Home Depot Inc (HD) — Q3 2022 Earnings Call Transcript

Thank you, Christine, and good morning, everyone. Welcome to Home Depot’s third quarter 2022 earnings call. Joining us on our call today are Ted Decker, Chair, President and CEO; 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 and one follow-up. If we are unable to get your questions 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 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 our call this morning. Sales for the third quarter were $38.9 billion, up 5.6% from the same period last year. Comp sales were up 4.3% from the same period last year, and our U.S. stores had positive comps of 4.5%. Diluted earnings per share were $4.24 in the third quarter compared to $3.92 in the third quarter of last year. From a geographical perspective, each of our 19 U.S. regions delivered positive comps versus last year, while Mexico posted comps above the Company average and Canada below the Company average, both in local currency. The team has done a fantastic job serving our customers while continuing to navigate global supply chain disruptions, inflation, and a tight labor market. This quarter also marked another active hurricane season. As they always do, our associates and suppliers did an incredible job supporting those in the path of both Hurricanes Fiona and Ian, and our thoughts continue to be with those impacted by these storms. Our results in the quarter reflect continued solid demand for home improvement projects. While we did see some deceleration in certain products and categories, as Jeff will detail, the project business remains strong across most of our departments. We also saw year-over-year growth with both our Pro and DIY customers in the quarter. While the business performed very well and our consumer remains resilient, we are navigating a unique environment. We can’t predict how the evolving macroeconomic backdrop will impact our customers going forward. However, we continue to closely monitor elasticities and trends across our business and believe we have the tools, team, and the experience to effectively manage in any environment. Despite near-term uncertainties, we believe the long-term underpinnings of demand for home improvement remain strong, and we are well positioned to leverage our distinct competitive advantages to capitalize on compelling growth opportunities in our space. We are pleased with the traction we are seeing in our interconnected business as we continue to build on our momentum with both our Pro and DIY customers. For example, as we have better functionality and capabilities in our Home Depot app, we see greater engagement. In fact, throughout the year, we have seen strong double-digit growth in monthly active users compared to last year. The growth is attributable to several enhancements we have made, including an improved online experience for our Pro loyalty program, the seamless connectivity we’ve provided for a military program, and the launch of our new store mode feature, which makes navigating the store and interacting with products much easier. These enhancements translate to less friction for our customers as they navigate the digital world and connect to the physical world. We also remain focused on driving continuous improvement in productivity within the four walls of our store to enhance both the associate and customer experience. We are currently launching a new application on our in-store mobile devices called Sidekick, which is an in-aisle tasking tool designed to direct associates to the highest value tasks in real time. The tool will direct associates to key bays where on-shelf availability is low or outages exist. By simplifying our operations, we can generate productivity to enhance both the customer and associate experience. For the Pro customer, we remain focused on investing in an ecosystem of capabilities, including enhanced fulfillment, a more personalized online experience, as well as other business management tools to drive deeper engagement with these customers. While we are focused on removing friction from the shopping experience, we are also onboarding capabilities to help our Pros run their businesses more efficiently. Our Pros tell us that finding qualified skilled labor is a pain point in their business. To that end, we recently announced our Path to Pro platform, connecting skilled trades people with hiring trades professionals. This unique and proprietary platform is available at no cost to all Pro extra members. It already contains thousands of candidates, and Pros have begun posting their open jobs. Our team remains focused 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 third quarter, we continued to see solid demand for home improvement projects and strong execution from our teams and supplier partners. Turning to our comp performance during the third quarter: 11 of our 14 merchandising departments posted positive comps. Build materials, plumbing, lumber, millwork, paint, and hardware had comps above the company average. All other departments with the exception of appliances, flooring, and indoor garden were positive, but below the company average. During the third quarter, our comp average ticket increased 8.8%, and comp transactions decreased 4.4%. 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. Inflation from core commodity categories positively impacted our average ticket growth by approximately 200 basis points during the third quarter, driven by inflation in build materials, lumber, and copper. Big ticket comp transactions, or those over $1,000, were up 10.1% compared to the third quarter of last year. We saw big ticket strength across many Pro-heavy categories like fasteners, pipe and fittings, and gypsum. During the third quarter, both Pro and DIY sales growth were positive, with Pro outpacing DIY. We’re encouraged by the continued momentum we are seeing with both our Pro and DIY customers. In addition, our Pros tell us their backlogs remain strong. During the quarter, our project business remained healthy. This can be seen in the double-digit comp performance of our build materials, plumbing, lumber, and millwork departments, as well as in other categories like fencing, siding, conduit boxes and fittings, hubs and showers, and cabinets. We’re also encouraged by the momentum we continue to see with our larger Pro customers. These medium to large repair-remodel Pros continue to post strong double-digit comps. We believe we are building a unique interconnected Pro ecosystem that will increase our ability to grow share in a $450 billion addressable Pro space. To serve the Pro, it’s about removing friction through a multitude of enhanced product offerings and capabilities. We feel confident that the investments across our Pro ecosystem are resonating and that we continue to gain share with this important customer. As you know, we’ve been on a journey to remove friction from our interconnected shopping experience. A great example of this was our announcement in December of 2017 to own more of the appliance delivery end-to-end. In the third quarter, we achieved an important milestone. We now have 100% of our appliance delivery volume managed through our market delivery operations. This has significantly improved the customer experience. On-time and complete deliveries have increased meaningfully, and customer satisfaction metrics have increased by approximately 6 percentage points compared to the third quarter of last year. Turning to total company online sales. We are very pleased with the performance of our digital assets. Sales leveraging our digital platforms increased nearly 10% compared to the third quarter of last year. This was driven by our continued investments, which are resonating with our customers. For example, during the quarter, lead times improved across different fulfillment capabilities, which drove greater conversion. For those customers that chose to transact with us online during the third quarter, approximately 50% of our online orders were fulfilled through our stores, a testament to the power of our interconnected retail strategy. We’re excited about the holiday season. During the third quarter, we hosted our Halloween event and could not be happier with the results. 2022 was a record sales year for our Halloween program, both in-store and online, as our customers continue to add to their collection with our unique and exclusive assortment. As we turn our attention to the fourth quarter, we intend to continue this momentum with our annual holiday, Black Friday, and gift center events. Our teams have sourced the most compelling artificial tree assortment we have ever had, which makes it easier for our customers to find the perfect tree for their holiday. In terms of our decorative holiday program, we couldn’t be happier with our industry-leading assortment with extraordinary features and functionality that looks great and also reflects exceptional value. In our gift center, we continue to lean into brands that matter most for our customers with our assortment of Milwaukee, RYOBI, Makita, DEWALT, RIDGID, Husky, and more. Earlier this fall, we launched the next generation of the Milwaukee drill and Drive M18 fuel lineup, offering more power, run time, and increased safety for our customers. In our gift center, we are featuring this innovation in combo kits with 4 tools and 2 tools. And we have our exclusive RIDGID 4-tool, 18-volt brushless combination kit with 2 free tools, all backed by our lifetime service agreement. And in appliances, we have exciting offers on LG, Samsung, Flash, Oracle, GE, and Frigidaire. We have multiple exclusive offers, including the LG side-by-side refrigerator with craft ice, a great innovation in ice-making. As with prior years, we’ve extended these events over several weeks, and we believe we are well positioned with the right brands, the right inventory, and a great customer experience. With that, I’d like to turn the call over to Richard.

