Home Depot Inc (HD) — Q3 2020 Earnings Call Transcript

Thank you Christine and good morning everyone. Joining us on our call today are Craig Menear, Chairman and CEO; Ted Decker, President and Chief Operating Officer; 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 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 presentation 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 thanks for joining our call this morning. We hope that you and your loved ones are safe and healthy. As we announced yesterday, we entered into a definitive agreement to acquire HD Supply, a leading national distributor of maintenance, repair and operations products in the multi-family and hospitality end markets. Before moving to the results of the quarter, I want to take a moment to discuss how HD Supply fits into our strategic framework. As you know, the MRO customer is an important pro customer for The Home Depot. We are committed to better serving the MRO customer and growing in this space. The success we’ve had with our existing MRO business makes us confident in our ability to accelerate sales growth in a highly fragmented $55 billion MRO marketplace. While the transaction is subject to customary regulatory approvals, I look forward to welcoming the HD Supply associates to The Home Depot. Richard will take you through the financial details shortly. Now let’s discuss our third quarter results. Sales for the third quarter grew $6.3 billion to $33.5 billion, up 23.2% from last year. Comp sales were up 24.1% from last year with U.S. comps of positive 24.6%. Diluted earnings per share were $3.18 in the third quarter. The third quarter was another exceptional quarter for The Home Depot as we saw the continuation of outsized demand for home improvement projects. Our results were driven by broad-based strength across the store and geographies. All of our top 40 markets posted double-digit comps while Canada posted comps above the company average and Mexico posted its best performance since the onset of the pandemic, with double-digit comps in local currency. As Ted will detail, both tickets and transactions were up double digits in the quarter and we saw strong double-digit growth from both the pro and DIY customers. As we mentioned last quarter, the step change in volume of business that we have witnessed over the last six months is not without its challenges, but our strategic investments coupled with our near-term actions taken have allowed us to better serve our customers. Our third quarter performance is a reflection of this and as we continue to learn and adapt to meet the unprecedented level of demand we are seeing in the market. Actions we have taken across our supply chain, in our stores, and in partnership with our suppliers have helped us to improve in-stock levels, reduce lead times, better manage in-store replenishment, and improve fulfillment options and delivery times. All of this has ultimately translated to over 300 basis points of sequential improvement in customer satisfaction scores for the third quarter. Our interconnected retail strategy and underlying technology infrastructure have continued to support record level web traffic on a consistent basis for over six months. Sales leveraging our digital platforms increased approximately 80% versus the third quarter last year and approximately 60% of online orders were fulfilled through a store. We continue to invest in our digital assets, introducing new capabilities and different ways to engage with The Home Depot. Over the past several months, we have refreshed the digital experience in key categories and are extremely pleased with the customer response. In decorative lighting, for example, we enhanced the category experience to offer improved visual imaging and more lifestyle photos of our on-trend lighting assortment. As a result of these changes and increased marketing efforts to better highlight our offering, we have seen significantly higher customer engagement with the category online which helped to drive sales growth above the company average in the quarter. We also found new ways to leverage our online platform to better showcase our assortment for events. For our Halloween event, we increased our digital offering and enhanced our presentation, which resonated with our customers, resulting in the strongest customer response we’ve had to these events. We are focused on continuing the momentum of our strategic investments to enhance the interconnected shopping experience and position ourselves for continued share capture over the long term. Key components of our One Home Depot strategy, such as opening various supply chain facilities, technology investments, and enhancements to the digital experience remain on track, and we have now restarted many of the store investments that were paused at the onset of the pandemic. Our results through the first nine months of the year clearly indicate that for many customers, the home has never been more important, and we hear from them that they will continue to invest in home improvement through a multitude of different projects and plan to embrace the upcoming holiday season. As customers engage with The Home Depot, we see a continued blend of both the physical and digital worlds. As a result, the distinct competitive advantages and overarching benefits of an interconnected One Home Depot strategy have never been more relevant. I’m incredibly proud of our associates for the many ways that they have lived our values by serving our customers, communities, and each other during these unquestionably challenging times. Our ability to grow the business by more than $15 billion through the first nine months of the year while navigating the global pandemic and supporting our communities through multiple natural disasters is a direct result of our associates’ extraordinary efforts. Given the ongoing demands and complexities of the current environment, we continue to focus on taking care of our people in part by extending weekly bonuses for hourly associates in our stores and distribution centers for the duration of the third quarter. Through the end of the third quarter, we have spent approximately $1.7 billion on temporary pay and benefits in response to COVID-19. As Richard will discuss, we have now made the decision to transition from our temporary weekly bonus program to invest in permanent compensation enhancements for our frontline hourly associates. This will result in approximately $1 billion of incremental compensation expense on an annualized basis. Our orange apron associates are the heartbeat of The Home Depot, and supporting them through this time of uncertainty and beyond continues to be a key priority. We know that we must remain agile and flexible to execute against the demands of the current environment and our third quarter performance highlights key progress that we have made as we continue to learn and adapt. I could not be more proud of the resilience and strength that our associates have continued to demonstrate and I want to thank them and our supplier partners for their hard work and dedication to serving our customers and communities. Finally, I want to take a quick moment to congratulate Ted, Ann-Marie, and Jeff, who are on the call with me today, on their recent promotions and expanded responsibilities. Their new roles are among a number of leadership development moves that we have made as we continue to invest and grow the deep bench of talent that we are fortunate to have here at The Home Depot. With that, I’d like to turn the call over to Ted.

