Home Depot Inc (HD) — Q3 2023 Earnings Call Transcript

Thank you, Isabel, and good morning, everyone. Sales for the third quarter were $37.7 billion, down 3% from the same period last year. Comp sales declined 3.1% from the same period last year and our U.S. stores had negative comps of 3.5%. Diluted earnings per share were $3.81 in the third quarter compared to $4.24 in the third quarter last year. The third quarter was in line with our expectations. Similar to the second quarter, we saw continued customer engagement with smaller projects and experienced pressure in certain big-ticket discretionary categories. In addition, lumber, copper, and wire deflation and storm-related overlaps negatively impacted results in the quarter. Billy will discuss these and other business trends shortly. During the third quarter, our Pro customer outperformed our DIY customer. While internal and external surveys suggest that Pro backlogs are lower than they were a year ago, they are still healthy and elevated relative to historical norms. There is only one quarter left in the year, we believe the endpoints for our previous guidance range are no longer likely outcomes. As a result, as we announced in this morning's press release, we narrowed our guidance range for fiscal 2023. Richard will take you through the details in a moment. As we've discussed, this year reflects a period of moderation. However, we are confident in our ability to navigate through this unique environment. We remain very excited about our strategic initiatives and are committed to investing in the business to deliver the best interconnected shopping experience, capture wallet share with the Pro and grow our store footprint. As we discussed at the investor conference in June, we continue to invest and focus on creating a frictionless interconnected shopping experience for our customers. We are pleased with the progress we are making. homedepot.com is one of the largest retail websites in the United States, and our digital app is one of the most highly rated in all of retail. And yet, we believe there is still opportunity to reduce pain points across the shopping journey. Our teams are identifying areas of improvement like better communication throughout the shopping journey and an easier returns process and the ability to seamlessly and intuitively make changes to an order once placed. For our Pros, we're investing in a multitude of initiatives. We remain focused on building out our unique ecosystem of products and services. As a result, we are evolving our organizational structure and recently elevated Ann-Marie Campbell to Senior Executive Vice President, better aligning our outside sales and service business in the global stores organization. Pro is one of our biggest growth opportunities, and this organizational change will allow us to better serve them by leveraging our full ecosystem of expertise, product assortment, fulfillment, and operations. Our merchants, store MET teams, supplier partners and supply chain teams did an outstanding job delivering value and service to our customers throughout the quarter, and I'd like to close by thanking them for their dedication and hard work. In addition, the Home Depot is proud to have tens of thousands of veterans, service members, and military spouses in orange aprons. Last week, we announced The Home Depot Foundation surpassed the goal of $500 million invested in veterans causes and also increased the total commitment to $750 million by 2030. And with that, I'd like to turn the call over to Ann.

