Home Depot Inc (HD) — Q4 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 Richard McPhail, Executive Vice President and Chief Financial Officer. Following our prepared remarks, the call will be open for questions. Questions will be limited to analysts and investors. And as a reminder, please limit yourself to one question and 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. Fiscal 2019 was another record year for our business, as we achieved the highest sales in company history. Excluding the extra week in 2018, fiscal 2019 sales grew 3.5% to $110.2 billion. Diluted earnings per share were $10.25. As expected, we finished the year with our strongest comp performance in the fourth quarter. Comp sales were up 5.2% from last year and our U.S. comps were positive 5.3%. Sales for the fourth quarter were $25.8 billion and diluted earnings per share were $2.28. We saw broad based growth across all geographies and merchandising departments in the quarter. All 19 of our U.S. regions posted positive comps, and internationally both Canada and Mexico reported positive comps in the fourth quarter. As Ted will detail, both comp ticket and transactions grew in the core and we saw growth with both our Pro and DIY customers. We had a strong holiday season with record setting sales on Black Friday and during Cyber Week. These results reflect solid execution by our stores, our merchants, our supply chain teams, as well as our vendor partners and demonstrate the overall health of the consumer. I am proud of our results in fiscal 2019 as the team successfully navigated a number of external headwinds by maintaining a relentless focus on our customer. 2019 was also a pivotal year in our transformation to create the One Home Depot experience. We are now two years into our multiyear investment and are realizing benefits. We have more conviction than ever that these strategic initiatives are creating a value proposition that is unique to the marketplace and will extend our leadership position for years to come. The majority of our U.S. stores have a new look and feel, and we addressed customer pain points around navigation and checkout. Our enhanced signage and store refresh package, along with investments in the front-end of our stores, have improved the customer experience and driven associate productivity. These store investments are driving higher customer satisfaction scores, which we believe is translating into market share gains. As a compliment to our store investments, we’re investing to strengthen the competitive advantages that we have built through the blending of our physical and digital platforms into a more seamless interconnected experience. For example, our chain wide rollout of digital appliance labels connecting ratings from the digital world to the physical world, enhancing the in-store shopping experience. Additionally, homedepot.com continues to be an engine for growth for our overall business, driving increased traffic online and additional footsteps to our stores, because of this, we continue to invest in search functionality, category presentations, product content and enhance fulfillment options to remove friction from the online shopping experience. Excluding the extra week last year, online sales grew 20.8% in the quarter, and 21.4% for the year, and over 50% of the time, our customers choose to pick up their order in a store. This is the power of the interconnected retail strategy. We’ve also expanded our digital capabilities by investing in a B2B website experience tailored specifically for the needs of our Pro customers. We have now onboarded over 1 million Pro customers. Additionally, during the quarter, we completed the integration of our third-party best-in-class CRM system for all of our Pro sales and services teams. This enhances our visibility, enabling us to better serve our customers. I’m excited about the opportunities ahead as we continue to build capabilities to engage with a Pro, no matter when, where or how they want to interact. Another key component of the best-in-class interconnected shopping experience centers on enhanced delivery and fulfillment options. In 2019, we continued our multiyear journey to create the fastest, most efficient delivery network in home improvement. We are now live with at least one of each type of facility that we’re building. So, it is early days, we’re pleased with the initial results. For example, we have opened a dozen Market Delivery Operations or MDOs that have enabled us to transition 20% of our clients’ deliveries from an outsourced model to one in which we control more of the customer experience. This has translated to meaningful improvements in our customer satisfaction scores for appliance deliveries. Our supply chain build-out will continue to ramp from here with the largest number of new facilities coming online in 2021 and 2022. Turning to 2020, Richard will take you to the details, but we expect another year of growth, with both sales and top growth ranging from approximately 3.5% to 4%, and diluted earnings per share of approximately $10.45. Today, our Board approved a 10% increase in our quarterly dividend to $1.50 per share, which equates to an annual dividend of $6 per share. We remain committed to maintaining a disciplined approach to capital allocation to create value for our shareholders. I’m incredibly proud of the progress our teams made as we transform ourselves into the One Home Depot for the future. While we define our sales growth in percentage terms, we capture share in dollar terms and in the second year of the One Home Depot investment program, we have grown sales by over $9 billion, a level of growth unmatched in our market. As we look forward to 2020, I am more excited than ever about the opportunities ahead. We’re investing to unlock the power of a truly interconnected customer experience by enhancing our already strong foundation to further extend our leadership position into the marketplace. As with any transformation, the work we’re doing is complex and I’m proud of the way our associates continue to execute at higher levels and focus on what’s most important in our business, our customers. I want to close by thanking our associates for their hard work and dedication 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 associates. We look forward to continuing our momentum in 2020. And with that, let me turn the call over to Ted.

