使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主
Operator
Good day, everyone, and welcome to today's Home Depot second quarter earnings conference call.
As a reminder, today's conference is being recorded.
Beginning today's discussion is Ms. Diane Nayha, Vice President of Investor Relations.
Please go ahead, ma'am.
Diane Nayha - VP Investor Relations
Thank you, Laurie.
Good morning.
Welcome to The Home Depot second quarter earnings conference call.
As we reported this morning, earnings per diluted share for the second quarter were 56 cents, up 12% compared with the second quarter last year, and 2 cents ahead of diluted EPS consensus.
Joining us on our call today are Bob Nardelli, Chairman, President, and CEO of The Home Depot, and Carol Tome, Executive Vice President and Chief Financial Officer, together with other Home Depot executives.
Carol will begin the call with the details of the financial results and then Bob will discuss his outlook for the year.
Then we will take questions.
As a reminder, question and answers will be limited to analysts and investors.
Our media relations department will be available for media questions following the call at 770-384-4646.
This conference call is being broadcast realtime on the Internet at www.homedepot.com, with links on both our home page and under the Investor Relations section.
Before I turn the call over to Carol, let me remind you that our discussion today will include forward-looking statements relating to, among other things, our estimates and expectations for sales and earnings growth, new store openings, gross margin expansion, expenses, remodels and capital expenditures for fiscal 2003, and the adoption of EITF 02-16.
These statements are subject to various risks and uncertainties that may cause actual results to differ materially from the company's historical experience and its present expectations.
These risks and uncertainties include, but are not limited to, fluctuations in and the overall condition of the U.S. economy, stability of costs and availability of sourcing channels, conditions affecting new store development, our ability to implement new technologies and processes, the company's ability to attract, train, and retain highly qualified associates, unanticipated weather conditions, and the impact of competition and regulatory and litigation matters.
Undo reliance should not be placed on such forward-looking statements, as such statements speak only as of the date on which they are made.
Additional information regarding these and other risks is contained in the company's periodic filings with the Securities and Exchange Commission.
Now, I would like to turn the call over to Carol.
Carol Tome - EVP, CFO
Thanks, Diane, and good morning, everyone.
Our 2003 focus on sales, service, and execution continues to drive our business fundamentals.
New and innovative products and category display, coupled with our national advertising campaign, supported positive sales trends during the quarter.
Additionally, customers found our stores to be better in stock, with knowledgeable associates there to help.
We are doing what we said we would do as evidenced by our financial results.
In the second quarter, we reversed the negative comp trend that began last year and posted positive comps of 2.2%.
Comp sales for the quarter strengthened each month, going from 0.8% in May to 2.7% in June, and 3% in July.
In the second quarter, the majority of our selling departments posted positive comps.
To share a few highlights, lawn and garden was a strong category for the quarter, led by outdoor power equipment with continued strength from John Deere tractors, as well as Toro and Honda walk-behind mowers.
Given the wet conditions across the country, sales relating to mosquito repellents and insecticides were also strong.
Paint was another strong category in the quarter, led by pressure washers and interior paints.
Following a fierce winter and an unusually wet spring, we saw pent-up demand for building materials, with strong sales in concrete and roofing materials.
Additionally, sales growth in our service business, including the flooring companies we acquired last year, gained 45% over the prior year, driven by HVAC, counter top, sheds, and fencing.
Now offsetting some of the strong performance in the categories I just mentioned, we continued to experience lumber price deflation, which had a negative impact to comps.
And sales and soft flooring, or carpet, were weaker than last year, as we did not repeat certain promotional activities in this category.
As you know, cannibalization is a part of our operating model.
This quarter we cannibalized about 18% of our stores.
Cannibalization had a negative impact to our second quarter comp sales of about 3%.
For the quarter, our total sales grew 10.5% to $18 billion, driven by new stores and comp sales.
During the second quarter, we added 39 new stores, including one Home Depot Landscape Supply store, bringing our total store count to 1,607.
Of the stores opened during the quarter, we opened 8 in May, 12 in June, and 19 in July.
Our plans call for us to open 200 stores in fiscal 2003.
In the third quarter, we plan to open 35 new stores, including one Home Depot Landscape Supply store.
