家得寶 (HD) 2002 Q1 法說會逐字稿

Please stand by.

Welcome to today's Home Depot first quarter earnings conference

call. This call is being recorded. Beginning today's

discussion is Bob Burton, vice president of investor relations

Good morning. Welcome to the Home

Depot first quarter conference call. The earnings per share

were 36 cents ahead of guidance. With us, Bob Nardell, chief

executive officer, and Carol (unintelligible), vice president and

chief financial officer, together with other Home Depot executives.

Carol will go over the results, and Bob will make comments,

and then we will have questions. The question and answer

session will be available. Questions will be limited to

analysts and investors. This conference is being broadcast

real time at homedepot.com. There will be a two-day

telephone replay available at (719) 457-0820. The confirmation

number is 777100.

Before I turn the call over to Carol, let me remind you, our

discussion will contain forward-looking statements relating to our

expectations. Additional information could cause our actual

results to differ materially from our forward-looking statements.

Additional information concerning these risks and uncertainties

are contained in the companies fillings with the Securities and

Exchange Commission, including the companies annual

including the companies annual report on Form 10 k.

We caution that these statements are (inaudible) as

of the date they are made, and actual results made from the

present expectations or projections may vary.

Here is Carol.

In this choppy economic

environment our associates delivered and drove continued

improvements in labor productivity. This morning we are

reporting the highest first quarter return on sales in company

history and the highest first quarter earnings per share

gains. Equally important, Home Depot drove a 50 basis

point improvement in our key value metric. Return on

investment capital - The financial strength of the Home

Depot remains unsurpassed. A record 5.2 billion dollars

in cash. On a net basis we generated 2.7 billion dollars

in cash during the first quarter, driven by significant

improvements in working capital. This is more cash than

we generated during all of 2001. Over the next few minutes

my comments will review the quarter performance in detail

and provide guidance for the second

quarter of fiscal year 2002. First quarter 2002 net earnings

856 million dollars, up from 632 million dollars from fiscal

2001 diluted earnings per share were 9 cents better than

the prior year. Sales for the quarter totaled 14.3 billion

dollars up 17 percent from the prior year driven by new

store openings and 5 percent comp sales. Our strong comp

sales reflects favorable weather as well as merchandising

and paint initiatives. Paint, lumber and, lawn and garden

reflect an early spring season. The weather-related categories,

customers responded to the tightly focused value driven

events that drove sales in flooring and kitchen and bath.

We continue to see strong performance and stores that are

offering special services to the professional customer,

what we call our pro initiative. Through the quarter

we added 234 stores to the pro initiative. We now have

the pro initiative in 769 or 55 percent of our stores.

During the quarter, our pro initiative stores outperformed

core stores in productivity, operating margins and inventory

turnover. We saw an increase in carpet and kitchen installation.

In the first quarter, consistent with accounting principals

we record these upon completion of the job which results

in a sales deferral. This grew by 200 million dollars.

We call this to your attention; as our service business

grows, this will grow. This is reflected as a deferred

revenue liability and will flow into revenue as the projects

are completed. Due to the 14th week of the fourth quarter

of 2001, first quarter benefited from a seasonal time shift

which added 350 million dollars to sales. Based on current

economic indicators, as we told you last year we remain

cautious in our expectations for the strengthening recovery.

Against a 1 percent comp in the second quarter last year,

we expect store sales to be positive from 2 to 4 percent

during the second quarter. During the first quarter we

added 57 new stores and completed the sales of 4 stores

in Argentina. That's 1,386 stores made up of Home Depot

stores and Expo Design Center stores. Others opened

during the quarter, 23 in February, 11 in March and 23

in April. We plan to open 200 stores in 2002, a 15 percent

increase over 1333 stores at the end of fiscal 2001. In

the second quarter of 2002, we plan to open an additional

48 new stores. Including two Expo Design Centers. Store

productivity metrics - Floor store footage increased

151 million. The average store footage was up from

1600 square feet last year.

Customer transactions grew 14 percent

to 284 million for the year. Our average customer ticket

increased 3.6 percent - This is a company record and

reflects gains in large ticket items like flooring, kitchen

and appliances, as well as seasonal power equipment. Our

weighted average weekly store sales were $808,000,

compared to $807,000 last year. We are

pleased with the store productivity.

We are reflecting improved in-store execution. Additionally,

new store productivity continues to improve. Gross margin

for the first quarter was 30.53 percent, 57 basis points

ahead of the prior year and the highest first quarter gross

margin in company history. This margin performance reflects

the benefits of central purchasing in several ways.

We're lowering the cost with online auctions. We are

rationalizing the inventory across the store, optimizing

the product mix, like in lighting and ceiling fans. We

are building alliances and key supplier partners. Finally,

as we said before, the increase in the number of tool rental

centers, continues to provide benefits. At the end of

the first quarter we were up from the 381 at the end of last

year. We currently anticipate that the second quarter

gross margin rate will reflect modest expansion against

the second quarter of 2001. In the first quarter, we

leveraged total expenses for the third consecutive quarter. Selling

and operating expenses decreased 40 basis points to 19.2

percent from last year. The first quarter, first we

saw continued gains as a result of initiatives like service

performance improvements, or Spy. And while we continue

to view payroll as investment and we retain the best

associates, we are using new tools to manage wage rates.

We experienced no wage rate inflation for the quarter.

This was offset by workers compensation and general liability

costs which increased against last year. Pre-opening expenses

were 25 million dollars for the first quarter compared with

27 million, 4 basis points as a percent of sales. Our

pre-opening costs on a per store basis are down 25 percent

as we have taken two weeks out of the pre-opening period.

The year-over-year comparison reflects timing of store

opening. General and administrative expenses were 1.6

percent compared to 1.7 percent last year, a decrease of

10 basis points. This decrease was driven by organizational

realignments, including the centerization of purchase

merchandising.

With the sale of South American organizations and the

consolidation of southeast operations, we remain focused on

expenses. We expect to leverage expenses in the next

quarter. Net interest income was 10 million dollars for

the first quarter against 3 million dollars in the comparable

quarter last year. As a percent of sales, 9.16, up

from 8.44 percent last year. This performance is the first

operating return on sales in company sales, and marks the

third consecutive quarter of expansion. Reflecting our

efforts to optimize our tax position through higher tax

credits and by lowering our effective state income tax rate.

For the remainder of fiscal 2002, we expect the effective

tax rate to be 37.6 percent. Net earnings were 5.99 percent

versus 5.89 ,18 percent. That's 36 cents against 27 cents

in the prior year. Dilution for the quarter were 2.365

billion shares compared to 2.347 billion in the prior year.

Our estimates of weighted earnings per share for fiscal

year 2002 are as follows - Second quarter, 2.376 shares,

third, 2.383, fourth, 2.390 and for the year, 2.376

billion shares. Now moving on to the balance sheet,

as I previously mentioned cash and shorts from investments

totaled 5.2 billion dollars compared to last year, driven

primarily by significant improvements in working capital.

Average inventory $5.4 million, down 13 percent. We are pleased

with this performance, but we focus on improving velocity.

Inventory turnover was 5.6 compared to 5.1 last year.

This is the best first quarter performance since 1994 and

reflects continuing strong performance in year-over-year

turnover improvement. Our days payable outstanding were 51

compared to 39 days in the prior year as we moved our payment

terms towards industry standard. Long-term debt at the

end of first quarter was 1.285 million dollars. Return

on invested capital is the benchmark we use as a company

to measure value creation. Computed on beginning

debt and equity, our return on invested capital 19.2 percent,

versus 18.7 percent last year. The operating performance

improvements we are driving will be reflected in this metric

as we move through the year. Capital expenditures were

$639 million for the quarter. We own 81 percent of our stores.

Our statement for fiscal year 2002, 3.6

million dollars. Based on our guidance given for the second

quarter we are comfortable with that and we'll be glad

to answer your questions on the quarter. But before we do

that, I would like to turn the call to Bob Nardelli.