Thanks, Craig. Good morning, everyone. We had a strong finish to the year with fourth quarter sales exceeding our expectations. We saw growth across both Pro and DIY customers. All of our merchandising departments posted positive comps, but the appliances department, which posted double-digit comps in the quarter, as well as decor and storage and tools were also above the company average. All other merchandising departments were positive but below the company top of 5.2%. In the fourth quarter, comp average ticket increased 4.4% and comps transactions increased 0.8%. The strength in our comp was partially driven by a shift in our event timing, which Richard will talk through in a moment. In addition, we had an excellent response to our Black Friday and Holiday events, and our customers continued to trade up to new and innovative items. After experiencing significant deflation in lumber and copper during the first three quarters of 2019, commodity prices had a more neutral impact in the fourth quarter. During the fourth quarter, big ticket transactions, those over $1,000, which represent approximately 20% of US sales, were up double digits. The strength in our big ticket sales was driven in part by the shift in our event timing, as well as strong performance in the number of other big ticket categories. During the fourth quarter, big ticket categories like appliances, vinyl plank flooring, and our installation services business, all posted comps above the company average. Consumer demand is strong, and this was evident during our annual Black Friday gift center and decorative holiday events. The partnership and collaboration between our merchants and supplier partners helped bring a fantastic lineup of great deals in special box categories like smartphone power tools, hand tools and decorative holiday. Our unique assortment, together with excellent customer service and execution, led to incredible results. Black Friday was a record sales day for our company, and our gift center event grew double digits versus last year. We also saw our customers tackle a variety of projects around the house. During the fourth quarter we saw comps above the company average in several kitchen and bath categories, special window coverings, cleaning and exterior paint. We also saw significant growth in our online-only home decor categories, which we call HD Home as we build awareness of these high-quality, style-forward assortments. Sales for our Pro customers were healthy, driven by strength in categories like pneumatics, concrete, hand tools, and COGS all of which grew faster than the company average. Looking back at 2019, our team continued their unwavering commitment to serve our customers with great everyday values and innovative products. We did this while investing in a customer-back store interconnected experience to ensure that we continue to be the product authority in home improvement for years to come. At our Investors Conference back in December, we talked about investments we were making across our business. We also shared our new ad campaign and tagline, 'How Doers Get More Done,' that we launched to highlight our investments into these new experiences and capabilities. We believe that it’s important to signal to our customers that the Home Depot is evolving as their needs change. But it’s still early in our campaign; we see customers responding to our enhanced capabilities, giving us credit for saving them time and helping them complete their projects. In response to our campaign, we saw one of our largest single days of downloads of our award-winning mobile app and double-digit growth in usage of mobile tools like product locator and image search. As we look forward to 2020, we will continue our investments to better meet our customers’ needs and drive a great shopping experience. One of the investments you’ll see in the first half of the year is a reset to our outdoor power equipment base. We know the marketplace for outdoor power tools has transitioned to cordless technology, and we’ve learned in our tools department that once a customer adopts a battery platform, they see tremendous value in sticking with that platform. Similar to what we’ve done in our tools department, we’re in the process of resetting our outdoor power equipment phase to showcase our assortment by brand, highlighting EGO, Toro, Milwaukee, Ryobi, Dewalt and Makita, many of which can only be found at the Home Depot. With this new presentation, customers can clearly see and easily shop the value proposition that these cordless platforms bring, including being more environmentally friendly, safer and easier to use, all with the power and runtime to get the job done. These powerful brands now have the lion’s share of batteries in the marketplace with hundreds of millions of batteries in customers' homes and job sites today. We currently offer over 1000 cordless power tools, and that number will continue to grow as our supplier partners are introducing innovative products all the time. Our comprehensive and unique assortment of outdoor power equipment resulted in double-digit comps in fiscal 2019. With spring right around the corner, we are gearing up for another busy season. Our stores are stocked with new and innovative products, and we just recently announced we are hiring 80,000 new associates to help us serve our customers during our spring selling season. With that, I’d like to turn the call over to Richard.