Thank you, Jeff, and good morning, everyone. In the third quarter, total sales were $38.9 billion, an increase of $2.1 billion or 5.6% from last year. During the third quarter, our total company comps were positive 4.3%, with positive comps of 7.1% in August, 4.4% in September, and 2.1% in October. Comps in the U.S. were positive 4.5% for the quarter, with positive comps of 7.2% in August, 4.2% in September, and 2.5% in October. On a three-year basis, monthly comps were consistent across the quarter. In the third quarter, our gross margin was approximately 34%, a decrease of approximately 10 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 third quarter, operating expense as a percent of sales decreased 18 basis points to 18.2%. Our operating expense performance was in line with our expectations, which reflected continued wage investments as well as planned investments designed to drive efficiency in our store environment. Our operating margin for the third quarter was 15.8% compared to 15.7% in the third quarter of 2021. Interest and other expenses for the third quarter increased by $80 million to $406 million due primarily to higher long-term debt levels than one year ago. In the third quarter, our effective tax rate was 24.4%, down from 24.5% in the third quarter of fiscal 2021. Our diluted earnings per share for the third quarter were $4.24, an increase of 8.2% compared to the third quarter of 2021. During the third quarter, we opened three new stores, one in the U.S. and two in Mexico, bringing our total store count to 2,319. Retail selling square footage was approximately 241 million square feet. At the end of the third quarter, inventories were $25.7 billion, up $5.1 billion compared to the third quarter of 2021. Inventory turns were 4.3 times, down from 5.4 times last year. Our inventory growth primarily reflects product cost inflation and strategic decisions in response to continued global supply chain disruption. 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 third quarter, we invested $770 million back into our business in the form of capital expenditures. And during the quarter, we paid approximately $1.9 billion in dividends to our shareholders, and we returned approximately $1.2 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 43.3%, down from 43.9% in the third 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 solid performance we saw during the third quarter. Today, we are reaffirming our guidance for 2022. We expect comp sales growth of approximately 3% for fiscal 2022. We expect comp sales to be positive for the fourth quarter. 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. As we’ve said throughout the year, we find ourselves in a unique environment with many cross-currents. We are 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. To date, our customer has proven resilient. 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. Before opening the call for questions, we are pleased to announce that we will be holding an investor conference on June 13, 2023, in New York City. We will share more details in the near future, but for now, please hold the date. 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. The sentiment and narrative around your stock is so heavily focused right now on factors that are out of The Home Depot’s control, like the state of the housing market and its ultimate impact on home improvement demand. So, can you help frame what is in your control? If home improvement demand, for example, was down 5% next year, is the state of your initiative such that The Home Depot could gain a couple of hundred basis points of market share, and in that environment, you’d only be down, call it, 3%? And if your comps were only down 3%, given the flexibility that you have with your cost structure coupled with your current capitalization that affords you to buy back a lot of stock, you could actually grow earnings in that sort of scenario.

