Home Depot Inc (HD) — Q2 2024 Earnings Call Transcript

Thank you, Isabel, and good morning, everyone. Sales for the second quarter were $43.2 billion, an increase of 0.6% from the same period last year. Our sales in the quarter include $1.3 billion from SRS. Recall that we closed on the SRS acquisition on June 18, and we've included approximately six weeks of their performance in our consolidated results. Comp sales declined 3.3% from the same period last year, and our U.S. stores had negative comps of 3.6%. Adjusted diluted earnings per share were $4.67 in the second quarter, compared to $4.68 in the second quarter of last year. The team continues to navigate this unique environment while executing at a high level. During the quarter, higher interest rates and greater macroeconomic uncertainty pressured consumer demand more broadly, resulting in weaker spending across home improvement projects. Additionally, we saw continued softness in spring projects, which were also impacted by the extreme weather changes throughout the quarter. When we look at the performance in the first six months of the year, as well as continued uncertainty around underlying consumer demand, we believe a more cautious sales outlook is warranted for the year. Richard will take you through the details in a moment, but we are now guiding to a comp sales decline of approximately 3% to 4% for fiscal 2024. Regardless of the current pressure in the environment, our team remains focused on serving our customers and ensuring we have the right products at the right values. And we're focused on long-term share growth in the highly fragmented approximately $1 trillion home improvement market. Remember, we operate in one of the largest asset classes which is estimated at approximately $45 trillion, representing the installed base of homes in the United States. Today, we have roughly 17% market share with tremendous growth potential. That is why we have been investing and executing on our strategy to create the best interconnected experience for a Pro wallet share through a differentiated set of capabilities and building new stores. Now, I'll take a few moments to comment on our acquisition of SRS Distribution. SRS has an exceptional team with a proven growth track record, and we are thrilled to welcome them into The Home Depot family. While our financials only reflect a portion of their first half performance for the first six months of the year matching our first half, they generated high single-digit top-line growth while growing operating income largely in line with sales compared to the previous year. We are incredibly excited about what we can achieve together by leveraging our combined assets, capabilities, and competitive advantages. We plan to drive incremental growth through several sales and cross-synergy opportunities. We will make their more comprehensive product offering in roofing, pool, and landscape available to all our customers through our Pro desk, and we will offer SRS customers a form of credit tied to their account, which will make purchases at Home Depot stores much more convenient. The fundamentals of the home improvement market remain strong, and we have significant growth opportunities in front of us. We are gaining share of wallet with our customers whether they are shopping in our stores, on our digital assets, or through our Pro ecosystem. Our merchants, store and MET teams, supplier partners, and supply chain teams are always ready to serve in any environment. They 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. With that, let me turn the call over to Ann.

