Home Depot Inc (HD) — Q2 2022 Earnings Call Transcript

Thank you, Isabel, and good morning, everyone. We appreciate you joining us on our call this morning. In the second quarter, we delivered the highest quarterly sales and earnings in our company's history. Sales for the second quarter were $43.8 billion, up 6.5% from the same period last year. Comp sales were up 5.8% from the same period last year, and our US stores had positive comps of 5.4%. Diluted earnings per share were $5.05 in the second quarter, up 11.5% from $4.53 in the second quarter of last year. From a geographical perspective, each of our 19 US regions delivered positive comps versus last year, while Mexico and Canada posted comps above the company average. The team has done a fantastic job serving our customers while continuing to navigate global supply chain disruptions, inflation, and a tight labor market. Our results in the second quarter reflect continued strong demand for home improvement projects. As Jeff will detail, the business was strong across our departments. While our seasonal business posted positive comps as spring broke in the second quarter, these categories underperformed our expectations for the first half of the year. This was more than offset by strength in project-related categories that outperformed our expectations. We also saw growth with both our Pro and DIY customers in the quarter and are encouraged that project backlogs remain healthy. While the business performed very well and our consumer remained resilient through the first half of the year, we are navigating a unique environment. We can't predict how the evolving macroeconomic backdrop will impact our customer going forward. However, we continue to closely monitor elasticities and trends across our respective categories and believe we have the tools, team, and experience to effectively manage in any environment. Despite near-term uncertainties, we believe that the long-term underpinnings of demand for home improvement remain strong and that we are well positioned to leverage our distinct competitive advantages to capitalize on compelling growth opportunities in our space. For the Pro customer, we continue to invest in the ecosystem of capabilities, including enhanced fulfillment, 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. In May, we launched new capabilities on our B2B website to enhance the interconnected shopping and quoting experience for our Pros. In the past, our website was not integrated with our ordering and quoting systems, so an associate could not seamlessly modify an order if a customer had questions or changes before placing the order. Our new interconnected capabilities remove friction for both pros and associates, allowing them to collaborate on orders both in-store and online. Sales leveraging our digital platforms increased 12% versus the second quarter last year. We also saw record downloads, traffic, and sales via our mobile app. We continue to see improved conversion rates as ongoing enhancements within our digital properties are resonating with our customers. Our team is focused on what is most important, our associates and customers. Our merchants, store, and supply chain teams did an outstanding job delivering value and service to our customers throughout the quarter. Based on first-half results, 100% of our stores qualified for Success Sharing, our profit-sharing program for hourly associates. 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 second quarter, we continued to see strong demand for home improvement projects and strong execution from our teams and supplier partners. Turning to our comp performance during the second quarter. All of our merchandising departments posted positive comps. Building materials, plumbing, millwork, paint, and hardware were all above the company average. Electrical, decor and storage, kitchen and bath, outdoor garden tools, appliances, indoor garden, lumber, and flooring were positive, but below the company average. As you heard from Ted, while our seasonal businesses posted positive comps in the second quarter, they underperformed our expectations for the first half of the year, driven by categories like grills, fertilizers, chemicals, and mowers. Keep in mind that we are up against very tough comparisons versus the last two years in these categories, when our customers focused on outdoor living, and these are some of our best-performing departments. During the second quarter, our comp average ticket increased 9%, and comp transactions decreased 3.1%. The growth in our comp average ticket was driven primarily by inflation across our product categories, as well as demand for new and innovative products. On a three-year basis, both comp average ticket and comp transactions were healthy and positive. Deflation from core commodity categories negatively impacted our average ticket growth by 14 basis points during the second quarter, driven primarily by lower lumber prices. Big ticket comp transactions, or those over $1,000, were up 11.6% compared to the second quarter of last year. We saw big ticket strength across many Pro-heavy categories like pipe and fittings, gypsum, and fasteners. During the second quarter, both Pro and DIY sales growth was positive, with Pro outpacing DIY. We're encouraged by the continued momentum we are seeing with our Pros, and they tell us their backlogs remain healthy. During the quarter, we saw robust project demand across the business. This can be seen in the double-digit comp performance of our building materials, plumbing, and millwork departments, as well as in certain project-related categories like fencing, siding, conduit boxes and fittings, tubs and showers, and countertops. We continue to introduce new and innovative products aimed at simplifying the project, saving our Pros time, and helping them take on more jobs. One example in building materials, where we launched nationally Henry's Tropi-Cool Roof Coatings. This new formula offers maximum reflectivity, helping reduce cooling costs. Henry's Tropi-Cool can be applied in any season, is 100% waterproof, and rain-safe within 15 minutes of application. This product is exclusive to Home Depot in the big box channel. In bath, we're excited about the success we're having with our great assortment of Delta Tub & Shower wall combinations. Delta Classic 500 series is a simple tub or shower system that delivers a big transformation to a bathroom in a fraction of the time. It is easy to install and its acrylic surface makes it easy to clean. This series is exclusive to Home Depot in the big box channel. Turning to our online sales. We are very pleased with the performance of our digital assets as we delivered the highest sales dollar volume in company history. Sales leveraging our digital platforms increased 12% during the second quarter. This was driven by our continued investments, which are resonating with our customers, enhanced search capabilities, improved Pro site experience, and more robust fulfillment capabilities help drive online conversion. For those customers that chose to transact with us online during the second quarter, more than 50% of our online orders were fulfilled through our stores, a testament to the power of our interconnected retail strategy. As we look forward to the back half of the year, we remain committed to being our customers' advocate for value. Last quarter, we highlighted several new innovative products for our customers. This quarter, we're excited to announce the launch of Makita's new XGT 40-volt and 80-volt Max system of cordless equipment and tools in our outdoor power categories. The XGT system is engineered to achieve the optimum power required for heavier load applications without sacrificing run time. These one-battery solution tools are exclusive to Home Depot in the big box channel. We're also excited to build on the success of our Hubspace Smart Home platform, expanding our assortment across several categories such as door locks, lighting control, fixtures, and ceiling fans. Hubspace makes it easier to set up and manage your smart home products and pairs well with voice-controlled operating systems. This platform is exclusive to Home Depot. In garage organization, we'll be rolling out our Milwaukee PACKOUT and RYOBI LINK wall systems, utilizing the same locking technology across the system that can be customized to meet your organizational needs from the workshop to the workplace. We're also excited about our lineup for Halloween. Our merchants have worked with our supplier partners to put together an expanded assortment of product offerings for this Halloween season. These products bring excitement to our stores and help drive traffic, and our sneak preview of our Halloween lineup was a tremendous success. We are thrilled for the full rollout in the upcoming weeks. With that, I'll turn the call over to Richard.

