Home Depot Inc (HD) — Q1 2022 Earnings Call Transcript

Thank you, Christine, and good morning everyone. Welcome to Home Depot’s first quarter 2022 earnings call. Joining us on our call today are Ted Decker, CEO and President; Jeff Kinnaird, 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 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 Ted, 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 press 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 Ted.

Thank you, Isabel, and good morning everyone. We appreciate you joining us on the call this morning. Fiscal 2022 is off to a strong start. Sales for the first quarter were $38.9 billion, up 3.8% from the same period last year. Comp sales were up 2.2% from the same period last year, and our U.S. stores had positive comps of 1.7%. Diluted earnings per share were $4.09 in the first quarter, up 6% from $3.86 in the first quarter last year. The strong performance in the quarter is even more impressive given the robust performance we were comparing against last year. A year ago, we delivered the highest first quarter sales in company history as we benefited from outsized demand for home improvement goods, favorable weather, and government stimulus. This year, we achieved a new high watermark for first quarter sales as strong demand for home improvement goods continued despite a slower start to spring in many parts of the country. Delivering such strong results on top of last year’s historical growth is a testament to our dedicated associates. They are maintaining their relentless focus on our customers while continuing to navigate the ongoing pandemic, global supply chain disruptions, inflation, and a tight labor market. We are also thankful for the strength of our relationships with our supplier and transportation partners. Our respective teams are working tirelessly to flow product to stores and distribution centers as quickly and efficiently as possible. I would like to thank them for their ongoing support as we continue to navigate a challenging and dynamic environment. The demand seen in the first quarter exceeded our expectations. The home improvement consumer remains engaged. Customers continue to tell us that their homes have never been more important and project backlogs are very healthy. We believe that the medium to longer-term underpinnings of demand for home improvement have never been stronger. We are thrilled with our Pro performance in the quarter driven by underlying strength in project demand. We continue to invest in an ecosystem of capabilities, including enhanced fulfillment options, a more personalized online experience as well as other business management tools to drive deeper engagement with our Pro customers. And we believe our efforts are resonating. We are navigating a unique environment, but we believe we have the tools, the team, and the experience to effectively manage through. While we don’t know how inflation might impact consumer behavior going forward, we are closely monitoring elasticities in customer trends across our respective categories and geographies and remain encouraged by the underlying strength we see in the business. Jeff will provide a bit more color about what we have observed from a category and big-ticket standpoint in a moment. And while inflation impacted our average ticket increase this quarter, it wasn’t the only impact. As we have seen over the past several years, our customers continue to trade up for premium innovative products. In March, we held an in-person store manager meeting for the first time in 3 years. One of the many highlights of that week is our Product Walk, where vendors showcased the latest in product innovation. What I can share with you is that the level of innovation across the business is robust. In fact, almost 90% of the products on display this year are entirely new SKUs to The Home Depot. So, the pipeline for innovative products remains very strong. Beyond product and innovation, my biggest takeaway from the store managers’ meeting is how energized the team is. The exceptional execution our associates delivered over the last few years hasn’t been easy, but our teams have consistently risen to the challenge. We frequently survey our associate base and are pleased that engagement and morale remain high. Last quarter, we talked about our customer-backed approach to remove friction at every touchpoint of the shopping experience. To that end, we recently announced that Matt Carey has been named Executive Vice President of Customer Experience. In this newly formed role, Matt will partner across the business to help design and develop new and innovative solutions to drive a seamless experience for our customers. As Matt transitions to this new role, we also announced that Fahim Siddiqui has been promoted to Executive Vice President and Chief Information Officer, where he is responsible for all aspects of our technology development and strategy. These moves will help drive further alignment around our interconnected retail strategy, which will allow us to enhance what we believe is the best experience in home improvement. Richard will talk to you in a few minutes about our guidance for the remainder of the year, but the first quarter certainly got us off to a great start. We are also encouraged by the continued strength we see in the business through the first two weeks of the second quarter as spring is breaking more broadly across the U.S. Our team continues to focus on what is most important: our associates and customers. Our merchants, store and met teams, supplier partners, and supply chain teams did an outstanding job delivering value and service to our customers throughout the quarter. I’d like to close by thanking them for their dedication and hard work. With that, let me turn the call over to Jeff.

