Home Depot Inc (HD) — Q1 2019 Earnings Call Transcript

Thank you, and good morning, everyone. Joining us on our call today are Craig Menear, Chairman, CEO and President; Ted Decker, Executive Vice President of Merchandising; and Carol Tomé, Chief Financial Officer and Executive Vice President, Corporate Services. Following our prepared remarks, the call will be opened for questions. Questions will be limited to analysts and investors. And as a reminder, please limit yourself to one question with one follow-up. If we are unable to get to your question during the call, please call our Investor Relations department at 770-384-2387. 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, Isabel, and good morning, everyone. Before I begin, let me take a moment if you would of personal privilege. As you've read, at the end of April, we announced that Carol has decided to retire as our Chief Financial Officer and EVP of Corporate Services effective August 31, after 24 years of service to the Home Depot. This month, in fact, marks her 18th anniversary as our CFO, making her one of the longest tenured CFOs in the Fortune 100. And while I have more to say about Carol's numerous contributions to the Home Depot, as we get closer to her actual retirement, I did want to note on today's call Carol's extraordinary financial stewardship of our company. Richard McPhail, who will become our CFO in September, will indeed have big shoes to fill. And Carol, I can't thank you enough for your service to our company and to our shareholders.

Thank you, Craig.

Sales for the first quarter were $26.4 billion, up 5.7% from last year. Comp sales were up 2.5% from last year with U.S. comps of positive 3%. Diluted earnings per share were $2.27 in the first quarter. Our sales performance came in below our expectations in the quarter, as a result of two factors: First, the month of February was the second wettest on record for the U.S. Second, lumber prices continued to decline in the quarter, resulting in a negative impact to sales growth of approximately $200 million. Looking at our results geographically, all of our U.S. divisions posted positive comps. Two of our 19 U.S. regions posted mid-single-digit negative comps as they faced difficult compares due to hurricane-related sales a year ago. Internationally, Mexico posted another quarter of positive comps in local currency, while Canada's comps were slightly negative. This, no doubt, was a noisy quarter, but when you look through the noise to the core business, we are pleased with the underlying performance. We saw growth in both ticket and transactions in the quarter, and 10 of our 14 merchandising departments posted positive comps. Ted will provide additional details around departments that were negative in the quarter as hurricane comparison and price deflation impacted several categories. What I remain excited about is the progress we're making with regards to our strategic investment priorities. These investments enable us to continue to grow share in a highly fragmented $600 billion addressable market. We are making these investments from a position of strength as the number one retailer in home improvement. Every investment was formed using a customer-backed approach to create a truly seamless, frictionless customer experience that will drive results not just over the next several years, but for the long term. Our strategic efforts to drive and enhance interconnected customer experience through investments in both the physical and digital worlds are yielding solid returns. Online traffic growth was healthy and first quarter online sales grew 23% from the first quarter of 2018. We continue to use our digital platforms to lean into adjacent categories like HD Home, pool and even workwear where the customer has told us that we have the right to compete for an additional share of their wallet. For the consumer, we are investing in new category experiences that make it easier for a customer to shop their full project needs online. If a customer is redoing a bathroom and decides on a particular type and finish of faucet, chances are they probably want to see the full suite of matching bath faucets for vanity, shower and tub. In order to take friction out of this process, we are now rolling the ability to shop a collection using minimal clicks. While we are investing to address the unique demands of the digital customer experience, we know that our customers continue to value the relevancy of our stores as seen in an increased number of customer transactions in the quarter. Additionally, approximately 54% of our online U.S. orders were picked up in our stores during the quarter, a testament to our interconnected strategy. During the quarter, we continued to make progress, enhancing this interconnected customer experience by investing in our stores to improve our front-end checkout experience, continuing to roll out automated lockers, streamlining our customer service desks, and simplifying tools for our associates. This has translated to reduced wait times and increased customer satisfaction as our customer service scores and checkout time satisfaction have increased over 500 basis points versus last year. Not only do these front-end investments have customer service and productivity benefits, they are also helping us to optimize store layouts to maximize merchandising space productivity in high traffic event and lay-down areas. Another key focus area from an investment standpoint is our Pro customer, which, once again, outpaced the DIY customer in the quarter. Pros tell us that they are busier than ever. This is why investing in a portfolio of offerings to help them manage their businesses efficiently and remove friction from their shopping experience are critical. Having the brands that pros care about in-stock with job-lot quantities is table stakes. You have to have that to serve them. But the value proposition that we are creating for the Pro through various investments over the next several years is, as we believe, unique to the marketplace. We continue to onboard Pro customers to our new B2B website experience, adding 35,000 customers in the quarter for a total of 135,000 customers that have been migrated to this experience so far. Our plan is to onboard over 1 million customers by the end of this year. Though it is early days, we are seeing increased engagement, which translates into increased spend. We also continue to make traction with the investments in other capabilities like tool rental, for example. We know that 90% of Pros rent tools. But several years ago, only about 1 out of 10 pros rented from us. Today, that number has improved to 1 out of 4, yet there remains opportunity for further growth as we continue to invest in our tool rental experience. We know that when Pros rent tools from us, their spend increases. Again, the theme here is about driving engagement. The more dimensional the relationship is with our Pro customers, the more they spend. This is a time of transformational change in the business as we execute our One Home Depot strategy. Our team continues to focus on what is most important, our customers. We hired 80,000 new associates for spring, and thanks to our new in-aisle mobile training solution, PocketGuide, they have product knowledge at their fingertips to help them get up to speed quickly. Our merchants, store MET teams, supplier partners, and supply chain teams did an outstanding job of delivering value and service to our customers throughout the quarter. I'd like to close by thanking them for their dedication, hard work and commitment to our customers. And with that, let me turn the call over to Ted.