Thank you, Jeff, and good morning, everyone. In the second quarter, total sales were $43.8 billion, an increase of $2.7 billion or 6.5% from last year. During the second quarter, our total company comps were positive 5.8%, with positive comps of 5.2% in May, 4.9% in June, and 7.1% in July. Comps in the US were positive 5.4% for the quarter, with positive comps of 4.1% in May, 4.7% in June, and 7.2% in July. In the second quarter, our gross margin was approximately 33.1%, a decrease of approximately 15 basis points from last year, primarily driven by supply chain investments. We continue to successfully offset significant transportation and product cost pressures while maintaining our position as the customer's advocate for value. During the second quarter, operating expense as a percent of sales decreased approximately 50 basis points to 16.6%. Our operating leverage during the second quarter reflects solid expense management for the quarter. Our operating margin for the second quarter was 16.5% compared to 16.1% in the second quarter of 2021. Interest and other expenses for the second quarter increased by $58 million to $379 million, due primarily to higher long-term debt levels than one year ago. In the second quarter, our effective tax rate was 24.3%, up from 23.9% in the second quarter of fiscal 2021. Our diluted earnings per share for the second quarter were $5.05, an increase of 11.5% compared to the second 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. At the end of the second quarter, inventories were $26.1 billion, up $7.2 billion compared to the second quarter of 2021. Inventory turns were 4.5 times, down from 5.7 times last year. Approximately half of the year-over-year increase in inventory reflects product cost inflation. Our inventory also reflects deliberate investments in higher in-stock levels and pull forward of inventory for back half events in response to continued global supply chain disruption, investment in our new supply chain facilities, and carryover of some spring seasonal inventory. 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. During the second quarter, we invested approximately $750 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 $1.5 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 45.6%, up from 44.7% in the second quarter of fiscal 2021. Now, I will comment on our guidance for fiscal 2022. As you heard from Ted, we are very pleased with the strong performance we saw during the second quarter, which was in line with our expectations. Today, we are reaffirming our guidance for 2022. We expect sales growth and comp sales growth of approximately 3% for fiscal 2022. We expect comp sales to be stronger in the first half of the year than in the second half of the year. We expect our fiscal 2022 operating margin to be approximately 15.4% for the year. And we expect mid-single-digit percent growth in diluted earnings per share compared to fiscal 2021. We find ourselves in a unique environment with many crosscurrents. We're operating in a broad-based inflationary environment not seen in four decades while managing through constrained global supply chain conditions, all against the backdrop of monetary policy shifts intended to moderate demand. We also see engaged and resilient homeowners who have strong balance sheets, consumers spending more time in their homes, and continued structural support for home improvement project demand. We feel confident that we will continue to manage with flexibility 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 a lot for taking my question. Are you seeing any signs that housing is having a negative impact on the business? Could it be that some of the seasonal performance that fell short of your expectation is a sign that some of the underlying challenges in housing are starting to leak its way into home improvement?

Hey good morning, Michael. We have not seen that yet. In fact, with the strong performance this quarter, the variability across our regions has been the lowest that we've seen in some time. So we follow those very closely, but we have not seen anything in our business yet from macro housing.

Is there a case, Ted, where it's not evident in the business because you're generating a very healthy return on the investments that Home Depot has made over the last couple of years? Perhaps you could frame this as what's going on in the Dallas market, which is where some of the distribution facilities and Pro efforts that have been in place for the longest versus what you've experienced in the rest of the market.

Sure. And Michael, we'll get to Dallas, and Hector will take us through some of the things we're seeing with our Pro, which is incredibly strong. But what we're seeing overall in the business, while concerns about housing and the economy are very real, again, things we're following closely, we just couldn't feel better about our business. We just reported record quarterly sales and profits and reaffirmed our guidance, and that's on top of the $40 billion in growth in the past two years. We see a very engaged customer, both DIY and Pro. And as Richard said, though, we are operating in a unique environment with many cross currents including inflation and interest rates. But given all that, our customer in our markets has been incredibly resilient. As Jeff said, project demand is incredibly strong. Our Pro in particular is very strong and their backlog remains healthy. In DIY, we did see some seasonal weakness. But as we parse through that, it's difficult to say if that weakness is due to the overlap of the two prior incredibly strong years, the weather where we had a really bad and late spring, or fundamental demand pressures. Again, we have not seen a broad-based fundamental demand pressure in the business. So we couldn't be happier with the overall business, and I can just say, as I said in my comments, Michael, whatever comes, we are an agile business, and we look to take share in any environment. Hector, if you can give some color on overall Pro and specifically Dallas, that would be great.

Yeah. And Michael, as you know, we're building a unique interconnected Pro ecosystem to capture more of that Pro planned purchase. To serve our Pros, it's really about removing friction through a multitude of enhanced product offerings and capabilities that begin with brand assortments and job lot quantities. As you know, these new supply chain assets allow us to do that at a different level. But it also includes digital tools and personalized experience, fulfillment options for reliable delivery, our Pro Extra loyalty tool, and other value-added offerings such as credit, tool rental, and Quotecenter. For our larger Pros, we are expanding our onsite sales team and building an inside sales team. I will tell you specifically that Dallas is performing extremely well. We're thrilled to see our Pros trying our capabilities and growing their spend quarter-over-quarter. Other top markets for us are where we have the new supply chain assets and other parts of the ecosystem live.

Thank you very much, and good luck.

Good morning, everyone. Hope you're good. I wanted to ask an oldie, but goodie on the reversion given the significant gains that have occurred post-COVID. One of the ways that we've been looking at it suggests that most of the unit reversion is basically in the base. We've kind of rebaselined a significant part of the business in 2022 and that it opens the door to growing next year. I'm not asking for any endorsement on 2023, but I'm curious how you're looking at this reversion question and anything interesting on units as you look at it?

It's a good question. I think we have to return to Ted's commentary that our consumer, both in Pro and DIY has been more resilient than we even expected at the beginning of the year. When we issued guidance at the very beginning of the year, we assumed ticket growth driven by inflation and a like-for-like offset in transaction, and we haven't seen that. That has led to our increase in guidance in Q1 of a 3% comp, which we have reaffirmed today. It assumes that inflation persists at current levels and that we may see a slightly greater offset in transactions through the year. But that's a conservative assumption and not really based on observation right now. The consumers and customers are resilient.