Thank you, Ted, and good morning, everyone. Before we begin, let me take a quick moment to remind everyone that fiscal 2019 consisted of 52 weeks, while fiscal '18 consisted of 53 weeks. This extra week added approximately $1.7 billion in sales for the fourth quarter of fiscal 2018. When we report our comparable sales or comps, we report them on a 52-week to 52-week basis by comparing weeks one through 52 of fiscal 2019 with weeks two through 53 of fiscal 2018. In the fourth quarter of 2019, total sales were $25.8 billion, a 2.7% decrease from last year, reflecting the comparison against the extra week in 2018. Our total company comp sales in the fourth quarter increased 5.2% and comps in the U.S. increased 5.3%. Because of last year’s 53rd week and the resulting calendar shift, our monthly comps are distorted due to the timing of our annual Black Friday and Cyber Monday events this year versus last year. Our reported monthly comps for the total company were positive 1.2% in November, 9.9% in December, and 5.7% in January. Our monthly comps in the U.S. were positive 1.1% in November, 10.4% in December, and 5.8% in January. Given the distortion in our monthly comps caused by the calendar shift, we believe that it is more appropriate to look at November and December on a combined basis. For the combined two months of November and December, our total company comp was 5%, followed by 5.7% in January. For the year, our sales totaled a record $110.2 billion. If we exclude the sales from the 53rd week in fiscal 2018, we grew sales by approximately $3.7 billion in fiscal 2019, a level of growth unmatched in our market. For the year, total company comp sales increased 3.5% and U.S. comp sales increased 3.8%. In the fourth quarter, our gross margin was 33.9%, a decrease of 20 basis points from last year. Similar to the last quarter, the change in our gross margin was primarily driven by higher shrink and a mix of products sold compared to last year. For the year, our gross margin was 34.1%, slightly higher than our guidance at the beginning of the year. In the fourth quarter, operating expense as a percent of sales decreased by 64 basis points to 20.7%, slightly better than our plan. During the quarter, we saw approximately 77 basis points of leverage, as we lapped the fiscal 2018 impairment of certain trade names and the 53rd week last year. This leverage was partially offset by expenses related to our strategic investment plan of approximately $280 million, which increased approximately $25 million from last year and cost 12 basis points on the average. Fiscal 2019 operating expense as a percent of sales was 19.7%, a decrease of 28 basis points from last year. Our fiscal 2019 expense performance was better than our initial expectations, driven by productivity initiatives in our core business. During the year, we spent approximately $1 billion of investment expenses related to our strategic initiatives in line with our plan. Our operating margin for the fourth quarter was approximately 13.2%, and for the year was approximately 14.4%. Interest and other expenses for the fourth quarter grew by $27 million to $292 million due primarily to the higher long-term debt levels than one year ago. In the fourth quarter, our effective tax rate was 20.3% and for fiscal 2019 was 23.6%. The lower than expected effective tax rate in the fourth quarter and for fiscal 2019 was driven primarily by several discrete tax items. Our diluted earnings per share for the fourth quarter were $2.28, an increase of 9.1% from last year. For fiscal 2019, diluted earnings per share were $10.25, an increase of 5.3% compared to fiscal 2018. Moving on to some additional highlights, we ended the year with a store count of 2,291, while retail selling square footage was approximately 238 million square feet. For the fiscal year, total sales per retail square foot were $455, the highest in our company’s history. At the end of the quarter, merchandise inventories grew $606 million to $14.5 billion and inventory turns were 4.9 times, down slightly versus last year. The growth in our inventory versus last year reflects the investments we’re making to accelerate merchandising resets and higher in-stock levels than we had one year ago. Moving on to capital allocation. In fiscal 2019, we generated approximately $13.7 billion of cash from operations, using that cash, as well as the proceeds from $2.4 billion of net debt issuances to invest in our business, pay dividends to our shareholders, and repurchase our shares. During the year, we invested approximately $2.7 billion back into the business through capital expenditures. Further, we paid $6 billion in dividends to our shareholders. Finally, during the year, we repurchased approximately $7 billion or about 32.8 million of our outstanding shares, including roughly $3.25 billion or 14.5 million shares in the fourth quarter. Completed on the average of beginning and ending long-term debt and equity for the trailing 12 months, the return on invested capital was approximately 45.4%, 60 basis points higher than the end of fiscal 2018. Today’s press release includes our guidance for fiscal 2020, and I want to take a few moments to comment on the highlights. Remember that we got off of GAAP, so fiscal 2020 guidance will watch from our reported results for fiscal 2019. At our Investor Conference in December of 2019, we shared with you some preliminary thoughts for 2020, and we’re reiterating that guidance today. The economy is strong and the U.S. consumer is healthy. The foundation of our sales plan starts with GDP, and our 2020 sales guidance assumes U.S. GDP growth of slightly less than 2% in 2020. The GDP, we add the impact that we think we will see from the housing environment, including demand driven by home price appreciation, housing turnover, household formation and the age of the housing stock. As we look at these metrics, we see an environment that is healthy and stable. Our 2020 guidance also assumes that we will continue to gain share in the marketplace. For fiscal 2020, we expect both sales growth and total company costs sales growth of approximately 3.5% to 4%. Fiscal 2020 represents the peak year of our investment program, and as a result, we expect our fiscal 2020 operating expenses to grow at 1.2 times the rate of our expected sales growth. For the year, we expect to grow operating profit dollars to $16 billion, giving us an operating margin of approximately 14%. For fiscal 2020, we assume our effective tax rate will be approximately 24%. We expect fiscal 2020 diluted earnings per share to grow approximately 2% to $10.45. For the year, we project cash flow from operations of approximately $13.5 billion. We plan to invest $2.8 billion of this cash back into the business in the form of capital expenditures. We also plan to use this cash to pay $6.4 billion in dividends and repurchase at least $5 billion of outstanding shares. Before I close, I would like to update you on how we’re thinking about one of our capital allocation principles. With regards to our dividends in lieu of using a 55% payout ratio, we will look to grow our dividends every year as we grow earnings, as we have for the last 11 years. This morning, we announced that our Board increased our quarterly dividend by 10%, which equates to an annual dividend of $6 per share. With that, I want to thank you for your participation in today’s call. And Christine, we are now ready for questions.