Thanks Craig, and good morning everyone. As Craig mentioned, while we worked through the noise of the first quarter we were pleased with how the business performed. Looking at our departments, comps in appliances, indoor garden, decor tools, outdoor garden, building materials, plumbing, and hardware were above the company average. Paint and kitchen bath were positive, but below the company average. Millwork and flooring were slightly negative in large part due to hurricane overlaps. Our electrical lighting department reported a low single-digit negative comp due primarily to light bulbs. Commodity deflation was up high single-digit negative comps. In the first quarter, comp average ticket increased 2% and comp transactions increased 5.5%. During the first quarter, we continued to see significant deflationary trends in lumber that began last year. Let me give you an example. When lumber prices peaked last year, we were selling a 4x8 sheet of OSB for approximately $17 and our units were negative. At the end of the first quarter, the price for that same sheet of OSB has fallen over 50% to about $8. While we have seen nicely in productivities prices have fallen. We have not overcome the top line headwind from the significant deflation. Without lumber price deflation, our average ticket growth would have been closer to 3%. During the first quarter big ticket comp transactions for those over $1,000, which represent approximately 20% of U.S. sales were up 3.9%, reflecting in part the impact of last year's hurricane-related sales. Excluding hurricane-related markets, big ticket comps were up approximately 5.1%. Wet weather in February also had a significant impact on our big ticket performance in the quarter, as big ticket comps were flat in the month of February. And finally, lumber price deflation also had a negative impact. We continue to see strong performance in big ticket categories like vinyl plank flooring, water heaters, and appliances. And just to comment on appliances, as a result of our supply chain initiatives and working more closely with our partners, we are seeing improved customer satisfaction scores in appliance delivery. During the first quarter, we saw growth with both our Pro and do-it-yourself customers. Pros are complex customers. And we are investing in a number of different initiatives and services to help our Pros get their jobs done. One of these services is our tool rental business. We have the largest number of tool rental centers in North America with approximately 1,100 locations inside our conveniently located stores. As Craig mentioned, we know that approximately 90% of Pros rent tools, but only one in four of our Pros rent tools from us. We also know that when Pros start renting tools from us, they see a significant uptick in their overall Home Depot spend. As part of our multi-year investment plan we are investing in more space, more tools and better technology to improve the customer experience and continue to grow this differentiated service offering. In addition to our Pro investments, we continue to invest across our interconnected platforms. During the first quarter, we had record quarterly online business that helped drive 23% growth in our online business. As we continue to invest in the online experience and reduce friction, we see higher traffic and improved conversion rates. In addition to enhanced site functionality, we are also expanding certain online assortments. At our investor conference in 2017, we talked to you about HD Home our expansion in home decor. We continue to lean into this category by offering a wide assortment of great values and we are seeing strong growth. We are also expanding our online assortments in categories like auto, pool and workwear, natural extensions to our in-store assortments. We are excited about the growth we are seeing from brands like Weather Guard, Hayward and Carhartt. Now let's turn our attention to the second quarter. We are thrilled to announce the launch of the DEWALT ATOMIC 20-volt compact series exclusive to The Home Depot. These compact tools offer the same 20-volt cordless power as traditional 20-volt tools in a smaller more versatile platform. The DEWALT Atomic series complements our already successful lineup of compact and subcompact power tools from Milwaukee and Makita. The Milwaukee 12-volt program is a favorite for mechanical trades, while the subcompact Makita 18-volt lineup offers the most power and torque in its class. In the big-box channel, these DEWALT, Milwaukee and Makita tools can only be found at The Home Depot. We are excited about new product offerings across all of our categories in our upcoming events. During the second quarter, we will host our Memorial Day, Father's Day and Fourth of July events, where we will be offering more great values 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. Before we discuss our first quarter results, I want to mention that at the beginning of fiscal 2019, we adopted ASU number 2016-02, which pertains to how we account for leases. The adoption of this standard impacted our balance sheet, but it did not materially impact our income statement or statement of cash flows. Under this new standard operating lease right-of-use assets and liabilities are now reflected on our balance sheet. With that let's move on to our first quarter results. In the first quarter, total sales were $26.4 billion, a 5.7% increase from last year. Versus last year, a stronger U.S. dollar negatively impacted the total sales growth by approximately $76 million or 0.3%. Recall that for our first quarter comp calculation, we are comparing weeks one through 13 of fiscal 2019 against weeks two through 14 of fiscal 2018. Our total company comps were positive 2.5% for the quarter with negative comps of 2% in February, positive comps of 5.6% in