Thanks, very

much. It's a strong report and it's a tough act to follow,

as well. I would like to add my comments on this record

setting quarter, also. First and always, I want to thank

you, our loyal, orange-blooded associates who embrace the

new initiatives you have talked about, and we've talked

to the analysts about for the last year or slightly more.

They helped us sell through a conflict-filled economic environment

and I want to thank you our loyal long-term customers and

the new customers who are joining the Home Depot family.

Allow me to highlight some of the record setting accomplishments

for the next 5 minutes. I promise all of you we won't look

back and we'll leave this call today ready to take on the

second quarter with all of the passion and aggressiveness

that Carol has highlighted in this report and what we've

been sharing with you now for over a year. Let's pause

for a moment and think about , we opened 57 stores. That's

the highest first quarter store opening in company history

and certainly is reflective of the momentum we're trying

to gain making sure that our proficiency investments are

gaining full-year benefit by opening more in the first quarter,

first half. We opened a record 17 stores on a single day

on February 7th. We opened our first urban store in Brooklyn

and several of you were complimentary

in your visits. We are very encouraged with

the initial customer traffic. This is proof-positive about

our comments about developing a neighborhood family friendly

store that represents a market-back approach to our mix

and assortment. We're impressed that a significant number

of customers early on were in the neighborhood and walked

to visit our store. We're encouraged the sales per square

foot and the return on capital metrics are strong, strong

to the point we continued to look favorably upon two more

openings this year - One in Staten Island in the third

quarter, and we're excited about entering

downtown Chicago, Lincoln Park. I think these new store

sets, as we've shared previously, give us many more arrows

in our quiver versus a traditional and competitive store

strategy we had been on. Think about the first quarter

gross margins that reached the highest level in company

history and at three percent we delivered the highest first

quarter earnings per share gain as Carol highlighted -

Six percent. We generated the highest return on sales in

company history in spite of an economic environment, um,

downward spiraling economy, conflicted economic metrics.

Again, I couldn't be prouder of our team as they

sold through this environment. Inventory, reached 5.6,

the highest first quarter performance since 1994 and the

50 basis points is the best since 1988. At $50.40 our

average customer ticket reached record levels. This is

attributed to our associates that have embraced, Spy.

The comments that Carol made about the pro and

cross-merchandising efforts going on in our stores:

We are starting to see traction of the

initiatives we talked about last year. And let's recognize

that the stores have not all comped, if you will,

relative to these initiatives. We're seeing the early

stages of Spy - Improved shopability, improved customer

greets, stores more navigable, easier to access merchandise,

favorable feedback from customers and associates. I

just completed a 14-day tour visiting every division and

holding town-hall meetings with store associates. I talked

to over 3500 of our associates in that period of time, and

I will tell you, the candor, the entrepreneurial spirit,

everything is alive and well as we go through transition

between Bernie and I and the transformation in our business

plan. Our cash reached a record 5.2 billion, and at times

like this, what could be more important than cash and the

debt to equity ratio Carol talked about - and an improving return

on invested capital. We've talked about this together

and separately in our analyst meetings. We continue to

be very encouraged that our initiatives are delivering improved

performance in shopability, efficiency and productivity.

Early spring brought customers in for paint, lumber, lawn

and garden products. We're excited relative to some of

the new exclusive products unique to our stores further

emphasizing the Home Depot as the store of destination

in these neighborhoods. We also saw customers respond

to great values, unique values in flooring, kitchen, and

bath throughout the entire quarter. Carol touched on the

centralization of the purchasing. We talk about Spy for

merchandising, really bringing the task here to Atlanta

and allowing a hybrid organization that allows for focus

on sales and service of merchandising in each of our store,

districts, regions and divisions. We'll continue to rationalize

assortments as well as our Pro and Spy initiatives, making

sure we're maximizing sales per square

foot to really be able to dial in the appropriate mix for

the neighborhood and optimization of our assets deployed.

We're reaching out to customers in other ways and we're

trying to change the landscape of our business. We're

expanding our appliance program by ruling out other areas.