Thanks, Ted, and good morning, everyone. As you heard from Ted, despite the environment, our associates continue to be engaged and ready to serve our customers. We know that delivering the best shopping experience for any purchase occasion is critical to our success. That is why we continue to invest in our associates, our in-store capabilities, our fulfillment channels, and the customer experience. Over the past year, we have talked about the tool that helps us create this differentiated experience. Specifically, our focus on in-stock and on-shelf availability or OSA with our Sidekick and Computer Vision applications. Today, our in-stock and OSA are at best-in-class levels and provide the foundation for a fast in-and-out convenient experience that many of our customers desire, especially our Pro customers. We have also enhanced the tools our associates use for our in-store Pros and specialty selling. Within the MyView tool, which has many in-store applications, we have given our associates better visibility to our customers' activity with The Home Depot. For example, for our in-store Pros, we can see sales trends, specific buying patterns, and expiring perks, equipping our associates with insights to better partner with share wallet and deliver value for our customers. To drive conversion for specialty customers, we launched a new platform known as Pipeline Management that enables interconnected product selling for kitchen designs. With this tool, associates and store leaders will now be able to have a consolidated digital view of their pipeline and all activities related to our customer's journey. This allows associates to more easily manage multiple complex projects while more effectively communicating with our customers throughout their journey. Additionally, we continue to make progress on our organic efforts around our different assets and capabilities to grow share of wallet with a complex project purchase occasion. We are pleased to announce that we now have key full capabilities in 17 markets, including a broader product assortment, digital assets, a sales force, and broader fulfillment options. Our trade credit pilot program is also underway, and while it's still early days, we have seen the program resonate with our customers and the benefits of extending credit for larger scale products that are stayed for a longer period of time. We are also making progress on our order management system as we continue to roll out enhancements to the end-to-end selling system. We are very excited about our continued success serving the complex product certification and are focused on delivering the best customer service to all our customers. Our store readiness and execution are strong, and our associates are engaged. I look forward to the many opportunities ahead of us, and I want to thank all our associates for all they do to take care of our customers. 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 second quarter, the higher interest rate environment and greater macroeconomic uncertainty pressured overall project demand. In addition, our sales reflect a softer spring selling season, which was also impacted by extreme changes in the weather throughout the quarter. Turning to our merchandising department comp performance for the second quarter. Our plumbing department posted a positive comp, while power, building materials, appliances, and paint were all above the Company average. During the second quarter, our comp transactions decreased 2.2%, and comp average ticket decreased to 1.3%. However, during the quarter, we continued to see our customers trading up for new and innovative products. Big ticket comp transactions, or those over $1,000, were down 5.8% when compared to the second quarter of last year. We continue to see softer engagement in larger discretionary projects where customers typically use financing to fund the project, such as kitchen and bath remodels. Pros outperformed the DIY customer, but both were negative for the quarter. We saw positive growth with Pros who engage in the Pro Extra program, deliveries to the job site, and our B2B website. Turning to total company online sales. Sales leveraging our digital platforms increased approximately 4% compared to the second quarter of last year. For those customers that chose to transact with us online during the second quarter, nearly half of our online orders were fulfilled through our stores. In addition, during the second quarter, we expanded our partnership with Instacart to improve the interconnected shopping experience nationwide. While we are still in the early days of our expanded partnership, we are encouraged by the results we are seeing. During the second quarter, we leaned into products and projects that resonate with our customers. We updated some line structures focused on innovation and continued to deliver a compelling value proposition while focusing on the customer experience. For example, we upgraded the durability of all Lifeproof Vinyl Plank while also introducing on-trend colors, patterns, and lengths. This helped drive positive comps in the category for the quarter. In water heaters, we recently modified our line structure to better serve the Pro customer needs. We simplified our value proposition, adding new and better features, which drove increased engagement in the category. In paint, we continue to see the benefits of the investments we are making around our products and our fulfillment options, including our in-store service and job site delivery capabilities with the Pro who paints driving continued share gains in the quarter. And finally, we continue to see tremendous success in our outdoor power equipment categories, driving both positive unit and dollar comps in the quarter. As we've mentioned before, we have built a strong competitive advantage with our extensive lineup of battery-powered platforms that allows us to continue to grow share in these categories. As we look ahead to the third quarter, 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. This quarter, we are launching the first-to-market smart glass door with Feather River. Feather River is a leader in the fiberglass door market and continues to bring innovation to our customers. This new door technology allows customers to easily change the glass from privacy or frosted to clear with the push of a button and is compatible with our hub space ecosystem. This will be exclusive to The Home Depot in the big box retail channel. Additionally, we continue to lean in with our exclusive partner in Milwaukee across the business and have seen great adoption of electrical hand tools. Our partnership is expanding with a broader assortment of Made in the USA tools. These tools provide a high degree of precision with lasting results for our Pro customers and will continue to strengthen our position as the number one destination for the electrical trade in the big box retail channel. With that, I'd like to turn the call over to Richard.

Thank you, Billy, and good morning, everyone. In the second quarter, Total sales were $43.2 billion, an increase of approximately 0.6% from last year. Total sales include $1.3 billion from the recent acquisition of SRS, which represents approximately six weeks of sales in the quarter. During the second quarter, our total company comps were negative 3.3%, with comps of negative 3.7% in May, negative 0.9% in June, and negative 4.9% in July. Comps in the U.S. were negative 3.6% for the quarter, with comps of negative 4.1% in May, negative 1.4% in June, and negative 5% in July. In the second quarter, our gross margin was approximately 33.4%, an increase of 40 basis points from the second quarter last year, primarily driven by benefits from lower transportation costs and shrink, partially offset by mix as a result of the SRS acquisition. During the second quarter, operating expense as a percent of sales increased approximately 65 basis points to 18.3% compared to the second quarter of 2023. Our operating expense performance was in line with our expectations. Beginning this quarter, in addition to our GAAP measures, we are providing the following non-GAAP measures: adjusted operating income, adjusted operating margin, and adjusted diluted earnings per share, which exclude non-cash amortization of acquired intangible assets. We believe these supplemental measures will help investors better understand and analyze our performance. Our operating margin for the second quarter was 15.1% compared to 15.4% in the second quarter of 2023. In the quarter, pretax intangible asset amortization was $90 million, including $39 million related to SRS. Excluding the intangible asset amortization in the quarter, our adjusted operating margin for the second quarter was 15.3% and compared to 15.5% in the second quarter of 2023. Interest and other expense for the second quarter increased by $61 million to $489 million due primarily to higher debt balances than a year ago. In the second quarter, our effective tax rate was 24.5%, compared to 24.4% in the second quarter of fiscal 2023. Our diluted earnings per share for the second quarter were $4.60, a decrease of approximately 1% compared to the second quarter of 2023. Excluding intangible asset amortization, our adjusted diluted earnings per share for the second quarter were $4.67, essentially flat compared to the second quarter of 2023. During the second quarter, we opened three new stores, bringing our total store count to 2,340. Retail selling square footage was approximately 243 million square feet. At the end of the quarter, merchandise inventories were $23.1 billion, down approximately $200 million compared to the second quarter of 2023, and inventory turns were 4.9x, up from 4.4x last year. Turning to capital allocation. During the second quarter, we invested approximately $720 million back into our business in the form of capital expenditures. During the quarter, we paid approximately $2.2 billion in dividends to our shareholders. Our disciplined approach to capital allocation remains unchanged. First and foremost, we will invest in the business and expect capital expenditures of approximately 2% of sales on an annual basis. After investing in the business, we plan to pay the dividend, and it is our intent to return any excess cash 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 31.9%, down from 41.5% in the second quarter of fiscal 2023. Now, I will comment on our updated outlook for fiscal 2024. As you heard from Ted, given the softer-than-expected performance in the first half of the year, and reflecting continued uncertainty around underlying consumer demand, we believe a more cautious outlook for the year is warranted. With the recent closing of the SRS acquisition, we are now including their results in our consolidated outlook for the year. For the period matching our first half, which includes periods prior to the acquisition and not fully reflected in our financial statements, SRS generated high single-digit percentage sales growth with operating income growing largely in line with sales. We believe that over the next several years, SRS on its own, and through our combined Pro efforts, will help accelerate sales and earnings growth for our company. Updating our fiscal 2024 guidance for the factors we just discussed, we now expect total sales growth between 2.5% and 3.5%, including the SRS acquisition and the 53rd week. The 53rd week is projected to add approximately $2.3 billion to total sales. SRS is expected to contribute approximately $6.4 billion in incremental sales. Comparable sales are expected to decline between negative 3% and negative 4% for the 52-week period. The high end of our range implies a consumer demand environment consistent with the first half of fiscal 2024. While comparable sales for the Company are not currently on the trajectory for the low end of the range, a negative 4% comp implies incremental pressure on consumer demand beyond what we are seeing today. We expect to open approximately 12 new stores. Our gross margin is expected to be approximately 33.5%. We expect operating margin to be between 13.5% and 13.6%, and adjusted operating margin to be between 13.8% and 13.9%. Our effective tax rate is targeted at approximately 24%. We expect net interest expense of approximately $2.2 billion. Our diluted earnings per share percent will decline between negative 2% and negative 4% compared to fiscal 2023, with the extra week contributing approximately $0.30. We expect our adjusted diluted earnings per share percent to decline between negative 1% and negative 3%, compared to fiscal 2023, with the extra week contributing approximately $0.30. We believe that we have positioned ourselves to meet the needs of our customers in any environment. The investments we've made in our business have enabled agility in our operating model. As we look forward, we will continue to invest to strengthen our position with our customers, leverage our scale and low-cost position to drive growth faster than the market and deliver shareholder value. Thank you for your participation in today's call. And Christine, we are now ready for questions.

So, it sounds like you guys are seeing a bit more of a shift towards, let's call it, broader consumer weakness from what previously seemed to be hesitancy around finance projects. Can you provide a couple of examples just so we can better understand kind of the incremental hesitancy on consumer spending patterns?

Well, I think it's just in broader projects, Scott. As we said in the prior couple of few quarters, the consumer remains engaged. Our consumer, in particular, remains quite healthy. Again, these are consumers who have seen their home values go up 50% in the last four years; their home equity has increased almost 70% since right before the pandemic. So, that translates to over $13 trillion. Equity values have been strong, jobs are strong, earnings are strong. But we saw engagement the last several quarters in smaller projects. What we saw this most recent quarter is further pressure in larger projects. We see that in building materials in lumber categories that are very specifically tied to construction in a larger project. That was really the change that we saw as the quarter progressed.

So, in other words, like it's not necessarily broadening out, but it's increased pressure on, let's call it, project-oriented purchases?

Yes. As you mentioned, there has been a change over the course of the quarter. Looking back, we've been navigating a period of moderation, and the first notable shift was in spending, with consumers moving from purchasing goods to services. We have essentially completed that transition, and the share of spending is roughly back to pre-pandemic levels. We also experienced some pull forward in our segment, and while we're not completely past that, we’re mostly through it. It's been nearly four years since the onset of the pandemic when there was a surge in purchases like grills and patio furniture. Now, we're seeing the effects of higher interest rates on the housing market, particularly housing turnover, which has decreased by about 40%. Recent numbers indicate we're nearing 40-year lows on an annualized basis. This decline is affecting customers' willingness to finance larger projects, as many are anticipating a drop in rates and are postponing those undertakings. Additionally, there are now broader concerns regarding the macro economy, with considerable uncertainty stemming from the political and geopolitical climate, rising unemployment, and inflation eroding disposable income. Consequently, consumers seemed to hesitate as we moved through the quarter, likely due to these macro uncertainties.

I wanted to ask about just performance across different channels. So, core Home Depot retail, I think that's pretty clear. But Home Depot or HD Supply, it seems like it's outperformed, but kind of hard to tell from our side. And then on SRS, if you can maybe just elaborate more on the trends you're seeing there. As you step back and think about, hopefully, an eventual recovery, you've built up this very diverse business over the last few years. I mean, how do you think about the timing of these different segments and how they come out of this?

Sure, Seth. We're very proud of all components of our business. We are executing exceptionally well across our core operations and the businesses you mentioned. While we don't separate HD Supply from our core, we are pleased to report that both we and HD Supply have recently achieved strong sales growth in the second quarter, which is a positive highlight for The Home Depot. Regarding SRS, as we mentioned when we acquired them, this is a growth company acquiring another growth company. SRS has consistently outperformed its competition in all its verticals over the past 15 years. In the first six months of the year, despite only owning them for six weeks, they experienced high single-digit growth in the first half. They also showed substantial growth in the second quarter, and we anticipate they will report single-digit growth for the entire year of 2024, even though we will only have owned them for seven months by then. These two business models, HD Supply and SRS, exemplify market leaders who are skilled at increasing their market share and achieving solid financial results.

Yes. And I'd add to that, Seth, we're not going to break out operating segments. But in HD Supply's case, there are some appropriate comparisons in SRS; there are very much publicly traded comparatives. We feel really good about the MRO business, the roofing, the pool, and the landscape business against those comparables.

Okay. That's super helpful. And then if we just zoom back in on core Home Depot, maybe just speak about your relative performance. If there are categories that you may be seeing some widening gap. You called out a number of categories that seem to be under a lot of cyclical pressure, but were cited as bright spots, outdoor power equipment, you mentioned appliances above average. Obviously, that's been a tough category. I think you even mentioned vinyl plank having positive comps. So maybe just speak to some of those categories and where you may be seeing that widening gap?

