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Good day everyone and welcome to today's Home Depot second quarter earning conference call. As a reminder, today's call is being recorded. Beginning today's discussion is Mr. [Bob Burton], Vice President of Investor Relations. Please go ahead, sir.

Good morning everyone. Thanks for calling in and welcome to the Home Depot's second quarter conference call. As we reported this morning, the earnings results for the company were $0.39 per share. This performance is a company record and marks our return to double-digit net income growth. It also betters consensus estimates by $0.2 in the face of a retail environment that continues to be challenging. Joining us on our call today are Bob Nardelli, President and Chief Executive Officer of Home Depot, Carol Tome, Executive Vice President and Chief Financial Officer together with other Home Depot executives. Carol will review the details of the quarterly results, Bob will offer his comments, and then we will take your questions. As a reminder, the question and answer session is available to all interested parties, although questions will be limited to analysts and investors. We will be available for media questions following the call. This conference call is being broadcast real time on the Internet at www.Homedepot.com. We will also offer an Internet replay of the call for a five-day period and a two-day telephone replay, which is available at 719-457-0820 with the confirmation code of 625329. Before I turn the call over to Carol, let me remind you that our discussion today will include forward-looking statements relating to our estimates and expectations. Additional information concerning factors that could cause our actual results to materially differ from these forward-looking statements is included in our 2000 annual report on Form 10-K. We caution that written or oral forward looking statements speak only as of the date they are made and our actual results may differ materially from the present expectations or projections. I will now turn the call over to Carol.

Thank you Bob, and good morning everyone. Although, second quarter results continued to reflect a difficult economy, I am delighted to report that Home Depot delivered earnings above expectations. During the quarter, we saw a return to positive comparable sales, improvements in expense control, and higher labor productivity. My comments over the next few minutes will review the quarter's performance in detail and provide some guidance for the third quarter of 2001. Second quarter 2001 net earnings totaled at $924 million; up from $838 million in the second quarter of fiscal 2000. Diluted earnings per share were $0.39, 8%, or 3 pennies ahead of the prior year and 2 pennies ahead of consensus. Sales for the quarter totaled $14.6 billion, up 16% from the prior year. This increase in sales was achieved primarily through new store openings, which increased our total store account to 23% from the second quarter of 2000 as we accelerated new store opening into the first half of the year. Comparable store gained 1%, slightly ahead over our expectations and a solid performance, given the current economic environment. During the quarter, we had several merchandising events that supported strong sales in appliances and paints, and very strong sales in energy efficient products, as we positioned Home Depot to be the customers' primary source of product knowledge and selection in this category. During the quarter, we also saw certain commodity prices increase versus last year, particularly in our lumbar category.

Over the past year, lumbar and building materials price depletion had pulled down comps by as much as 2 percentage points. In the second quarter, it had an immaterial impact. Looking at various recent economic indicators, we continue to be cautious in our expectations for sharp recovery. Consequently, we expect comparable store sales to be flat to slightly positive in the third quarter. During the second quarter, we added 71 new stores bringing our total store count to 1249. During the first six months of 2001, the Home Depot added 115 stores; a 40% increase over the number of stores opened in the first half of 2000. The stores opened in the quarter included 63 Home Depot stores, four EXPO design center stores, and four stores that were recently acquired in Mexico. We also relocated three stores. Of the stores opened during the quarter, we opened 22 in May, 23 in June, and 26 in July. In the third quarter of 2001, we plan to open 46 new stores, including 4 EXPO design centers and we remain on track to open 204 stores this year. We expect to have 1338 stores by end of the fiscal 2001, an 18% increase over 1134 stores at the end of fiscal 2000. Store productivity matrix improved from first quarter performance, but continues to reflect the weak economy. Selling square footage increased 24% from last year to 135.9 million. The average square foot per store was up 0.5% to 108,800 compared to 108,200 last year. Customer transactions grew 14.5% to 295 million for the quarter, up from a 12% increase in the first quarter.