And, Simeon, we've been watching, obviously, all those metrics in PCE and share on goods and share on services. Clearly, the US consumer has reengaged in activities outside the house, and travel is incredibly strong right now in eating out and hospitality. So there has been movement in PCE to services as we thought. But home improvement, in particular, has been incredibly strong, as Richard laid out, which led us to increase our guidance from what was essentially flat at the start of the year to the 3% we just affirmed. But we just don't see a slowdown from that and remain incredibly bullish about the engagement level. It's a dynamic of home improvement. So many crosscurrents in the economy, but when you think of the wealth that our core customers have, their home equity increased by approximately $9 trillion, the excess savings rates, the strong jobs and wage growth, and the fact that we're just continuing to spend more time at home, people are super engaged in improving the home they spend more time in. We're certainly benefiting from that longer-term dynamic.

There's an interesting dynamic that kind of pushes against reversion. Those who may have considered moving into another house are looking at their fixed rate mortgage and saying they like that mortgage and their equity position in their home. They decide to stay and remodel. We see that in survey data showing customers' intent for projects of all sizes is still very high.

Yes. And my follow-up, I think, Ted and Richard, you basically answered it. I was going to ask why you think the backlogs are still so healthy because looking at other high-ticket spending across the consumer complex, a lot of it is contracting, yet you're basically saying you're not really seeing that or expecting it. I think it's partly the vibrancy of the housing market, to your point. I don't know if it's income cohort, but if there's anything else, because you mostly answered it in the response to the last question, but I'm curious if there's more.

Our customer skews heavily towards homeowners. Our Pros spend on behalf of homeowners, and our DIY customers, over 90% of that sales is to a homeowner. As Ted said, when you look at home price appreciation of almost 40% in the last two years, our customer is just in a really good position right now. That also carries over to income; if you look at the real purchasing power of our customers, it compares favorably.

Thank you.

Good morning, guys. At the sake of asking a shorter-term question here, it's hard not to notice that July sales ticked up a couple of hundred basis points on a stack basis. I guess I'm wondering, would you guys point to anything specific, be it weather, the slight easing we've seen in interest rates or gas prices? Any kind of color on that might be helpful.

Yes. Scot. Good morning. On a three-year basis, it's more or less stable. July had a relatively easier compare. One thing we have noticed is that our strength has continued into Q3 here in the first couple of weeks. As people have come back, particularly in the South where we start school very early, we saw the acceleration of the business midway through July, and that has continued into August as people are back engaging in home improvement projects.

Okay. That's helpful. And then just can you size the adverse impact on seasonal in the first half? Obviously, it came a little short of expectations. Is there a way to provide a magnitude of that for us?

As Ted said, we're accustomed to offsets in our business, and we look at home improvement demand in total. We've met expectations this year. There's always variability in our quarters, but we feel great about the demand we saw out there.

Thanks, guys.

Thank you.

Thank you.

Good morning, guys. Thanks for taking my questions. Ted, I was hoping we could revisit your comments about the macro backdrop. Are you concerned there could be a lag in the sense that demand could slow over time? Because in the past, you've looked at home price appreciation as a key factor for home improvement demand. Are you concerned that home prices could stay flattish or potentially decline from here, and does that alter your view on the demand outlook for the near to medium term?

So it hasn't as of yet. And this is what we're seeing. Home price appreciation, transactions, household formation, etc. are multiple inputs on housing but the strongest and most correlated for our sales is home price appreciation. Now that's gone up, as Richard said, 30%, 40% in the last couple of years, which we believe translates to almost $9 trillion of increased wealth with our core customer base. So when mortgage rates touched 6% for a moment, you certainly saw new home construction feel that immediately. If we have a couple of years of holding serve on this incredible price appreciation, we don't see that impacting demand. The fact that we're not going up year after year is less important than the significant increase in the past two years and the equity position in these homes is so strong, coupled with people spending more time in their homes, so repair and remodel demand will continue to increase. You're going to want more space and make improvements in the home because you're there more often. The US home stock is aging, and it's aging disproportionately because we have so many years where we underbuilt in housing. We have over half the homes in the United States over 40 years old. All those factors with the incredibly strong run-up in value support home improvement for some time to come, regardless if you have further appreciation in the near term.