JERRY EDWARDSs and Larry Mercer are working to make sure that

the 1500 to 2000 square feet in new appliance set with

over 150 SKUs really improves the shopability and makes

sure we're continuing to drive the female friendly aspect

of our store. The new appliance layout will be in all

stores and we're - all the new stores we open, plus retrofitted

into as many as 200 for a total of 400 by end of this year. And our

Design Center Initiative - It's open, quiet, self-contained. It's

distinct features will add to the

overall atransactiveness emphasizing that

we're a destination store for our customers. We are retrofitting

225 stores for the design place initiative this year bringing

the total to 510 stores currently. And by year-end we'll

expect to reach over 900 stores with this program. You

can see many similarities to our pro initiative that we're

now applying to our appliance and our design place initiative.

Again, we have a champion, we have commonality of roll-

out and points of responsibility in each division to embrace

this to make sure we're focused on speed and efficiency.

We've opened our fourth Home Depot supply store in Mesquite

Texas and Milpitas, California. These stores give us an

entry to the largest volume purchasers of large contracts

being currently supplied by supply houses. Our 5th store

is planned for Denver. During the quarter, we enhanced

our presence in the 12.5 billion dollar Mexican home improvement

market with a tremendous response, and we've announced

the plans to acquire Gal Norte (phonetic) which will conclude this

quarter. This is bringing the stores to loyal customers

that have been shopping us on the border for a number of

years. We're adding two additional stores that are under

construction. We're focused on organic and inorganic growth

in this opportunity. In the area of the logistics and

supply chain management. Our suppliers are over 300 in

transportation and logistics who joined us in the community

for a ka-boom build, and then also sharing with them our vision

and the mutual partnering that will be required for us to

continue to be preeminent in the area of logistics supply

and low-cost operations. We're adding three cross dot

transit facilities. Orlando, Atlanta and Baltimore.

Total today is six with four more expected by

the end of the year. We continue to see efficiency generated

in the supply chain as a result of cross dot capacity ramp-up

I hope you agree that this continuing performance

is a credit to the leadership team, and as Carol mentioned

at our seasonal peek, 290,000 associates who took on

a downward spiraling economy last year, but embraced a whole

host of new initiatives is starting to gain traction in

the financial reporting today. It's paying dividend compensation.

We're excited for the positioning for the balance

of the year. It's my belief that most companies would

have buckled just from the economic pressure alone without

embracing the significant number of challenges that we thought

were critical for repositioning, enhancing our business -

Enhance, extend and expand. Making sure that we continue

to mirror-image a changing economy and landscape, recognizing

the demographic shifts and our consumers'

buying preferences. You've asked me

about the leadership team and about some of the changes

that have gone on. As we've gone through transition and now

transformation, the first quarter we saw great additions

to the management team. We will preserve the Home Depot

culture and address business perspective and expertise.

JERRY EDWARDSs who had over 40 years in industry

and 10 years with Home Depot was named executive

vice-president of merchandising. He is the engine in

gross margin merchandising and the overall assortment.

I would like to reemphasize to be able to have captured Bob

Burton, he has a strong background in high volume transactions.

He was instrumental in the beginning of saber technology.

Bob has been working feverishly with us to make sure our

information systems are leading edge in providing the kind

of gain changing projects necessary for merchandising,

human resources, overall project management. I would like

to reemphasize the addition of Frank Blake, our new EVP of

business and corporate operations. He was the deputy secretary

of (inaudible). He brings broad business experiences, business

law and politics. We're excited to have Frank on the team.

Millard has joined JERRY EDWARDSs as the senior

vice-president of merchandising. Excuse me. He was

the CEO of Payless, and had a long stint with Wal-Mart

in international operations. Jim Stoddart was named president

of Home Depot supply, a new emerging piece of our business

that will take advantage of the 19 billion dollars of equity.

I'm excited about the team, the new additions, the history

that we have on this leadership team. Just to give you

a perspective on that

let me tell you, in terms of direct respects, they are

over 160 years of Home Depot experience, alone. 160 years

of Home Depot experience. Add to that industry experience

and we're well over 225 to 250 years. That says the average

length of service of my direct reports within Home Depot

is 8 years and 1 month. That's almost 30 percent of the

life of this company - this very new company. So I just

want to, again, reinforce that we have a tremendous bench;

we have tremendous regard for the culture and the history,

but clearly we're transforming for the future. We have

not changed our cautious outlook for the economy in the

home improvement industry which we shared in November.

Carol and I went through a very strong econometric model

that highlighted many of the things we're experiencing today

which is why Carol and I and the rest of the team remain

cautious. Our outlook back then and continues today was

for a flat home improvement growth this year, followed

by very modest 3 percent growth in each of the extending

years for '0 2 and '03. The model that we did, results

of our store process, again, continues to indicate that recovery

would be modest this year. And I think that's reflected

in the conflicted economic indicators that we're seeing

today. We saw where the secretary of labor announced

unemployment reaching 6 percent and looking to

6 and-a-half percent by mid summer. The April housing

starts dropped to the lowest level since October, 5.4 to

a rate of 5.6 million units. However sales first quarter

annual rate of 5.78 million, is at an historic high. Home ownership

climbs as we see an increase in family formation. Home

affordability remains unchanged and certainly bodes well

for us. Mortgage refinancings are picking up, although

uncertain whether they will support ongoing home improvement

spending. Financial targets, in a continuing choppy economic

environment, you can expect Home Depot to stay on strategy.

We did not go off strategy one dollar as we told you

we would open 200 stores; we hired 40 thousand new associates;

and we would invest 3 billion dollars. We're staying right

on target with this year's strategy. We expect to see

topline benefits from our initiatives like pro and at-home

services and merchandising, and Spy, and certainly appliances

and the decor. We're maintaining very strong earnings

leverage as we deliver on productivity and efficiency investments

throughout the year. We continue to be comfortable in

our earnings guidance as Carol mentioned for 47 openings for

the second quarter. I hope you feel a sense of confidence

as we transitioned through the prior year and now clearly

are on track as a result of our store initiatives, again

strategic, operating and resource deployment. At this

point, I would like to turn it back over to Bob Burton

and we'll be ready to take questions you might have.

We're ready for questions.

Signal us by pressing the star key

and the 1 on the keypad. We will take the questions as

time permits. We have Matthew with Goldman, Sachs and Co.

k you. Good morning. Two questions:

if I may, if you could give us a sense

as to how the tone of business might have evolved through

the quarter and how that might influence your comp guidance

for the second quarter.

And just to state the second questions - Your cash

balance has risen to astounding levels and

my sense is that you're actively thinking about

that, and I'm asking what your thought process is about

what you want to do with the cash?

Those are two

good questions. I highlighted that basically our comp

forecast or guidance for the second quarter was

somewhere around two to four percent. And again, Matt,

I think while we're seeing conflicted economic metric,

and we're seeing, you know, certainly their ability across

the country. I mean, one of the wonderful advantages we

have is our geographic reach, and one of the disadvantages

is the seasonability and the weather. We aren't seeing

much difference in what you've heard other retailers

reporting. Not to make this a Weather Channel report, but

we're still waiting for spring up in the northeast. I'm

certainly tickled to death to be living in Atlanta versus

upstate New York that had snow the other day, putting a damper

on the seasonality. We're comfortable with the guidance

that Carol highlighted for the quarter, up two to four percent.

If you think about the second question on cash, it's a credit

to the team here who have embraced, in particular, a tough

economic environment, the importance of cash. We read -

we hear a lot now as cash being one of the key metrics

to really validate the health of a company. Because it really

is, um, reflective of what he coming in. As I've said

before, we are and have been and will continue to look at

opportunistic acquisitions. We think there's a lot of opportunity

out there. Frank Blake and the leadership team will be

working closely together. Total homes acquisition in new

Mexico are proof positive on how we will redeploy the

cash; cash that will give us geographic persons, bring

us into markets for new vendor and merchandising sources

and the logistics and the adjacencies that it brings us

along with the close relationship of the leadership team.

We're excited about it. And I think there will be other

opportunities resulting in acquisitions.

We will get a return on

capital of 19.2 percent.

Fair enough. Thank you.

Moving now to take our next question

from Maureen (inaudible) at State Street Research. Maureen?

I was wondering if we could

talk about the increase in the tickets, which is up. How

much of that is driven by the pro business and what's happening

with the average retail customer? And what if any correlation

does this have to the shift of more projects in the mix?

As you mentioned, there's deferral in that, as well.

I would like

to give a few comments and I'll turn it over to Carol for

the specifics. As we announced a year ago, and we looked

at the demographic shifts, we saw two things that really

drove our strategic initiatives - At-home services to

make sure that when loyal customers were moving from the

do-it-yourself to do-it-for-me, we could extend the product

from in the box to out of the box; and in that shift, some

would go to repair, remodel and contractors. So we needed

the duality of at-home services and pro. We asked Tom

Taylor who was running one of our divisions to come in and

he's reflective of how we're running it today, he's putting

highly regarded champions into position. You heard the

number of stores, over 500 last year and 900 this year

with pro set. We're seeing seasoned associates on the

desk. Our pros are telling us they like the stability

of having licensed plumbers, general contractors, licensed

electricians. We're seeing cross merchandising, and the

professional shopping the entire store. So we think this

initiative is really providing a tremendous base for improving

our average ticket. Carol, you commented earlier.

When we look at the pro initiative,

the average ticket is higher than the core DIY stores.

The real driver between the 3.6 percent increase we posted

was an increase in large ticket items, flooring, kitchen

and appliances, and seasonal power equipment. And

the new Toro line. Jerry?

We have had a

successful season and the new Toro line, exclusive

line to us, in the home improvement industry has been remarkably

successful in the mid range price points. This has helped

our outdoor power equipment sales.

The other thing -

Larry Mercer, I would like to have him comment - who is

the father of Spy and who has really, not only driven this

thing from a launch, but also the fact that we now have metrics

in place that are monitoring the actual Spy implementation,

to make sure we're getting the traction.

We're really seeing in the

first quarter of this year a real productivity shift in

terms of the staffing on the floor and it's part of the

Spy platform, and even though we haven't comped it yet in

all stores across the country, we're seeing a

lift in terms of our average ticket and better staffing

on the floor. As Bob mentioned, we have a very rigid 30-day

measurement of every store in the Home Depot and we're

able to look at the opportunity of customer demand versus

actual staffing. It's been a challenge that Home Depot

has been continually improving on. And we're pleased with

what we're seeing off of the two-year build up of Spy

That's great. Thank you.

Moving on, we'll take a question from

Dan Weaver, at Deca Bank (phonetic).

My question is regarding the

same store sales guidance. If you think about the, um,

the two-year comp trend, um, you're coming off of a 2 percent

increase in the first quarter and advertising at 3 to 4 percent

outlook. And at the same time you are

expressing cautious views.

Based on the economic drivers Bob set

forth for you. And based on the current stores. We're looking

at the initiatives, we have to drive same store sales. We're

comfortable with the 2 to 4 percent guidance we've given

you.

When you have a 10 k

discussing cannibalization - and I would estimate diluted

the same store sales by four percentage points from last

year. Based on the real estate strategies in place, would

that be less or equal to a year-ago trends

That's the ongoing rate of cannibalization.

We don't comment on that, because we deliberately cannibalize.

I was thinking if the cannibalization

was less it might build more in-store sales.

Let me comment.

You're on the fringe of an important area for us.

And here's two responses. No. 1, we have changed the

format of our store relative to size and location. Let

me comment on two things we're doing. You know that we

had an additional 120 thousand square foot store and that's

the culture and heritage of the store that got us where

we are. In going forward we had to re-examine that business

model and we have to the point we have the 120 thousand

square foot box, 90, 95,000 square foot, and a 60 to 65,000.

square feet. We've added an arrow to our quiver. As

we look at the markets, we're putting in the right size

and assortment to maximize the return on that investment.

Carol mentioned new store productivity and inventory.

This is not a business, Dan, and you know that, this is

not one size fits all. There are places for consistency

or uniformity, compliant entrepreneurial. There's also the

entrepreneurial spirit; that's alive and well. Geographically,

we're making sure that when we reach a point when the store's

120, 125 million dollar stores - can we really take care

of the customer? What we'll do is put a store in an adjacent

store to better serve the customer base. A

portion will peel away from the existing store, but we

want to improve accessibility and shopability. We're

going to locations that represent net new. And when we

sit in the monthly real estate meeting, we're exploring

on a geographic basis, not only the need to better serve

a customer where we have, you know, where we're being, um,

stressed at a high volume, but we're also looking for net

new. And this urban concept allows us to reach customers

previously we haven't gotten to. We're excited about it.

So I think while you're point about cannibalization

is correct, our goal would be to stabilize and work through

it to a lesser degree as we go forward.

Thanks a lot.

Up next, we'll take a question from

Raymond James, Bud Bugash (phonetic).

Good morning. A question

on the margin issue. The modest improvement in gross margin.

Could you quantify where the shifts in margins are,

and did much of that come from increased reliance

of imports as acquisitions?

As we talked about with regards to our

centralized purchasing groups, going forward, we are

projecting modest gross margin expansion. As we continue

to look at ways to increase customer value, today

our import penetration is 6.2 percent which is the same

as the at the end of 2001. We hope to increase that penetration

over the next several years, but it is something that takes

time to develop those vendor supplier relationships to ensure

we're delivering the best quality and best product

offerings.

What was that at the

end of the first quarter of 2001?

5.2 percent.

It's 100 basis points from

this just past - up 57 is more than just

modest?

57 is more than modest in my estimation.

Two more. Can you give

us a number on accounts payable?

As a percent of accounts payable?

You gave us 51 days. I

just wanted to know if you would give us the actual number?

Bob Burton here.

I'll call and give you the number.

Peter Caruso.

What happens in this

industry is you get comparisons with the major competitors

in the industry, that being Lowes. And you know, when you

look back over history, you have outcomped each other and

sometimes you're in line. I'm not making a big deal with

the fact that Lowes is outcomping Home Depot right now. I think

there is a merit where they have expanded the classes of

trade. And they've taken up the average ticket. Can

you and Jerry address your merchandise content within your

store, on the consumer side - not the pro side - how you

may try to expand classes of trade, and whether you see

a merit in taking up the average price point in order to

have a better class of goods in some categories within your

store?

I think those

are fair questions. And we're doing a number of things

within our store. I want to, number one - I'm

not sure if this was your question or not, but you know

gross margin from our standpoint is going to be earned

gross margin. We don't see a lot of pricing out there

as a way of enhancing gross margin. Quite honestly in

our tradition of everyday low prices we think bringing

value to the customer is critically important. Point one and

two. That's point one and two. I think your other question

goes to the point of mix. And what are the opportunities

to enhance our mix to help drive, um, the profitability

of our stores. I think Jerry can talk about some of the

things we've seen in those categories. In those categories,

I think lawn and garden represent - I'll

let Jerry comment.

As an oversight, I think lawn and

garden, the merchant, and the whole team have positioned

us far better than we've ever been positioned, whether

you look at power, power equipment. If you think about

the way we've organized now, centrally, to get some of the

large buys, but keeping the hybrid of lawn and garden.

For the local nurseries. I think we have more color,

more vitality. More freshness than we've had in a long

time. If you look across the store in flooring and some

of the values Jerry and his team have been able to bring,

it's evidence if you walk the store, but our customer reaction,

certainly on the hard flooring, has been phenomenal. And

of course our side, we've been able to gain tremendous leverage

for some of the best hard flooring

in the industry. You want to comment? We are -

we are rolling out a proprietary traffic master. The designs

and colors are all unique to Home Depot. And they offer

tremendous value as highly competitive price points. This

will be a winner as we roll this out in the third and fourth

quarter. We have greatly expanded our lighting and ceiling

fans. And in Hampton Bay, the largest ceiling fan, we have

7 energy star rated ceiling fans. Nobody else has this.

So we're showing tremendous growth in this category this year.

We're also rolling out an expanded lamp program, 150 new

SKUs' of portable lighting that's beginning to show very

positive results for us. And power tools are - Reoby (phonetic)

power tool line is showing a lot of growth for us - which

is exclusive to us. And we mentioned that Toro and Honda

are both proprietary and are showing us good growth this

year. Our affiliation, with YOW, allows us to provide next-day

delivery at a cost of only $7.50. This will enable us to

scale back existing inventory and greatly improve our capability

of providing much higher price points of faucets to our

customers

When Lowes do come into

a Home Depot market, same store sales will decline about

10 percent in the first year and then get back to normal

- breaking even in the second year, and get back to normal

in the third year. Can you give us an update on that metric?

Geez, Peter,

I can't. I'm not familiar with what Arthur was talking

about there. What I have seen is both sides of that

equation. We've seen, you know, our nearest competitor

put up a store right across the street with no impact,

quite honestly. Obviously what we've done is, make sure

that that store is better prepared than ever. We have

seen some stores that have lost some sales - just the novelty

effect of a new store in the neighborhood - and we'll come

back again. I can't comment on the 10 percent, number.

I will tell you, Peter, they recently went to

look at the markets where we're competing against Lowes - Dallas

Seattle, et cetera, and I was pleased with

what I saw.

I think we have time for one more

question. Wayne Hood at Prudential.

I was - you made a comment

about improved labor productivity. And that had a positive

impact on the sale and in store sales. I'm wondering,

what's systemic in that that's preventing you from getting

back to those historical levels? Workers

compensation or other things?

Several things go into that equation.

Things like increased depreciation. If you think about the number

of stores we now own versus the number of stores that we

owned in the 1998, 1999 time frame. We have higher property

tax expense, we have higher utility expenses.

There are a number of factors that suggest we

can't get back to those levels quickly, but we're driving

productivity and a wonderful experience for our customers

so we drive that top line

It's almost redundant,

but what we're seeing on the measurements, in the second

year of Spy, it would indicate a much higher degree of customer

demand in the aisles of the store. What we can control

on a day-to-day basis, we are pleased.

Retraction, managing the

improved profitability, what do you see in the first quarter

in comp store sales trends?

Let me comment,

Wayne. I know that from the standpoint of previous numbers

your term, retraction, but, again, we're talking about doubling

over three years, the number of stores that we have. Going

from the 40, 44, up to 80 stores. And Carol commented that

the number of stores that we opened in the first quarter and

we have a few more to go yet this year. I think we've

gone through a transformation with Expo. And again, as you

know, we have taken what was a separate merchandising

organization, and blended it in with Jerry to maximize our buying

leverage, so we're buying on a host basis, but

have maintained the individuality and the merchant that

is unique to Expo. We have re-aligned our labor productivity

model and are working closely with Jerry and his team. We

have taken a different approach to the roll-out of Expo.

It was mirror imaging of putting in a store and get in-fill.

We're now looking for geographic reach versus density.

And we're starting to see the benefits of that now, Wayne,

this year. Now while we changed the strategy, we had

commitments for real estate we fulfilled, but we're now starting

to see that we also, as you know, have broadened

the band of our served market. So by doing that, we doubled

the population, the potential targeted population. We're

still tuning this thing up and we're still on track as we

shared with you in November in the rest of the analyst

meeting, the rest of you that were in the analyst meeting.

We're not coming off strategy. We're challenging

ourselves. It's a unique niche that allows a solution

for that particular customer segment

Did they have improved

profitability in the first quarter?

We don't break

that out Wayne.

You can.

But we don't. (laughter)

We know but we

don't share that.

Thank you.

That concludes the question and answer

session. Mr. Burton, I'll turn things back to you.

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