March and positive comps of 3.2% in April. Comps in the U.S. were positive 3% for the quarter with negative comps of 1.9% in February, positive comps of 6.1% in March, and positive comps of 4% in April. The cadence of our monthly comps was a bit distorted by the Easter shift this year. Adjusting for the timing of Easter, our U.S. comps were 4.5% in March and 5.3% in April. As you heard from Craig, our first quarter sales growth missed our expectations driven primarily by two notable factors. First, weather had a negative impact on our February performance. To put the February weather impact into perspective, 17 of our 19 U.S. regions reported negative comps in February. By the end of the quarter, however, only two regions reported negative comps. And that was due to hurricane-related overlaps. Second, versus last year, lumber price deflation hurt our sales growth by approximately $200 million. If you ignore the weather impact of February across our business and lumber price deflation, our total company comp would have been closer to 4.5%. In the first quarter, our gross margin was 34.2%, a decrease of 36 basis points from last year. The year-over-year change in our gross margin reflects the following factors. First, the change in mix of products sold caused approximately 17 basis points of gross margin contraction. Second, higher shrink than one year ago resulted in 13 basis points of contraction. And finally, higher supply chain and fulfillment expense caused approximately six basis points of gross margin contraction. In the first quarter, operating expense as a percent of sales decreased by 44 basis points to 20.5%. Our operating expense performance reflects the impact of our strategic investment plan and ongoing expense control. Specifically, expenses related to our strategic investment plan of $229 million reflect a $50 million increase over last year and approximately 15 basis points of operating expense deleverage. This deleverage was offset by productivity in BAU or business-as-usual expenses, which drove 59 basis points of operating expense leverage. Our operating margin for the first quarter was 13.6%, an increase of 8 basis points from last year. Interest and other expense for the first quarter grew by $34 million to $273 million, due primarily to higher long-term debt levels than one year ago. In the first quarter, our effective tax rate was 24.4% compared to 23.5% in the first quarter of fiscal 2018. Our first quarter tax rate was higher than last year due to certain state tax settlements that did not repeat. For the year we expect our effective tax rate to be approximately 25.5%, in line with our guidance. Our diluted earnings per share for the first quarter were $2.27, an increase of 9.1% from last year. Now moving on to some additional highlights. During the quarter, we opened two net new stores for an ending store count of 2,289. Selling square footage at the end of the quarter was 238 million square feet. Total sales per square foot for the first quarter were $435, up 5.6% from last year. At the end of the quarter, inventory turns were 4.7 times, down from 4.9 times last year, reflecting growth in inventory to accelerate merchandising resets, as well as an early load-in for spring sales. For the year, we expect our inventory turns to be flat to what we reported in fiscal 2018. Moving on to capital allocation. In the first quarter, we repurchased $1.25 billion or approximately 6.5 million shares of outstanding stock. Computed on the average of beginning and ending long-term debt and equity for the trailing 12 months, return on invested capital was approximately 45.4%, 940 basis points higher than the first quarter of fiscal 2018. Turning to the remainder of the year. Our view on the U.S. economy and the drivers of home improvement spend are not fundamentally different from what we shared with you back in February. First quarter U.S. GDP growth was strong. Unemployment is the lowest it has been in nearly six decades and wages are rising. The relevant housing metrics that drive home improvement spending, notably home price appreciation, existing home turnover, household formation and the age of the housing stock continue to be supportive of our outlook. And as you heard from Craig, as expected, we are seeing benefit from our strategic investments. The building blocks of our 2019 plan are in place. Nonetheless, two factors have changed since we put their plan together. First, there was a recent announcement that certain tariffs are increasing to 25%. We are working through the impact of these tariffs and as a result have not included them in today's guidance. Second and more immediate, is the significant deflation we are seeing in lumber prices. You will recall that our sales forecasting model does not include commodity price inflation or deflation. If lumber prices remain at today's level, this could hamper our fiscal 2019 sales growth plan by as much as $800 million. But because we cannot predict what will happen to lumber prices and because we are just one quarter into the year, at this point we are not changing our sales or earnings per share guidance for fiscal 2019. With that in mind, today we are reaffirming the sales and earnings per share growth guidance that we laid out on our fourth quarter earnings call. Remember that we guide off GAAP, so fiscal 2019 guidance will launch 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 through 53 in fiscal 2018. For fiscal 2019, we expect comp sales, as calculated on a 52-week basis, to increase by approximately 5%. We expect sales to increase by approximately 3.3%, reflecting the compare of 53 weeks last year. For earnings per share, 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. So we thank you for your participation in today's call and we are now ready to take questions.