For the year to date, customer transactions are up 13.4%. Our average customer ticket increased 0.4% to $48.93 for the quarter from $48.74 last year and was down 0.6% for the year to date. The year to date decrease reflects the impact of lumbar and building material price deflation in the first quarter. Our weighted average weekly store sales for the quarter were $923,000 compared to $984,000 last year, a 6.2% decrease. This decrease reflects the economic climate, the acceleration of store openings into the second quarter, and the resulting change in store mix. For the year to date, weighted average weekly sales were down from 7.8% to $866,000 from $939,000 last year. Sales per square foot for the quarter were $441.25 versus $472.98 last year, a 6.7% decrease reflecting the factors I mentioned a moment ago. For the year to date, sales per square foot declined 8.3% to $414 from $45 and $0.35 last year. Growth margin for the second quarter was 29.68%, an increase of 5 basis points from the prior year, which is in line with our guidance. Gross margin performance reflects merchandising initiatives, razor sharp pricing and the following:

First, the increase in the number of tool rental centers continues to provide margin benefits. At the end of the second quarter, we had 419 tool rental centers, compared to 235 at the end of the second quarter last year. Second, we continued to see benefits from product line reviews conducted within the past year, which are contributing to the lower cost of merchandise. As discussed in the past, however, benefits from product line reviews are moderating. Finally, gross margin in the second quarter reflects higher penetrations of low margin applying itself. Turning to gross margin assumptions, we currently anticipate that the third quarter gross margin rate will be flat to slightly better than that reported for the third quarter of 2000 reflecting the trends experienced in the second quarter. We had great expense control in the second quarter. Selling and store operating expenses for the quarter increased 69 basis points to 17.6, 2% from 16.93% last year and while we didn't leverage selling and store operating expense, this was our best performance in a year. Factors affecting the quarter were first, wage rate inflation is moderating, and while payroll continues to be negatively impacted by higher wage rates, wage increases for the quarter were more than offset by increased labor productivity. This productivity improvement was the result of initiatives in [private] store and new system enhancement. Second, medical insurance costs are higher than last year due to the expansion in our insured base of associates and rising health care costs. Third, the expansion of tool rental centers increases payroll costs, depreciation, and other operating costs while at the same time improving gross margin and return on sale. Fourth, store occupancy costs' as a percent of sales from the previous year grew due primarily to energy costs to rates that were running higher than last year. Finally, credit card discount are higher than last year due to a higher penetration of total credit sales.

We remained focussed on expense control and as a result we expect continued improvement in the third quarter. Pre-opening expenses were $32 million for the second quarter this year compared to $30 million last year, down 2 basis points at 8% of sales. The decrease is primarily attributable to expense control efforts and secondarily to the timing of third quarter store opening. Weak sector leverage pre-opening expenses for the remainder of the year. General and administrative expenses for the quarter were 1.5 7%, compared to 1.6 8%, last year - a decrease of 11 basis points. This is the third quarter in a row that we have leveraged G&A as expense control continued to take effect. We expect G&A to be flat or slightly down at a percent of sales in the third quarter. Net interest income was $8 million for the second quarter and $8 million in the comparable quarter last year. Pretax income for the quarter at the percent of sales was 10.32% versus 10.85% last year. The effective tax rate for the quarter was 38.6% compared to 38.8% for the second quarter last year. For the remainder of fiscal 2001, we expect the effective tax rate to be 38.6%. Net earnings for the quarter were 6.34% versus 6.64% last year. Diluted earnings per share for the quarter were $0.39 against $0.36 in the prior year. The weighted average shares, assuming dilution for the quarter were $2.355 billion shares compared to $2.352 billion last year. Our estimate of the weighted average share for the purpose of calculating diluted earnings per share for the third and fourth quarter and for the fiscal year are as follows:

Third quarter- 2.36 billion shares, fourth quarter 2.369 billion shares and for the year 2.357 billion shares. On the balance sheet, cash, and short-term investments totalled $1.3 billion compared to $944 million at the end of the second quarter last year. Average inventory per store at the quarter end was $5, 759,000 down 7.4% from the prior year. We continued to manage our inventory level in a slower [_____] environment for maintaining high standards for in-stock positions. Inventory turnover was 5.5 times equivalent to last year and reversing a declining trend in inventory turnover that began in the first quarter of 2000. Trade accounts payable was $3.1 billion or 43% inventory compared to 47% last year reflecting slowing purchases in light of current economic condition. Long-term debt was one billion, two hundred and seventy one million dollars compared to $767 million last year reflecting the opportunistic issuance of $500 million in Senior Notes during the first quarter. Our debt to equity ratio was 8% up from 6% last year. Return on invested capital computed on beginning debt in equity for the trailing fourth quarter with 18.1% this year versus 22.9% last year. This reflects continued investment in the business during a choppy economic period. Capital expenditures were $907 million for the quarter. We now own 991 of our stores or 79%. Our estimate per capital expenditure in fiscal year 2001 is $3.6 billion. Based on the guidance given for the third quarter, we are currently comfortable with the consensus of $0.33 earning per diluted share for the third quarter. Now, we will be glad to answer your specific questions on the quarter or the year, but before we do that, I would like to turn the call over to Bob Nardelli for his remarks.