Our store openings for 2003 are backend weighted, with 62.5% of new stores set to open in the second half of the year, and the majority opening late in the fourth quarter.
Now, I would like to update you on our remodel program.
This year, we are touching about 25% of our stores with some level of our remodel program.
For the Type A remodels, which are gut and renovate, we completed 6 in the first quarter and have 39 stores in the queue.
Now, not all of the stores will be completed this year due to timing and as we continue to refine the Type A remodel program.
It is still too early for us to reach definitive conclusions, given the few stores completed in the program.
To date, with limited information, we are seeing mixed results, but we have enough positive signals to suggest that Type A remodels are the right thing do to do.
Parallel to this program, we have completed close to 100 Type C remodels, which are effectively paint and repair models.
Type Cs also include our new signage package.
Our customers have reacted very positively to this program.
Today, an additional 56 stores are in the queue for Type C remodels.
Turning to store productivity metrics, selling square footage increased 10.2% from last year to 173 million, and our average square footage per store is now about 108,000 square feet.
Customer transactions grew to 350 million for the quarter, up 8.4%, from the second quarter last year.
In the second quarter, our average customer ticket increased slightly to $50.60.
Our average ticket increased in 10 of our 11 selling departments, with particular strength in our kitchen and bath categories, and in our garden and seasonal categories.
Our weighted average weekly store sales for the quarter were $861,000 compared to $883,000 last year, a decrease of 2.5%.
Sales per square foot for the quarter were $415.23 versus $421.14 last year, a decrease of 1.4%.
While down from last year, this year-over-year performance reflects significant improvement from the prior quarters, and includes positive trends in both our existing and new stores.
Gross margin for the second quarter was 31.16%, 77 basis points ahead of the prior year, and the highest second quarter gross margin in our history.
Our gross margin performance reflects the following.
First, lower markdowns, as we did not repeat the yellow tag events held in the second quarter of fiscal 2002.
Second, an increase in our direct import penetration, from 8% for the second quarter last year, to 9% this year.
And finally, continued but slowing benefit from our centralized merchandising programming.
As we have previously commented, we expect only modest gross margin expansion for fiscal 2003, as we anniversaried in last year's strong gain, particularly in the third quarter of 2002.
Now, moving to expenses, selling and store operating expenses increased 70 basis points as a percent of sales to 17.96% from 17.26% last year.
The increase in selling and store operating expenses was attributed, primarily, to one area.
Like many companies, due to rising medical costs, all worker's compensation and general liability expense rose considerably during the quarter.
We believe worker's compensation and general liability expense will moderate for the remainder of the year.
Preopening expenses were $17 million for the second quarter compared with $23 million for the same period last year, reflecting 12 fewer new stores in the second quarter this year and continued focus on improving our pre-opening profit.
General and administrative expenses for the second quarter rose 17 basis points as a percent of sales to 1.62% from 1.45% last year, reflecting incremental spending in information technology and growth initiatives, as well as expense associated with stock options granted in fiscal year 2003.
Net interest expense for the second quarter was 1 million compared to net interest income of 17 million in the second quarter last year.
Net interest expense in the quarter reflects lower short-term interest rates and lower capitalized interest due to the timing of store openings and site development.
The effective income tax rate for the quarter was 37.1% compared to 37.6% for the second quarter last year, reflecting higher tax credits and a lower effective state income tax rate.
We expect the effective tax rate to remain at 37.1% for the remainder of the year.
Second quarter 2003 consolidated net earnings totaled $1.3 billion, up 9.9% from $1.2 billion in the second quarter of last year.
As mentioned, diluted earnings per share was 56 cents, up 12% from last year.
The diluted weighted average shares for the second quarter were 2.302 billion shares compared to 2.363 billion in the second quarter last year.
The reduction was due, primarily, to the effect of last year's $2 billion share repurchase program.
In 2003, we announced a $500 million share repurchase program.
Through the second quarter, we have purchased 851,000 shares, or approximately $27 million.
Now, on the balance sheet, cash and short-term investments totaled $5.3 billion, an increase of $1 billion from the first quarter.
Since the beginning of the year, our cash balance has grown by $3 billion.
At the end of the second quarter, average inventory per store increased 7.1% from the prior year.
As we discussed on previous calls, our inventories were too light last year.