Thanks. Good morning. Can you hear me?

Good morning. Yes.

Yes. Good morning.

Good morning. Congratulations, Carol, and best of luck. I have a two-part question that I hope you can address. I understand you don't provide quarterly guidance, but could you share what the internal expectations for Q1 were and how much the actual performance fell short? I appreciate your comment about the 4.5% performance excluding weather and lumber. Are you expecting to recover 50 to 100 basis points over the year, and it seems like lumber might present a headwind of around 70 basis points. For the second part, if the impact is predominantly due to weather, should we anticipate most of the recovery in the second quarter with a little in the third, while leaving the fourth quarter as is?

Well, thank you for your questions, Simeon. As you point out, we normally don't provide our quarterly plan, but I will tell you that our plan for the first quarter of 2019 was a comp of 4.5%. So if you look through the weather noise in February, as well as the lumber deflation, we were very pleased with our first quarter results. The other thing that I will remind you all of is that, we are comping this year $800 million of hurricane-related sales. $500 million of those hurricane-related sales took place in the first quarter of last year. So our compares get much easier as we look to the back half of the year.

Right. I guess...

Now, to the question about weather, and will we cover it. This is very different than what we saw a year ago in the first quarter, which was very much an April story that impacted our garden department. The weather in February impacted our business. 17 of 19 regions were negative. The majority of our selling departments were negative. Our transactions were negative 2.5% for the month of February alone. Our big-ticket was flat in the month of February. Those sales are coming back as the weather improves. Part of those sales are related to our Pro customer and we understand from our pros that they have backlogs that are in excess of 90 days. So those sales will come into the second quarter and continue into the third quarter. That's what gives us confidence to reaffirm the guidance of a 5% comp for the year, albeit there is lumber price deflation and it continues into May actually. If we look through lumber price deflation our May results are performing as we expected. But we thought it was important to get that lumber price deflation number out there for you, because we can't predict. Too early in the year to know what's going to happen to lumber prices, but we thought we should give you the number.

That's helpful. To clarify, you initially indicated that the second half would be about 250 basis points stronger than the first half, and you mentioned the impact of hurricanes, estimating around $800 million in the first half of this year. Now, with lumber prices being a factor as well, it seems that there may not be much of an increase from other initiatives needed in the second half. Is that correct? Can you quantify what else is needed from the business to improve performance, aside from weather effects and the unfortunate lumber deflation?

So just as a point of clarification on the hurricanes, it’s $800 million for the year, $500 million in the first half, $300 million in the back half. So, clearly, the hurricane compares get much easier in the back half. As we look at the shape of the year today, we would expect that the back half comps to be more than 2 times the first half comps, principally because of those hurricane compares, but more importantly because of the initiatives that we are investing into, one of those initiatives being the B2B website that we've talked to you about. And Craig maybe you want to talk about what we're seeing, or Bill Lennie, what we're saying with the B2B website?

Yes. We're actually very pleased. I'll let Bill jump in here. We added 35,000 customers in the quarter, and we expect to have 1 million customers up by the end of the year.