Carol, thanks very much and good morning to everyone on the broadcast. I think Carol did an excellent job in really highlighting the factors behind our performance that we have announced this morning, and what I would like to do first as always is to thank all of our home people associates, some 250,000 orange-blooded men and women who put their aprons on with tremendous pride every morning and face what Carol has talked about the pretty tough and stubborn environment. Our associates really continue to deliver outstanding efforts in really providing ultimate service to our customers, which are really the bedrock and history and foundation of this wonderful company. I think when you look at our customer traffic, which was up, our average ticket modestly up, comp sales up 1%. Our associates really did the most important thing they could do and that is continuing to take care of our customers. In this environment, as we all know, you can't wait for the customer, you have to be aggressive and you have to have events that really make us the attraction in the community, and therefore consistent with that and our history, we have identified a number of opportunities in the past quarter, some of which I am sure you are very, very familiar with. Certainly our Memorial Day events, The fourth of July events that focussed on paint, focussed on grills ... our appliance programs, our kitchen and bath, we really felt that we created tremendous amount of excitement and we have a tremendous amount of momentum in our stores and of course, all of our associates are embracing that tremendously.

The other area that we are really excited about, Carol mentioned briefly, is we really have become the preferred center for energy conservation. This is something that is obviously good for the country, it is obviously good for our customers, and it has been very good for us in the retail side. We have reacted extremely strongly to the energy crisis and we have really come up with our merchants and our operating team with what we think is a wonderful set. We probably have the best execution across the company in launching our energy programs with three [en caps], banners, promotional programs, you have seen some of our recent advertising. We have seen tremendous response in the Northwest alone on a single day; we sold over 65,000 compact fluorescents. We are seeing tremendous response from the State of California, as they recognize, the governor has recognized us for our role in conservation. We are seeing a tremendous comps in insulation, in thermostat, we are excited about receiving and being recognized for energy stars, ceiling fans and in the announcement that we shared with you earlier on that this week. So all in all, I think that again true to form and the culture and the history of this company, we have gone out and created through entrepreneurship and innovation, new exciting events that continued to trade [out] as the attraction in the community. Now equally, of course, we have to face the realities of the economy and I think it proved positive that now is the two consecutive quarters, Carol highlighted the improvement in expense control. While we are trying to really continue top-line growth, again we are facing the reality of cost control. I could not be proud of our associates as they delivered sales for labor hour productivity. Really, that was the highest quarterly productivity gain in five years. So again, a real credit to the morale and enthusiasm of our associates that faced the reality of a stubborn economy helped sell our way through it, and deliver some really big themes and some big events.

We are continuing to manage our store level expenses in spite of rising energy costs and again some slowing of the top line, but true to form the home depot associate is delivering. Now, one other thing I wanted to announce today is a change in a policy within Home Depot and that change is that we are revising our in-store return policies as relates to giving cash back only with receipts. This is certainly consistent within the industry, it is a good business practice, and we are giving all of our associates and our customers ample notifications. Certainly today is the first of a series of announcements and posters that will be hanging in our stores. This will take effect on September 3rd.. Again, we will only give cash back with receipt effective September 3rd.. We will be moving to a declining balance card, which will be made available certainly towards the end of the year. We think this is appropriate. We think it is timely and we wanted to announce that consistent with other announcements today. We are continuing to maintain focus on long-term for continued growth in market share gain. The strength of our balance sheet again allows us to really grow through this economic downturn. As you saw, we delivered, I think, on our commitment relative to new store openings with 56% of the total stores opening in the first half. It is the highest performance we have had in this category since 1998, 40% more stores than we opened in the first half of last year and at the same time, we are continuing to gain market share in these critical geographic areas.

We are opening the industry's most productive and most profitable stores and, I think, Carol reinforced that in her comments. Now, our financial strength again allows us to do some research and development, if you will, and really work with the assortment in the sets of our stores. We announced the opening next year of our Urban Home Depot in Chicago. I had the opportunity to participate yesterday at the International Hardware Week, where we reinforced tremendous amount of pride of that new platform in Chicago while at the store. We are continuing to aggressively move through Pro, I will talk about that, but again in this quarter we opened a new totally dedicated pro-store in Reno and we are continuing to be encouraged with our floor store experiment in Dallas. I think this suggests evidence of our commitment to innovation, the driving sales, and the focus on driving sales and certainly continuing to do the right thing for our customers. Now, we are continuing to transform the company at a very fast pace over the last six months. And to that point, I want to comment briefly on our new merchandising reorganization. You have all seen a recent announcement where we have named Jerry Edwards as our new Senior Vice-President of merchandising. Jerry brings an unbelievable track record of 40 years of experience in this industry. He is very well known to all of the trade. It was evidenced yesterday Sunday and Monday at the show in Chicago. We were very happy to have Jerry rejoin us here in Atlanta from his tour of duty in Latin America, very strong background in merchandising, extremely strong support within Home Depot, and as I said within the vendor and supplier network.