Ted, I also think there's an emerging dynamic that counters reversion. Those who may have looked to move into another house a few years ago are looking at their fixed-rate mortgage and saying they like that mortgage, I like my equity position in my home. They are inclined to stay in place and remodel. We see that in the survey data where customer intent for doing projects of all sizes remains high.

Great. Very helpful. Just a quick follow-up on inventory levels. Maybe how much is inventory up on a unit basis, if you could share? Do you feel like you're at the right level of in-stocks in the business now?

Good morning, Stephen. From an inventory perspective, if you look at our total inventory, half of that is inflation as we manage through this inflationary environment. Second is just in-stock improvement; as you mentioned, we're happy with our improvement. Our merchants and supply chain teams have worked hand-in-hand in building a better in-stock this year versus last year. We still have a ways to go in terms of improvement, but very happy with how we progress. We still have to pull inventory forward. Considering today's supply chain environment, our focus is to be there for our customers, to be there for our Pros in terms of the right job lock quantities and timely events and other activities. Some of our inventory overage reflects that work. We have some carryover inventory from the spring season, but it is really low-risk inventory that we're managing through and ensuring that we're ready for next season. Overall, we feel very good about our in-stock position and managing the inflation of our environment in inventory.

Thanks very much. Best of luck in the back half.

Hi. Good morning. Nice quarter, congratulations.

Thank you.

So I have a couple of questions. First off, historically, having followed Home Depot now for a long time, your company has done a very good job understanding the macro inputs and building a model that forecasts your own sales. Is your business tracking consistent with where it should be, or are you actually performing better than the macro variables would dictate?

I think we’re in such a unique environment that to try to build models off macroeconomic factors is probably less valuable than spending our time managing in an agile way. What we are confident in is that we've been taking market share consistently, and we are positioned better than ever to take market share in any environment. As Ted said earlier, we've watched the same housing statistics for over a decade now. There's just a very positive environment regarding the homeowner. But we will not, at least at this moment, given the dynamism in the economy, tie it to any given macroeconomic factor.

Yeah, Brian, if I can add to that, there are parts of the business doing better than we expected. We are thrilled with what we're doing with the Pro as Hector outlined. This Pro ecosystem we’re building is not seen elsewhere in the marketplace. In talking to our Pros and the research we did, they are more than comfortable to do more with Home Depot as we develop capabilities to serve their larger plan purchases. As we updated our total addressable market to $900 billion earlier this year, with $450 billion of that in Pro, we see tremendous opportunity. That is a category where we are outperforming, and we are happy for it.

That's great, very, very helpful. And then the follow-up question I have, unrelated. With regard to inflation, are you seeing any incremental evidence that the consumer is starting to push back somewhat on these higher price points?

Brian, we have higher average unit retail growth, and that's higher than inflation. So we are not seeing any trade down; we've got strength in our ticket above $1,000, which speaks to the project into the Pro customer. We will say that in categories like grills, mowers, laundry, and a few other bigger-ticket items, it's possible there is some price sensitivity. But as Ted commented, there was COVID pull forward and stimulus effects. We went from a very cold and wet spring to a very hot summer in the majority of our markets. The consumer is focusing on other projects. The last year was all about the backyard. This year, it's about categories like paint and other large renovation categories, and we're seeing that across our business. We continue to see the consumer and the Pro trade up around innovation, and I'm proud of what our merchants and supplier partners have delivered for our customers. We've got a lot of products helping our Pros finish the job faster and simplifying the project for our consumers. Thus, no significant trade down is taking place.

Appreciate. Thank you.

Thanks. Good morning, everybody. A follow-up question on the Pro. Can you talk about the sort of the relative performance among the large Pro versus the smaller Pro? Is the large Pro outperforming, and what would you attribute that to? Also, are you seeing Pro transaction growth, because overall transaction growth is ground down, presumably, that was DIY?

The performance of our high spend Pro has been very consistent over the last several quarters, so we're very pleased with that. We're seeing areas of our Pro business accelerate quarter-over-quarter. We just feel really good. We are spending a substantial amount of time with them discussing backlogs, and we feel good about where they're positioned for the next couple of quarters.