Yes. Simeon, we're migrating customers as new website capabilities come onboard. I'll give you just a few examples of the capabilities we added in Q1. We added an administrator in user hierarchy, which allows administrators or account owners to add purchasers or users. We also now allow customers to easily link their purchases to QuickBooks and upload their purchase history. Then we also made localization much easier. Our Pro customers shop across multiple cities, multiple stores. This allows them to save their stores they shop and easily localize their purchases. And then in Q2, next up, we'll enable the Pro purchase card which is our legacy Interlink customer shopping in Home Depot stores. They'll be able to use their Pro purchase card online and they'll have their purchases attributed back to their account. We'll make buy it again easier for them. It will be an auto-populated page based on their recent purchase history, both in-store and online. And then we have a redesigned homepage coming up that's going to be based on our feedback from Test & Target on 1,500 customers that just more personalizes that experience makes it easier for them to transact. So, it is early days. It's too early to comment on sales lift, but the experience that we're delivering is all about engagement like Craig said. And we know the more that we take friction out of the ability to transact the more our customers engage. So, early days but pleased with the capabilities, pleased with the results that we're seeing from the customers that are active.

Great. Thank you.

Good morning. Thanks a lot for taking my questions and Carol congratulations and best wishes. There's not enough nice things we can say. Thank you for everything. With sales coming in below your expectations in 1Q and some of the challenges lingering into 2Q, at what point in the year do you start to see downside risk to the full year guidance if sales do not improve? Is that window as soon as June or July? Or do you think even if 2Q is softer than you expect you can maintain that full year 5% comp expectation?

Michael, we will need to monitor how the second quarter unfolds in relation to lumber. In the first quarter, the major issues stemmed from the severe conditions in February that affected lumber availability nationwide. I'll allow Ted to share the feedback we've received from our suppliers, but lumber is influenced by numerous factors. We won't have clarity until we assess the situation and any potential storms this year, which is expected to be another active season. This could significantly impact the market, and we are also gathering insights from our suppliers.

Yes. So, on lumber the situation this year is really the exact opposite of last year. So, last year the mills had a shortage of logs and we had some early housing activities, so lumber prices went to all-time highs. Those peaked at toward the end of May of 2018. This year the mills were able to harvest their logs. They had a tremendous amount of inventory on the log decks. And at the same time with the wet February, we had a slow start to housing. So, it's an exact opposite year. And so prices have fallen in some categories as I've said OSB as much as 50%. So, what we're hearing now is the mills are working through their backlog of logs. The mills have not been able to curtail earlier in this year because you've got to process the logs as they get wet and soggy. They've worked through a lot of that backlog and we're starting to see some of the first curtailments. But again it's very early days. We're going to need to see a rebound in spring in housing, construction. That's where lumber prices are set on the margin in the distributor channel not the retail channel. Our units are terrific. Given our units we'll be expecting to see lumber prices going up.

Exactly.

But unfortunately, the price is set at the margin through the wholesale distribution which has a lot more to do with housing starts. So, as weather clears up, mills curtail logs get worked there is promise for the back of the year. So, that's why again we laid out the risk but haven't called it.

Okay. Setting aside the lumber deflation and recognizing that your model is significantly impacted by overall GDP growth and home price appreciation, are any of your sales by category showing a correlation to housing turnover? Some of your specialty competitors in areas like flooring are showing weakness that closely correlates with housing turnover. If you're not experiencing this trend, what do you think accounts for that?

We continually assess discretionary categories, and we do not observe a direct correlation with any changes in those areas. For example, when we examine products like closet organization, which are entirely discretionary, we feel optimistic about those businesses. There has been a noticeable shift in the flooring sector towards vinyl, which has affected some other categories, but currently, we do not see any indications of a change.

So, Craig even though housing turnover's been under considerable amount of pressure over the last several months, it's not having an impact on any real category within your portfolio despite the fact that in the past it's been a pretty influential driver of the overall business?

Yes, Michael you've just written a report on this which was really helpful that there's been a disconnect between housing turnover and sales performance. And we went back in and tried to correlate turnover to our departments to see if there was any correlation and we couldn't see it. Now, our flooring department was one of our slower-growing departments in the quarter, but that isn't a correlated housing turnover. We think we have some opportunities within the mix.