Thanks, Ted, and good morning, everyone. Let me start by saying that I'm very excited about my new role and the alignment this will create between the outside sales and services business and the global store organization. As you heard at our investor conference in June, capturing a greater share of the Pro's wallet is one of our largest growth opportunities. It represents roughly $475 billion in addressable market, and today, we have relatively little share. The beauty of The Home Depot is that we have unique competitive advantages. Our convenient stores, our leading brands, our engaged associates, our expansive fulfillment options that are unmatched and that can be leveraged for the benefit of our customers. And that's exactly what we aim to do. To do that, our new organizational structure will create stronger momentum with our teams to drive success with the Pro. Hector Padilla will focus on improving the experience for Pro's shopping in our stores. His 29-year tenure and knowledge of our store operations and new Pro capabilities will be instrumental in achieving our goals. And Chip Devine, our Head of Outside Sales, brings nearly 30 years of distribution experience. He will work on building out capabilities to better serve more complex private needs. Ultimately, we must focus on removing friction within our operations, so our customers have a great experience every single time no matter how they choose to shop with us, whether in the aisles of our stores, picking a product at the store, receiving product at their job site with a sales associate or digitally. We know that most of our Pros use many of these capabilities across our ecosystem when shopping with us. For us, we are building trust and a partnership that lasts for decades and across generations. This means we have to work hard to deliver a great experience regardless of their point of interaction. As you know, we have identified additional growth opportunities with the Pro, which requires us to invest in new capabilities and functionalities across the business. Think about the initiative we are undertaking with the complex Pro. This customer interacts differently. They are accustomed to interacting with their suppliers in a different way than our traditional business model. Pros working on complex projects want to reserve product, use trade credit and have products delivered to their job site in a staged manner. While these capabilities exist in the market today, we are incorporating them in our full ecosystem to serve Pro customers in a way no one else can. I could not be more excited about the opportunity that lies ahead. And for the in-store experience, over the last several years, we have talked about the importance of in-stock, and ultimately, on-shelf availability or OSA. Having the right products in stock in the right quantity and on the shelf available for purchase is critical, and we've implemented several initiatives to help us do this more effectively and efficiently. In the past, we've talked about GSR or get stores right. GSR drives productivity by using our proprietary space allocation model coupled with our tenured field merchandising teams to determine which categories to invest in on a store-by-store basis. More recently, we have talked to you about our rollout of Sidekick and computer vision. Using machine learning technology, computer vision helps our associates quickly find de-palletized product in the overhead and Sidekick helps direct associates to key bays where OSA is low or outs exist. Today, these tools have been deployed across all U.S. stores. And while early days, they have driven meaningful improvement in our on-shelf availability. The beauty of these initiatives is that they also drive productivity. They make it easier for associates to restock product, have a greater depth of high-velocity product, and ensure we remain in stock with more products on the shelf and available for sale. As a result, we enable our associates to focus on the most important tasks and allocate more time to deliver a better shopping experience. These are just a few examples of the many different types of initiatives that can drive significant value for our customers, our associates, and our shareholders. Despite a challenging year, our amazing associates have remained engaged and ready to serve our customers, and I want to thank them for all they do. With that, let me turn the call over to Billy.

Thank you, Ann, 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, our sales were in line with our expectations. However, we did have some unfavorable impacts from core commodity deflation and storm-related overlaps. We saw the continuation of the trend that we have been observing throughout the year with softness in certain big-ticket discretionary-type purchases. Instead of engaging in larger projects, customers continued to take on smaller projects. Turning to our department comp performance for the third quarter. Our Building Materials department posted a positive comp and seven of our remaining thirteen merchandising departments posted comps above the company average, including plumbing, appliances, hardware, outdoor garden, millwork, tools, and paint. During the third quarter, our comp transactions decreased 2.7% and comp average ticket decreased 0.3%. Excluding deflation from core commodities, we experienced comp average ticket growth, primarily driven by demand for new and innovative products. Deflation from core commodity categories negatively impacted our average ticket growth by approximately 60 basis points during the third quarter, driven by deflation in lumber and copper. During the third quarter, we continued to see a decline in lumber prices relative to a year ago. As an example, on average, framing lumber was approximately $420 per thousand board feet compared to approximately $545 in the third quarter of 2022, representing a decrease of over 20%. Big-ticket comp transactions or those over $1,000 were down 5.2% compared to the third quarter of last year. We continue to see softer engagement in big-ticket discretionary categories like flooring, countertops, and cabinets. However, we saw big-ticket strength in Pro-heavy categories like roofing, insulation, and portable power. Turning to total company online sales. Sales leveraging our digital platforms increased approximately 5% compared to the third quarter of last year. We continued to invest in the digital experience across our website and app and released a variety of enhancements in the third quarter. These range from simple improvements to help customers track orders to more complex things like updating our search and recommendation algorithms. For those customers that transacted with us online during the third quarter nearly half of our online orders were fulfilled through our stores. During the third quarter, we hosted our Annual Labor Day and Halloween events, and we're pleased with the results. In appliances, we were encouraged with the customers' engagement during the event. And 2023 was another record sales year for our Halloween program, both in-store and online, as our customers continued to add to their collection with our unique and exclusive product 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. In our gift center, we continued to lean into brands that matter most for our customers with our assortment of Milwaukee, RYOBI, Makita, DEWALT, RIDGID, Husky, and more. We will have something for everyone, whether it's our wide assortment of cordless RYOBI tools, DEWALT Atomic Drill and impact kits, or our new Milwaukee M18 FORGE batteries. These new M18 FORGE batteries will be a game changer for our Pro customer, providing the most powerful, fastest-charging, and longest life of any battery on the Milwaukee M18 platform. This quarter, I'm also excited to announce the addition of WAGO to our powerhouse assortment of Pro brands including Milwaukee, USG, Custom Building Products, Leviton, and QEP to name a few. It is these strategic vendor relationships that make us the product authority in home improvement and the addition of WAGO will help extend our position. WAGO is one of the top requested most innovative Pro brands in the wire connector segment that features a releasable level log wire connector that speeds up installation and saves space in tight applications. We recently launched a number of SKUs in our stores, which are exclusive to The Home Depot in the national big box retail channel. Our merchandising organization remains focused on being our customers' advocate for value. This means continuing to provide a broad assortment of best-in-class products that are in stock and available for our customers when they need it. We will also continue to lean into products that simplify the project, saving our customers time and money. That's why I'm so excited about the innovation we continue to bring to the market. With that said, I'd like to turn the call over to Richard.