Thanks Craig, and good morning everyone. I want to thank all of our associates and supplier partners for their incredible effort to serve our customers in this unprecedented environment. The consistently strong demand we’ve seen over the last six months has been remarkable. For the last two quarters, we have seen comps north of 20% for 25 of the 26 weeks. The strong demand has pressured supply chains, and we have partnered with our supplier partners to make various improvements. As we mentioned last quarter, the actions we took include adjusting our assortments and plan-o-grams, introducing alternative products and, in some cases, reducing the number of SKUs in certain categories to focus on the highest demand products. In addition, we are further mechanizing our rapid deployment center network. We’ve now implemented mechanized floor loading in two-thirds of our facilities, meaningfully improving our productivity in those buildings. As a result of all these actions, we have seen reduced product lead times and continued improvement in our in-stock positions. The in-stock level in our U.S. stores has improved for 12 straight weeks. While we are pleased with these results, we are not at pre-pandemic levels. We have also revisited customer fulfillment choices, some of which we’d paused earlier in the year. As a result, we are starting to reestablish premium delivery windows and express car and van delivery service that covers over 70% of the U.S. population. During the third quarter, each of our merchandising departments posted double-digit comps, led by our lumber and décor and storage departments. Our comp average ticket increased 10% and comp transactions increased 13%. The growth in our comp average ticket was driven primarily by the continuation of project demand we saw in the second quarter, customers trading up to new and innovative items, as well as inflation in certain commodity categories like lumber. Over the last four months, we’ve seen significant volatility in the pricing of lumber as the industry works to balance supply and demand. During the third quarter, the average price of framing lumber was approximately 130% higher than the same period last year. As we exited the quarter, pricing for certain lumber categories had fallen from the peaks we saw mid-quarter but still sit well above the levels we saw this time last year. Despite this significant inflation, we saw strong double-digit unit comps in lumber in the third quarter. During the third quarter, inflation from core commodity categories positively impacted our average ticket growth by approximately 260 basis points. Additionally, the strength of our comp transaction growth was driven by consistently strong in-store and online transactions, continuing the same trends we saw in the second quarter. During the third quarter, big ticket comp transactions, or those over $1,000, were up approximately 23%. We saw strong performance across a number of big ticket categories like appliances, vinyl plank flooring, and lumber. During the third quarter, we saw double-digit growth in both our pro and DIY customers, and while DIY sales grew faster than pro sales, our pro business posted the strongest growth we’ve seen all year. As we look at our different pro cohorts, growth with our smaller pro customers has been consistent with strong double-digit growth every month of the year. Growth with our larger pro customers is healthy and accelerated from the second quarter; however, some large pros still face headwinds related to the current operating environment, including some customers being hesitant to invite pros into their homes. Turning to our DIY customers, we continue to see unprecedented levels of engagement from both new and existing customers across a variety of home improvement projects, and importantly as these customers complete a project, they are gaining the confidence to tackle their next project and re-engage with The Home Depot. During the third quarter, we saw customers take advantage of an extended selling season for our garden seasonal categories, resulting in significant growth in categories like hardscapes, soils, riding mowers, and outdoor power equipment; however, garden and seasonal were not the only projects our customers were working on. If we exclude our garden departments from our third quarter results, our comp was still north of 20%. We saw customers working on a variety of projects across their home in categories like garage and organization, ceiling fans, vanities, and power tools, all posting comps well above the company average. The customer engagement we are seeing was also evident in our annual Halloween event. During the third quarter, we hosted our most successful Halloween event with both in-store and online offerings. Customers responded to our larger assortment of animatronics, inflatables, and yard décor, as evidenced by our 12-foot giant skeleton that sold out before October, helping drive a record level of sell-through for the event. As we turn our attention to the fourth quarter, we are excited about the upcoming holiday season and believe that we are in a great position for continued customer engagement. During the quarter, we will be hosting our annual holiday, Black Friday, and gift center events; however, this year they are going to look a little different as we remain committed to prioritizing the health and safety of our customers and associates and promoting a safe shopping environment. We’ve adjusted our Black Friday event this year to cover an extended period of time and not just focus on one day. Additionally, for both our Black Friday and our gift center events, we’ve reorganized how we place and stage our product to assist with social distancing. For example, we’ve reduced the amount of product displayed on our front racetrack and we’ve created more space for our gift center presentation. We’ve made deeper buys on fewer SKUs to bring great values to our customers, and we’ve also included some of our core SKUs in our event which will help with replenishment as we continue to see strong comps. For example, featured in our gift center and Black Friday events this year, our exclusive power tool products from our industry-leading assortment of Milwaukee, Makita, DeWalt, Rigid, Ryobi, and more. This year, we are especially excited about the launch of Ryobi 18-volt ONE+ HP brushless tools. These tools have been designed from the ground up to serve our DIY and pro customers with more features and performance than ever. HP tools are up to 20% lighter and 30% more compact while delivering improved power and durability with brushless motors. The Ryobi ONE+ platform has more than 100 million batteries in our customers’ homes and job sites today, and this new HP line-up brings a strong pipeline of future innovation to the more than 175 Ryobi ONE+ tools in the marketplace today. Our Black Friday and gift center events kicked off a little over a week ago, and we are thrilled with the early results.