Yes. The dynamic in flooring and these things are trends and trends will reverse themselves. We saw a meaningful shift to hard surface flooring over the past several years that went into tile that then went into wood-look tile with not rectangular or not square, but more rectangular shape. And then the last couple of years luxury vinyl plank arrived on the scene. And it's an incredibly innovative product because you can put it below subfloors. It's waterproof. It's unbelievably easy to lie. You don't obviously have to get tile set material. You don't have to level floors. It's so much faster for our Pros. So, we've had unbelievable growth in the last three years and it just continues. That all-in is a lower price point lower all-in basket because you're not getting set materials grout et cetera. It's certainly less expensive for the Pro to lay. So, that's part of the mix shift that Carol is talking about. That's not to say that there isn't still plenty of demand for soft surface in tile, in wood, in laminate. And we need to do a better job responding on our mix in those categories as we put a lot of emphasis on the plank and we've got some work to do on mix in the other categories.

That's very helpful. And Carol congrats again.

Thank you.

Thank you and good morning, Carol. Congratulations on your impressive career. I started following your company in 2003, and I believe you’re the last remaining member of the C-suite. My first question is regarding your earlier statement at the beginning of the year, where you indicated that the first half would be 350 basis points below on a comparable basis, but the second half would be relatively flat on a stacked basis. Seeing as you’re lapping a significant May from last year due to the seasonal shift, should we consider 2Q on a two-year stack basis? Or do we expect to perform a bit better, especially given the shift to Pro that you mentioned, which occurred later in the year than originally planned?

I believe the easiest way to view the second quarter is that the comp rate is expected to be higher than what we reported in the first quarter due to the complexities introduced by the calendar shift. If I could adjust the calendar shift, I certainly would, as it complicates matters. But that's how I suggest thinking about your model.

Do you have an idea of how the period from weeks two to 14 last year compares to what you reported? I know you factor that into the top line impact, but it seems like the comparison was more challenging than what you reported last year. Have you quantified or analyzed how the first quarter would have appeared a year ago if you included weeks two to 14 in the comparison?

Yeah. So, if – yeah, if we hadn't shifted the calendar our un-shifted comps would have been 5.8% and I can give that to you by month, if you'd like. The un-shifted comp for February 2.6%, for March 5.5% and for April 8.1%.

Got it. Then as a follow-up on lumber deflation that obviously impact sales. But do you maintain gross margin – does margin rate sort of work in the opposite direction such that while you lose sales are gross profit dollars roughly the same? So in other words, if there is risk around deflation it seems like is that more of a top line risk but not necessarily a bottom line risk?

It's a top line risk, because margin is one of our lowest – lumber is one of our lowest-margin category. A lower penetration of a lower-margin category is good for the gross margin. So while we called out the risk to the top line, if lumber prices stay where they are today, we didn't call any risk to the bottom line, because there really isn't much risk to the bottom line.

Understood. Best of luck. Thank you.

Thank you.

Hey, guys. Carol my congratulations as well. It's been great to work with you. The – for my first question and just looking back into the garden sales category I think it was called out as being above, I think last year it was 200-plus basis point headwind. Can you maybe give us a sense of just how impactful garden was at least here in the first quarter shifted or un-shifted however you'd like to do it? That's my first question.

Well, I would say in garden, we've planned for if there is such a thing a more normal spring. It turned out, it wasn't as normal as we'd liked. But what you saw and when we called out above the comp – company comp particularly in indoor garden that was all driven by a consumer response to just fantastic innovative product. And we've talked about product innovation, consumer finding the value in the store, the Pro finding the tool to help them save time and save money on their jobs. And we have just such terrific product in outdoor power equipment, particularly as cordless technology moves into that space with our new grills with pellet grills led by Traeger which is an exclusive to us by far the dominant player in pellet grills new patio collections. So, despite the not-so-great weather the customer responded to the product and the values and that's what really drove the business. Live goods for example has some room to make up, which we're looking forward to in Q2. And that's obviously weather-driven and when we get great weather our live goods are selling double digits and obviously when it's cold and rainy on a weekend not so much. But really pleased with the garden business, again you wouldn't – you won't think it would be as strong given the weather we talked about, but it's really product and value.

Okay. That's helpful. Thanks. And then just – I think you called it earlier something around appliances that the customer service scores were up. I'm just curious, if you guys can give us an update of where you guys are in terms of delivery the DTC Delivery capabilities same-day, one-day. And just anything to call out there in terms of progress you're making on being more convenient for your customers? Thank you.

Peter, I'll make a comment and I'll turn it over to Mark. So 2018 was really the year that we put pilots in place and 2019 moving forward through 2022 will be the rollout of those. And so Mark, if you want to provide an update?