Thank you, Billy, and good morning, everyone. In the third quarter, total sales were $37.7 billion, a decrease of approximately $1.2 billion or 3% from last year. During the third quarter, our total company comps were negative 3.1% with comps of negative 2.1% in August, negative 3.4% in September, and negative 3.7% in October. Comps in the U.S. were negative 3.5% for the quarter with comps of negative 2.5% in August, negative 3.8% in September, and negative 4.1% in October. In local currency, Mexico and Canada posted comps above the company average. It is important to note that adjusting for storm-related overlaps and some seasonal shift, monthly comps were relatively consistent across the quarter. In the third quarter, our gross margin was 33.8%, a decrease of approximately 20 basis points from the third quarter last year, which was in line with our expectations. During the third quarter, operating expense as a percent of sales increased approximately 120 basis points to 19.4% compared to the third quarter of 2022. Our operating expense performance during the third quarter reflects our previously executed compensation increases for hourly associates as well as deleverage from our top line results. Our operating margin for the third quarter was 14.3% compared to 15.8% in the third quarter of 2022. Interest and other expense for the third quarter increased by approximately $30 million to $438 million. In the third quarter, our effective tax rate was 23.3%, down from 24.4% in the third quarter of fiscal 2022. Our diluted earnings per share for the third quarter were $3.81, a decrease of 10.1% compared to the third quarter of 2022. During the third quarter, we opened 7 new stores, bringing our total store count to 2,333. Retail selling square footage was approximately 242 million square feet. At the end of the quarter, merchandise inventories were $22.8 billion, down $2.9 billion or 11% compared to the third quarter of 2022. And inventory turns were 4.3 times, flat to one year ago. 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 quarter, we invested approximately $670 million back into our business in the form of capital expenditures. And during the quarter, we paid approximately $2.1 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 38.7%, down from 43.3% in the third quarter of fiscal 2022. Now I will comment on our guidance for fiscal 2023. As you heard from Ted, with one quarter remaining in fiscal 2023, we no longer expect the end points of our previous guidance range as likely outcomes, and therefore, we are narrowing our guidance for 2023. We expect fiscal 2023 sales and comp sales to decline between 3% and 4%. We are targeting an operating margin between 14.2% and 14.1% for the year. Our effective tax rate is targeted at approximately 24.5%. We expect interest expense of approximately $1.8 billion. And we are anticipating between a 9% and 11% decline in diluted earnings per share compared to fiscal 2022. In addition, as you heard from Ann, we continue to focus on driving productivity in the business. We have taken a number of actions that will help us realize the previously announced $500 million in annualized cost savings in 2024 and are fully confident that we will deliver on this commitment. We also remain focused on meeting the needs of our customers with our leading product authority in home improvement, strong in-stock levels, and knowledgeable associates. We will continue to prudently invest to strengthen our competitive position and leverage our scale and low-cost position to outperform our market and deliver shareholder value. Thank you for your participation in today's call. And Christine, we are now ready for questions.