Hey. Good morning, Michael. Thanks for the question. A lot of detail there that I won’t get into specifics but assure you that we look forward to taking share in any environment. There is a lot of noise around housing and home improvement. And you’ve heard some of this before, but if I can just step back a minute and lay out the environment the way we see it. I mean, we still feel very good, Michael, about our business. We just reported another strong quarter and reaffirmed our guidance for the year. And remember, we’ve grown this business by $47 billion in the last two and three quarters a year. From our core customer, we think our customer is still healthy. I mean, our customer tends to have a good job, growing wages, strong balance sheets. They own their home and have seen increased home equity. However, as Richard said in his prepared notes, I mean it is a unique environment, lots of cross-currents, inflation, and rising interest rates, et cetera. But given all that, our customer has remained resilient and engaged. As we said, both our Pro and DIY customers grew again in this past quarter. Project demand, in particular, is very strong. Our Pro sales are strong and our Pro intercepts with our customers indicate that their backlogs are still very healthy. Customers are still spending lots of time at home. We’re not all back at work five days a week. These homes continue to age. And they’re worth 40% more than they were pre-pandemic. Now, I’m sure we’ll get into some housing questions, and housing values may go down a bit, but we’re still going to be up meaningfully on a two-year basis. We did see some deceleration in certain products and categories. And again, that’s difficult to get at a root cause. Is it a consumer pulling back in general? Is there a reaction to price inflation? Do we have some pull forward in certain categories that people bought so much of certain categories during the pandemic, or are they moving on to other projects? Our transactions have been stronger than initially thought with this inflation. I mean, that’s why we have raised guidance throughout the year is that the price sensitivity wasn’t as strong as we thought it would be. However, our guidance implies that fourth quarter comps will be the lowest for the year, albeit positive, and we have tougher comps from Q4 last year. So, with all of that as a backdrop, I mean, as I said in my comments, we believe we have the team, the strategy, and the initiatives with each of our consumer and Pro that we’ll continue to take share in any operating environment. And while there may be some of these cross-currents in the next few quarters in housing, we still feel the backdrop of housing, the fundamental shortage of housing in this country and the aging of homes is incredibly strong for our space in the medium to long term.