So again, we believe that we are leading the change. We are really trying to shape the future versus allowing the future to shape us. We took the opportunity to not only to appoint Jerry, but flatten the organization now that Wayne Gibson, who is in charge of Global Logistics and Dick Sullivan who heads our marketing and advertising organization will also report to me along with Jerry. This has been a real [boundriless] event. All of the division presidents, all of the executive staff have been active participants, not only in working with Jerry, but the speed and the expediency with which we named all of the new department [MVPs]. We also have all of the division vice-presidents of merchandising sales and support in their positions. We have moved expeditiously to fill the global product line merchants. So again, I think, true to form, what you are seeing here is the transformation in the evolution, responding to the changes in the environment and certainly trying to position ourselves to build up all other factors that got us from 4 stores to 1250 Carol talked about, but more importantly positioning us for the future growth. Now, this organizational change is no different than what Larry Mercer has done at the operating level for SPI in the stores. This is really SPI for merchants. What it will do is allow us to move all of the task here to Atlanta so that we will get a broadening of our view with our vendor and supplier base - more of a holistic approach. We shared that with our new vendor advisory consult yesterday in Chicago.

This will allow the field to really be linked at the hip with the stores as relates to focusing on transactions versus task. Our new Vice-President of Merchandising Sales and Service will now be able to really focus on execution and driving sales. It will allow our merchants in the field to more than triple their time in the stores with the DMs. You know that we have gone through extensive DM training led by one of our co-founders [Pat Baer]. We will be winding that up towards the balance of the year when we think this is a wonderful one-two punch growth as to the operating level and the merchandising level, again all consistent with driving growth and top line initiatives. Let me just talk for a moment on SPI. We launched the southern division of 102 stores in June, we now have 146 stores operational, the remaining divisions are all queued with 12-week prep periods and we are still on track to have all stores SPI converted by the end of the year. We are continuing to see successful matrix in SPI. We are continuing to see higher customer service measured through breach in the store. We are continuing to see time in the [well] improved with deliveries. We are continuing to see tremendous momentum in our associates embracing this very critical initiative for Home Depot. Consistent with that let me update you on Pro and our Pro initiatives. We have now converted 277 stores, by year-end we are still on track to have 500 stores with our new Pro set in sight. Tom Taylor whom you know was running our Northwest division is now located in Atlanta heading this initiative with all of the enthusiasm with all of the experience that he has learnt over the years and we are seeing improved positive reaction from our valued Pro customers.

Next initiative - services. Again, all three of these, you heard me talk about are directly focussed at growing comp sales. We are continuing to see very positive response in services we are excited about the infrastructure expansion with our Tampa call center. The pilot will open it in early September. We are continuing to add again products specific merchants to help focus on categories like kitchen cabinet [_____] and flooring and again our five-city test with HBAC continues to roll out very favorably. Now, lets switch for a moment and again talk a little bit about the outlook. I think Carol has framed it extremely well. The economy continues to be very stubborn. Lumber prices for example, which firmed and then softened unfortunately over the past several weeks. We have seen a decrease in lumber prices over the past 3 quarters, albeit still slightly above last year. Consumer confidence continues to be somewhat lackluster. Certainly, the announcements of today in what we have seen in the last week relative to the unemployment rate had a very negative impact on consumer components. On the positive side, however, we are very encouraged with new and existing home sales. We continued to see that advancement. We are encouraged, as I have said before with the Fed's reaction. We are very excited about the six reductions that are in place, we are certainly hopeful that the Fed's will on August 21st add another reduction, but at the same time we are concerned relative to the flow down that some of the old proven matrix of Fed rate reserve reductions may not have same impact in the economy as they have had in the past.

We are encouraged that there is still $39 billion of tax rebate checks to be issued where we have seen modest results to date of offering the programs that allows for a tax rebate checks to be cashed in our store. Our marketing and our advertising are working well where we are certainly encouraging our customers to not spend their check, but to invest their check and energy conservation, which certainly will reduce consumption, therefore offsetting some of the sense for KW to bring some normality back to their utility rate. So, as you can see, we have got a plethora of things that we are working on. Our associates' morale is high, they are as committed as ever with the resolve to really drive top line, to really keep working internally on our cost initiatives, and I think again to Carol's point, we would just like to reconfirm consensus for the third quarter. Now with that, I would be happy to turn it over Bob, to you and try to respond to some questions on things that we have covered or maybe some areas that we haven't covered.