In thinking about inflections and when we might see one, looking at the spread maybe between DIY and Pro is the story of this quarter that maybe DIY has stabilized, but the Pro is getting a little bit worse? And then if that's right, and feel free to correct if that's wrong, would that mean that it could take a little longer than for the Pro sort of normalizing to play out? And actually, the overall comp could get a little worse before it gets better?

Thanks for the question. I would say Pro and consumer had the narrowest performance gap in some time. So they both performed reasonably well. If you step back and look at the quarter, we feel really good about the third quarter and we narrowed our comp guidance for the year because of that. In fact, if you look at the performance of the business overall this year, if you look at the seasonality of the first and second quarters, we're pretty smooth in that minus 3% comp through the first three quarters of this year, and that's normalized for weather and storms and commodity price deflation. And then our regional businesses are also pretty consistent. We've seen the least variability in regions. And as I said, the narrowest gap between Pro and consumer. We had really good seasonal sell-through. And as prices have settled with abating deflation, we feel pretty good about that. And our operations are increasingly getting back to normal. The supply chain is operating very well. Our inventory positions are better. Our in-stock rates are much better, as Ann took you through all the things we're doing in the store to improve on-shelf availability. Our value propositions, as Billy mentioned, are in great shape and product innovation is better than it's ever been. And the wage investments are paying off. Our attrition is way down. And with that attrition being down, our associates have had more time in the store, and their ability to serve customers has improved. So all of that really is what delivered that consistent comp throughout the year. But to answer your specific question, as we sit here feeling really good about the operations, the share shift of PCE from pre-COVID to today has not completely reverted and we're still not exactly sure where that reverts to. The asset class for home improvement is worth $15-odd trillion more than it was pre-pandemic. And we know now that the Fed definitely has a higher-for-longer monetary posture and that's going to continue to pressure durable goods, in financing or motivation for larger home improvement projects. So as we said, we see great engagement, engagement in seasonal goods, engagement with smaller projects. It's the larger projects that are a bit down at the moment. So that's what we're watching. I mean, we're not obviously talking about 2024 today, but lots of good news in the operations of the business. Great news with still a very resilient customer. I mean, we just came off of 4.9% GDP in Q3, driven by the consumer. But as you know, we're looking at it this year, this period of moderation for home improvement spend. But I couldn't feel better about the business and our operations overall.

You mentioned GDP earlier. Considering that home prices appear to be quite stable despite low turnover and may not improve, how should we view GDP? Should we consider it as a more accurate indicator of how the business might perform?

Simeon, this is Richard. We have approached the last few years thoughtfully regarding the business drivers and indicators that show our recovery from the pandemic. That's why we are focusing on our share of PCE. As Ted mentioned, we won't discuss 2024 today. There is a foundation of economic activity that supports our business. However, as Ted highlighted, we have not fully returned to 2019 levels of PCE share. Additionally, the Fed's stance on maintaining higher rates for an extended period may put increasing pressure on the outlook for durable goods and housing-related spending. As Ted mentioned, that is what we are currently monitoring, and we will address 2024 in our call next quarter.

Richard, considering all the ins and outs of your cost base this year with wage investments, you've got the legal settlement in Q1 plus the cost saves next year, is it fair for us to assume your operating margins can expand in 2024? Or is there a certain level of comp that you will need to see to hold this 14%-plus margin?

Thanks for that question. Margin expansion is largely a function of top line growth. There is a point there in the low positive comp digits where you see expense turn from deleverage to leverage. We're not going to take on 2024 guidance today. What we have done is we have put in place measures, and in fact, now have essentially completed actions that will provide us with a $500 million cost buffer heading into 2024. And so regardless of the outlook, that provides some buffer in margin.

Got it. And then you mentioned that you would reinvest the legal settlement gain from Q1. So first of all, any color on what this reinvestment actually is or what it would look like? And then is it fair to say the investment will be largely in Q4? Or was there a part of that in Q3?