So, sorry, just to interpret. So, you're saying that large Pro has been the best performer?

Our large Pros were the best performers this quarter. That's right, Chris.

Got it. And then are you able to look at it on a transaction level? Were transactions up for the Pro?

We're not going to break that out any further, but let's just say that demand is strong with the larger professional customer.

Got it. And then the follow-up on that sort of, Ted, your point on people coming back from vacation and reengaging in the category. Last year that seemed to happen more in the September timeframe where DIY reengaged. How are you thinking about the DIY business into the fall versus maybe people coming back and there are some things that need to get done, with kids going back to school? How do you think about the risk on DIY maybe fading as we get into September and the fall?

That's a great question. Given the strong first half and the strong second quarter, reaffirming guidance implies a lower comp in the second half; that's really the question for us. Frankly, we don't know the answer. We're comfortable with Pro; it continues to perform well. The second-half opportunity to improve on that implied comp depends on the consumer’s engagement. If the seasonal weakness we saw is due to factors like weather or consumer focus being diverted, that would be great news. We just haven't called that, which is a bit of conservatism for the second half.

Got it. Thanks very much. Best of luck.

Hey, thanks. Just to build off Chris' question, I'm curious about how you're planning the business from a category perspective over the next couple of quarters, and maybe into early 2023. Is it your expectation that Pro continues to lead, or do you think that what you've seen over the past few weeks may start to see a shift on that front?

Chuck, good morning. We are prepared for the continuation of the project customer when it comes to innovation and value. I point to Halloween and how we launched Halloween a few weeks ago, seeing great success in the early launch. We'll set it in stores in upcoming weeks and look forward to that category performing. In terms of the Pro, we'll be there in terms of innovation and job-lock quantities, leveraging our supply chain capabilities. So we're planning for the continuation of the project business, the Pro business, and we'll be ready for our consumer when it comes to Labor Day coming up in a few weeks. We've got a solid program planned for Labor Day, as we move through Halloween into the Black Friday timeframe.

It's interesting that something like Halloween is not a huge category and isn't going to move the needle on $150 billion in sales. But the excitement that category brings us in traffic shows the willingness of consumers to spend on clearly discretionary items. We had two releases of specific limited quantities leading up to this period, and we sold out in a very short amount of time. It shows the consumer's engagement with our offerings even when it comes to discretionary spending.

Switching gears to the next couple of years, I'm wondering if you guys can discuss the new facilities opened across the country and the benefits you're seeing. You touched on it in Dallas a little bit, but how much of a tailwind can that be over the next couple of years as you largely complete that rollout?

Our supply chain is an important component of the ecosystem we're building to serve our customers and drive productivity. Our intent is really to build the fastest, most efficient, and reliable delivery network in home improvement, reaching 90% of households with same-day, next-day service on parcels, big and bulky. Our original plan was to open 150 new buildings. While many will be complete by the end of this year, some will take longer due to the HD Supply acquisition, which we paused, and reevaluated our needs based on similar capabilities and some impacts associated with COVID. We have about 85 of our 100 planned market delivery operations open, and we're very pleased with the performance of those buildings as we expand our flatbed distribution centers. Dallas was the first market we unlocked these capabilities in, which has been operational for over two years now. We're learning greatly and we're winning the Pro planned purchases.

As you asked about the tailwinds, we couldn't be happier with the HD Supply acquisition. Shane O'Kelly and his team are doing a terrific job. That integration is going incredibly well on product catalog and customers and sales force integration, and they're off to a great start. We have combined the number one and two multifamily players and have a leading position in multifamily housing and added verticals in hospitality and healthcare, plus government. It's all performing incredibly well, and we couldn't be happier with HD Supply.

Thanks, Ted.

Good morning. Ted, Jeff, I was hoping to expand on the Pro loyalty program and the B2B website experience, looking for specific data points to help us better understand the maturation benefits of these initiatives. For instance, how many members do you have? How often are they engaging in the personalized offers? What's happened to the average wallet share of the Pro post onboarding? Anything you can provide to help us understand the opportunity here?

Thanks for the question. We don't break those details out. But what I would say is we are super happy with our loyalty customers. They are outperforming the average, and customers logged into our B2B experience significantly outperformed customers on the consumer side.