Sure. Thanks, Craig. And good morning, Peter. Yeah. We – first off in terms of next day and or one-day delivery coverage from our Home Depot Pro distribution centers formerly Interline, we already have coverage today via private fleet trucks for all our Home Depot Pro customers in all major metropolitan areas. When you look at parcel shipping capability from our direct fulfillment centers with secondary or faster delivery for over 90% of the population, we're at next day for 36% of the population. We began to retrofit our Hagerstown Maryland direct fulfillment center for further parcel shipping. And because of its proximity to the population centers of the Northeast that will get us to next-day delivery of parcel for 50% of the U.S. population by the end of this quarter. We'll further improve our next-day delivery capability with our new direct fulfillment centers under development in both Dallas and up in the Pacific Northwest near Seattle. And then when it comes to stores, we deliver from stores every day as well. And we've talked in the past about our delivery partnerships with Deliv and Roadie for crowd-sourced delivery via car and van. And that's now available to 40% of the U.S. population for car 70% for van. And what that means for customers is we've got same-day delivery available for orders placed by 2:00 P.M. and next day after that time. And by the end of Q2, we'll have the same day and next day capabilities for small parcel items from stores moving from 40% to 50% of the population. So our delivery keeps getting faster. And that's very important because our data showed that every time we take time out of the delivery lead time, we increase conversion. We've got new data tools that are helping us to know what products to stop where and what delivery options to enable. Those tools can help us with understanding, hey, if we take a day out of power tools versus a day out of power tool accessories which creates more value to our customers in terms of conversion and we can tell that across the departments and classes in the company.

That's great color. Thanks Mark and good luck.

Good morning, guys. Scot Ciccarelli. Actually another delivery question and I appreciate all the color there. But when you look specifically at your Pro sales I'm sure it depends on category. What percent of your Pro sales today are delivered to a Pro's jobsite? And then, how do you think that evolves as you build out your supply chain in the delivery capabilities you were just talking about?

Yeah. Scott for competitive reasons obviously we won't share the specific data on that. But we believe that delivery is important for the Pro. In particular segments of the Pro customers, it's important to be able to get them what they need, when they need it, so that they can depend on that service. And that's what we're working to do.

Yeah. And Craig a little bit more color on that. We're definitely designing our delivery offerings around key Pro use cases. For instance, we'll be opening our new flatbed delivery center out of Dallas later this year. That's really a Pro-oriented delivery with the flatbed trucks with the Moffett on the back they're able to put it on the jobsite. Also, we've implemented those two and four-hour delivery windows that give our Pro reliability in terms of when a delivery will be there so that they can count on their crews being kept busy by having a great time with delivery.

So let me ask this presumably as you build out that capability more and more people will wind up taking advantage of it presumably. That's why you're making it. But how should we think about that – the margin implications as the delivery to jobsite mix grows?

It's an all-in calculation that we use obviously. And as you grow with the Pro that actually uses delivery it gives us an opportunity to much more effectively compete against the distribution houses and the lumber and building material yards that provide the service and we look at as an all-in cost of operation considering what we get on the trucks and what kind of gross margin dollars that actually provides.

Yeah. And Craig, we manage this as a portfolio as you've said. And we have seen that when our Pros engage with us in delivery they buy more across the portfolio. So it's an important portfolio management tool for us.

And you get that blend with the Pro. The overall margin with the Pro on a blended basis is very comparable to the DIY customer.

Got it. All right. Thanks a lot guys.

Hey, guys. Thanks for taking the question. And, Carol again congrats to you. A couple of points I wanted to follow-up on. First on the deflation you talked about lumber being an 80 basis point headwind can you just give us a sense of the total commodity deflation impact comparable to sort of how you guys have disclosed it in the past? And then the second part of the question is around just sort of broader inflation that you're seeing across the store. Outside of the commodity categories, sort of any trends that you're seeing? What are you guys seeing from vendors? And how are you trying to sort of manage through that from a retail price perspective?

Sure. If you look at the commodity business excluding lumber, we look at building materials and copper and there was actually a slight inflation in the quarter. About 30 basis points of growth came from commodity inflation. That was offset obviously by the stronger U.S. dollar because that was deflating, so it kind of works its way out. And then in terms of just general inflation across the store...

Yes, I would say that has eased. We are working closely with our finance partners to monitor all requests for cost changes from our suppliers and our own costs related to our direct import product label supporting private label products, which increased significantly throughout 2018. As we entered 2019, while we haven't completely reversed it, we have found better cost-saving opportunities, and the pressure has lessened. Excluding the effects of new tariffs, I would say we are in a neutral to slightly positive cost position even without considering lumber deflation. Regarding tariffs, we increased the phase three tariffs on all products shipped from China starting May 10. Nothing has arrived yet, as it takes about three weeks to cross the Pacific. We anticipate that by the end of this month, the tariff on $200 billion of products will increase from 10% to 25%. This will amount to roughly $1 billion for us. The tariffs we encountered in 2018 were manageable, impacting us by about $1 billion. If these new tariffs persist, they will add another $1 billion, which is less than 1% of our total sales. While it will have a more significant impact on certain categories, we emphasize that we manage the business as a portfolio. Overall, 1% of sales is more challenging but still manageable.

And so that's just the math of it.

That's just the math of it. We haven't gone vendor-by-vendor, product-by-product to actually determine what the actions will be.

Seth, there was one notable point regarding the tariff that I'd like to mention. In the laundry sector, which was affected, we initially didn't see any impact for the first few months following its implementation. Eventually, we did experience a decline in unit sales. However, in the last quarter, we have observed significant double-digit growth in laundry. It will be interesting to see how these factors influence our portfolio strategy as Ted mentioned, and how they ultimately manifest in the market. More updates will follow on this.

Yes. To Craig's point, we would say that the laundry category has been fully accounted for. It was our strongest performing appliance category, showing double-digit growth as Craig mentioned, and those tariffs have remained in place, potentially increasing up to 50%.

Okay. Great. Thanks everybody for the color. I'll leave it there.

Hey thanks, good morning and Carol congrats. Just on the macro front here, just wondering how sales are turning in some of the markets where we're starting to see some of the home prices start to slow down or in some cases compress?

Well let's take a market like L.A. There's been a lot of conversation about what's happening in home prices in L.A. Our comp in L.A. was considerably ahead our company for the first quarter. Let's take a market like New Jersey where people are very concerned about what would happen to sales, given it's a high-salt state and we see that New Jersey is actually outperforming the company average too. So trust me, we're spending a lot of attention looking at performance by market, but we just can't see anything at this point in a negative way. Pardon me we see lots of things but in a negative way.

I just wanted to clarify on the guidance. I know you're maintaining the sales and earnings estimates, but are you still confident in the 34% gross margin, the 53% expense growth factor, and the overall operating margin of 14.4%?

Yes. Nothing has changed within the top and the bottom line of the P&L guide.

Okay. Great. Congrats again.

Thank you.

Hey, good morning. First of all, Carol also Richard congrats. First question from me on the SG&A line, Q1 had the benefit of the calendar shift on the topline. Curious how that impacted margins here. And as we think about the cadence into Q2 with the calendar shift reversing, should we anticipate incremental deleverage with comps presumably above total sales? Could you just walk us through the moving parts here a little bit?

Yes. So, first as it relates to the gross margin, the calendar shift doesn't impact the gross margin because you have 13 weeks of sales against 13 weeks of sales. From an expense perspective, because we do have a difference in our comp rate and our total sales growth rate, it will have a more meaningful impact on expenses either as a percent of sales or from an expense growth factor perspective. So we are expecting in the second quarter that our comp will be higher than our sales growth again because of the calendar shift. So you would expect our expense growth factor to be higher in the second quarter than it was in the first quarter. Does that make sense? Hopefully that makes sense for you.

Yes, that makes sense. I appreciate that. To follow up again on the inflation at the 10% level, it has eased somewhat. Could you comment on the elasticity of demand in your categories based on the data you have, as further price increases appear to be likely?

You broke up a little, but I think I got that. We look at the elasticity very carefully. And that supports when we always say we take a portfolio approach. We don't necessarily put dollar cost received into a like dollar increase in retail. If that's a super elastic item, we may hold it or not even drop price in that category for trying to spur demand and manage the cost increases somewhere else in the portfolio. And yes, we have very, very robust data and great again support with our finance partners and internal assortment planning and pricing teams that are working all those elasticities by category by product by market.

These are sophisticated tools that we've built up over a number of years that allows us to have this kind of responsiveness.

Yes. It's going on eight years.

Got it, appreciate the color.

Christine, we have time for one more question.

Thank you. I may have missed this, but could you provide an update on the current stance of U.S. tile manufacturers regarding antidumping and countervailing duties against Chinese tile manufacturers? Do you source a significant portion of your tiles from China? Additionally, what is your current strategy related to duties and tariffs on those imported products?

We don't have a huge fight in the China tile import. Fortunately, we're sourcing largely domestically in Mexico.

Great. Thank you. That’s helpful.

Thank you for joining us today. We look forward to speaking with you on our second quarter earnings call in August.