We've had part of that spent throughout the year. I think it is still a correct assumption that, that favorability will be fully offset by the end of the year. And so I really point you to our guidance as the best jumping off point for your modeling.

So in some other retail verticals or a lot of other retail verticals, we're seeing a return to pre-COVID purchasing patterns where you probably see more activity, purchasing activity on weekends and around holidays and events with, frankly, bigger lulls in between. So the questions are: one, are you seeing a similar general pattern? And two, assuming that is the case, are there ways for you guys to take advantage of that pattern from an operational standpoint to improve productivity?

Yes. Thanks for the question, Scot. It's Billy. Listen, if it relates to different fluctuations in customer patterns and so forth, we haven't seen that. It's been very consistent throughout the quarter. And as Ted mentioned in his prepared remarks, really throughout the year when you account for some of the weather and some of the best effect we saw in the first half. So we haven't seen that. Listen, if it relates to promotional activity whatsoever. We have events in our stores that we love to execute and drive excitement for our customers. But from a promotional activity standpoint, it's really reverted back to pre-COVID times. Our pricing is certainly, as Ted mentioned, settled over the last several months. The environment certainly stabilized. So we operate in a very rational market and promotional environment. As I said, this has returned to kind of pre-pandemic times.

We will always focus on everyday low pricing. While we have fun events during certain seasons that engage our associates and customers, our commitment is to be an everyday low price retailer with great values all year round.

No. We called out in my prepared remarks, categories like portable power and so forth, where we have seen great engagement. And candidly, we're thrilled with the innovation that we continue to partner with our supplier base on that we bring to the market. And where we continue to see innovation, we continue to see great engagement with both the Pro and the consumer.

So a couple of follow-ups to prior questions. My first one is, with the gross margin decline in the third quarter, can you talk a little bit about what drove that? You were lapping storm-related demand and you had some commodity deflation. So I would have thought that those would be positive. So is that fair? And what were the offsets to that drove it lower?

Thanks for the question, Chris. Referring to Billy's comments and what Ted mentioned, I believe the key point we've identified is that the most challenging phase of the inflationary environment is behind us. Consequently, as Billy indicated, retail prices are stabilizing in the market. Some prices are adjusting to levels higher than in 2022, while others are settling lower. However, we are observing a degree of stabilization that Billy can elaborate on. Regarding the quarter and gross margin, there are timing differences as some prices adjusted earlier than the expected benefits from product and transportation cost decreases that will come as we move through our inventory. I consider those to be timing issues. For the full year, our outlook on gross margin remains unchanged, and we anticipate slight year-over-year pressure. Billy, perhaps you can discuss the price stabilization further.

Yes. I mean, as you mentioned, the inflation environment seems to be behind us. Prices absolutely settled in. And again, I reiterate what I said, work in a very rational market. And the other thing I'd add is this is no different than any other time frame, frankly. We have a portfolio approach to how we take on, whether it's lumber deflation that we've talked a lot about throughout the year or other ins and outs as it relates to the P&L. So a very normalized environment, rational and really a stabilization that we've seen across the board as it relates to pricing.

Understood. That makes sense. Regarding variable costs, you mentioned that historically, there has been a low single-digit leverage point along with $500 million in cost savings projected for next year. At the same time, negative transactions have persisted for a while. Can you elaborate on the current situation, particularly how labor might become less variable over time, perhaps relating it to the percentage of stores operating at minimum staffing levels? If we experience negative comps in '24 or over the next six months, will the flexibility provided by the $500 million savings be countered by continued negative transactions and reduced flexibility?

Chris, thank you for your question. There is a lot of speculation about 2024 in that response. I agree with your point. When discussing changes in our labor model, the extent of the change in transactions is not significant enough to suggest a fundamental shift in our labor model.

You talked about the promotional environment discounting being very rational. If the cycle or the downturn for home improvement remains protracted and extended, under what conditions would you expect that discounting will be more intense than it was in 2019 across the industry? And if that were to be the case, would Home Depot choose to remain true to the everyday low price and the portfolio approach that it has or would it look to protect market share and participate in some of that activity?

We will stay committed to EDLP. And our promotional cadences, as we said earlier, the Black Friday, appliances, and gift center and some spring events for seasonal garden items to get traffic in stores, those have been the playbook for years and years, right, Billy, and we don't see us going away from that. In fact, we've stayed truer to reductions of promotions when you think of categories like ceiling fans that I remember was constantly on and off 10% and 20% off. Paint, which was a promotional category, were 5% and 10%, and then it went to 10% and 20s, we've backed off all of that. And on the margin, we prefer to be even less promotional than we are today. If you had a protracted downturn in the market, I mean for sure, we're going to be competitive. And for sure, we are going to protect our share. But when you think of the nature of large home improvement projects, certainly one done by a pro, the labor component is such a big piece of that job. I mean just take paint, for example. If you're painting your living room for $500, the paint in that job is going to be less than $100, and it's your labor bill, either your opportunity cost as a consumer or the pro doing your job for you. So being super aggressive to take $10 off the $100 component of a $500 job, I don't think really moves the needle, and that's why our bias, our starting position would be no, we wouldn't chase a lot of price in that dynamic.

Got you. Very helpful. My follow-up question is, historically, Home Depot has underpromised and overdelivered in just about all facets. Is it realistic to think that you took the same approach when building this $500 million of net cost savings for next year such that there could be upside to that number?

Well, that cost number was really more a function of having built capacity to handle the explosion in our volume during COVID. And then the sort of other side of that pill, where we pulled capacity in many forms back. And so it was the right thing to do regardless of the environment. It does happen to provide a buffer for our operating margin as we move into 2024.

Congrats on the new role. I wanted to focus on the Pro side of the business. So the commentary about growing with the complex Pro. In the past, there's been a focus on the flatbed distribution centers and the rollout on a regional basis. Is that still very much the strategy for the next couple of years? And as you zoom out and think about the opportunity with the complex Pro, what are the top priorities within those next 1 to 2 years?

Steven, thank you so much for the kind words there. Chip is in the room, and he has been intimately knowledgeable about that. And so I'm going to throw it over to Chip, and he'll talk a little bit about some of the capabilities that we continue to leverage and some of the functionalities and capabilities that we will continue to build.

Yes. Thank you, Steven. We are going to continue certainly our march down to the expansion of our outside sales teams and continue to grow the complex Pro as it was mentioned in the earlier remarks, the connectivity into the store is an important part of this asset build as well. Our Pros shop in our stores every single day and connecting that ecosystem to our flatbed delivery systems is part of that. So as we look and expand into different markets as we move forward from where we currently are, we will continue to evaluate the best opportunity to expand those distribution assets as well to support our growth in Pro.

Okay. I wanted to revisit Simeon's question about inflection because I know it's a challenging backdrop to predict. But I guess as you think about the business, what are the key building blocks to take the business from this period of moderation to a more stable market backdrop when you talked about low single-digit market growth? I'm curious if you could opine on, is it really the PCE shift? Is it rates? Just any help you provide would be helpful.

Yes, Steven, for that, we're always looking at a balance between ticket and transactions. And what was interesting during the COVID period, we had inflation. So we had AUR up and we had ticket up, also driven by basket size. But the engagement was so high, you really didn't have elasticities. You had driving ticket in transactions, and that's what led to the 25% comp. As inflation has abated in primarily commodities and those prices have come down, you've seen a fall-off in ticket. And you didn't get the elasticity initially that you'd expect, and that was because people were still powering through projects. And now it's a mix of what's the level of response from pricing versus pull forward versus the Fed stance and higher interest rates. So that's all the dynamic that it's muddying the traditional ticket and transaction dynamic. But what's healthy for us is a solid comp equally balanced between ticket and transactions. And that's what we'd be looking for. And now as we've said, prices have essentially leveled. Our ticket was down modestly. And if you take out commodity, our ticket would have been up for the quarter. And then transactions, we're still working through a bit of that PCE shift pull forward, whatever that dynamic might be. But we'd be looking for growth in each in a nice balance going forward.

The question I have, I think Michael may have asked previously just about price actions, but I guess maybe to expand that a bit further. So we've been discussing now this trend and weakness in bigger tickets for a while. I mean, obviously, a very unique demand backdrop. But again, from your perspective, particularly as you look towards '24, are there other levers that Home Depot could pull to potentially spur better demand within big-ticket other than price?

Well, the primary way we're focused on driving demand is through the complex Pro. This is our key strategy and our main area of focus. We've identified a $200 billion segment within a $950 billion market that is evenly divided between Pro and consumer. Out of the $475 billion for Pro, there is $200 billion that caters to larger professionals with more complex spending, and we are enhancing our capabilities to meet that demand. This is what we are very committed to, and I believe it will be a significant driver for our business over the coming years as we capture market share in this $200 billion opportunity.

Thanks, Ted. Understood. For my follow-up, much quicker. You've narrowed your guidance for the remainder of the year and discussed trends in the fiscal third quarter. Can you provide any insights on sales trends early in fiscal Q4?

Our performance in the first two weeks is on track to achieve our full year 2023 guidance.

Before the pandemic, our average ticket was around $67, and now it's trending closer to $90, reflecting a 35% increase. Richard, do you have any insights on the inflation component for like-for-like SKUs compared to the big-ticket mix? It appears that your like-for-like inflation is stabilizing. While there are innovations that may disrupt the like-for-like comparison, I'm curious about your thoughts on the big-ticket exposure and its potential implications. How significant is that?

Thanks for the question. I believe there are several factors to consider. Firstly, we've observed a decrease in inflation, which appears to be stabilizing across the portfolio. It's noteworthy that there have been various trends in big-ticket items over the years, particularly with fluctuations in lumber prices impacting those results. Billy, could you share some insights on those trends?

Yes. Ted responded to Brian regarding categories like drywall, roofing, insulation, and portable power where we have capabilities and have introduced innovation. We continue to observe positive reactions from both professionals and consumers to these innovations. In terms of big-ticket items, as we've discussed, there have been some deferments, and the pull forward effect is likely still influencing this as we distance ourselves from the pandemic. We will monitor this closely. Overall, we don't see any significant changes. As I mentioned, pricing has stabilized, and the environment remains rational, consistent with what we've observed over the past several months.

Thank you. We've maintained a position very close to that 2x debt-to-EBITDA leverage ratio and we intend to do so in the foreseeable future. We will also really maintain consistency with respect to capital allocation. We invest in the business first. We pay our dividends. And then as we determine excess cash, we flow that to our shareholders in the form of repurchases. To your point, to date, we've repurchased $6.5 billion. There's really no change in our stance. And so I think that's the important takeaway there.

As we look ahead to the fourth quarter, the midpoint of the implied guidance suggests a slight slowdown. However, your business appears to have been stable. Am I interpreting that correctly, or should we be anticipating a slowdown? Additionally, you mentioned that Halloween performed exceptionally well. Historically, your holiday decorating business has shown that in about 10 of the last 14 years, fourth quarter performance has outpaced the third quarter. What makes this year different?

Thanks for the question. The narrowing of the range is truly what it is. We saw the extreme points of that range become less likely and so we felt it would be helpful for our investors for us to narrow that range. There has been an assumption all year from the beginning of the year that our guidance reflected a reversion of our share of PCE from the pandemic time period back to 2019 levels. Our prior guidance range assumes that, that share will continue to revert throughout the year. We've seen that reversion gradually and steadily. And our current range still has an assumption built in for Q4. We're largely reverted, but not all the way back. So there is some notion of that in our guide.

Okay, so it seems like it's just a matter of reaching the midpoint of the range. If I could ask another question, you mentioned storms and seasonality. Many retailers have observed that it's been a warm fall. How does that affect you? Do you need the weather to get colder as we move into the fourth quarter to boost your business? How should we consider that?

It's been a bit warmer, but it hasn't had a significant impact. We've noticed that the weather is starting to normalize. The fall cleanup and business have really picked up. We haven't experienced snow yet, so things are aligning with what we would consider a more typical year, where the weather feels more like fall. You've observed the categories and businesses trending upward in that positive direction.

Tad, or perhaps Ann, could you provide an update on the performance of the Dallas market in Pro sales, specifically the chain average? Additionally, can you share any observations about behavioral differences in Pro markets influenced by the maturity of your strategic initiatives aimed at the complex Pro? Are you noticing any predictable changes in behavior that you can analyze?

Yes. I want to emphasize that the capabilities and functionalities developed by Hector and Chip over the past few years are definitely going to contribute to building momentum and success with the Pro. Chip, I'm handing it over to you since you have a deep understanding of this. Our focus is on the Pro ecosystem, particularly the complex Pro, not just the in-store aspect. As we enhance these capabilities and observe their effectiveness, we will continue to utilize them. Chip, please provide more details regarding Dallas.

Yes. Thanks, Ann. And Steven, yes, absolutely, where we built capabilities inclusive of assets, distribution assets, and where we've expanded our sales force, we've seen meaningful impact in growth. Our outside sales team is the best-performing cohort of all Pro. So we're going to continue, as I mentioned before, to invest in that and then add assets where necessary in the appropriate markets.

Maybe just a quick follow-up for Richard or Billy, all the ticket conversations here, any way to just sum up how the quarter for big-ticket progressed relative to expectations? It sounds like it performed better than expected. You have sort of stabilization in multiyear big-ticket comp trends. I would imagine that wasn't the expectation. But any way to help us frame on how the quarter progressed for big-ticket versus internal plan?

Yes, I think it went largely as we anticipated. I noted some excellent engagement from our consumers regarding appliances. Additionally, we had a stronger inventory position, which contributed positively. Overall, everything unfolded as we expected. Again, as I mentioned earlier, it has been a very balanced year overall, taking into account some early weather changes and the aftermath of the hurricane, with balanced performance across all regions.

I think it's important to thematically just to sort of repeat the point, this stance by the Fed of higher for longer is sort of coming across in surveys. There is a deferral of larger projects. And so if you just want to zoom all the way back to the true macro here and the forces on ticket that we're watching, that's probably the largest macro for us.

That's right.

My question is about the Pro and really just understanding the performance of the Pro relative to the comp overall and then splitting that out between store sales to Pro versus complex project sales to Pro. So just to make sure I'm understanding, you put up, call it, a negative 3% comp. DIY and Pro, very close to one another, U.S. slightly worse than Canada and Mexico. So I'm assuming U.S. Pro, call it, down 2%, 2.5%? And then can you just either verify or correct that? And then can you characterize Pro sales in the store relative to Pro sales outside of the store through the outside sales force and the CFCs?

Well, taking your last part first, it's an ecosystem like Ann said. We're actually not we don't have goals or targets with respect to the separation of store and delivered sales. The point is actually lifting all sales. And that's what we've seen consistently in every market where we've rolled out capabilities. Originally, we worried, okay, our delivered sales is going to begin to cannibalize the store. The opposite has proven true. And so we are progressing in a way that we're pleased. With respect to your first question, factually, the Pro did outperform the consumer in Q3, albeit at the narrowest margin we've seen in quite some time. If you actually normalize for commodity impact, the Pro was essentially flat for the quarter.

Okay. Great. And I guess my follow-up would be when you guys measure big project versus small projects, can you just clarify for us how you're determining what constitutes a big project versus a small? Is it like transaction size over $1,000? And if you could clarify that for us, that would be great.

We infer from category sales and from class sales. When you look at categories that are more likely to sell at higher volumes in larger projects, kitchens, flooring, millwork to an extent, we are doing some inference. We also ask our customers what they're seeing and what kind of projects they're working on. We use external survey data that tells us that the nature of projects is kind of shifting from larger to smaller. And so it's a triangulation.