Thank you Ted, and good morning everyone. We appreciate everyone joining the call today and we hope you and your loved ones are safe and healthy. In the third quarter, total sales were $33.5 billion, a 23.2% increase from last year. Foreign exchange rates negatively impacted total sales growth by approximately $100 million. Our total company comps were positive 24.1% for the quarter with positive comps of 21.8% in August, 27.8% in September, and 23% in October. Comps in the U.S. were positive 24.6% for the quarter with positive comps of 22.6% in August, 28.5% in September, and 23% in October. Our comps in August and September of this year were impacted by a shift in our Labor Day event. This year, our Labor Day event fell in fiscal September, and last year it fell in fiscal August. If we adjust for this shift, our monthly comps in the U.S. would be 24.7% in August and 26.4% in September. All 19 of our U.S. regions, as well as Canada and Mexico posted double-digit positive comps in local currency. In the third quarter, our gross margin was 34.2%, a decrease of approximately 30 basis points from last year. Gross margin was negatively impacted during the quarter by several factors, including product mix and pressure from shrink. Mix pressure from lumber alone negatively impacted gross margin by approximately 35 basis points in the third quarter. The decline in gross margin was partially offset by the benefit of reduced promotional events during the quarter. During the third quarter, operating expenses were approximately 19.7% of sales, representing a decrease of approximately 30 basis points compared to last year. Let me take a moment to comment on a few of our expense items. First, during the quarter we continued to support our associates with enhanced benefits in response to COVID-19 which totaled approximately $355 million, resulting in approximately 105 basis points of expense de-leverage. As you heard earlier from Craig, through the end of the third quarter we have spent approximately $1.7 billion on enhanced associate pay and benefits in response to COVID-19. We’ve also made the decision to transition from our temporary weekly bonus program to permanent compensation enhancements for our frontline hourly associates. This will result in approximately $1 billion of incremental expense on an annual basis. We began making these adjustments in the third quarter and will continue to make the majority of them in the fourth quarter on a market-by-market basis. Second, we incurred approximately $60 million of operational COVID-related expenses, including personal protective equipment for our associates and customers and enhanced cleaning of our stores, resulting in approximately 20 basis points of operating expense de-leverage. Third, we recorded expenses related to our strategic investment plan of approximately $325 million, an increase of approximately $48 million compared to last year. Finally, during the third quarter we showed strong expense control in other areas of the business and drove approximately 155 basis points of expense leverage. Included in this 155 basis points of leverage is approximately 70 basis points of pressure driven by accrued bonus expense primarily related to our current outperformance for our biannual store success sharing program and store and field-based management bonuses for the second half. The success sharing and store and field-based management bonuses are in addition to the $1.7 billion of enhanced pay and benefits in response to COVID-19. Our operating margin for the third quarter was approximately 14.5%, flat with the same period last year. Interest and other expense for the third quarter grew by $49 million to $329 million due primarily to higher long-term debt levels compared to one year ago. In the third quarter, our effective tax rate was 24.1% compared to 24.5% in the third quarter of fiscal 2019. Our diluted earnings per share for the third quarter were $3.18, an increase of 25.7% compared to the third quarter of 2019. At the end of the quarter, merchandise inventories were $16.2 billion, an increase of $444 million versus last year, and inventory turns were 5.9 times, up from 5 times from the same period last year. Moving onto capital allocation, our long-term principles for how we think about deploying capital have not changed. After investing in the business, it is our intent to return excess cash to shareholders through a balanced approach of paying a healthy dividend and through share repurchases. Let’s take a moment to talk about our first priority. We are committed to reinvesting in the business to drive growth faster than the market, and the acquisition of HD Supply strategically positions us to drive accelerated sales growth in a highly fragmented MRO space. Under the terms of the merger agreement, a subsidiary of The Home Depot will commence a cash tender offer to purchase all outstanding shares of HD Supply common stock for $56 per share for a total enterprise value, including net cash, of approximately $8 billion. The closing of the tender offer is subject to customary closing conditions, including regulatory approvals and the tender of a majority of the shares of HD Supply common stock then outstanding on a fully diluted basis and is expected to be completed during The Home Depot’s fiscal fourth quarter, which ends on January 31, 2021. We plan to finance the acquisition with cash on hand and new debt. We also expect the transaction to be accretive to EPS in fiscal 2021 with potential for significant shareholder value creation over the long term. During the quarter, we invested approximately $470 million back into our business in the form of capital expenditure and paid $1.6 billion in dividends to our shareholders. Computed on the average of beginning and ending long-term debt and equity for the trailing 12 months, return on invested capital was approximately 41.6%, down from 45.1% in the third quarter of fiscal 2019. This decrease primarily reflects our decision to temporarily enhance our liquidity position, including the suspension of our share repurchase program back in March. Turning to the macro environment, the strong demand we’ve seen has continued. Comps have slightly accelerated in the first two weeks of November, reflecting an earlier start for our Black Friday and holiday events versus last year. We are encouraged by consumer sentiment and consumption trends which show home improvement receiving more than its historical share of consumer spending. Housing metrics are significantly stronger than when we entered this crisis. Turnover is rising, we see continued growth in household formation, and home prices are appreciating as inventory on the market hovers near record lows. Our customers tell us their homes have never been more important and they intend to continue their investment in the improvement of their homes. While the current demand environment is strong, it is important to remember that we are not through the COVID-19 pandemic and we do not think it is prudent to extrapolate recent trends to predict future performance. Our main focus remains on meeting our customers’ needs while prioritizing safety, and we believe that the investments we have made over the last several years have uniquely positioned us to capture market share regardless of the environment. Thank you for your participation in today’s call, and we are now ready for questions.

Thanks, good morning guys. I know you mentioned about the slight acceleration quarter to date, but I was wondering if what you’ve seen in areas where COVID cases have spiked, what do you think the business looks like as it gets colder and outdoor DIY gets tougher? You mentioned the low 20% ex-gardening comp - do you think that’s a good proxy for the underlying trend, or would you expect the large pro to continue to improve and provide a benefit?

Chris, the first comment would be we see no correlation in the business as it relates to COVID cases. Our performance overall was actually really tight geography-wise, and we saw broad strength across the store. As Ted mentioned, we had an extended season because of the weather in garden, but we were extremely pleased with the performance outside of our outdoor categories, so we feel good about that. We’ve seen the pro continue to recover and the large pro recover.

Got it, and then a couple follow-up questions on the investment outlook. It sounds like you’re making progress on the store investments again. Will you end up on track versus the original plan, and what do you think about the degree at which investment dollars and SG&A are down year-over-year in 2021? Then now that you have HD Supply, was curious how many of the 150 or so new buildings that you’ve planned to build under the current investment plan related to the MRO, and does the acquisition of HD Supply impact the outlook for building those buildings and capex related to that? Thank you.

With respect to the investment outlook, as we’ve said in the past, we have deferred certain investments that principally relate to investments made inside the store. A large number of those investments remain deferred. We started the year with a capex plan of approximately $2.8 billion. We have deferred less than half a billion dollars, so while I won’t give you an exact number, I would say we will see deferral of, call it $300 million to $400 million from our original plans in 2020. Some of that may push into 2021, and we’ll update you as time goes on; but I would say that overall, 2021 is going to be very similar to 2020 in terms of capex.

And as it relates to the HD Supply asset base in total, obviously we’ll take a look at that and we’ll evaluate the combined asset base once this gets approval, and we’ll move forward with what we think the best leverage point is to serve our customers and grow in the MRO space, which is a $55 billion fragmented market that we’re pretty excited about.

If I could just take a minute, Chris, on what we’ve accomplished, while we did push a bit into 2021, we’re just thrilled that we are finishing the investment in our new look and feel of the store. Our sign packages will be done in all U.S. stores this year - I think that is probably the first time the brand standard across all the United States stores has been the same, maybe since our first two stores opened in 1979. We have completed all of our self checkout refreshes, we’ve added storage to most of our stores for online pick-up, we’ve implemented electronic sign labels in all our appliance departments, completely refreshed our color wall experience in our paint department, we’ve completed the tool corral by brand standards in those leading brands in our tool business, and we’ve also taken that to our outdoor power equipment and we’ll be done early next year resetting all our outdoor power equipment, again by those battery platforms that are leading brands in the industry. We’ve completed a ton of work despite some of the setbacks with COVID this year. The team did a terrific job getting all that work done.

So then Richard, I know you mentioned capex deferring in, but I think originally ’21 was from an opex perspective a source of funds - you know, incremental investment dollars down year-over-year versus being up the past few years. Do you still expect those investment dollars in opex to be down in ’21?

They’ll be flat to down in ’21, those specific expense dollars with respect to the investment program that continued alongside the deferred spending in ’20.

Good morning guys. You did talk about product mix as the primary factor for the gross margin decline. Was there much of an impact on gross margins from channel mix as e-commerce has outpaced store growth, or was it really all on the product side or were there any other factors we should be mindful of? Thanks.

Nothing in particular, Scot. By far the big driver was the lumber penetration, the lumber mix, as strong as that business was.

So, as we consider the future, Ted, should we think about achieving a more balanced mix and possibly returning to stable gross margins? Is that the correct way to approach it in terms of timing?

I think at this point with the level of uncertainty in the environment and the dynamics in the business today, we wouldn’t give any forward expectations with respect to margins. We’re running a very healthy business. We run it on a portfolio basis. You bring up channel mix - we run this as a portfolio and have for many, many years, and you’ve seen the stability in our gross margin reflects that. Remember that over 60% of sales that are purchased on our digital assets are picked up in the store and have an identical mix in essence to our store mix, so that’s where we stand. We’re very comfortable with the mix of business we see.

Okay, very helpful. Thanks guys.

Good morning. Thanks a lot for taking my question. There’s a lot of moving pieces with Home Depot’s longer run earnings power between any changes in consumer behavior, the incremental costs that you’re paying your associates, the acquisition of HD Supply, channel mix, so relative to the 14% operating margin expectation you put out previously, recognizing that that’s sale expectation and you’re not providing longer run guidance, do you think the business can now earn a higher, lower, or about the same margin, knowing what you know today than what you had thought previously?

Well, I’d say a lot is dynamic, but many things stay the same. I think we have executed exceptionally well in terms of expense management throughout the year, and I think you can expect that from us in the future. I think one thing I will just make sure that we clarify is how the shape of our investments to support our associates goes from 2020 into 2021. As we said, our expenses through the first three quarters of the year in support of our associates totaled approximately $1.7 billion. We are transitioning the nature of those investments into permanent wage investments during the fourth quarter, so if you think about the fourth quarter, we’re not going to quite be down to that billion dollar annualized run rate as some of these programs leak into the beginning of the fourth quarter. We will be lower than the third quarter run rate, but add it to $1.7 billion and say that 2020 will likely end at a total of $2 billion of investments in our associates. Of that $2 billion, only $1 billion will remain in our cost base in 2021, so I think that’s the most important fact with respect to our cost base. I’d like to make sure we clarify that.

And Michael, the only other comment I’d add to that is everything that we’ve been doing through our investment program is to try to position The Home Depot to grow faster than the market on a consistent basis no matter what the operating environment is, and to deliver incremental op margin dollars as a result. That’s our focus. That’s what we’re trying to get done.

Great, that’s a good segue to my second question, which is recognizing that it’s very hard to prognosticate how demand for overall home improvements is going to shape up next year, if you had to make an estimate, what percentage of your categories or your SKUs do you think you’ll be ordering inventories down next year?

First of all, the inventory planning for The Home Depot is on a very short cycle. We plan really week to week. We release orders every single day, and 70% of what we purchase is domestic goods and comes from short lead time-type performance, so we’ll manage that on a day-to-day, week-to-week basis based on what we see in demand, and really we’re not looking to extrapolate anything at this point from current performance. Our whole focus is on being able to be flexible and agile and adjust accordingly.

Okay, I guess the heart of the question was do you think home improvement demand is going to grow next year?

Look, the only thing I can tell you at this point is when we talk to our customers and we do work on surveys, the customer tells us that the home has never been more important, maintenance in the home is going up as people spend way more time in their home, and they tell us there’s a significant percentage of folks that say they are going to do a project within the next six months, so everything that we see at this point in terms of customer feedback would suggest they’re going to continue to invest in their homes.

There is a significant amount of uncertainty in the current environment, influenced by various macroeconomic factors. However, as Craig mentioned, the home improvement sector remains a strong area of investment. When customers observe an increase in their home value, they are more likely to put money into home projects. Due to the uncertainty surrounding the macro environment, we cannot provide specifics about 2021 at this time. Nevertheless, we believe there is considerable confidence among our customers regarding home improvement.

Understood. Thank you so much, and have a really nice holiday.

Thank you.

Hi, thanks very much. Just a couple of questions. I guess I’m wondering with respect to your inventory, following up on Michael’s question, do you actually think you maybe lost sales with inventory that was a little too lean, and then wondering how to think about inventory for the fourth quarter? Then the second question I had is you obviously have more and more information on your DIY customer than you’ve had for the last several quarters, given the e-commerce penetration. I’m wondering if you could give a little more color on what the general demographic is looking like now and what the biggest shift or changes that you’ve seen from an age or income cohort.

On inventory, it’s difficult to determine some of the lost sales opportunities we faced. This was likely more of a Q2 issue for us due to our cautious approach when the pandemic began. We limited customer hours and counts, and reduced inventory. However, our merchandising, supply chain, sourcing, and transportation teams have worked hard to get products into the store. As I mentioned earlier, we improved our in-stock levels each week of the quarter. Our inventory increased by over $400 million compared to last year, marking our first year-over-year growth this year. In terms of volume, our accounts payable demonstrates that we have procured over $3 billion worth of goods since our lowest point. While our in-stock levels are still not quite where we want them, we have made significant improvements. The efforts of our merchants, even though we still have some work to do, have ensured we are offering the right products in the store that customers want by collaborating with our suppliers and updating plan-o-grams. Regarding online trends, our online business is performing superbly, and it's important to remember that over 60% of our goods are picked up in-store. Our interconnected business surged by 80%, accounting for 13% of our overall business, translating to nearly $2 billion in quarter-on-quarter online sales growth. Our visits have increased significantly across mobile and desktop platforms, and our conversion rates have improved despite high growth in app and mobile web, which usually see lower conversion rates. Our app downloads and active users are both up, as are our order numbers. Customers setting up accounts with Home Depot allow us to know them better, and Millennials are very engaged with our brand. Our professional customers and B2B website are also seeing record engagement. In summary, we currently have a strong interconnected digital environment at Home Depot.

Great, thanks very much.

Hi, good morning. Thanks for taking my question. I know you gave your comments on HD Supply, but I wonder if there was any more color you could give on the source and magnitude of any synergies, and how much debt might be taken or raised for the deal?

We’re really excited about what the combination of these two MRO businesses will bring to our customer. We think we’ve got the opportunity to create significant shareholder value creation through that combination. We’re not going to talk about the degree of accretion, but we’re confident that we’ll see earnings per share accretion in 2021.

Kate, we are thrilled about the potential here. If you consider the approximately 130 million occupied households in the U.S., around 80 million are owned homes, mostly single-family, while about 50 million are rentals. Of those, approximately 30 million operate in the multi-family sector. This represents a vast opportunity for The Home Depot to expand not just in maintenance, repair, and operations, but also by establishing stronger relationships with customers in this area. This will enable us to participate in capital improvements for those facilities, which we are keenly focused on. We are very enthusiastic about the opportunities available in the maintenance, repair, and operations space.

Okay, thank you. I wonder if I could ask an unrelated follow-up question, just in regards to your seasonal business that you do in the fourth quarter. Is there any way to dimensionalize or size how big of a business that is becoming for you in the fourth quarter?

I’m trying to remember off the top of my head. We talk about seasonal breakout of outdoor categories. The fourth quarter is the lowest of the year, right Ted?

Yes, so generally it’s been shifting a little bit this year given the extended garden season and as engaged as customers have been. But we usually think of Q4 as low 21%-ish penetration of what we would deem outdoor business, and that very much is the low point with Q2 traditionally being the high point - think of mid-30s, so that’s sort of the range of changes in the business.

Thank you.

Thank you, good morning everyone. First, a question for Richard. You mentioned a few macro factors, and I’m trying to understand your perspective. It seems like you might be more optimistic about these than in previous calls. Can you provide any insight into what these factors could look like for 2021 in terms of magnitude, such as home price appreciation, housing turnover, and so on?

In my earlier comments, I said we’re really pleased with the current level of consumer sentiment and consumption in the economy. I’m not going to make a prediction on where those macroeconomic levers go in the future.

The only thing, Simeon, that I would say is I think the last number I saw is somewhere in the 2.7 months of supply in housing, and the historical average on that is six months, so you’d have to believe that’s going to continue to hold up home values. I think home value improvements have been the surprise this year

I think it’s a positive housing environment. We’re not extrapolating that into expectations for sales, principally because of the uncertainty in the macro environment. We are optimistic and current conditions are certainly favorable for home improvement, but there is uncertainty. We’ll learn a lot in the fourth quarter.

Okay, fair enough. Then for my follow-up regarding the results by customer type, the pro customers are returning. Can you discuss the backlog you're observing? Are you seeing a return to normal for indoor jobs? I believe this has been asked before, but how is the transition from outdoor to indoor jobs progressing?

Simeon, you’re right - the pro has been coming back. We see double-digit comps in pro, we did last quarter as well. Small pro is leading the large pro. We’ve seen that large pro really strengthen in the larger metro markets, and our services business, if you look at that as a benchmark to pro business, we have one of the larger backlogs of to-be-installed sales jobs that we’ve ever seen, and as you’d imagine, a lot of this is special order goods, so getting the bespoke special order made and shipped to the particular job and then getting the labor to install that job continues to be a bit of a pressure, and more so in certain markets, leading to that large backlog. But if what we’re seeing our services business translates to what the larger pros are also seeing, that would be a sizeable backlog.

Hey, good morning. Great quarter. Can you talk about where you are in the supply chain build-out that you’ve outlined over the past few quarters, and maybe how much of a delay COVID’s caused and the degree to which you can make that up in ’21?

Sure. Largely COVID hasn’t had a big impact, and I’ll let Mark comment on where we are.

Yes, good morning - Mark Holifield here. We’ve continued to open facilities through the pandemic. I’ve been incredibly impressed that the team has been able to keep our program on track in terms of the one supply chain initiative. In Q3, we opened up about 11 MDOs - those are market delivery operations. We now have three flatbed delivery centers open and we’ve got a very solid pipeline for ’21 that we’re working, so we’re very much on track with the one supply chain initiative.

Okay, that’s great. Then just maybe one for Richard. You’ve spoken a lot over the past year about the ongoing margin headwind from shrink, and I realize maybe you’ve seen limited in your ability to do some of the inventory, the physical inventories, but where are we in that life cycle? It seems like it was an issue again here in the third quarter. Any line of sight on when you think the shrink could flip from a negative to a positive?

Well, at the beginning of the year, we said that impacts from our initiatives weren’t really going to be seen until the year 2021. It takes time to roll these out. We did anticipate at the beginning of the year that we would see pressure on a year-over-year basis. The results through the third quarter have been essentially consistent with our original expectations.

Hi, thanks. I have a couple of questions. First, since Halloween has been strong, does that usually serve as a predictor for Christmas or even Thanksgiving? In other words, if people are purchasing large decorations for Halloween, does that suggest similar spending for Christmas? I'm not sure if you have significant Thanksgiving sales, but does that give us any indication of what to expect in the fourth quarter?

I believe the performance of our Halloween business aligns closely with what we have typically observed in storm markets. In the past, when a hurricane occurred, we thought we needed to reduce our inventory of products because customer interest would shift, and we would require space for rebuilding items. However, customers indicated that they were actually seeking some level of normalcy and wanted to purchase those products from us. This observation aligns with our expectations, as we have seen strong results during our holiday programs, with Halloween being our best event to date. We foresaw this demand early in the year, especially since these products are planned for purchase well in advance, and we anticipated that customers would want to engage in holiday shopping and adjusted our inventory accordingly.

Do you have that same expectation for Christmas? Did you purchase that similarly?

Yes, that’s what I mean. We bought into the whole holiday décor for the entire season - you know, Halloween all the way through Christmas, because we anticipated the customers were going to want some kind of normalcy in their life.

The holiday set has been set now for Christmas for several weeks in the store now, and as I said, we’re very pleased with the early engagement in sales in the program.

Thank you, Christine, and thank you everybody for joining us today. We look forward to speaking with you on our fourth quarter earnings call in February.