Our focus on improving in stock positions has driven total inventory up from last year, according to our plan.
If you look at inventory per store on a two-year basis, inventory has declined 6.8%.
Second quarter year-to-date inventory turnover was 5.2 times as compared to 4.7 times at the end of the first quarter.
Days payable outstanding was 43 at the end of the quarter, unchanged from the second quarter last year.
We believe we have realized the majority of the benefit from our renegotiated payment terms.
Long-term debt at the end of the second quarter remained flat from year end at $1.3 billion.
Our debt to equity ratio was 6.1%, the lowest in our industry.
Computed on beginning debt and equity for the trailing four quarters, return on invested capital was 17.8%.
The good news about having cash is that we have financial flexibility.
The bad news, especially in this interest rate environment, is that cash did reduce our return on invested capital as compared to the prior year.
Excluding cash and short-term investments, our return on invested capital was 24.5%, up 340 basis points from the prior year on an equivalent basis.
Capital expenditures were $1.7 billion as compared to $1.3 billion last year.
Capital expenditures in 2003 reflect new stores and investments in store remodeling, technology, and other initiatives.
Given the timing of our remodel and new store spending, we now believe our capital expenditures will be in the range of 3.6 to 3.8 billion for fiscal 2003.
We own 1,329 of our stores, or 83%.
Our unencumbered real estate positions supports our long-term strategy of market dominance and financial flexibility.
I would like to provide an update on EITF 02-16.
Under this accounting change, certain advertising co-op allowances received from vendors are required to be treated as a reduction of inventory costs.
This is effective for all contracts entered into after December 31, 2002.
Adopting EITF 02-16 will not have a material impact on our fiscal 2003.
We estimate that this change in accounting will reduce fiscal year 2004 diluted earnings per share by as much as 5 cents per share, the majority of which will be recognized in the first quarter of next year.
As you know, this is a one-time noncash charge.
We had a solid second quarter and our sales momentum continued.
Two weeks into the third quarter, our comps are running better than what we experienced in the second quarter.
That said, a lot of work remains ahead of us in the back half of fiscal 2003.
Our transformation continues and can be disruptive.
Based on our six-month performance, and our outlook for the remainder of the year, we are reiterating our annual guidance to grow our top line, or sales, by 9% to 12%, and our bottom line, or earnings per share, by 9% to 14%.
Thanks very much, and I will now turn the call over to Bob Nardelli for his remarks.
Robert Nardelli - Chairman, President, CEO
Thanks, Carol.
As Carol indicated, this certainly was a very important quarter for us.
Not only in that it is our largest quarter from a seasonal perspective, but also that we continued the momentum that we built from last quarter.
We are very proud of the contributions of our leadership team, and especially the performance of our associates whose ownership and accountability of their stores delivered solid sequential improvements in our business.
We are making solid progress in our business transformation, moving from 1600 separate businesses under one brand, to one brand with 1600 very strong stores.
Our customers are responding to our store reinvestment strategy, which is delivering better, cleaner, brighter stores, with more new and innovative products.
Looking at the quarter, we saw strong performance across the board, especially in some of the following markets.
Boston was very strong, as was Washington, D.C.
Tampa and Charlotte, San Francisco, Cleveland, Los Angeles, Phoenix, Long Island, and Minneapolis, just to name a few.
And we're also very pleased with the continual performance of both our new business in Mexico, which is gaining tremendous momentum, and the solid continual performance out of our Canadian group.
Now, let me touch on some factors that are supporting this quarter's performance.
In terms of merchandising, our in stock and assortments remain strong.
Since last year, as Carol indicated, we have built inventories to match the needs of our customers, with a strong emphasis on customer pull.
Our inventory assortment and our levels are fresher and better than they've been for several years.
We continue to see very strong results from great new product offerings.
Certainly, the John Deere tractors, which are offered exclusively at Home Depot and an average ticket of $2,000, continue to perform very strongly, and the sell-through of the tractors have been consistent with our very aggressive expectations.
Pressure washers are performing very well, with a 55% increase in units sold, driven primarily by our Husky line.
Husky, which sold over 170,000 units, has an average ticket of $169.
Now, we've tried some new innovative approaches and utilized a three-prong format to sell this product.