That’s very helpful framework. But in light of some of the deceleration that you’re seeing, one might assume that that might be a prelude to what could be a more pronounced deceleration into ‘23, especially as some of the material benefit from inflation that The Home Depot has experienced this year fades. So, is it best to recalibrate our expectations and think and model more about a negative comp in 2023 for The Home Depot, even if it’s just slightly negative?

Well, we’ll talk about ‘23 after our fourth quarter earnings call in February. Again, we remain incredibly bullish. There are certainly factors outside of our control. Are the Fed actions going to ultimately take us to a recession? If so, how deep that might be? Those are things that we’re all wrestling with, and everyone has an opinion. But we’re focused on what we can control, rolling out our strategies, delighting our customers, and taking share in any environment.

Focusing on housing. Housing metrics are declining much faster than your comparisons. Is this just a lag effect? I’m uncertain if this lag is longer than others, and Ted, you mentioned the possibility that sales may not align with these metrics. I believe it’s a temporary situation due to home equity and the fact that we’re spending more time at home, or are you proposing that it might not be temporary because of the increased time we’re spending at home?

So, Simeon, it’s Richard. To add more detail to Ted’s background, much attention is given to home prices and their changes, which we believe have always influenced home improvement demand. We've discussed this with you for a long time. However, what we also noticed in the middle part of the last decade was that as home prices started to stabilize, price discovery became somewhat more challenging. The ongoing question has been whether there is a delay in spending; specifically, will someone spend during the time they see their home price appreciating, or will there be a lingering effect across multiple periods? Our hypothesis suggests that there is indeed a lag, and we observed this in the last decade. This perspective feels intuitive. There are numerous critical factors to consider, especially since many of us are somewhat influenced by the events of 2008 and 2009. Back then, 25% of homeowners were underwater on their mortgages, which impacted our comparable sales due to rising foreclosures. The situation wasn’t characterized by the slight home price declines that we're discussing now; there was a significant price drop from 2006 to 2008, with substantial daily price changes reported in the news and many forced sellers impacting the market. Currently, as Ted mentioned, we have experienced about 40% home price appreciation over the past three years, with an increase of 13% year-over-year and 8% since December. While this growth is slowing down, most observers seem to predict that if there's any correction, it will be modest. My question revolves around how price discovery will take place and whether any price depreciation will significantly affect consumer spending behavior. As Ted noted, homeowners are generally in a strong financial position, likely having jobs and savings. Additionally, with rising mortgage rates, our customers are increasingly inclined to stay put and improve their homes rather than move. Looking back, during the previous crisis, 25% of mortgages were underwater. Now, regarding the current state of U.S. housing, 40% of owner-occupied households own their homes outright, and among the 60% with mortgages, 90% have fixed-rate loans, with 73% of those fixed rates below 4%. We’re observing a trend toward staying in place and enhancing one’s home, which is supported by feedback from both our customers and the professionals they interact with.

That’s helpful. A follow-up on another very easy to forecast variable, inflation. Can you frame maybe what percentage of your sales could be at risk from disinflation? Is it 100? Or it shouldn’t be 100 because some parts of your product mix aren’t going to be vulnerable?

It’s A - Jeff Kinnaird. We’re watching inflation very carefully. We have seen some deceleration in inflation in the recent months, which is good for our consumers. But broadly, we are still experiencing some inflation in some specific categories. I’ll call it the lumber market. We have seen a deflationary market in lumber over the recent weeks. In fact, we’ve seen a lot of stabilization in that industry versus the prior two years. I did call out an impact from inflation in lumber for the quarter that was more representative of early days in the quarter. But we’re looking at it carefully. We’re managing category by category. We’re working closely with our suppliers in terms of managing costs and cost components. We have a very good and deep understanding of virtually all cost components of all products that we sell. And again, we’re managing it very closely.

So, maybe to summarize your comments today, I guess, it’s that you are incrementally more cautious because you’re seeing certain categories maybe become slowing or more volatile but it’s not dramatic and it’s more the uncertainty of what the Fed’s rate raising is going to affect the business in the future potentially?

That’s yes, I think that’s a fair representation, Chris.

Okay. And then, can you talk about some of the KPIs you’re watching? I guess, what categories specifically are concerning you? Are you seeing DIY trade down? Are you seeing maybe unit trends in the project business slowing? It seems like the commodity inflation is driving some of your best project categories. And are you seeing any more sort of volatility from the consumer, I guess, over the past couple of months that is adding that element of caution?

I would say that the most positive aspect we observe is the project nature of the demand. We analyze various data sets by geography and category, and our business is heavily project-oriented. The categories that are driving this project demand remain very robust for both our professional and consumer customers. However, we are seeing some caution; for instance, we're questioning whether there was a pull-forward in demand or if there’s some price sensitivity affecting whole goods, like appliances and grills. Those categories have definitely cooled off. After three years of purchasing, customers have shifted focus more towards projects and home improvements, which may also be influenced by inflation, making it difficult to understand the full picture. As an example, in our indoor garden business, we observed mixed results: while grill sales were down, we experienced one of the strongest quarters for patio products. So, there are definitely mixed signals, which have caught our attention and led to our cautious stance.

I would like to follow up on your discussion about the consistent trends over the past three years. October was a particularly strong month last year. Do you believe that the early holiday shopping trends we observed last year may be impacting the business in November, especially with the ongoing election? Additionally, how are you approaching your current positioning as we move into the holiday season?

Look, we see some normalization back to 2019 in terms of the consumer trend. In the last couple of years, we’ve seen pull forward in concerns of supply chain-driven shortages across retail. So, we do see potentially just the return back to a more normal holiday spend by the consumer. As I commented in our prepared remarks, we feel very good about our Black Friday, our gift center, and our decorative holiday assortments, and we’re excited about the overall Black Friday season.

And just in case you don’t have the numbers in front of you, Chris, you called out monthly cadence. So really, our comps were consistent across the months, so not just a 3-year but also a 2-year basis. Just keeping in mind that last year’s comps in August, September, and October were 3.1%, 4.5%, and 9.9% sequentially. So, if you look at a 2- or 3-year basis, maybe smoothing some of that out, the 1-year months don’t tell you quite as much.

Congrats on the strong results. To follow up on Chris’s commentary about the recent performance, has there been any impact from the hurricane recovery spend to call out maybe the end of the third quarter and thus far in Q4?

It was relatively minimal. So, we think we had about $120 million impact from hurricanes this quarter. But keep in mind, we were overlapping a similar amount from last year. So, these hurricanes and storm impacts extend across quarters. What we’re more concerned about is the health and safety of our customers and our associates. And our minds and hearts are certainly with them right now.

A lot of discussion around the top-line outlook given the housing uncertainty, but I wanted to focus on margin. I know there’s not a target in place on a multiyear basis. But can you help us think through the levers to protect margin rate if sales growth were to weaken in the future? I guess, specific to gross margin, is there an opportunity for gross margin rate improvement as supply chain costs ease?

We’re managing margin closely, Steven. We look at it quarter-on-quarter. There are a lot of ins and outs when it comes to margin as we look forward.

Look, I’d just add that we think we have the tools and the experience and the people to manage pricing costs as well above than anyone else here. We’ve proven that. Over the last three years, there’s been a mix disruption in our value chain. And yes, I think the proof is in the pudding when you look back at our history.

So, I think everyone here kind of understands there’s some uncertainty around the broader home improvement environment given what’s happening with interest rates. But how are you guys thinking about the growth potential prospects of the large Pro business as we roll out to ‘23 because you guys will obviously have a lot more infrastructure and more relationships still at that stage?

Thanks for the question, Scot. Actually, we couldn’t be more excited as we’ve identified a $450 billion addressable market. And an understanding of what capabilities we need to deliver to get a larger share of wallet with that large Pro repair remodeler. I’ve been here, as you may know, over 22 years, and we’ve always known what we needed to do to capture our share of wallet with that Pro. And what’s so exciting is that Hector and his team right now are actually building out the capability set to get more share of wallet with that large Pro. And as we build out these capabilities, introduce them to the customers, we’re seeing the engagement and incrementality of sales growth take off.

We are really thrilled about the positive feedback from our Pros as we continue to enhance our ecosystem by eliminating friction. The growth of our outside sales resources has been exciting, as our customers are thriving. They are not only increasing direct sales through our exceptional sales associates but are also interacting more with our digital platform and making unexpected purchases in our stores. As we develop additional capabilities in areas such as B2B, digital, and in-store platforms, we remain very enthusiastic about our Pros' responses. We are successfully reducing friction across all channels, leading to greater engagement from our customers.

Is there a way to potentially size or at least for us to conceptually think about kind of what the potential revenue ramp is as these capabilities get filled out?

As Ted said, we’re excited. One of the reasons we’re so excited is because it’s such a fragmented market, such a fragmented market of suppliers. And so, we just think the opportunity is exciting and tremendous and part of the excitement is it’s hard to size.

But I can say, I mean, we don’t break out these numbers, but each of Pro and consumer grew again this quarter, and the Pro yet again grew meaningfully faster than the consumer. And our large Pro, the ones who are engaging with what Hector and team are developing, are growing the fastest yet.

Overall transaction is down a little over 4%. I was wondering if you could pack that for us across the Pro and DIY customer base.

I don’t know if we break that out, but the strongest, again, was the large Pro.

I would say that our Pro segment is consistent across our product offerings. You'll notice similar patterns in ticket transactions throughout the business. However, it's important to emphasize that the Pro segment is where we see the most strength.

Okay, makes sense. And then on the cost pressure front, as costs start to ease, how do you think about the pricing environment? Do you think you and peers are likely to hold on to prices as costs start to moderate and you retain that margin as a result, or are you likely to lower prices and try to maintain the same gross profit margin dollars?

Chuck, we watch this very closely. We are the customer’s advocate for value, and we watch the market and our competitors very closely. I will say that there has been an enormous shift to trading up to more innovation and more innovative products. We see that in our tool category. We see that in the outdoor garden business. We could see it across multiple categories. We still see that willingness to trade up for great value and great innovation.

On the cost side, it's definitely easing. Looking at commodities, they have been down for six or seven months in a row. Lumber has significantly decreased from nearly $1,500 to under $500 in the past three years. However, we still observe inflation across the store. While some costs and retail prices may decrease in certain categories, our current forecast indicates that net inflationary cost pressures will persist into 2023.

My first question is related to Chuck’s inquiry, but I’d like to frame it differently. Regarding inflation, The Home Depot has effectively navigated the challenge of passing along inflation costs. Ted, you've noted a few times that inflationary pressures are starting to ease. My question is whether you anticipate that as these pressures lessen, even if prices do not gradually decrease, there might be some elasticity in demand, suggesting that unit demand could increase in such an environment.

That's an excellent question. You might wonder if the elasticities weren't as responsive on the way up, would they also be less so during a moderation? That's something we still need to figure out. Overall, the price sensitivity hasn't been as pronounced as we anticipated over the last couple of years. This is why we began each year with a mostly flat forecast and have consistently exceeded that over the past two years. For certain commodities like lumber and copper wire, where we adjust prices weekly to reflect the market, we observe a more typical response to price changes and unit productivity. In other areas, like grills, there are established price thresholds. When prices for some plastic grills exceeded $600, we noticed a significant drop in customer engagement. However, when Jeff and the team reduced those prices to around the low to mid $400s, or low to mid $500s, we observed an uptick in unit productivity. Overall, there has been substantial innovation across our product categories, as Jeff highlighted. The changes in outdoor power equipment, power tools, and appliances, along with the features and technological advancements in these products, are noteworthy. While it's not quite the level of an iPhone, power tools are approaching that level of innovation. Customers appreciate the new developments despite the higher prices, and they are responding by making purchases. So, Brian, I think it varies by category, and that's where Jeff and our merchant teams excel in their management efforts each day.

Got it. That’s very helpful. And then my follow-up, and a quick one, just for Richard, you gave us like the cadence of comps through the quarter, obviously, we saw the reiteration of guidance, but any commentary more specific on just the trend of business here into Q4?

Nothing in the first two weeks of Q4 changes our view on 2022 guidance. And as we said, we expect comps to be positive in the quarter.

As you think about your DIY customers specifically and the well-documented challenges in the first half of the year, is it fair to say that your DIY customer improved on a one- and three-year basis this quarter? And as you think about consumer behavior in tighter economic and housing conditions ahead, is there a scenario where the DIY category outperforms Pro as customers trade down or maybe pull back on bigger projects?

Zach, could you please repeat the second part of your question? Regarding the first part, we are really pleased with our consumer business throughout the year. In the first quarter, we experienced what we often call a bathtub effect, which led to a seasonal impact on our consumer segment. However, both the second and third quarters have been positive, and we are very happy with that aspect of the business.

Yes. Is there a scenario where DIY outperforms Pro as customers trade down or pull back on bigger projects?

Well, I don’t think that there’s any way to conjecture that. I do think that what we love about this business is it’s all end customer demand regardless of the channel that appears through. But we don’t have a target Pro penetration for the business. And what we’ve seen through cycles is that, number one, we do very well with both. And you can see some fluctuation between the two. But really, what we have going right now is what we’re observing, which is the Pro business is leading the Company that shows us that the demand for large projects is very healthy right now.

Someone previously asked about this, and I’m not sure we addressed it. We are not experiencing a trade down. For instance, with grills or appliances, it's not that people are buying less expensive options; rather, they have already made purchases in the last few years. When they do buy, they tend to choose innovative products. Our Traeger business is a great example of this strength, as their innovation attracts a positive response from customers.

Got it. And when you think about your sixth straight quarter of transaction declines and the fact that there is a more stable repair and maintenance component of your business, to what extent do you believe we fully cycled away from all the pull-forward in excess discretionary category demand in 2020 and 2021? And when would you expect this to translate to a more normalized positive transaction cadence?

That's a great question and something we are closely analyzing. Looking back, we are now 11 quarters into this pandemic. In the first 5 or 6 quarters, we experienced remarkable transaction growth. As we all know, there wasn’t much cost inflation during that time. However, in the last six quarters, while we continued to build off that impressive activity, various factors such as supply chain issues, commodity prices, and global cost pressures led to substantial costs for our business. This past quarter, our comparisons were influenced by ticket sizes over the number of transactions. Now, as we step back and look at almost three years, our transaction rate, or our three-year compound annual growth rate, is roughly back to pre-pandemic levels. You might view that as a slowdown, but one could argue, as Richard mentioned, that this industry experienced a surge in demand for 1.5 years. After facing significant cost increases, our customers remained resilient, and overall, we've seen growth in transactions and units over this three-year timeframe, despite maintaining higher price levels. This ties back to my initial comments regarding the dynamics of our industry and the strength and engagement of our customer base. If we can stabilize from here, that would be fantastic. There's naturally uncertainty regarding the potential for a recession, which we cannot predict any better than you can. However, when reflecting on the developments of the past three years, it's clear this market segment has shown remarkable resilience.

I appreciate the insight on the fourth quarter outlook. You've significantly improved your holiday business. In fact, in 10 of the last 13 years, your fourth quarter comp has surpassed your third quarter comp, despite tougher comparisons. Can you discuss what you've done to make the fourth quarter such a stronger period for you and what might be different this year?

Mike, it’s Jeff. Yes, we’ve had an exceptional fourth quarter. We’ve built the business over the years focusing on decorative holiday items, and we are committed to providing value in that category with great innovation for our customers. Additionally, we’ve developed our gifting business in our gift centers, and the innovation we are offering to both professionals and consumers is remarkable. I previously mentioned the M18 Milwaukee drill/driver combo kit; the innovation there is outstanding, as Ted mentioned earlier. Appliances also represent a significant category for The Home Depot, growing at an impressive rate. We are investing in delivery capabilities and enhancing our online services to meet customers' needs for reviews and purchases made online. Furthermore, we are seeing a strong project and business push in the fourth quarter, which is an ideal time for consumers to tackle smaller home projects in preparation for the holidays. Lastly, we have a fantastic storage organization event, and we remain a strong advocate for value in the storage category across our business. We have developed a remarkable online business and highlighted its performance in Q3. We expect a successful Q4 with Cyber Monday approaching, significantly driven by our digital and app performance. I have Jordan Broggi here, our President of Online. Jordan, would you like to share a few thoughts about the app?

Yes, sure. Yes. Thanks, Jeff. I mean Ted called out at the front, the experience is what it’s all about. We love the experience improvements we’ve made. A lot of it’s around in-store connectivity. We talked about store mode. We talked about military. We talked about loyalty. We’ve got some features coming out on Pro for in-store checkout experience. And our customers really respond. I mean, we love the ratings in the App Store, 4.8 with Apple, 4.7 with Google, but we see it in our numbers as well, strong double-digit performance and growth in downloads and MAUs, monthly average users, in our traffic. It’s our fastest-growing online property. We’re got billions of dollars of sales through the app. We couldn’t be more excited.

Great. If I could ask one more follow-up. Your buyback did slow a little bit this quarter. Is that maybe a function of higher borrowing costs, or how should we think about buybacks going forward? Thanks.

We don’t ascribe to necessarily a smooth cadence of buybacks, and that will typically reflect just sort of how we think about working capital investment through the year and a cash buffer throughout the year. So, there’s really nothing to read into that.

So, going back to some of the category comments. Are you seeing some evidence that the, call it, more discretionary items are turning lower and at a faster pace? I know last quarter, you mentioned some of those higher ticket $300, $400 Halloween items being pretty much as discretionary as it gets and performing pretty well. We saw some discounts on those items in the weeks preceding Halloween. So, any indications that those splurge items are starting to cool off and more quickly than the rest of the business?

David, as I mentioned earlier, we achieved record sales both in-store and online during Halloween, featuring the popular Skelly, which has been one of our top sellers. The innovation and value we provide to our customers are truly unparalleled in the market, and we are very pleased with our Halloween performance. Looking ahead to the fourth quarter, we're really enthusiastic about our holiday decor selection. We have excellent innovation and great value for our customers in trees, lights, and decorations, and we feel very optimistic about the category. Our consumers are responding extremely well to it.

Got it. I have a Skelly. So, I know exactly what you’re talking about. My follow-up, just on the inventory levels. How much of that growth is aimed at Pro customers? So, is there a piece of that inventory that’s not sitting in the stores? Maybe it’s at facilities like in Dallas so that the number looks to be a bit more elevated to us at the store level. Just help us unpack the $25.7 billion inventory growth number and just get us comfortable that you aren’t sitting on too much at this point, especially with some of the deceleration you’re now seeing.

Well, so look, investment in inventory and our One Supply Chain facility is certainly one of the factors in inventory growth year-over-year. But the primary factor is really just inflation as part of the inventory value. And then, we made strategic decisions to land inventory earlier in the year than we have prior. And really, just to give you some numbers around that and to reflect the fact we feel fantastic about our inventory position. In Q2, we grew our inventory 38% year-over-year. In Q3, that number dropped to 27% year-over-year. And actually, if you look throughout our history, we typically build inventory from Q2 to Q3. In this case, our inventory actually came down by $400 million from Q2 to Q3. Our inventory is healthy, and we’re happy with our position.

Christine, we have time for one more question.

Maybe just a follow-up or focus on the quarterly performance. If I look at the press release, the selected sales data obviously excludes HD Supply. So curious, Ted, if you can expand on the performance of that asset in today’s backdrop as it looks like it may be driving some upside to the overall performance of the business.

Yes. Steven, thanks. Yes, another great quarter for HD Supply. We mentioned this last quarter and they are just doing a terrific job. Shane O’Kelly and his team are running the largest and the best-focused MRO business for multifamily housing and hospitality, extended living, et cetera. We remain well ahead of all our financial projections, and we made the acquisition. Their integration is tracking, they’re integrating sales forces, customer records, and now starting the work or on their way in the work of integrating the supply chain. So, that one has just been a terrific acquisition that we’re super happy about.

And then maybe just a quick follow-up for Richard or Ted. Given the performance, can you remind us on what percentage of sales that business is today? And then, as we look at the sort of spread between comp and net sales growth, any reason to think that the current sort of year-to-date spread doesn’t hold into the fourth quarter?

We don't separate HD Supply out, but as Ted mentioned, we're very pleased with it. There's always been a gap between sales and comparable sales. Comparable sales reflect the sales from the point of sale, while total sales indicate actual deliveries or installations. That number will be visible. Throughout the year, total sales will likely be slightly higher than the comparable sales guidance, but the key metric to focus on is the comparable sales, as it measures our sales activity.

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