Good morning. Thank you for taking my question. I want to ask about any potential supply disruptions coming from Asia. What have you taken into account regarding this? What is the current status of your supply chain? Have you encountered any issues with obtaining products from Asia at this time? If these issues persist for a significant duration, how do you estimate the potential impact on your sales and earnings over the coming quarters?

So, Michael, I’ll start off and then I’ll hand it over to Mark Holifield. First of all, the guidance we’ve provided does not include any updates regarding the situation. It’s very fluid, and we’re monitoring it closely. All of our goods for Q1 are essentially onshore or on their way, so we feel pretty good about that situation. Mark, do you want to provide an update on...

Yeah. Sure, Craig. As you mentioned, it does change every day. Our Q1 merchandise is already here or on the way and Q2 the picture is still developing there. For our direct import, our sourcing offices in Asia are in touch with our top factories as they are returning to operations. For our domestic vendors, we’re working with them to understand and mitigate any potential impacts in their supply chains. Our teams are working with all of our suppliers, both domestic and import, and our logistics service providers on a PO-by-PO, container-by-container basis to understand what the impacts of our product flow are, and they’re taking appropriate action. We are encouraged that we’re seeing factories come back to work, provinces coming back to work in China, but it is a fluid situation and highly variable in terms of what’s the current state?

And just to clarify, based on what you know today, do you think there will be an earnings hit over the next couple of quarters due to any supply disruptions, even if things return to normal in the very near future, or do you feel you have time to adjust based on what you know at this point?

Michael, based on what we know today, we couldn’t say that there would be a hit. Again, the teams are working this day-to-day, as Mark said to the PO-to-PO, container-to-container. We’re also putting plans in place and mitigate any risk going forward.

That’s what going in there…

70% of what we do is domestic.

Okay. Thanks. My follow-up question is you just wrapped up your second year in a row with about 1% growth comp growth in traffic after many years of higher traffic than that. Is 1% growth in traffic the new norm and how do you think the implementation of your strategic investment plan is going to impact traffic in the next few years?

The objective of what we’re doing on the investments plan is to position ourselves to be able to continue to grow faster than the market. I think some of the growth that we saw in years past was a result of an accelerated recovery from a very difficult spot. What we’ve always focused on is how do we balance ticket and transactions, and that’s really where our focus is and the market will determine what level that is.

Okay. Thank you very much, and good luck.

Thank you.

Good morning, guys. I actually had a follow-up on Michael’s question first, like, I guess, the question is, given the delta that we’ve seen in transactions and average ticket. What would you guys point to regarding kind of what’s driving that divergence, I mean, and you just referenced you had a recovery phase, but I would think that recovery phase actually would help both sides of that ledger, not just one.

Yes. So, I’d say we have some opportunity areas that we’ve invested in to continue to grow that have accelerated our ticket growth, largely being we put significant investment in appliances, that has paid back in a very big way in terms of the accelerated growth we’ve seen in that business. The same thing would hold true for what Ted referenced as it relates to the lithium technology and the average ticket growth we’ve seen in power tools and now in outdoor power equipment. So I think there are some innovation and investment factors that have helped drive ticket maybe even above and beyond as we took share in those categories. But we look pretty pleased with the consistency of our traffic growth over time. And like I said, we’ll work to balance traffic and ticket; we always want to make sure there’s a reasonable balance there.

So when you think about it, I’m sorry, go ahead?

I was just going to add, Scott, I’ll add to that. Q4 was very much event-driven or gift center, decorative holiday, and as Craig said, appliances and those all performed incredibly well. So that contributes to the ticket, and as we see consumers continue to trade up to the new innovative products that we’re offering. And while we’re happy with transactions, they were a little bit depressed with the lack of cold weather. So if you think during a winter you get a lot of people stopping in for ice melt for those smaller quick pickup items like car washer fluid, et cetera, and with the more mild winter, a lot of the biggest suppression there of transactions were those quick cold weather pickup items?

Okay. That’s helpful. And I guess when you think about all the investments you guys have been making in the business and supply chain technology, should we continue to expect kind of the pattern that we’ve seen here continue or is it have a more balanced impact as we go forward? Thanks.

Yeah. I think, again, we look for kind of balance in that. Will it be perfect one way or another? No, but we would look for balance.

Okay. Thank you.

Thanks. Good morning. Long-term question first, so thinking again about the payback from investments, it sounds like we’ll see some costs moderate next year, so that’ll be good to margin. But in terms of the topline lift and I realize you’re probably not going to quantify much. But can you tell us where the places will start to see better comps? Is it the Pro wallet share, is it MRO categories, DIY? So what are some of the KPIs that won’t be as apparent as comps that you’re seeing that tells you that some of these investments are beginning to pay off?

First of all, our investments are targeted for all of the above that you just rolled out. Probably, we think MRO, you think consumer; our intent is to grow in all of those spaces. But what we’re really trying to set ourselves up to do in the investment is to position Home Depot to grow faster than the market growth on a consistent basis, no matter what that environment is. That’s really what we’re trying to get done.

And does that require waiting for the supply chain investment to finish rolling out or no? That should stagger as all these other investments are taking place?

The supply chain is an integral part of the overall structure. As we've previously mentioned, we are making investments across various areas of our business, including stores, digital platforms, marketing, product development, and supply chain. As we enhance these capabilities and continue to expand the supply chain by opening more facilities in 2021 and 2022, we expect to see consistent growth as we leverage these capabilities in the market.

Okay. And then my follow-up is in the fourth quarter, it looks like the business performed a little better than planned. Can you parse out underlying housing signs and maybe improving versus some of the seasonal, it sounds like December was a big month. I don’t know if that’s more holiday, but at the same time, you didn’t have as much weather impact. So if you can just talk about underlying housing versus other drivers?

Sure. Simeon, this is Richard. So from a housing perspective, all housing indicators wound up really sort of where we expected them. And so we don’t think that that had any material impact on our business. You mentioned December, there’s a little bit of a timing shift there in the calendar from November to December. But, overall, it was really the strong execution across the quarter and Ted, maybe you want to go a little bit more into the strength of the quarter.

I believe, as I mentioned earlier, we appreciate the balance between ticket and transaction, and we are pleased with the mix of consumer and Pro segments, with Pro performing well in Q4. We observed strong engagement from consumers, especially in discretionary categories, along with impressive sales in our artificial Christmas tree business, and record sales and growth in our gift center. Additionally, we experienced double-digit comparable sales growth in appliances. It's not just about replacing broken refrigerators; there is an increasing trend towards discretionary purchases. Overall, we observed a very strong consumer market.

Great. Thank you.

Yeah. Thanks. Nice quarter. And normalizing for the event shifts, sales are pretty consistent across the quarter. I’m just wondering how we think about the cadence of comps by quarter in 2020, and I’m wondering if you could offer some thoughts on how February started out?

Well, thank you, Chuck. So we don’t provide quarterly guidance, but we would say that in 2020, we will see a relatively evenly spread across the two halves of the year with respect to the comp sales. And with respect to what we’ve seen so far in 2020, our guidance is based on the best information we have of the moment, and so our results today are consistent with that guidance.

Okay. Great. And then just bigger picture if one of you guys could just amplify on the opportunity that you have with the Pro, as you onboard more of them onto the B2B website, particularly now that there’s going to be the CRM aspect included? Thanks.

Yeah. I think when we think about the Pro customer, we’re actually building an ecosystem for our Pro customer that encompasses product and brands and delivery and credit services and our digital capabilities with B2B tool rental and a whole lot more. Obviously, all of that coming together allows us to be able to service our Pro customers in a more holistic way and it allows us to continue to grow with larger, more complex customers. And so, when we look at the Pro business and we think we’re in the 15% to 17% range, we’d love to see that be much more in line with consumer penetration of share that we have as we go forward, which is why we’re making these investments.

Thank you.

Thanks. Good morning, everybody. So one to a couple follow up. So first on this seasonal business and the impact of the weather, overall, how would you assess the weather impact last year in December is really wet. I think you called out 85 basis points of headwind a year ago, you also had warm weather in January against Polar Vortex at the end there last year. But at the same time, you didn’t get the snow melt and the snow blower. So how would you assess your overall impact of weather?

Chris, this is Ted. I’d say neutral. It’s just, as you said, extended season in some markets, the ground’s not freezing, et cetera, that Pros could stay at work. But then on the other hand, you didn’t get all your cold weather categories, so our merchants in the shore and snow and ice melt business aren’t as happy as some of our other merchants. But I would say on balance a little impact, neutral?

Got it. On the gross margin, the performance improved compared to the third quarter. You mentioned that shrink and mix continued to be challenges, which you've noted persisted into 2020. However, there was a slight improvement. What changed in that regard that helped offset those issues, or did one of those factors lessen, and does this alter your perspective on 2020?

Shrink was consistent with what we have observed through the year, and we are taking steps to address that in 2020, as we discussed. We had some great benefit, as we’ve had all year from some of the supply chain investments we’re making and productivity supply chain, but shrink was consistent.

And so the delta versus last quarter, anything to call out there?

It’s a consistent trend, and we are looking to address it at the beginning of 2020.

Got it. Thanks so much. Have a great spring

Thanks.

Thanks Chris.

Hi. Thanks. A couple here. So one, the comp outlook for next year, 3.5 to 4. This year your comp at 3.5, but you were hurt by at least 50 basis points from lumber. So essentially you got into a slowdown next year and in fact the slowest comp in a number of years, when you adjust for inflation, yet housing seems to be getting better. So just curious disconnect there. Is it just sort of setting up for some potential upside?

I mean like, our methodology that we use hasn’t changed, and it’s not a perfect model. But Richard, do you want to just walk through this?

Yeah. Sure. We stay consistent with our methodology providing sales guidance, and if you look at the elements of that methodology from GDP assumptions to what we’re thinking with respect to support from housing to the expectation that we will continue to take share. None of the assumptions behind those elements has changed significantly since December, and so that’s why we’re reconfirming that outlook.

One comment I'd like to make is that people often try to relate our business to interest rates. However, we have never been able to connect our sales to interest rates, so that does not influence our thinking.

But I guess a follow-up on that. You would think that your business correlates to housing, right, which I guess in turn correlates with interest rates. Is that a fair statement?

It’s a fair statement. We have seen some indicators pick up recently, but we’re not going to adjust guidance based on short-term fluctuations or observations in housing. We believe housing is healthy and stable. It will continue to provide positive support for the business.

Okay. That makes sense. If I can follow up, as I recall, the third quarter was hurt a little bit by the timing of Black Friday. So presumably that helped the fourth quarter, I get the shift in the month within the quarter, but third quarter versus fourth quarter, did that help fourth quarter at all, and if so by how much?

Yeah. It was roughly a 35 basis points shift those ways, so it hurt Q3 about 35, it shifted that to Q4 by 35.

Thank you. I have one more question. You mentioned that you don't change your methodology for comparisons, but it seems you are altering the approach for the dividend. I'm curious about the reason for this change. Is it simply due to having a new CFO, or is there another reason we should consider?

No. Look, we are maintaining our policy of wanting to increase our dividend every year as we grow earnings. We’re not going to tie to a specific payout ratio. But I think that this year’s increase of 10% is a great example of our intention to continue to increase the dividend and also reflection of our confidence in business.

Okay. Make sense. Appreciate the time.

Hi. Thanks. Actually just a follow-up on that comment on the dividend, so is there a specific relationship we should think about as it relates to EPS growth versus dividend growth, because obviously, as you said, a 10% increase is very impressive, given that in 2020, you’re kind of only looking for, call it, a 2% increase in earnings and presumably earnings growth will accelerate in ‘21?

Our approach to capital allocation remains consistent. Our priority is to invest sufficiently in the business to ensure long-term success. With any excess cash, we evaluate potential opportunities and are committed to growing our dividend annually as we increase earnings. Additionally, we will seek ways to return capital to shareholders through share repurchases. These principles are fundamental to our operations, and we adhere to our established guidelines.

Okay. Thanks. That’s helpful. And then on the 14% operating margin guidance, obviously, you came in a little bit higher this year at 14.4%, is there anything to call out there in terms of the 40-basis-point decline versus the prior 30-basis-point?

No. It’s really just a reflection of outperformance in Q4 and sort of rounding up to a 14.4% rather than our expectations around 2020, which has not changed. But with great execution across the business from sales to gross margins to operating expense, it was a team effort, and we’re proud of the results we deliver.

Okay. And then just last one for me, is there any update you could provide on additional personalization and functionality on the B2B and maybe any color you could provide on behavior with the Pros and/or conversions with respect to the ones you’ve onboarded?

Look, we continue to drive engagement with the Pros that we’ve onboarded to the B2B website. We like what we see as those Pros accelerate their engagement. But again, it’s also, as I mentioned before, we’re building a complete ecosystem around the Pro. The B2B website is one portion of that experience but encompasses all the things that I laid out before.

Okay. Great. Thanks.

Hi. Good morning.

Good morning.

Thank you for taking my question. Nice quarter.

Thanks.

So I wanted just to take a step back a bit. At a meeting in December, we spent a lot of time talking about the investment initiatives. And then you would highlight that some of these were not coming as quickly as you initially thought that they were still coming. I guess I want an update there, as we look at the business now, you had a very nice quarter; you seem excited about the initiatives. Have you seen more progress on that front than was articulated in December?

Well, I think, as we shared in December that we would continue to see the investments have a payback as we move forward and that is what we’re seeing. I think the quarter in particular, as Ted called, was a combination of the strength that we see in terms of the events that we put in place, the product offerings that we brought to the market, the continued development of our initiatives. It’s all those things coming together that actually delivered on this quarter. So, yeah, we’re pleased with the continued growth that we see in the initiatives. But at the same time, really proud of the team, the execution by our stores was outstanding. The supply chain team did a great job. Our suppliers gave us outstanding products and values. And the customer’s ability to start that shopping experience in the digital world and research product and/or purchase product there, all of that is leading to the kind of performance that we saw in the fourth quarter.

Got it. Then my follow-up, Craig, and I guess so much of questions on shrink and another topic we spent a lot of time discussing in the December Analyst Meeting. How much of a swing factor could shrink be here in 2020 to the extent that you were able to improve the performance versus what we saw in 2019?

I think, as we shared in December, we’re in the process of implementing our initiatives to mitigate the impact from shrink. It will take time for us to actually realize the benefit as that flows through the P&L because we basically do the inventory in the stores once a while.

And it’s a phased rollout.

Right.

We’ve piloted approaches. We feel very confident about those results, but we still learn as we go. We feel confident. And as Craig said, not only do you have the rollout, but you also have the actual recognition in the P&L, which is on a lag basis as we take inventories.

All right. Thank you and good luck to the spring.

Thank you.

Thank you.

Great. Thank you. Regarding the margin guidance for 2020, can you talk about what assumptions you’re making for product margin and the mix impacts on gross margin?

Sure. For competitive reasons, we don’t detail that...

Yeah. We wouldn’t do that.

Okay. So there’s no expectation that the mix could be negative given the strong appliance sales, for example, or is there anything factored into your gross margin assumption in terms of mix?

Well, there is, and as we had outlined in December, and if you think about the walk to the 14.0% guidance, you start with the fact that we’re going to generate operating expense leverage on a business as usual basis, sort of underlying everything. But then recall, this is the peak year of investment of our three-year investment program. So that will put pressure on margin. And then we see the impact from shrink, which is we said we’re taking steps to address, and also from mix. But the mixed pressure is a good pressure. This is the pressure that reflects the fact that we’re taking share in categories, like appliances, like power tools, like outdoor power. And so, while we do think that there is mix pressure there, our objective is to grow incremental market share, incremental sales and incremental operating profit dollars, and we do that through attacking our market opportunities in front of us.

Got it. Okay. And has there been products that have been excluded from tariffs retroactively where you’re now getting refunds, and are those refunds a positive offset to your cost of goods sold?

Yes. First, I want to express my gratitude to our combined merchandising, finance, supply chain, and global sourcing teams for their hard work throughout the year in addressing the tariff issue. We put in significant effort, and the teams did an outstanding job, especially concerning the exclusions, which involve closely monitoring submissions and requests for exclusions, identifying SKUs, and completing all necessary paperwork for approvals. This is a substantial workload the team is currently handling. One major category that has now been excluded is luxury vinyl plank in our flooring business, which is likely the largest one. We are actively pursuing the refund for tariffs that were previously paid.

Okay. Have those refunds affected your fourth quarter at all, or will their impact be felt more in the future? You might see some of that effect in the first half of the year?

There was some of that.

There was some benefit, but in terms of the ins and outs of the quarter, we still feel great about the overall performance.

Okay. Thank you.

Hey. Good morning. Curious if you could speak specifically to the outlook for your e-commerce business in fiscal ‘20. And given all the initiatives around fulfillment and Pro, curious whether you expect that 20% growth handle to continue, whether you’re still adding any categories and what you think that 2020 drivers could be?

We’re excited about our e-commerce business as part of a whole interconnected retail strategy. We believe that the front door of our store is not on the customer’s pocket; it’s on the job site. Most of our customer shopping experience starts in the digital world, even if it finishes in the physical world. As Ted has talked about, we have expanded our assortment into more categories online around the home. We think that is a continued opportunity as customers have shared with us that they believe that we can bring great value in these home categories, and they trust us to bring that value. So we think that our digital business continues to be an engine for growth, both in the digital world and in the physical world.

And it’s not a separate business. It is managed by our merchandising team, all one merchandising team, right? And so rather than think about a separate business, you have to think about it as a capability.

Got it. And on the appliance category, curious if you could talk a little more about the impact of taking home delivery in-house and considering your share gains in the category over the past several years. Could you comment on how much you think share-wise is still up for grabs and where do you think it’s coming from?

Yeah. We are really pleased, excuse me, it’s Mark. We’re really pleased with the work we’ve done in our market delivery operations or MDOs. Those are staffed with orange aprons, Home Depot associates who are ensuring that the freight comes into those locations and is dispatched properly to the customer damage-free. They’re also working to ensure that there’s a great customer experience; they’re working with the delivery teams. So I’m really pleased with the progress there. As Craig mentioned in his comments, we’ve got a dozen of those up. We have another dozen or so leases signed, and we’re going to continue to roll those out through 2020. And as we do, we continue to see an improvement to our on-time performance, reschedule rate and our customer satisfaction.

And I’d say an opportunity to keep growing. There are still lots of participants, regional, super regionals, even mom and pop furniture stores that have clients offering. So we think there’s still lots of share out there. I mean, clearly, Shears has been a donor over the years and very markedly diminished store base. But we still see just a huge market that we’ve had a disruptive attitude in this space for a long time, and that’s continuing to pay dividends as we picture.

Got it. Appreciate the time.

Christine, we have time for one more question.

Great. Hey, guys. Thanks for squeezing me in. A couple follow-ups here, first, on the guidance and specifically the cadence. Richard, I think he gave us a comp cadence similar throughout the year. How should we be thinking about gross margin and SG&A, and I guess just the cadence of investments? Should we be thinking about more pressure on the operating margin in the first half relative to the second half?

First, we think about it in halves, and we don’t provide specific half guidance. We’re looking at a relatively balanced year across the halves.

Got it. Okay. And then just to follow up on the exit rate, January being a better month here, should we be thinking about any sort of pull-forward because of weather? Or do you think it’s some combination of your initiatives and just solid demand overall? And then just some related piece here around the macro, it sounds like you’re maintaining a relatively conservative view. I guess my question is really are you seeing any sort of improvement or divergence in maybe markets that were slowing last year and are starting to get a little bit better, any change in performance there that would maybe lead you to believe that housing backdrop is just better for the business right now? Thanks.

I’d say, first of all, on regional variability, this past quarter was one of the narrowest we’ve seen in recent times and we don’t see any widespread variability. It’s really early to determine how the business plays out for the first half. We’ve always talked about this in terms of halves because anything can happen from a weather standpoint that could either accelerate or delay a spring, and then you generally work to capture that in the first half. That’s really our approach. We’re not seeing anything that would have us any differently to that whatsoever.

Okay. Understood. Thanks a lot.

Great. Thank you for joining us today. We look forward to speaking with you on our first quarter earnings call in May.