We call it Click, Call or Visit.
Click, where customers can buy over the Internet, Call, where our customers, after viewing a new innovated infomercial can call our 1-800 line, or Visit, our customers at some of our stores.
Hardware, one of the real crown jewels for this company.
We're very excited, last week, with TTI and Emerson's announcement, the launch of the new line of RIDGID professional power tools that were built on extensive customer research and feedback from our professionals.
These tools will be available in our stores, along with professional and industrial tool houses.
We will carry the entire line of more than 30 different tools with a very, very strong assortment.
These tools will be available in the U.S. and Canada, beginning in October.
And I can personally attest to the performance of these tools, having had the opportunity to test them myself.
I am as excited as I could be with this new innovative launch.
Again, I think it is just an example of the freshness and the innovation that we're seeing in our new merchandising organization.
We've had a number of resets during the year, and I would like to comment on one that really stands out as one of the most outstanding accomplishments we've put in place so far this year, and that is the color solution center.
It is the fastest category that we were able to reset.
We did the entire company, and set a record with all stores completed in two months.
This is a very innovative set, and we're hearing nothing but positive feedback from our customers that love it, and love the color match capability and the technology embedded in this reset.
As a result, this was really the best comping department in the second quarter.
Our Behr Premium Plus, our Behr Premium Plus stain paint were recently named best in class by a recent consumer evaluation, which also named John Deere tractors and our at home services as best in class for their respective categories.
Again, I think this is proof-positive that we're offering great innovative products and merchandise that customers find exclusively at their conveniently located Home Depot store.
In marketing, we are connecting with our customers more than ever.
Our 'More Than A Store' advertising campaign helped to drive more traffic through our stores through its high frequency drive time radio ads and high impact television ads.
With 350 million customer transactions in the quarter, this was the most in any quarter in our history.
We recently announced a new partnership with Discovery Network.
This is an exclusive sponsorship of 'Trading Spaces' and 'While You Were Out.', two of the top-rated shows in the home improvement category.
Our personalized learning relationships with customers is also growing extremely strong.
We held our second 'Do It Herself' night across the country on July 28 and attracted over 60,000 customers.
Now, this is 20,000 more than we attracted in our first event in the first quarter of this year, and they are asking for more, and the registration and subscription continues to grow.
We believe that many of our customers will also enjoy watching the finals of the Women's Cup Soccer this fall.
This will be hosted at the all new Home Depot Center in Los Angeles, as we competed against the traditional Rose Bowl facility.
The Home Depot Center opened in July and has received tremendous response and has been dubbed the cathedral for soccer.
This, again, is consistent with Home Depot's philosophy and sponsorship and increasing our visibility beyond anything we've experienced in the past.
Some other significant highlights in the quarter include the end-of-quarter conversion to Citicorp for our private label credit cards.
This was a tremendous accomplishment of horrific magnitude with smooth transition, and really positions us for significant improvement for future sales and credit opportunities.
We also announced, organizationally, some additional changes in the quarter.
We announced the retirement of Jerry Edwards, our Executive Vice President of Merchandising, after nearly 12 years of service to this company, with over 40 years of service to the home improvement channel.
And I and the staff and the rest of the organization want to thank Jerry for his hard work and dedication, and certainly closing out with a very strong quarter.
John Costello will add merchandising to his current marketing responsibilities, which will result in more seamless synergies.
We also are very excited about announcing two long-term associates that have been promoted to Senior Vice Presidents of Merchandising.
Bill Lennie, an 11-year Home Depot associate, will run our decor department, and Craig Menear, a 6-year Home Depot associate, with oversee all of our hard lines for us.
And both of these gentlemen, along with John, are off to a very strong start.
Carol mentioned services.
You'll recall that about two years ago we identified services as a growth field within our extend, expand, and enhance strategy.
By sticking to our strategy in this initiative also, and through a combination of both organic and inorganic growth, we continued to grow our business in the 'do it for me' market, as Carol mentioned.
We're excited about the growth.
And we're even more excited about the future potentials of extending and expanding our service categories.
Consistent with that is the creation of an entirely new vertical channel which provides tremendous productivity and adjacency in our Home Depot supply business.
We are also pleased with the progress of our 9 Home Depot Landscape Supply stores located in Atlanta and in Dallas.