At this time, the question and answer session will be conducted electronically. If you would like to ask a question, you may do so by pressing the * key followed by the digit 1 on your touchtone telephone. We will take your questions in the order that you signal us and we will take as many questions as time permits. Once again, it is *1 to ask a question. And we will pause a moment while we assemble our roster. Our first question today comes from Wayne Hood with Prudential Securities.

Yes, Bob. I was just curious on the revision on your return policy. I wonder if you can get more aggressive with how you handle returns and what your implications are, at least what you are doing, and may be in the tightening, you actually did a little more with respect to margin, and my second question is at what level com. stores sales growth do you need to achieve the leverage that is so up in your expense ratio. Thank you.

I will try to respond to the first one and I will let Carol handle the second one, Wayne. As you know, we were probably the last one in the industry to really change our policy relative to cash returns without receipts. In the first quarter, I think we had announced the realignment and refocussing of our loss prevention organization. As we continued to investigate and look at this policy in light of the industry, in light of the economy, we felt that it was very appropriate at this time to align ourselves with the industry. We have done, I think, an extremely thorough job with our loss prevention team and our divisional precedence will be extremely thoughtful of getting this notification up. There will be point of sale reinforcement. We are adding nomenclature to all receipts. Highlighting that, we have special packets during the next three weeks at which point, when you cash out, your receipt will be put into a folder that says that these receipt must be maintained for returns, particularly if it is cash. Obviously, exchange of merchandise has always been the case here, will be handled as in the past. Our associates have gone through some training to make sure that, again, as always to make sure that we take care of our customers. We think this is the appropriate time, this is the right thing to do, Wayne, and again, we are doing it in a very thoughtful and deliberate manner. Now, let me turn to Carol in regards to your second question.

Hi, Wayne. How are you? As you know, this is a very stubborn economy and because of that, we are projecting comps flat to slightly positive. Let me tell you. It won't take us much more than that to leverage the selling and store operating expenses.

Okay, thanks Carol.

Our next question comes from Daniel Fox, JP Morgan.

My first question is, in light of the weak economy, could you discuss what you did differently this year from a store staffing and inventory stocking perspective and do you see a strong second quarter and how you will be approaching the second half of the year, differently this year compared to last.

Yes, I would Danielle, and the two part question, #1 I would like Larry Mercer who is in the room with me today to talk about store staffing. It is his area of responsibility working with the division president. As you know, Larry is also spear heading our spike program. So, Larry if you want to talk about our store staffing?

Thank you, Bob. Good morning, Danielle. We have put in place since February about 15 different labor initiatives, some of them supported by systems, some of them basically shifts in the way we are staffing our store. One of the ones that have been more significant to Home Depot is that we have shortened the opening time of our new stores to a significant contribution to labor improvement and our stores respondents have responded very positively with that. We have funding scheme to capture, which has been existence supported initiatives that has reduced funding time, transaction time, and given our customers a better shopping experience quicker exit from the stores ... our initiative after two years of roll out and a number of stores. We have been able to sharpen the payroll staffing and labor investment in our pro initiative along with certain programs receiving in certain parts of the country where we have gone from Home Depot transfer facilities and our own work group, our own distribution systems we have been able to go through a certified program in the back end of the store, which has been significant to Home Depot, and on and on there are about 50 significant initiatives that our stores have responded to year to date.

Great Larry. Thank you. Jerry Edwards is also in the room with me today. And, Jerry and the merchandising group and the division's president have been working very close together. I would reinforce Carol's comment about new store ... opening store inventory and I would ask Jerry to comment on the specific analysis as it relates to neighborhood, family, friendly initiative in this effort.

Thanks, Bob. Good morning Danielle. As you know, our average inventories were down 7.4% in the quarter and we contribute this to improved inventory management due to [_____] down skews that were nonproductive, improvements in [_____] and the new organizational structure that we are putting into place, I think will give us greater inventory productivity as we work with our suppliers to really fine tune our inventories and accelerate sales in our fields.

okay, great and just one final question. Could you comment on the sequential trend in the counter of the quarter?

Danielle, this Bob Burton. Generally, we have not commented on month-to-month trends, but you know I would say that our business, the comp that we reported is fairly indicative of the tone of the business throughout most of the quarter.

Okay, thanks a lot.

Our next question comes from Dana Telsey with Bear Stearns.

Good morning everyone. Can you talk a little bit about the urban concept and your thoughts of putting Villager in the urban concept and when we should hear more about that

Sure, I will be happy to do that. As you know, we have been testing a concept called Villager. We have four stores and our team has run a tremendous amount. Again, that is right at the corner stone of our concept when we neighborhood family and friendly. Bob and his entire team have taken on the responsibility to really do the store set and to look at how we would facilitate and what is the exact skew assortment we would put in between a 50-80,000 sq. foot complex and we are not calling it an urban Home Depot. Urban is just the designate to make it clear to you. So, we are exited about working on this new store in Linking Park in Chicago. The concept on this store will be somewhat of a hub and spoke concept. My point is this that the adjacent 120,000 + sq. foot Home Depot would be somewhat the hub and the spoke would be again in this case the Linking Park store. Our intent would be to have associates rotate through so there is a commonality and familiarity with the skew assortment in some of the ... or both stores. The store manager in the larger store would provide again the senior leadership for the area. We would have signs that would reflect, if you don't see it add in our line of convenience ... the 5-6 mile line of convenience would allow for immediate transport of those things that may not be stocked in the urban facility. We are interested in having a facility that is really customized and we will announcing shortly some additional programming efforts in software technology that will give us even a finer look ... a finer cut of what is important to that neighborhood family and friendly consumer. That is what we want to stock on the show and I think that is just an extension of what Jerry talked about that we are already doing with new store openings. So, Villagers has provided a wonderful platform. We will obviously make a decision before the end of the year on Villager, but we certainly are committed to this urban cast and again this will be the first of a few tests that will continue to explore, but we are pretty confident of this idea.

Thank you and also any updates on the floor store in Texas?

The floor store again continues to perform very well for us. We are continuing to look at the model in this set. We have modified a few of the skewed categories in there, but at this point we are going to stay with the one floor store until we get a higher level of confidence.

Thank you.

Our next question will come from Aram Rubinson with UBS Warburg.

Hi great job making a tough quarter. Couple of questions one Home Depot, to my understanding far of strong personalities. What with this new merchandising change are you telling those folks that might perceive a loss of responsibility in some instances to keep them very happy and with you or otherwise we have ahead of this and just do not fit into the new culture.

Let me give a broad overview, and I think that the person who does qualify to do that is Jerry, because he is right in the heart of this thing, but obviously as new guide to the company, there is some trepidation and anxiety in taking on the change of this magnitude, not only structurally, but culturally. And I have been very fortunate to have the remark as right at my side, who is providing tremendous cultural guidance along with many of the others senior member of this staff whether it is Jerry or Larry Mercer, but again they have their entire section. And again, we did not do this in a vacuum. I am very proud of the process we used there; we had again a multifunctional teamwork on this thing. From human resources, Dennis Donnawan had joined us from Raybion. We had field support and our division presidents. We had a number of inputs, so again this was really done in harmony with the entire organization, which as you pointed out, is the way the culture is here. Now this is not a loss of responsibility. This is exactly consistent with what we are doing in spite. All we are trying to do is to take advantage of the unprecedented growth this company has had over the past 22-23 years and bring the cash of dealing with our vendor suppliers to Atlanta. They are very encouraged with this to have a single point of contact that allows them to reduce their service cost to us and to become much more efficient in the role out of large programs and large events. Now you have noticed that there were no announcements of restructuring costs. There is no head count reduction. This was not a cost out play. This was a strategic decision to bring cash to Atlanta to get more size, more scale, and more leverage to allow a single port of contact with Jerry and his senior merchants, and at the same time, we have a very significant, very talented organization in the fields that now allows them to spend 70% of the time. This is exactly SPI for the store where we went from 30% in the transactions and in the 70% cost with our associates on the floor. We are looking for the same response of our Vice President of Merchandising Sales and Service. They now will ramp up with the RVP and focus on what has made this company great serving the customer. So we have got total buy on roles and responsibilities. We had the luxury of selecting our department Vice President. We had 25000 associates to pick from, so I think we have got the cream of the crop, not only from within our own organization, but from within the whole industry. So I hope you can tell by the tone of the voice of the infliction. I am so excited, we are breathing fresh air, we had a meeting with the vendor advisory counsel yesterday, they are elated, we met in the afternoon with the rep service organization; they are excited about it and Jerry, if I have not covered anything jump in.

Bob you have almost covered everything. I would just reinforce what you said regarding the dual responsibilities. We have a cadre of extremely season Home Depot veterans that are handling the sales and services opportunities in the field. I cannot think of any reason why this is not the strongest merchandizing organization in all of retail. It has the vendor community absolutely elated at the prospect of really driving sales in our stores and improvement productivity for all of us.

Okay I will just carry a look at this. We hold all town hall meeting. This organization is really embracing all of the metrics, all of the initiatives, all of the accountability and the direction that we were collectively putting together to develop this company for the next level.

The one followup that I would be asking is have you changed your merchandise organization as you add to the list of your capabilities by opening a transit facility in California and all these other things that you are doing. It seems to be system requirement become greater and I am curious if you can tell us where you stand on those things and all of the endeavors you are trying and implementing right now, are they all fully supportable as the system stand today.

It is a great question. And I had shared in a couple of conference sessions what we have introduced here is what we call SOAR stands for Strategic Operating and Resource Planning. It is the three elements again that we will use going forward to have a rolling three-year mid range forecast always in front of us. We have already had the first path of that both at the functional level and with the divisions, we are getting ready to go out again and we are also getting ready to go out and spend an entire day in every division, Dennis M. Donovan and myself looking at the resource redeployment necessary to support the strategic try. Obviously, out of the first round as you might guess there was an extensive list of systems initiatives, digitization efforts to drive productivity, to really streamline exactly as you said between the logistics side creating a marketing plan by department, by supplier, through execution inspired in all of our stores. In the next two and a half months or so we are raking and stocking all of those programs. We are doing net present value. We are also looking at the importance of sequencing the implementation of ERP in the modules to make sure that the dependent factors of the subsequent module are based upon the installation and implementation of the data whether it be a data ware housing start, so that we have access. So we are trying to do the logistics roll out, so that we understand the importance of each data points as it peaks subsequent module and at the same time we are doing another cut that looks at net present value and the benefits we derive both from customers satisfaction and efficiencies supporting Larry inspire in this stores, so we have recognized it, we are going to fund it, and we will resource it.

Thank you and good luck.

We will take our next question from Gary Balter with CS First Boston.

Hi congratulations, first of all on great quarter.

Thanks Gary.

Could you discuss a little bit, most of my questions have been answered, any thoughts of square footage growth point forward? We have been on around 18% some of that obviously is not Home Depot, but if you look to the, all the initiatives are working great. Can you talk a bit driving same store sales although lowering square footage growth in the future to focus on with your. Second is do you think these factor lower the market rates now it was trying to drop and it will have an impact, if you still look at the background.

Yeah, I think Gary two very good questions. The first one on store, we have, as a group, I think this team has had discussions with many of you on the phone. We are really asking you to work with us to understand our new growth formula. The new growth formula obviously as I said before, is enhancing comps, extending through new stores, and expanding through adjacency. So the traditional or historical model that focus just on square footage really will not serve the initiatives that we have got going forward. We are looking at a variety of platforms that we have not historically looked at. Certainly the expansions of exports, Gary, if you think about the urban store, pro store, the floor store. We are really looking at a whole new formula that will require us to be obviously more thoughtful and we will require a little more modeling than we have had in the past with the traditional X2 footage x gross margin x sales gives you the bottom. It is going to be a little more challenging for all of us as we go forward to derive those calculations. We still believe very strongly that there is geographic reach for us going forward, Gary. We believe there is still tremendous opportunity for instill and we are excited about the new platform models that gives us even more adjacency growth than what you may have seen from the competition. So again not only do we have three arrows in the quiver, but we have got subsets of this new store platform that we are continuing because of the strength of our balance sheet. We have the opportunities to do this experimentation. Now as it relates to mortgage rates, I think there are two things we have to look at; one the last time the FED dropped, and we saw almost a sequential drop in mortgage rates which we are not seeing today, Gary as you know, but we are starting to some softening. The data that I looked at suggest two premises one the last time we went this and as you know $18.3 billion came back in the home improvement of the $60 billion through refinancing. We have not seen that yet. People are taking cash out. Now what we are monitoring is trying to understand whether they are taking cash out or whether they are just reducing rates to get themselves positioned, Gary, through an economic period. I think there are just two things that cause us to look at this more closely. If you look at credit card penetration for the quarter, it was also up and it was also up in our private brand credit card. So I think we see a combination of maybe people extending themselves on the credit side and trying to reposition themselves on the cash flow side through refinancing this time rather than taking cash or equity out is really just trying to modulate their monthly payments. We do not have transparency to all of those things, but those are some of the instances that we are looking at to try to guide our business, Gary.

Thank you very much.