Thanks, Seth. So, it's Billy. Listen, as I did mention in our prepared remarks that we continue to talk about the finance projects, we continue to see ongoing pressure. I don't think that's new news. Having said that, we called out a number of businesses that you just mentioned, vinyl plank, we saw great performance in both sales and unit comps. Water heaters, as I mentioned, certainly, paint. We're thrilled with the efforts we've had in paint with the Pro that paints and our paint business in total. And again, power across our platforms as well. So non-finance projects, while we did see some softness in some of the seasonal pieces that we alluded to in our prepared remarks, the continued ongoing pressure of just the uncertainty as it relates to interest rates, it's going to continue to put some pressure on those finance projects. But we're pleased with some of the other pieces I mentioned, larger ticket, one-time purchase categories like riders, as an example, we continue to see good engagement in businesses like that as well.

What do you think the key level for the 30-year fixed rate mortgage needs to fall to in order to drive Home Depot business higher? And does that rate change, or that level change, is the decrease in rates due to an erosion in the labor market rather than just a moderation in inflation?

Michael, full question there. Hard to pinpoint what that magical rate number is historically and then, as you say, with some added pressure. All I can do is reference towards the end of last year when rates came off the highs over 7% and moderated down; I think even hit below 6.5% there for a bit. You saw an immediate increase in housing activity, mortgage applications, mortgage refi applications. Unfortunately, the rates spiked back up, think almost to 7% again. So, we're trending down again. I think you're approaching 6.5% for qualified mortgage. Based on what we saw towards the end of last year, we would think you're approaching a level that people are going to engage. A caveat to that would be, again, this broader economic and geopolitical concerns that people still might pause a little bit until some of this gets sorted out, which would be understandable. But as rates head down towards 6%, we would expect to see activity. The other thought or piece of this whole puzzle is the number of folks, as you know, who are in mortgages as low as 3%. Plenty of mortgages under 5%. There's definitely a little bit of a golden handcuff dynamic going on with those rates. But again, as time goes on, family dynamics change. One or two years, you might stay in those golden handcuffs and enjoy the low rate, but family size increases, household formation, moves for employment, retirement, etc. We would see a gradual unlocking of that even if that adds to a little bit of a delayed response to housing from a traditional rate cut environment.

Okay. My follow-up question is, the longer that this downturn persists, does Home Depot have an inclination to invest more in price or value as a way to grab market share that it could sustain on an eventual upturn? And maybe as a part of this, could you pull apart your updated gross margin guidance to reflect the underlying dynamics within core Home Depot versus the influence of SRS on this line item?

Yes, Michael, thanks. I'll take the first part of that, and then I'll hand it to Richard on a second piece of that question. As it relates to just the promotional activity, I mean, listen, we're going to continue to drive innovation and create value for our consumers. We are in a very rational environment as it relates to the home improvement sector. While there's been some pressure in categories like appliances, we don't see the need or are in the environment where we need to be more promotional. We're focused on driving innovation and value, creating opportunities for our customers to come into our stores every day. We don't want to be in the promotional business. We feel very good about our position and creating these opportunities and excitement in our stores around just those things, and we've seen great adoption. We've been able to bring value into the marketplace. Areas like our proprietary brands continue to perform very well, and we're very pleased with that and don't see a change in really the promotional cadence going forward. Now, I'll toss it to Richard for more on the gross margin piece.

Yes, let me expand on the question since it's important to provide broader context. If you're inquiring about gross margin, let's focus on SRS for a moment. In last June's Investor conference, we outlined a base case predicting a 3% to 4% increase in sales and a high single-digit to mid to high single-digit growth in earnings per share. The acquisition of SRS is one of the factors that could accelerate our growth beyond that base case. Our goal with SRS is to increase our market share with professionals, accelerate sales growth, operating profit growth, and earnings per share growth. From a sales and operating profit perspective, SRS is already making an immediate contribution to our company. In terms of earnings per share, SRS will contribute positively in cash EPS during the first 12 months of our ownership, as we indicated in March, factoring in the amortization of associated non-cash intangibles. Regarding how SRS is incorporated into our financials, we have included six weeks of results from SRS in Q2 and will account for approximately seven months of results in our full year. SRS has a different product mix compared to Home Depot; about two-thirds of their products are roofing and the remaining one-third includes pool and landscape items. SRS maintains margins similar to those of The Home Depot, but these products generally have a lower gross margin compared to our overall average. For the second quarter, SRS impacted our gross margin by approximately 35 basis points. Annualizing that, it suggests a reset of our margin profile by about 45 basis points, which will translate to about 35 basis points for 2024. In terms of how SRS affects our operating margin, incorporating SRS lowers our base operating margin profile by about 30 basis points in Q2 and approximately 40 basis points for the full year of 2024. When annualized, this adjustments represents about 60 basis points over a year. These figures are GAAP-based, and we can discuss adjusted numbers if necessary. Again looking at gross margin for the quarter, it’s important to highlight some outstanding performances across our operations. We’ve seen significant transportation benefits from our supply chain and merchant partners, along with a notable decrease in shrink compared to last year. We have achieved multiple consecutive quarters of shrink benefits. The driving force behind this performance is our exceptional team, and the returns from our investments continue to be outstanding. To sum up, when you evaluate our gross margin performance year-over-year and exclude the SRS mix shift of 35 basis points, we actually achieved a 75 basis point improvement compared to last year, reflecting an exceptional gross margin performance across our entire team.

I have a question about reversion. In 2019, when we examine transactions, they appear to be relatively flat or slightly declining. As Ted mentioned earlier, most of that decline seems to be related to transactions. However, ticket prices are still up around 30 to 34 percent. This increase seems to be influenced by the number of items consumers include in their baskets and the impact of inflation. My question is whether there are any indications that product prices, excluding commodities like lumber, are showing signs of deflation or a decrease in inflation within the channel.

No, Simeon, thank you for your question. Your calculations are quite accurate. The good news is that we are not experiencing any significant reduction in costs or retail prices. As we outlined for Average Unit Retail this year, we anticipated a pressure of around 150 basis points in the first half, which would ease to 50 basis points in the second half. This change is primarily due to comparing against last year's cost and retail adjustments. There isn't much new activity impacting costs or retail prices. In fact, we have a strong team collaborating with our merchants on this, and the current situation is fairly neutral, with minimal activity. As Billy mentioned, we will not be engaging in promotions; we are an everyday low price retailer dedicated to providing value to our professionals consistently. The cost and price environments are neutral, and we haven't observed significant trading down or an increase in other pricing penetration. Everything appears quite stable compared to previous periods. The changes in Average Unit Retail are primarily a result of comparisons, and we do not foresee fluctuations in our cost or retail levels from where they currently stand. Keep in mind that costs from our suppliers involve more than just material input costs; we have a comprehensive understanding of this thanks to our cost finance team. However, over the last four years, labor costs have notably risen, and we are still managing transportation costs. So while it's easy to view the current situation as highly inflationary and expect a reversal, the overall cost structure, especially concerning labor, has similarly increased. This is why we do not see irrational price reductions in the marketplace.

Okay. Follow-up, trying to think about what the core business is doing in terms of decremental margins in the second half? I think some of Richard's comments before gave us some more clues. But it looks like the EBIT dollar guidance of the whole business, dollars are roughly the same. We had a one single point before. So whatever we're losing from the core, it seems like we're picking back up in SRS. It looks like the decrementals are somewhere around 20% to 25%. Is that right? Is that the right run rate if this sort of negative comp or low negative comp environment persists?

Let's discuss our performance to date and how our guidance reflects that performance. We have actually exceeded some expectations in our cost of goods sold, and the team has managed expenses remarkably well. At the beginning of the year, we set a guidance of a negative 1% comparable sales with a 14.1% operating margin. If we adjust the comparable sales from a negative 1% to a negative 3%, we would generally expect a decrease of about 25 to 30 basis points in our operating margin due to the drop in top line expectations. However, we have experienced favorable conditions year-to-date that positively impact our earnings. Excluding SRS for simplification, if our operating margin were to drop, it would typically go to approximately 13.9% to 13.8% at a negative 3%. Instead, we are now guiding for an operating margin of 14% at a negative 3%, effectively maintaining that core margin despite the decline in comparable sales. This stability is due to the benefits we've gained from our strategic investments. With SRS included, there is a mix shift affecting our operating margin base, which adjusts that 14% guidance to 13.6% at the higher end of our negative 3% range.

You guys talked about SRS revenue growth in the high single-digit range year-to-date, which is really strong in this environment. I'm curious what's driving that success? Were there some acquisitions made by SRS? Has it been all organic? And I guess, how do we think about that growth rate as we move into '25?

Thanks, Chuck. Yes, they remain a robust share-taking grower, and that high single digit is split roughly equally between organic growth and lapping of acquisitions.

Okay. Great. And any thoughts on how the pace of that will go into '25?

Yes. We wouldn't give any guidance in '25. But remember, their mode of growth, which they have demonstrated since inception in the mid-2000s, is there a balanced grower between comping their existing branches, their open base of branches, opening greenfield branches, and then some roll up M&A, geographical customer list add-on. So, that's the profile that they've grown for years, and that is exactly the profile that we will support going forward.

And just for clarity's sake, SRS is not in our comp base. So, they are not reflected in our comp sales guidance. They will become comp once we've owned them for 12 months.

Okay. That's helpful. And then, Richard, you've talked about the consumer deferring projects over the past few quarters. But as the prospects for lower rates begin to materialize, I mean, we can start to see the line of sight for maybe a 6% mortgage rate. Is it possible that the pace of deferrals begins to ramp higher over the next couple of quarters? And if that's the case, what parts of your business do you think could be most exposed?

Well, intuitively, it's probably the converse of what we've seen. You think about the categories and Billy, please chime in. But those things that are components of the large project, kitchen, bath, flooring, and lighting are all under pressure. Our customers tell us it's because that large project is being deferred. We're certainly not going to try to call timing. But just to echo what Ted said, there is certainly a direct relationship between decreases in mortgage rates and the amount of activity that you at least see picking up in turnover. The important point here is, as we've said for years, the long-term fundamentals of home improvement demand are strong. We have continued to invest through this period of moderation. 2024 marks the highest amount of CapEx that we've invested back in the business really in the last 15 years because we are bullish on the future. Timing is uncertain, but we're going to be ready for it.

So, my first question, just with respect to the pace of comps. The numbers you gave at your prepared remarks, there was a mark slowdown from June to July. Is there anything that's notable there? Or was it just that growing delays we talked about?

Yes, Brian, thanks for the question. To reiterate, in our comps, we were minus 3.7%, minus 0.9%, and then a minus 4.9%. While we did see some softness in July, as we alluded to in Ted's comments, there's no question that the extreme heat took some sales in weather-related categories. Think ACs and fans, think air circulation, think watering; those typically come for us in the July timeframe, and we saw, as I think everyone on the call is aware, a pull forward of that significantly back into June. So, it was really just a shift as we saw some of those categories move into the back half of June. I'll let Richard expand a little bit further.

Yes. And Brian, Billy's comments were spot-on. There were signs of maybe a little more general weakness. The major driver was those heat-related categories. There were some signs of more general weakness. That had an influence on our guidance range. But let's just talk about that range and kind of how we've started off the quarter. August has started off at a level consistent with what we would expect in a negative 3% comp result for the year. August comps are better than July, right? There are a lot of factors that went into our guidance. But again, August has started off at a level consistent with what we'd expect in the negative 3% comp case.

That's very helpful. I appreciate that. And the second question I have, I guess, the bigger picture. But when we're talking a lot about SRS, the acquisition now is closed. You're working on the integration. Because we're watching Home Depot, this continued push into the professional market, I mean, should we be expecting you to be exploring other acquisition opportunities there?

Well, Brian, as I said, SRS will continue their activity to fill in geographies and segments, etc. Look, we just made a very large acquisition that we feel great about in the early, early days of joint business planning and value creation. We've always talked about utilizing M&A for growth opportunities, whether it's segments or geographies or customer bases. Expect us to continue to do that, but do not expect us to do anything large having just done this very significant transaction with SRS.

It sounds like the Pro spread widened versus DIY relative to Q1. Curious if there's any call out there? And then you mentioned positive comps for Pros engaging in your new ecosystem. I'm curious what percent of Pro's this now represents and how you expect this trajectory to trend now that SRS is under your belt?

Yes, Zach, it's Ann-Marie. Pro certainly outperformed due to our selfers in the quarter. As we have mentioned, we continue to invest in the Pro ecosystem to accelerate growth and really drive and grow the share of wallet. I'll go it over to Chip and just speak a little bit about the investments and what we're seeing there.

Yes. Thanks, Zach. As we've mentioned in the past, we're investing in markets. Last year, we had 14 markets we invested in. We'll be fully invested in 17 markets this year. When we talk about investing in markets, it's a distribution supply chain capability play, foundational capabilities that help us better serve the Pro. Most importantly, our expansion of our outside sales team. We've seen positive growth in all of those markets since we've been investing, and we see that quarter after quarter. So, we're very, very pleased with our progress over the last 1.5 years as we've marched and we continue to march in '25 with the same progress and expectation of expansion.

Got you. And then, Richard, two quick ones. First on buybacks and how we should think about the timeline around the return? And then second, on the long-term structural margins. You gave some good detail around the impact of SRS. Curious how we should think about the new high watermark in recovery over time?

Well, let's talk about share repurchases. As we announced, as part of the SRS acquisition, we financed the acquisition with $10 billion in bond issuances and then some short-term commercial paper raising. We are currently at a 2.6x debt-to-EBITDA ratio. We like to see that ratio around 2.0x. It's our intent to deleverage over time before we restart repurchases. That's going to take us likely into the year 2026, and we will obviously update our investors on how that looks over time. But that would be the kind of the current calculation, sometime in 2026, we have returned. As for a long-term structural perspective, when we laid out our base in an accelerated case, we said to the base case, we anticipate that we will always generate some degree of operating leverage. That will always remain true. We're not going to talk about a high watermark. We're executing with exceptional expense management, and we are delivering above the profitability we would have expected at this top line rate. We are happy that we're running the business as it should be run. We believe in those base case and accelerated cases that we laid out in June.

Maybe just a quick follow-up on SRS. Ted, you mentioned the growth rate and broke it down 50-50 between comp. And I think you said lapping acquisitions. So maybe just give us an update on where the branch count is today? And then how would you sort of summarize the capital spending needs of that business to fund both greenfield and acquisition-related expansion as it included in the CapEx guidance?

Sure. The good news is on their greenfield operations, it's reasonably capital light, at least a more modest-sized facility than a Home Depot DC would be. Think of this as a branch operation. High-turning inventory and variable pay for the sales force. They tend to be breakeven in year one of operation. Similarly, when they make infill acquisitions, they have a great process to get that acquisition up on their ERP system. They literally do it over the weekend. They acquire a company on a Friday, and when that company opens up on a Monday, they are on the core ERP system of SRS. That lets them get the operating process and technology synergies very quickly. They have a track record of doubling EBITDA of acquired companies in the first three years of ownership. So, it's reasonably asset-light. It's quickly profitable on a greenfield basis, and it's multiples of earnings expansion on an acquired company. Since we owned them, they've made, in fact, I think last Friday, they closed on a small pool deal. They have a couple more under LOIs. These are modest infill acquisitions that they do in the normal course of business. We're really excited to watch them grow. Again, it's reasonably asset-light on greenfield, and the multiples they're paying, as you can imagine, are on smaller regional companies that are generally in single-digit EBITDA multiples. So, nice earnings profile on their acquisition case.

And Steven, on branches, they're about 775. So, when we announced in March, it was 760; you can see their growth profile. They've opened 20-plus branches just in the last few months. These folks are super growth oriented.