We plan to have 12 stores by the end of the year, and I think, again, this is a perfect example of extension of business beyond our traditional Home Depot Garden Centers, and really responding and more mirror-imaging our customer requirements.
In the area of government, again, during the quarter, we've completed all of the necessary government compliance work, and therefore, we are very proud to announce that we were awarded a GSA schedule contract.
Here again, it represents tremendous opportunity to become the largest retail supplier to the U.S. government.
And in return, provide them with tremendous value.
In the area of technology, we continue to significantly invest in technology, as Carol indicated.
Our priority in technology is to improve customer experience and customer service.
To that point, we had self checkouts in 667 stores at the end of the quarter, an increase from 392 stores at the end of the first quarter.
Today, we are really excited about more than 30% of all transactions in the stores ran through the self checkout.
This is, again, I think, proof-positive of technology providing a tremendous benefit, as customer queue time was reduced 40%.
Equally, the business benefits has allowed us to take the hours from the self checkout and redeploy them to the selling floor to improve our customer experience.
We again would reconfirm that we expect to have 800 stores with self checkout by the end of this year.
As I move on to our associates, while we're heavily investing in our physical assets, we are equally investing in our human assets as well, and ensuring that our entrepreneurial spirit continues to flourish.
We are very proud of the fact that our success sharing program is now paying out twice a year.
In fact, based on our first half performance, we expect three times as many stores to hit their target than last year.
We will be paying out as much in the first half of this year as we did the entire year of 2002.
We will pay out over $16 million to our sales associate on the floor who are making sure that our customer experience is unparalleled in the home improvement industry.
We are excited about the caliber of our store leadership team and have taken a three-pronged approach.
That of internal promotions, fast track, and our store leadership program.
We've invested heavily in people asset to create and develop a pipeline of talent for our stores.
Today, we now have over 25 SLPs managing a broad range of stores across the country.
We are also committed to taking care of each other.
As we've indicated before, we have 1,806 of our associates that have been called up for active duty.
And which we are pleased to say that nearly 50 have returned home safely.
We announced Project Homefront in support of these associates, that, while they were protecting our homeland, we should help protect their homefront.
We've spent nearly $750,000 and done over 600 repair projects for families of our military personnel.
So in closing, our transformation continues to gain traction.
We continue to drive sales, service, and execution.
Knowing that improved execution enhances service, enhanced service will result in more sales.
And our associates have embraced and have tremendous enthusiasm, and morale is as high as I've ever seen it.
While we're building for the future, I think you would agree that we're delivering improvement on a quarter-by-quarter basis.
While long-term interest rates have been on the rise, home improvement continues to benefit from a solid housing market.
We have the power of industry leadership, our customers recognize us as the leader and innovator in home improvement, and our marketing and merchandising, really, are supporting the key themes of broad product assortment, everyday low prices, and associate know how.
Our financial strength is among the best in business, with a cash and a formidable balance sheet and real estate assets.
And lastly, our greatest strength is in our associates, 300,000 strong, who are passionate about winning and being the best.
They are passionate for one another and our customers, and who give back to our shareholders and the communities in which they live and work.
And now we are ready to take some questions.
Diane.
Diane Nayha - VP Investor Relations
Laurie, we're ready for questions.
Operator
[Operator instructions]
We will take the first question today from Bill Sims with Smith Barney.
Bill Sims - Analyst
Good morning, and congratulations on a solid quarter.
Robert Nardelli - Chairman, President, CEO
Thank you, Bill.
Bill Sims - Analyst
Two questions, if I may.
The first is in regard to new store productivity.
Based on my own calculations, I believe you saw a lift in the second quarter over the first quarter, as well as last year.
If that is correct, if you could confirm that, can you indicate what is driving, you know, what initiatives you think are key to driving the new store productivity relative to last quarter?
And the second question is, Carol mentioned that the Type A remodels were seeing mixed results.
If you wouldn't mind commenting on some of the underperformers and what you think is driving the underperformance and what changes you're making.
Thank you.
Robert Nardelli - Chairman, President, CEO
Yeah, Bill, in general, you're correct in that new store productivity is showing an improvement.
Carol will reconfirm those numbers with you.