Do you have anything to add to that, Carol?

Just a couple of comments on this point Gary. We looked at the refinancing activity and found that the loans that we refinanced averaged 1.6 years of old. So that is how we the people are refinancing the loans they took out a year or year and a half ago when mortgage rates were about 100 basis points higher. When we looked at what they are doing in terms of the mortgage balance, they are not taking out more dollars. So it is a very different thing aided by the consumer on home orders today. They are refinancing to drop their mortgage rates.

And that was my point earlier, Gary, that some of the old metrics that maybe have worked in the past may not be working as effectively in the future with the wealth effect, stock market concerns, and the unemployment concerns. I think all of those really in aggregate cause us to talk about obviously being very cautious in the third quarter, but very deliberate in what we were doing since our work our way through the third quarter.

As long as you keep on delivering the numbers, we are fine. Thanks.

I think we have time for one more question.

We will take our final question from Matt Fassler with Goldman Sachs.

Thanks a lot and good morning. I have a couple of questions, if I may. First of all, you spoke about the [SPI] and the pro efforts and you spoke about some of the metrics that you are looking at are related to service and some of the performance that you have really seen. Can you talk about what you have seen on some of the more tangible financial metrics, your expectations for the impact on sales and the cost, your updated thinking for those two efforts please.

Sure Matt. This is Carol. We do not break out the performance of the initiatives, but I will tell you that if you look at tangible financial metrics like com, like average ticket and we see on a relative basis better performance in our SPI and our pro stores that will do our non SPI and non gross stores.

I think what I would like to do is, just have Larry talk about not financial measurements, but some of the in store metrics that we are seeing as a result that we see, Larry, could you give us that update.

Thanks Bob. Good morning Matt. We have got some of the drivers that we really look at with SPI are first one obviously is we are not a kind where Home Depot associates could actually spend phased time with the customer and we have doubled that number. We were up about 65% from a pre SPI number that was in the 30s. We are very excited about that. We think given the Home Depot associates ability to be freed up to do that. They will do a very fine job. We take a reading on just a number of greets, so that when you are walking the aisles of the Home Depot store how long, did you actually gained, just a hello thanks for coming in and what is your project is that is 30%, that is actually 30% versus pre SPI or today's non SPI store. We have picked up a lot of labor efficiencies in the back end and you have probably heard we talked a lot about the engineered process of SPI. We have increased our pack out time, something we measure as managed pallets per hour, best gone from 1.5 pallets per hour to something in the neighborhood of 3.5-4 pallets. We think that number is just getting better as we learn that process. Our corporate carriers are very interested in another driver, the average minute per freight bill in the neighborhood of 15-18 minutes pre SPI; we are at ten minutes at the 50% improvement. I think these are the numbers that we can see today that really give us a great amount of enthusiasm about SPI.

Thank you so much for the detail. One final follow up. You have terrific inventory performance this quarter and I think you have generated the first improvement in inventory turns in something like seven quarters. As said, if you try to gauge your purchases looking into your inventory tables, it looks like your purchases are up a bit and perhaps you are pretty content of your inventories as they stand today. Can you tell us what our inventory reduction still should have the urgency in the next couple of quarters that it has in the first half of the year?

Let me just share with you and everybody else. These are not initiatives of the week or the month. We all believe here collectively as a staff; that includes all the division presidents in the field. We need to increase the velocity of our inventory, we need to continue the challenge of ourselves on all of the metrics and all of the platforms that we have in placements. I cannot be more emphatic on the fact that we will continue to work on the categories, we will continue to work on queue assortments, we are continuing to look at new store reset, I think Jerry talked about the improvements we have had on new stores. We are not where we want to be or where we will be as it relates to inventory. We are talking about that much more aggressively with all of our vendors and we are talking about it from the standpoint of pack size, we are talking about the logistics side, from Wayne Gibson. We are talking about resetting the stores relative to the heights of this field. We will really focus on what we will call the strike zone for the customers, that eight-foot strike zone. So there are a lot of things we are working on here, so our efforts will continue. We have got an entire dedicated inventory counsel that partner with each of the divisions in the merchants. We are continuing to come up with new ideas and new ways to bring vitality and freshness to our inventory.

Great I appreciate that and thank you very much.

Okay thank you for joining us on this conference call. As stated earlier, we will offer an Internet replay of the call for five-day period. And beginning at about noon today, we will have a two day telephone replay which is available at 719-457-0820 the confirmation code for that replay again is 625-329. Thank you for calling in. I will be in my office if anyone would like to call me later. Thank you. Good-bye.

That concludes today' conference.