I’m thrilled with the second year's performance of Pro Xtra. We linked our Pro Xtra loyalty to our commercial credit cards this past spring, which has been another leap in performance. We see great existing member engagement, strong new sign-ups, and high revenue growth. Our Pros engage in the perks, and we are seeing significant growth in that engagement.

And just a quick follow-up, maybe for Richard. Ted mentioned that 100% of the stores qualified for Success Sharing. Any color on how that payment compared to last year, or to the original plan for the year, as we think about the expense build?

It was roughly equivalent to last year.

Hi, guys. I wanted to ask, a lot of moving parts in the environment, but through it all, according to your guidance, you are going to comp at about 3% with flattish operating margins. Is that the right way to think about the business longer-term? Is that your target for comp and margin breakeven at about 3%?

We typically leverage operating expenses into the very low single-digit comp. We expect to do so as a part of our financial model, which has worked for us in the past. You will see variability from quarter-to-quarter, but we feel great about where we think the year is heading. Again, I point you to guidance with respect to what we anticipate.

If I could follow-up on that, it seems both of those comments suggest you are willing to let gross margins continue to tick down, which they have been down by about 10 to 20 basis points a year over the last couple of years. Is that the idea—are you okay with gross margins ticking down slightly if it's driving comp and leveraging SG&A?

We think about dollar growth first and foremost, along with cash-on-cash returns. Gross margin is a secondary metric. For example, we identified appliances as a category where we believed we could make inroads, even when the gross margin on appliances was below our company average. The return on invested capital was excellent. We will look for opportunities to drive market share, operating profit dollar growth, and return on invested capital. If we feel we can drive substantial value from a category, we won’t shy away from it just because the gross margin is below average.

Perfect. That makes sense. Thanks for the color.

Hey, good morning. I wanted to follow-up on your Dallas market as performance seems to be tracking at or above your expectations. Now that you've had some time for your supply chain and facility investments to resonate, is there any quantification you can share in terms of comp lift for the market, new customer wins, or wallet share gains versus the overall fleet?

We're not going to break down the specific performance for Dallas. But again, I would tell you that Dallas is among our top-performing areas in the Pro segment. We're excited to see our Pros engaging with our capabilities and growing their spend quarter-over-quarter. Other top markets align with new supply chain assets and other parts of the ecosystem coming online. It's early in the transformation with great signals from our customers, who want to consolidate their purchasing. Our Pros visit our stores over 60 times a year but still need to visit other retailers for project complements—we can serve those needs.

As we monitor the Pro size, we look at the small emergency purchases versus larger planned purchases days out that are delivered. As these Pros engage with capabilities like dedicated sales resources, credit programs, loyalty programs, tool rental, and quoting systems, we expect larger purchases and repeat purchases, aligning with our expectations.

Got it. That's all helpful. Just wanted to ask with the recent leveling out of CPI and the step down in your commodity basket, could you discuss the impact? Is it fair to say you’ll pass savings on to customers immediately, or do you view most recent price increases as sustainable?

Hi, Zach. Yes, we manage a large portfolio of goods. We conduct competitive pricing analysis and will remain competitive in the market. We deeply understand the cost components for almost all our products and are working with suppliers on what it looks like when we see commodities fall off. We’ve noticed a reduction in the broader commodity index, which we’re watching closely. We will maintain our competitiveness as we monitor changes in commodities in the short and midterm.

Thanks for the time.

Hey, thanks for getting me on. A couple of quick ones. You mentioned a slower pace of sales implied in the back half for the 3% comp for the year. How should we think about operating expense growth in relation to sales growth in both Q3 and Q4? Any specific measures you're taking to get better leverage on cost after the nice results in Q2? Also, just remind us how much of the expense structure is tied to payroll and your ability to flex that up or down in real-time?

We don’t break out the percentage of payroll to sales, but it is our largest operating expense, and we manage it closely. As for the remainder of the year, I point you to our guidance. There will be variability quarter-to-quarter in operating expense leverage, but we feel great about where we think the year is heading and anticipate success.

And one other one. Can you talk about the share buyback outlook? Given where Q2 numbers have landed, any potential share repurchase acceleration? We have a potential 1% added tax coming January 1. Any change on the buyback?

There's no change in our capital allocation philosophy or approach. We will continue to return excess cash to shareholders.