I believe the fact is that we're doing a much better job in a broad range of areas.
Certainly, if you think about the associates, the leadership team, and the associate training, prior to new store opening, is a very strong point.
Second, I think you're seeing the results, not only centralization of merchandising, but also store planning and store design and store layout that is underneath John Costello's responsibility.
Frank Blake and his team, I think, are doing a much better job relative to, not only construction of the store, but setting the store, along with our own associates and our suppliers.
So, I think if you look at it from a three- or four-pronged approach, we're really seeing the benefits of increasing visibility, better process, better accountability and ownership across a broad range.
So we're excited about that.
I think it bodes well for the future.
And I think it underpins both Carol's comments and mine regarding the progress we're making relative to the transformation, and maybe even more importantly, is the buy in across the entire organization of this transformation.
Relative to remodels, my comment on that, and Carol will jump in here, is that, as she's indicated, we've done 6.
We're very pleased with the progress.
We are reviewing on a regular basis the work elements to continue to drive efficiency in the remodel process.
We're continually appraising some of the resets that are going on in our stores, and making sure that the latest reset is incorporated in the remodel.
So we want to make sure, you know, as you know in the past, we have underinvested in resets and remodels.
We want to make sure that we're putting in all the due diligence, all the thoughtfulness that can go into these remodels to make sure we're getting the maximum benefit for the return on this investment.
Carol Tome - EVP, CFO
And Bill, I know you will agree, 6 stores is a small sample size.
They've only, really, been operating post remodel for 90 days, so it is a short period of time.
So we do believe we have limited information.
We see a lot of positive signs.
And where we are -- where we don't, we're looking at the markets.
Our stores are across the country where we've remodeled, and I will tell you, one of the stores in Denver is not doing as well as we would like, but the Denver marketplace is very soft because of the outflow of people in that market.
So we don't think it is the remodel at all.
We think that's the market.
Bill Sims - Analyst
Okay.
One quick follow-up on cannibalization.
Are you still expecting a 4% impact in cannibalization in the back year, or has that number changed?
Carol Tome - EVP, CFO
As we look at the store openings planned for the remainder of the year, they will go into existing markets, for the most part.
So yes, we anticipate that the impact from cannibalization will go back to that 4% level by the end of the year.
Bill Sims - Analyst
Thank you.
Carol Tome - EVP, CFO
Thank you.
Operator
And we will take our next question from David Schick with Legg Mason.
David Schick - Analyst
Hi, good morning.
Carol Tome - EVP, CFO
Good morning.
David Schick - Analyst
A couple of questions.
Could you -- you discussed self checkout and that you're adding labor back to the floor.
Could you talk about whether that is one for one, or what your experience has been in those stores, overall?
So, not just what is happening at the self checkout, but what is happening in those stores where you've rolled that out?
And then secondly, any more details you could give on financial impacts of the switch to Citigroup credit.
Robert Nardelli - Chairman, President, CEO
Yes, David, let me give you two comments, then I'm going to ask both Troy Rice, and then Frank Blake, to comment.
The fact is we made a commitment when we entered into the self checkout that we would take hour for hour of benefit from the frontend technology and innovation, and we have in fact done that to date.
Troy can talk about how that is working, and can also share with you the total number of customers that we have tracked through self checkout.
Troy.
Troy Rice - SVP Operations
Hey, Dave.
This is Troy Rice.
When we rolled out self checkout, obviously, there are some productivity benefits associated with that.
And on average in our stores it is about 75 to 80 hours, on average.
We've redeployed those hours to the selling departments.
And we're tracking that on a constant basis to look for sales productivity.
The great news for us is that productivity is up in the second quarter, so we think we are getting benefit from that.
We're continuing to get consumer acceptance of self checkout.
As Bob mentioned earlier, we have over one-third of our customer transactions on the frontend of our stores that is going through self checkout, and we just surpassed the 10 millionth customer through self checkout.
Robert Nardelli - Chairman, President, CEO
So, okay.
What I would like to do now is, on your second question, Dave, again, I couldn't be more proud of what our team accomplished working with City in the transition of our private label credit card, and the platform that that creates for new marketing, and new opportunities.
But Frank Blake and his team deserve all that credit.
Frank you want to comment?
Francis Blake - