tax rate for the quarter and the year reflects the closeout of the provisional charge we took last year related to Tax Reform and certain positive audit settlements. Our diluted earnings per share for the fourth quarter were $2.09, an increase of 37.5% from last year. For the year, diluted earnings per share were $9.73, an increase of 33.5% compared to fiscal 2017. Our fourth quarter and fiscal 2018 diluted earnings per share were negatively impacted by approximately $0.16 due to the impairment charge recorded in the fourth quarter. Moving on to some additional highlights, during the year we opened three new stores including one in the U.S. and two in Mexico for an ending store count of 2,287; selling square footage at the end of the year was 238 million square feet. For the fiscal year, total sales per square foot increased 7.2% to $447, the highest in our company history. At the end of the quarter, merchandise inventories grew $1.2 billion to $13.9 billion and inventory turns were 5.1 times flat with last year. The growth in our inventory versus last year reflects the investments we are making to accelerate merchandising resets and higher in-stock levels than we had one year ago. Moving on to capital allocation, in fiscal 2018 we generated approximately $13.3 billion of cash from the business and used that cash as well as the proceeds from $2.2 billion of net debt issuances and cash on hand to invest in the business, pay dividends to our shareholders, and repurchase our shares. During the year, we invested approximately $2.4 billion back into the business through capital expenditures. Furthermore, we paid $4.7 billion in dividends to our shareholders. Finally, during the year, we repurchased approximately $10 billion or about 54.3 million of our outstanding shares including roughly $4.5 billion or 25.7 million shares in the fourth quarter. Computed on the average of beginning and ending long-term debt and equity for the trailing 12 months, the return on invested capital was approximately 44.8%, 1060 basis points higher than the end of fiscal 2017. Today's press release includes our guidance for fiscal 2019. I want to take a few moments to comment on the main points. Remember that we guide off GAAP for fiscal 2019 guidance to a loss from our reported results for fiscal 2018, which includes sales and earnings associated with the 53rd week. When we report our quarterly comp sales results, we will compare weeks one through 52 in fiscal 2019 against weeks two to 53 in fiscal 2018. Turning to our sales growth projections, as you know, we use a directionally correct but imperfect model to project our sales growth. It starts with GDP. While we are in the 10th year of economic recovery, U.S. GDP is expected to grow in 2019. For our model, we are using 2.6% GDP growth. To GDP, we add the expected spending impact from key housing metrics, including home price appreciation, housing turnover, household formation, and the age of the housing stock. As we look to 2019, most housing metrics are trending positive, albeit heading towards stability. Two of these metrics we're highlighting are home equity, which is a function of home price appreciation, and the age of the housing stock. Home equity has more than doubled since 2011, and 52% of the homes in the U.S. are greater than 40 years old. As you will recall, the three-year sales target we established in 2017 started with a base comp of 4%. The sales forecasting model that we built for 2019 doesn't move us materially off that base. For 2019, we are planning a 5% comp, which includes our base model plus growth stemming from our strategic investments. For fiscal 2019, we expect total sales growth of approximately 3.3%, reflecting the comparison to 52 weeks last year. When thinking about the shape of the year, we expect the comp for the first half of 2019 to be about 250 basis points lower than the second half of the year because of the hurricane-related sales overlap. On a two-year stack basis, we expect that our first half and second half comps will be relatively similar. Because of the shift in the year and the seasonality of our business, our 2019 comp sales will not match our sales growth rates in the third or fourth quarter. During the year, we plan to open five net new stores, four in the U.S. and one in Mexico. For fiscal 2019, we are projecting our gross margin rate to be approximately 34%, in line with the 2020 target we set forth during our December 2017 investor conference. At this time, we are not expecting further gross margin contraction in fiscal 2020. We expect our fiscal 2019 operating expenses to grow at approximately 53% the rate of our sales growth. On a 52-to-52 week basis, and ignoring the impairment charge we reported in the fourth quarter of fiscal 2018, we expect our fiscal 2019 operating expenses to grow at approximately 90% of the rate of our sales growth. For the year, we expect that our operating margin will be essentially flat with what we reported in fiscal 2018. For fiscal 2019, we estimate our effective tax rate to be approximately 25.5%. We expect fiscal 2019 diluted earnings per share to grow approximately 3.1% to $10.03. Our earnings per share guidance includes our plan to repurchase approximately $5 billion of outstanding shares during the year. For the year, we project cash flow from the business of roughly $14 billion. We will invest $2.7 billion of this cash back into the business in support of our strategic initiative. We also plan to use this cash to pay $6 billion in dividends. As Craig mentioned, we just announced a 32% increase in our quarterly dividend, which equates to an annual dividend of $5.44, in line with our targeted dividend payout ratio of 55% of earnings. Finally, we plan to repurchase $5 billion of outstanding shares using excess cash. At our last investor conference in December 2017, we shared with you our long-term financial target and our strategy to create the One Home Depot. By the end of fiscal 2020, we are aiming to grow our sales to a range of $115 billion to $120 billion, with an operating margin range of 14.4% to 15%, and return on invested capital of more than 40%. As evidenced by our fiscal 2018 results and our guidance for 2019, today, we are reaffirming our long-term targets. Thank you for your participation in today's call. And Christine, we are now ready for questions.

Thanks. Good morning. My first question is two parts regarding gross margin. So, getting to the 34% level in 2019, was that always part of your plan and did the Street just look like it was mis-modeling or is something changing on your investment cadence? And then the second part of that gross margin question is, can you split it; it looks like about 30 basis points of contraction into like fixed versus variable costs, and how much would gross margin compare to or better or worse than the 100 basis points of your forecast?

Simeon, I think the first comment I'd have is as it relates to the margin rate, there was a difference in what we anticipated—a little bit more sustained pressure in supply chain than what we initially anticipated in 2017.

But as we look at our model for '19 and '20, let me break apart the gross margin performance for you and our expectations. First, as you know, productivity is a virtuous cycle at The Home Depot. And we have productivity in our cost of goods. We project productivity into '19 and '20. Offsetting the productivity in '19 is some pressure that Craig mentioned in supply chain as well as our supply chain rollout. There's a little bit of shrink pressure in 2019, but we're going to cover that off with productivity. And then there's a mix pressure, which was always in our plan as we see relatively outperformance of growth in lower-margin categories. So looking through '19 to '20, nothing comes to our attention at this point that indicates the margin will contract further because productivity will continue into '20. Regarding your second part of your question, in terms of the fixed variable nature of our gross margin or of our cost of goods, we don't actually look at it through that lens. But I will tell you, within the performance in the fourth quarter, there were a few surprises relative to the guidance that we gave at the end of the third quarter. First, the supply chain contraction of 19 basis points was a bit higher than we had anticipated. We had three basis points of fuel pressure come through and about five basis points of higher fees related to third-party delivery agents. And then we had a bit higher shrink than we anticipated. Hopefully that's helpful.

Yes, it's helpful. My follow-up is on the demand side. Can you tell us if there were any markets that were 'normal', not meaning ex-weather, did they perform in line or did they perform better than you thought? And then you've told us in the past where housing turnover markets have been soft you've called out that the business has been solid. Just checking if that's still the case.

Yes. We've got great performance in areas that had good weather. I must say the weather was across the country, but you can find pockets of relative outperformance. If you look at the housing-related markets, let's take Seattle as an example. Seattle is talked about a lot as the place where there's been huge home price appreciation. The comp in Seattle for the fourth quarter was at 6.3%. Let's take Dallas. Dallas is another area of the country where home prices have seen significant home price appreciation. The comp in Dallas was in line with the company average. So, we're not seeing any negative impact on our performance because of the housing environment.

If you looked at a market like L.A., when the weather shifted, we've seen 1,400 basis points swing week-to-week based on weather. So, when the weather was positive, it lifted 1,400 basis points.

Good morning. Thanks a lot for taking my question. You noted that your comp guidance is based on 4% growth from underlying economic conditions in housing. Can you size the potential downside if GDP doesn't meet 2.6% and we see a continued deceleration in some of the key housing metrics?

Well, clearly, our base model starts with GDP, and the forecast for GDP next year has a wide range. We landed on 2.6%. We think that's the right number for you. We added to that about a point coming from the various housing metrics that we look at, so that takes our base comp to 3.6%, and candidly, we rounded up to four because we are just not that good at it. We wanted to highlight two things that are important in our model: One is equity; there's about $15.4 trillion of home equity out there. Home equity has more than doubled since 2011. If you look at the home equity per owner-occupied household, that equity is $193,000 and has not been extracted, so we think that bodes well; it's a wealth effect that bodes well into 2019. The other aspect of the housing market is just the age of the housing stock. 52% of homes are older than 40 years. We know that spend for homes that are 40 years and older is 30% greater than for homes less than 10 years old.

And my follow-up question is on the contribution from your initiatives. Shouldn't we expect that the contribution, which we've stated at 100 basis points, will build over the course of the year, as you've had more time to benefit from what you've put in place over the last 12 to 18 months? What's the upside risk from those initiatives driving more than a 100 basis points contribution?

Michael, it will build as we go forward. You're thinking about that the right way. We definitely see it building throughout 2019 and then beyond.

Michael, I mentioned that the back half comp would be greater than the first half comp. Part of that is due to hurricane overlap, but part of it is due to build.

And what leading indicators are you looking at within the business that give you confidence that it's going to contribute 100 basis points as you expected?

When we look at the initiatives we've begun to put in place, whether that is the amount of store refreshes that we have done or whether it is the interconnected experience with the automated lockers that we've put in place, which is driving a great response from customers. These are things that we tested, we piloted, and as we roll them out, we began to see benefits and test results, feeling comfortable that those will drive the point of initiative growth.

We're also seeing growth in our pro business. As we continue to add pros to our website, our new pro experience, if you will, we're adding over a million customers this year. We see spending with those customers increasing.

Good morning, guys. So can you help us understand the investment pace better? It sounds like there may be some shifts between the original expectations for 2019 and 2020 from a timing perspective, number one. Number two, could we end up facing a scenario where the absolute investment amount you're doing in the supply chain and in the stores, etc., might exceed your prior views? It seems like every company out there has a moving target?

I'm happy to take you back to December '17 when we laid out our investment plan. You'll recall we announced a $1.1 billion investment plan, which was $5.4 billion over what we would have spent on a BAU basis. We shared a chart back in 2017 that broke that spending down by year, stating we would spend $1.4 billion in '18, $1.9 billion in '19, and $2.1 billion in '20. If we look at what we spent in '18, we spent $1.4 billion—about $550 million in expense and $800 million in capital. Now on the expenses, we also had some depreciation that wasn't on the chart we shared with you. If you add the depreciation related to our investments in 2018, it was more like $700 million. As we look to '19, we are projecting in our guidance that we will spend $1.7 billion—$550 million in expense and about $1.1 billion in capital. That's roughly $200 million under what we shared with you in 2017; that spending is being pushed to '20, and it might push out a little past '20. The reason is that we're just getting smarter about how we spend our dollars and I've had to change the prioritization of some of our activity to deal with some of our legacy IT systems. Our estimate is we won't exceed our spend and that we may be able to deliver this under our target. We need to face this the appropriate way so we don't deliver an initiative that the foundation can't support.

This year was a learning year related to the investments. We've found that some things we could accelerate, while other things will take us a little longer as Kelly mentioned because of legacy systems that we have to fix.

Hi, thanks. Good morning. Carol, just on the macro again, trying to connect the dots between your 5% guidance and your outlook for 2019, particularly your expectations on gains and renovation spending slowing as the year progresses, which seems counter to what you're articulating. Also, could you talk about the comp as the shift goes from weeks one to 52 weeks to 53 weeks? I know for some department stores that can throw things off a lot. Is there anything we should think about in terms of the quarterly cadence because of that?

Yes, let me address the latter part of your question first, then we'll get back to the macro. The shift in the calendar wouldn't be such a big deal if we weren't such a seasonal business. This year for the first quarter, we will compare weeks one through 13 versus weeks two through 14. This shift will have an impact. So you would expect the comp in the first quarter to actually be lower than the actual sales growth that we report. That reverses in the second quarter where we would expect the comps to be higher than the sales growth we report, and in the third quarter it'll be about the same, and then in the fourth quarter, the comp will be higher than the sales growth that we report aggressively, because we're up against 14 weeks versus 13 weeks that we share. The first week difference is about $1.5 billion in sales, so we're dropping off a comparison on a $1.5 billion and we're gaining that comparison of over $2 billion. Hopefully that helps you kind of model the first quarter's impacts. Now going back to the macro questions, we can use a directionally correct but imperfect model, and this has worked for us pretty well since we implemented it. If you recall, we set forth stages of housing recovery and the impact on our comps: sharp, moderate, and stability. We think we're trending toward stability, which our model suggests is GDP plus one to two. Being conservative, we said GDP plus one. If you use a 2.6% GDP and add 100 basis points to that, you get to 3.6%, and we rounded up a bit to 4%. We added a point relative to our strategic investments. There are many forces and economic prognoses you can use. Nevertheless, one thing we use to support our point of view is forecasting remodeling activity for 2019, which is expected to grow by 5%.

Okay, great. Thanks very much. One more for you, Carol. On the third quarter call, you gave some helpful color on tax refunds and the timing impact. Just curious if your views on that have changed at all. It looks like February refunds are down a lot, which is expected. Just wondering if that's impacted your business this February.

No, we wouldn’t say there’s an impact on our business from tax in February. As you pointed out, we wouldn’t expect the real benefits from tax reform to come later. As those filers who haven’t earned income credit or a child credit have not yet filed those returns, they get filed and processed later.

Thanks. Good morning, everybody. There's a lot of noise in '18: hurricane inflation in the first half of the year, a touch in the fourth quarter of deflation. Can you help us think about 2018? If we backed out the weather on an annual basis and we backed out the net benefit from inflation in the first three quarters; what is that underlying rate, and how does that compare to the 5% guide you're putting out for 2019, and does that guide include any benefit from or headwind from inflation and deflation?

So, we looked at that, and backing out those noise levels, it gets you somewhere in the area of a 55 to a 57 as a normalized run rate, taking out the storms, weather, and inflation—that's where we run into.

As you know, when we build our plan, we are commodity-inflation neutral; we don't really know how to plan for that. Based on where commodity prices are, I can provide a bit of a brush from in the first half of the year on what we plan for that.

Understood. Essentially, you're indicating a 70 to 80 basis point moderation in the underlying driven comp from '18 to '19. Okay, understood.

What you speculate is that we expect, given the housing recovery, we'd expect that.

Got it. And then just to sneak one last one in. Carol, anything specific around gross margin in SG&A versus sales growth? Obviously, in the fourth quarter, you have the extra week, but is there anything else to call out on a quarterly basis regarding margins?

We try to predict when spring will break. We use five-year historical averages and forecasts from Planalytics, and we try to predict it, but we're usually wrong. We believe spring will break in the first quarter based on the way we built our plan. Many of our seasonal categories are lower margin, and you should expect margin declines to be the greatest in the first quarter. That's important as you model, as we aren't particularly good at this. But that's how we're planning. On an expense growth factor, the real noise will be in the fourth quarter, but I think we've given enough color so you can model that. So there's really nothing too concerning on the expense side.

Have a great spring. Thanks very much.

Thanks so much.

Good morning.

Good morning.

I wanted to focus on the enhanced delivery and fulfillment option rollout that you mentioned for 2019. Could you comment on the number and type of facilities slated to open in '19 and how you're progressing relative to the original plan?

Yes, Steve, we're excited about the pilots we've put in place in 2018 and the learnings we have. Mark will address that, but we're excited about the options we've provided for our customers during the year on same-day delivery for a car and van service on products out of our stores.

Just a reminder, we have five direct fulfillment centers already up providing one and two-day service to over 90% of the population. We've got our Interline Brands facilities, now Home Depot Pro, which provide near national coverage with next-day delivery via 700 private fleet trucks. We've opened three market delivery operations, and we have openings planned and groundbreaking planned throughout the year for various new platforms, including market delivery operations and flatbed delivery centers. We're looking forward to that. Of course, we also have car delivery and van delivery fast options, achieving 40% coverage of the U.S. population for low-cost car delivery and 70% with van coverage.

And then just a quick follow-up, maybe more of a modeling question, regarding SG&A specifically, can you provide an update on how we should look at that as we look out to 2020?

In our guidance, we provided a number for SG&A of about $2.3 billion. Some of that flows through cost of goods sold. On the expense line, we’d recommend planning about $2 billion of SG&A on the expense line, with the remaining $300 million being in cost of goods sold.

Any comments to share regarding 2020 relative to the three-year plan you laid out during the Analyst Day?

I would keep it about that rate.

Hey, good morning. You talked about some dynamics around the transition to the spring selling season with a later spring last year. Is there anything giving you confidence this year regarding either weather to date or product perspective? Also, with the calendar ticket changes, do you anticipate the Q1 comp to be above or below the full-year comp growth?

I'll start with what Carol said earlier. We do use a multi-year average model in planning. When looking at that model, it suggests we will see spring break in Q1.

We don't provide quarterly guidance, as you know. To think about the first half is the easiest way to look at our business; I would expect the first half comp to be lower than the full-year comp.

Fair enough. Could you comment on how some external factors in '19, like lower gas prices and mortgage rates for consumers, are incorporated into the '19 outlook? Additionally, what do you expect around the tariff environment?

We've attempted for years to correlate gas prices to our business, but we've never drawn a correlation. So, there's nothing built in for that. Additionally, we've assumed nothing beyond what is in place today regarding tariffs. We have managed through all the current tariffs without any issues.