Thank you, Ted, and good morning everyone. I want to start by also thanking all of our associates and supplier partners for their ongoing commitment to serving our customers and communities. As you heard from Ted, during the first quarter, we continued to see outsized demand for home improvement projects and strong execution from our teams and supplier partners. Turning to our comp performance during the first quarter, 11 of our 14 merchandising departments posted positive comps, led by plumbing, building materials, millwork, and paint. During the first quarter of this year, we saw double-digit negative comps in our seasonal departments due to the late arrival of spring. Appliances posted slightly negative comps. Adjusting for a shift in event timing, appliance comps would have been positive for the quarter. Excluding seasonal categories, we are thrilled with the broad-based strength across the business and healthy project demand. During the first quarter, our comp average ticket increased 11.2% and comp transactions decreased 8.4%. The growth in our comp average ticket was driven primarily by inflation across several product categories as well as demand for new and innovative products. Comp transactions reflect the late start to spring and the anniversarying of stimulus. And on a 2 and 3-year basis, both comp average ticket and comp transactions were healthy and positive. Inflation from core commodity categories positively impacted our average ticket growth by approximately 240 basis points during the first quarter, driven by inflation in lumber, copper, and building materials. Lumber prices remained volatile during the quarter. As an example, framing lumber peaked at approximately $1,300 per 1,000 board feet during the first quarter before falling over $400 to approximately $900. Big-ticket comp transactions, or those over $1,000, were up 12.4% compared to the first quarter of last year. We saw big-ticket strength across many Pro-heavy categories like pipe and fittings, gypsum, and fasteners. During the first quarter, Pro sales growth outpaced DIY. On a 3-year comp basis, both growth with our Pro and DIY customers were consistent and strong. We’re encouraged by the momentum we are seeing with our Pros, and they tell us that their backlogs are strong. During the quarter, we saw many of our customers turn to Pros to help them with larger renovation projects. This can be seen in the double-digit comp performance of our building materials and plumbing departments as well as in certain kitchen and bath categories like in-stock kitchens, tubs and showers, and countertops. We also saw double-digit growth in our kitchen and bath installation business. This underscores the strength of project demand we are seeing across the business. Sales leveraging our digital platforms increased 3.7% during the first quarter. We are very pleased with the performance of our digital assets as we delivered the highest sales dollar volume in our company’s history. For those customers that chose to transact with us online during the first quarter, more than 50% of our online orders were fulfilled through our stores, a testament to the power of our interconnected retail strategy. As you heard from Ted, we are very excited about the innovation we are introducing across the business. We continue to lean into products that simplify the project, saving our customers time and helping them take on more jobs. One example is our Viega ProPress line of plumbing. Your plumbers can create a watertight copper connection in 60% less time than a traditional copper solder job. Viega ProPress fittings require no flame and work in wet applications. Viega is the market leader in this space and is exclusive to The Home Depot in the big box channel. In paint, working with Masco and PPG, we have put together a formidable Pro paint lineup that is resonating with our Pro painters. Masco’s bare-formulated, Pro-specific offering continues to perform well in our stores. In the first quarter, we added PPG Speed High series. This Pro-specific paint that is specified in the vast majority of multi-housing large commercial jobs, giving us an entry point with our Pro painter for larger scale projects. This is now exclusive to The Home Depot in the big-box channel. In spray paint, we launched PPG’s GlitonMaxFlex spray paint. PPG’s proprietary industrial-based technology is uniquely flexible, covering and preserving the original look and feel of a wide range of services, including leather and fabric. With Masco, we have expanded their exclusive offerings to spray paint, caulks and sealants, as well as interior stains. Now, let’s turn our attention to spring and the exciting lineup of products we have for our customers. We are thrilled to showcase our new product offerings across our seasonal categories. We are seeing an industry-wide shift from gas-powered to battery-powered mowers. Demand for cordless mowers has never been stronger, and our lineup of battery-powered mowers, including RYOBI’s 80-volt zero-turn riding mower, Milwaukee’s new MAT and fuel walk mower, DEWALT’s FlexVolt walk mower, and Makita’s LXT walk mower is unmatched. This lineup offers something for everyone, building on an ecosystem of innovative tools powered by the same battery platforms. In patio, we have continued to add optionality. Today, customers can create their perfect patio set to transform their outdoor living space through an enhanced online experience. We expanded our assortment of grills. We are particularly excited about our new Traeger Timberline XL, which provides a larger cooking surface, easier maintenance, and a side burner to enhance your cooking needs. Our new Nivo Nexgrill is the first propane-powered grill controlled via an app or mobile device. The app displays timers, grill temperatures, and internal food temperatures, providing a consistent cooking experience for hours. We are also excited about our Live Good program. Each year, our merchant provides customers with new and improved varieties to enhance the overall garden experience. We expanded our disease and drought-resistant product offerings, which provide superior performance. For example, beacon impatiens are disease-resistant, and our easy wave petunias now require less sunlight and last up to 6 weeks longer. Adding these new hardier plants allows our customers to have a vibrant and healthier garden for longer. Our Live Good Cabo looks incredible. We are ready for spring with everything from shrubs to a variety of flowers and edibles for every type of gardener. And with that, I turn the call over to Richard.

Thank you, Jeff, and good morning everyone. In the first quarter, total sales were $38.9 billion, an increase of $1.4 billion or 3.8% from last year. During the first quarter, our total company comps were positive 2.2%, with positive comps of 12.9% in February, essentially flat in March, and negative 2% in April. Comps in the U.S. were positive 1.7% for the quarter, with positive comps of 12.5% in February, negative 0.3% in March, and negative 2.9% in April. Recall that March reflects the anniversarying of stimulus, and April was impacted by a delayed spring this year. Our results this quarter were once again driven by continued strength across the business. Spring temperatures broke late in all our geographies but particularly impacted some of our northern regions. In local currency, both Mexico and Canada posted comps above the company average. In the first quarter, our gross margin was 33.8%, a decrease of approximately 20 basis points from last year, primarily driven by supply chain investments and pressure from lumber. We continue to successfully offset significant transportation and product cost pressures while maintaining our position as the customers’ advocate for value. During the first quarter, operating expense as a percent of sales remained essentially flat to last year at approximately 18.6%. We were pleased with our operating expense performance during the first quarter, which reflected planned increases in wages and the planned rollout of investments designed to drive efficiency in our store environment. Our operating margin for the first quarter was 15.2% compared to 15.4% in the first quarter of 2021. Interest and other expenses for the first quarter increased by $36 million to $369 million due primarily to higher long-term debt levels than one year ago. Our effective tax rate was 23.9% in the first quarter of both fiscal 2022 and 2021. Our diluted earnings per share for the first quarter were $4.09, an increase of 6% compared to the first quarter of 2021. Our total store count at the end of the quarter was 2,316, and selling square footage was 240 million square feet. Unfortunately, during the quarter, we lost a store in San Jose, California, due to a fire. Thankfully, no one was injured, and all of our associates have been reassigned to other nearby stores. The team has done a fantastic job continuing to serve our customers in the area. At the end of the quarter, inventories were $25.3 billion, up $6.1 billion compared to the first quarter of 2021 and inventory turns were 4.4x, down from 5.5x last year. This level of inventory reflects outsized demand for home improvement projects, actions taken to improve in-stocks, and the impact of the delayed start to spring. While our in-stock position is not back to pre-pandemic levels, it is the healthiest it has been since the pandemic began. Turning to capital allocation, after investing in our business and paying our dividend, it is our intent to return excess cash to shareholders in the form of share repurchases. As we have mentioned on previous calls, we plan to continue investing in our business with CapEx of approximately 2% of sales on an annual basis. We also plan to maintain the flexibility to move faster or slower, depending on the environment. During the first quarter, we invested approximately $700 million back into our business in the form of capital expenditures. And during the quarter, we paid approximately $2 billion in dividends to our shareholders, and we returned approximately $2.25 billion to shareholders in the form of share repurchases. Computed on the average of beginning and ending long-term debt and equity for the trailing 12 months, return on invested capital was approximately 45.3%, up from 45.1% in the first quarter of fiscal 2021. Now I will comment on our updated guidance for fiscal 2022. As you heard from Ted, we are very pleased with the strong performance we saw during the first quarter, which surpassed our expectations. Today, we are raising guidance for 2022. We now expect sales growth and comp sales growth of approximately 3% for fiscal 2022. We expect comps to be stronger in the first half of the year than the second half. We expect our fiscal 2022 operating margin to be approximately 15.4% for the year, and we expect mid-single-digit percentage growth in diluted earnings per share compared to fiscal 2021. While a number of uncertainties remain, we feel confident that we will be able to continue to manage through a dynamic environment while growing faster than our market and delivering exceptional shareholder value. Thank you for your participation in today’s call. And Christine, we are now ready for questions.

Good morning. Thanks for taking my question. Understanding that your overall results were very strong, are you seeing any signs that either inflationary pressure, rising interest rates, or simply home improvement fatigue are starting to have a negative impact on the business? And does it give you pause that comp transactions were down high single digits in the quarter as maybe a leading indicator that the business could soften from here?

Thanks, Michael. So a lot in that question. As we’ve said, we had a great in comp-to-comp from last year. As you recall, Q1 last year was our highest first quarter sales and our highest comp at 31% in a very long time. So as we went into this year, we were understandably conservative as to how we thought Q1 would pan out. But in fact, we saw that the consumer is very engaged. The Pro is very strong, and we posted those results with a very delayed spring. In Q2, it’s early, but we’re off to a strong start. We also think that the fundamentals—these are all very short-term comments, but the fundamentals for home improvement remain incredibly supportive. So when you look at inflation, interest rates, and any fatigue, if I take those in order, inflation is definitely higher than we thought. If you recall, last year, we thought we’d have about 5% growth in ticket. We are seeing much higher than that with 11% in ticket. A lot of that is inflation-driven. But our customers are resilient. We are not seeing the sensitivity to that level of inflation that we would have initially expected. On interest rates, Richard can talk a little more about interest rates and housing, but we have not seen that impacting our business. The nature of housing—again, Richard will cover in greater detail. And then the fatigue—we’re not seeing at all. We look at PCE and shifts in PCE, and while we are seeing some shift to services in general, we’re not seeing a big shift out of home improvement, and we’re not seeing fatigue with our customers given repair/remodel intent and activity still tracking at the highest levels we’ve recorded. Regarding transactions, we always look for a balance of ticket and transactions, but again, with these inflation rates, it’s a very unique year in inflation, and ticket is higher than the norm for sure. But again, the consumer is holding strong. And Richard, why don’t you touch on the interest rates?

Sure. Just to start with who our customer is, you need to keep in mind our customers are homeowners. Virtually all sales to our Pro customers are on behalf of a homeowner, and over 90% of our DIY customers are homeowners as well. So let’s talk about home improvement demand and what drives it. Over our history, we’ve seen that home price appreciation is the primary driver of home improvement demand. When your home appreciates in value, you view it as a smart investment and spend more on it. Looking at what’s happened to home prices, we’ve seen appreciation of over 30% over the last 2 years. In fact, home equity values have increased by 40% or over $7 billion just in the last 2 years. The homeowner has never had a balance sheet that looks like this. They’ve seen the price appreciation, and they have the means to spend. Surveys show our customers tell us that their homes have never been more important, and their intent to do projects of all sizes has never been higher. Our Pros say the same thing about their backlogs. Regarding interest rates, it’s important to remember that our addressable market is the 130 million housing units occupied in the U.S., plus an additional 40 to 50 million more in Canada and Mexico. Of those 130 million housing units, only about 4% or 5% are sold in any given year. That means that over 95% of our customers are staying in place. They are not shopping for a mortgage. Nearly 40% of those homes are owned outright. Of those who have mortgages, about 93% of them are fixed rate. So when you think about our addressable market, the vast majority aren’t really paying attention to mortgage rates. Interestingly, when they do look at moving, they’re often more tempted to stay in their low fixed-rate mortgage and remodel their home instead. So these locked-in low mortgages may be beneficial for home improvement.

That’s all very helpful information. And in light of that, I hate to follow-up with such a negative question, but out of an abundance of conservatism, I’ll ask. Historically, Home Depot has talked about a 20 basis point margin change for every 1% increase or potential decrease in same-store sales. Recognizing that the environment hasn’t necessarily been business as usual for quite some time, if we want to take a conservative expectation on the overall macro, would it be reasonable to think that if comps were to decline 1%, that this would translate to a 20 basis point decline in operating margin, or has the business just advanced so much over the last few years through the deployment of technology, a greater sophistication of supply chain, and other factors that perhaps the deleverage wouldn’t be as significant moving forward as it might have been in the past?

So Michael, first, we operate an activity-based model with respect to payroll, which is our largest operating cost. That naturally decreases as volume decreases. More importantly, we operate with a degree of financial flexibility in our P&L, which allows us to manage as we think is appropriate in any environment. So we have room to manage, and we’re confident that we can take share in any environment and manage this P&L wisely per the environment. With respect to any old benchmarks we may have given, we’re beyond that. We have financial flexibility in our model. And again, we would flex to meet the circumstances as we see them.

That’s helpful. Thank you so much and good luck.

Thank you.

Hey, everyone. My first question is if we could talk a little more detail around the intent and the backlog that was just mentioned. I’m curious if you’re seeing demand come through because supply was constrained, there’s some pent-up projects versus what the backlog or pipeline continues to build.

Well, I think you can just start with some survey results. These are public, published by the National Association of Homebuilders. This survey goes back to 2001. It says conditions—are you optimistic or pessimistic, 50 being the medium mark here? For the 20 years up to 2020, that optimism index never got above a 58. Today, it stands at an 86. So that is the sentiment of the remodeler. With respect to backlog, that is also surveyed; that number over the past 20 years never got above a 64. Today, it stands at an 84. Both of those sentiment numbers are all-time highs.

Fair enough. And maybe a follow-up. You mentioned home price appreciation being the most important lever. It looks like the home prices in Canada are starting to turn a bit, and the business seems to be holding up well. Can you talk about if that relationship holds or if the same dynamic, the macro conditions for the customer exist, and that’s why the business is sort of breaking away from that trend?

Well, yes, our Canadian business. I’m not as up to speed, Simeon, on the Canadian stats that Richard just went through for the U.S. But our Canadian business is in terrific shape. Remember, they had much more significant lockdowns last year. Ontario, in particular, our stores were closed in the first quarter, and we had curbside pickup only. So the business is very, very strong. I don’t have as much detail on the relationship with home prices.

Last Q1, as a company, we reported a 31% comp. Canada was higher than that. So we had a tougher comp in Canada. This quarter, our comp in Canada was higher than company average.

Thanks.

Okay. Two. One, simply, can you just quantify, if there’s any way to quantify, the weather impact of the late spring? How much of that hurt April? And what should we expect that to contribute into May? And then I’ll have a follow-up question.

So for the quarter, Michael, we think it was about 1%, the negative impact to comp sales in Q1.

And presumably, most of that occurs in April. Is that fair to say?

Yes, because in February, it’s not spring anywhere and it’s our lowest-volume month. So yes, that’s April-driven. As Richard said in his notes, March was more of a stimulus impact as well as a weaker spring in the south, and then as you started to move toward northern markets, particularly cold weather in April and for the quarter, 1%.

Yes. We’ve all felt that cold weather up here in the Northeast, although it’s getting better now. I also wanted to follow-up on the home price appreciation question. We’ve looked at this for many years, and I think most people get that home price appreciation is important. To what extent are you concerned that higher interest rates will eventually slow down existing home sales? We’ve seen that decline three or four months in a row, such that the record home price appreciation we’re seeing eventually has to slow down, particularly as the Fed keeps raising rates. And how big of a concern is that as you think about the rest of the year?

Well, we’re in a unique position now in recent housing history where we have built a chronic shortage of housing units in the U.S. consistently and steadily for the last 10 years. Some economists assume that the shortage is a little less than 2 million. You hear numbers as high as 4 million. If you take other estimates of what will likely be built, we’re looking at at least 5 years, if not 7 or 8 years, before we could actually get back to a point of equilibrium. We believe that supply and demand are going to be the main drivers of support for home price appreciation, and we know that chronic undersupply is going to be a condition for quite some time.

Okay. Yes, thanks. Appreciate your comment on that.

Thanks.

Thanks. Good morning. So on the seasonality sort of lens as you think about the year, you mentioned shifting of the bathtub effect in the second quarter. It looks like the guide doesn’t assume that this above-average seasonality that you saw in the first quarter holds. You’re actually degrading the seasonality going forward. So I guess my first—the two questions: are you expecting a full bathtub effect into the second quarter? And then is there any reason why you wouldn’t think normal seasonality could hold through the back half?

Good morning, Chris. Yes, I would—we certainly don’t think it’s going to degrade. I would say posting the results that we posted with a very cold and wet spring certainly exceeded our expectations. As commented earlier, we haven’t generally raised guidance after spring because we say bathtub effect and it’s too early into Q2 at the time of this call to make a determination. But the first quarter beating our expectation by such an extent, even with the poor weather, we felt necessary to raise to 3% for the year. We haven’t taken a specific view of Q2. I mean we know at least the 1% is going to flow into Q2. We generally get back all of our spring sales in Q2, even tracking back to the two or three worst early springs since I’ve been at Home Depot. But it is still just so early, and our largest weeks are ahead of us. We don’t want to get too far over our skis, but we’re certainly not anticipating the degradation of that normal bathtub effect.

Got it. And then my follow-up question is a number of vendors have indicated more price increases are coming. Can you talk about how much of the ticket increase was inflation? How are you expecting inflation to play out over the year? Like we just sort of flatten out as we lap through more prices over the next year? And do you expect units to turn positive as the year progresses? Thank you.

Right. So I’ll start, and then Jeff will give a bit more detail. Yes, as I mentioned earlier, inflation is higher than we had expected to about 2x. The 11-odd percent ticket was the vast majority of that was inflation-driven. It is impacting transactions, but as we said, not to the extent that we would have thought. So that’s all good. We have taken costs this year, and there is more on the table. Transportation—we’ve just finished up our ocean contracts. That’s a global contract cycle that goes into effect in May. So those are in place for the next 12 months. Those are certainly higher on a contract basis from 2021. We think inflation doesn’t go up necessarily from where we are but will hold steady at this, call it, double-digit, low 10%ish in our product categories through the balance of the year. In terms of the impact on transactions, we’re going to have better transaction results in Q2 just given spring. When you think of the number of transactions in our garden business in springtime, that’s just a tremendous number of transactions, and we feel very good that we’ll get those in Q2. Lumber was—it’s been on a bit of a seesaw and has been high on average to last year in Q1, and we saw that in negative transactions in lumber. But now we’re down quite a bit, and we’re down about 35% in lumber prices year-over-year. So we expect to pick up in Q2, particularly in lumber activity. In terms of the balance of the year and how we think about managing through this, I’ll let Jeff provide some more color.

Yes. Thank you, Ted. Look, we are managing through an inflationary environment, about 2x what we expected in the first quarter. We see some continuation of that. We are working with our supplier partners on managing through this inflationary environment. We’ve had long-standing relationships with many of our suppliers, and it’s a partnership to understand the ongoing complexities of the inflation we’re seeing. What we are doing is we are still the customers’ advocate for value in our business. If you look at the value that we’re offering across the spring categories, across the entire business, it is exceptional. If you look at the project business, we are pleased with what we’re seeing in project-related demand, inclusive of some of the inflation that we have experienced across the organization. As the customers’ advocate for value, we have the tools and the capabilities to manage our broader portfolio strategy and the inflationary environment. So, we are very pleased with the partnership across the business to manage this inflationary environment.

Thank you.

Good morning everyone. So, with the One Home Depot supply chain strategy, you guys are effectively moving into some new markets or certainly expanding your presence in certain verticals and expanding your TAM. Is there any way to potentially size the impact that some of these new markets are having on your results, be it—whether it’s MRO, large Pros, etc., maybe places where you weren’t as competitive just a couple of years ago?

Generally speaking, we are excited about what we are building out in terms of capability and our ability to go after the repair and remodel planned purchase occasions that we haven’t necessarily been able to in the past. But when you start thinking about contribution to results, we are building an ecosystem here for the Pro. It’s not just about fulfillment and delivery. It’s about an online experience that we think is second to none that’s seen incredible traction over the very short term. We have a relationship with our Pros in the store that we believe is second to none.

Yes. Richard and Scot, we are building capabilities to attract more of the Pro planned purchase. Every one of those Pro planned purchases helps us pull a lot of the other occasions out of our stores. When Richard talks about the ecosystem, it is about enabling capabilities across all channels to remove friction from the transactions and experiences from our Pros in every instance. We are encouraged by the early signs that we are seeing on the commercialization of the supply chain investments that we are making. The team is super encouraged and involved and engaged.

Okay. Thanks guys.

I would add on the MRO piece in the TAM, we couldn’t be happier with the combination of our legacy Interline HD Pro business with Home Depot Supply. We combined the number one and two players in that industry, but the Home Depot Supply had additional verticals that our business didn’t participate in. We think the TAM in that MRO market essentially doubled to about $100 billion, and we still sit with less than 10% share. The capabilities that we are building, combining those two businesses, we are well on our way of combining sales forces, getting customers oriented to one legacy customer sales force or the other. We are beginning to integrate the supply chains. What we are able to do now in MRO for multifamily housing is incredibly robust. New verticals, like hospitality, are booming as travel has come back. We love our position in MRO in the verticals we are in. Shane O’Kelly and his team are just doing a great job of that business.

Just to the TAM point, we talk about the 130 million households in the U.S.; about 30 million of those households actually occupy multifamily dwellings. The HD Supply acquisition opened up that TAM for us. It is a unique attribute of The Home Depot.

Excellent. Thanks a lot guys.

Hi. Thanks very much. Wondering if you could just give a little bit more color on the puts and takes for Q2 to Q4 with respect to gross margin and SG&A, I guess in the context of assuming inflation remains at the current level. And then also a bit more context on how you think traffic and ticket will shake out for the full year. I have one other question.

Sure. For the year, we believe that gross margin, if you sort of stay mix-neutral, will see slight pressure from the investments we are making in One Supply Chain. Those have been planned all year, and we have expected that for a while. With respect to operating expense leverage, as we have taken our sales guidance up, we have also raised our operating margin guidance. That reflects the operating expense leverage we expect to generate on those incremental sales. With respect to ticket and transaction, we assume that comps in the back half are positive. If inflation persists for the year, we expect the ticket to be in the range of 10% to 12% for the year, offset by transactions to net out to a 3% comp for the year.

I guess the question is on that. My follow-up would be, I mean investors are focused on your 2-year, 1-year, 2-year, 3-year traffic trends. I appreciate there is a labor efficiency component with negative traffic to some extent. But at what point does the traffic on a multiyear basis maybe start to concern you?

This is definitely a unique year for sure in our ticket and transaction dynamic. As I stated earlier, we do look for a balance between ticket and transaction. We usually plan that growth will come from more or less an equal mix of ticket and transaction. With two fundamental things going on, we are to your point on 2-year and 3-year stacks comping off the $40 billion of sales growth that Richard commented on. In Q1, we had a 31% comp, the highest comp in the longest time at Home Depot. To comp that is a huge positive. Now, the balance isn’t the norm for sure, again, a unique year with this level of inflation, 10%-odd. The customer engagement is much more resilient than we would have thought. That’s why we hit—alluding to the inflation going into the year and the potential impact on transactions. The level of activity in our space, and I’ve talked about the backlog and the intents, is really helping offset that, and consumers are staying more engaged. As we lap through these extraordinary comps from the $40 billion of growth and hopefully lap through the inflation, we would get back to the balance we would prefer.

Okay. That’s helpful. Thank you.

Hey, good morning. Ted, following up on your comment that Q1 beat your expectations, could you talk about the extent that was Pro-driven versus DIY or other pockets of your business? As you think about the second half of this year, to what extent do you incorporate stable Pro trends? Could they offset a more variable DIY if the macro or inflationary environment softens from here?

Sure. I would start by saying our Pro traffic is consumer-driven, right. Most projects fundamentally on the home—we certainly have trades in our business, buying products for servicing other spaces than the home, but the vast majority of our activity is supportive of the home. That being said, our Pro is stronger than we would have thought. That’s where the beat came from. Our Pro is incredibly strong, and our optimism continues to build as we develop this ecosystem. We just continue to gain momentum with our Pro customer and offset more of an as-expected consumer. When you think of spring as a consumer business in terms of garden, we don’t have large penetrations in Pro in our garden business, so that is consumer driven. The stimulus is really impacting the consumer. We’ve heard plenty of anecdotes about consumers getting their check last March, which led to purchasing new power tools or lawnmowers. This was unique. In terms of the trends over time, not just the intent Richard discussed but the engagement Hector talked about, what we love with our Pro customer is a stronger progression of comps from unplanned purchases in store, which are still positive, but moving up to higher and higher comps as we get to planned delivery purchases. Think of that Pro who is just coming to the store for cash and carry versus one we know who is staging out a project and getting that project delivered. The sequence of comps as they become more engaged is tremendous. And yes, we think those Pro trends will keep powering the business.

Thanks Ted. That’s helpful. And then for Richard, with your inventory growth outpacing sales growth for the past four quarters by a pretty wide margin, how do you think about your position here in terms of having enough inventory or too much inventory? With the slower start to spring that you called out, how should we think about the potential impact of higher promo on the gross margin line?

First, we took steps to invest in improving our in-stock position. While we are not quite where we were pre-pandemic, we are the healthiest we have been in the last few years. So, that pull-forward of inventory represents efforts to land inventory early, as in this business, customer service starts with being in stock. Also consider the impact of a late spring; that accounts for about half of the increase in inventory, while the other half reflects inflation's impact. Looking through the year, as spring kicks in, we will see inventory reflect seasonality. Our merchants, supply chain teams, and vendor partners work hard to maintain a navigated position.

Regarding the promotional activity, we did shift an appliance event into May, driven by Easter following mid-April. I’m thrilled with our appliance business, finishing the event in May. We don’t focus on promotions at all. Our goal is to provide everyday value for our customers. We are pleased with the progression towards that everyday value we are delivering to our customers.

Thanks for the time.

Great. Good morning everyone. Thanks for taking my question. Maybe a follow-up about consumer spending towards the home since it’s been discussed in detail here. Clearly, you are seeing strong demand from ongoing projects. I think investors are trying to grapple with the fact that home spending may slow at some point because of the macro, but the home also has increased importance post-pandemic. What’s your take on that debate? Do you think that makes home improvement spending more recession-resistant than it’s been in the past?

We simply need to look at the health of our customer today, which is strong. We must listen to our customers as well; these same surveys we discussed show that homeowner intent to do projects of small, medium, and large sizes has never been higher than right now.

Got it. Very helpful. Then just shifting, could you talk about capital allocation priorities if the macro environment were to get a bit choppier? How do you balance capital investment, share buyback, and the potential for M&A? Specific to M&A, it’s been 18 months since you did the HD Supply acquisition. Would you be open to more M&A in the next few years to reach your higher TAM? What criteria should we consider?

We generate strong free cash flow and have returned significant capital to shareholders over the last decade-plus. With respect to CapEx and investment in the business, we take a long-term view. We’re going to invest ahead of the customer and look years ahead to make sure we build the best customer experience in home improvement. This will likely be our stance but take circumstances into consideration.

On M&A, we maintain an active strategic business development group that is always looking in the marketplace for companies of all sizes that can add capabilities. You have heard us talk about some various data shops we have acquired. Certainly, the larger acquisition of HD Supply helped us into a market space. That review is active and ongoing for capabilities and market spaces that acquisition can accelerate.

Great. Thank you very much.

Christine, we have time for one more question.

Hey. Good morning. Thanks for letting me in, and great results; congrats. On inflation, are you seeing any unit demand destruction as you have been taking retails higher, or are there any signs of trade-down in the basket? Walmart called that out this morning, and I know your basket is obviously very different than theirs. Just wondering if you are seeing anything on that front?

Chuck, good morning. We are seeing no trade-down in the environment, and we are thrilled with the innovation that we are offering to our customers. As I commented earlier, we are seeing trade-up for innovation. We are seeing a lot of activity around our consumers looking to improve their homes and adopt new innovations. I talked about the electrified lawnmower business and the opportunity there. That’s just one example of the many examples of trade-up. Looking at the project business, we are seeing great demand, as we commented earlier.

Okay. That’s great to hear. And then for Richard, could you flesh out the expectation for comps in the front half to be better than the second half? If I look at your compares on a 3-year GEO stack, they are pretty consistent. Just wondering if you are being conservative there or if the expectation for the trend to slow a little bit in the last six months of the year.

It’s early. What I would say is we do expect Q2 to be the highest comp quarter of the year. We expect the first half to be higher than the second half, but we do expect positive comps through the year.

In the back half. Okay. Great. Thank you.

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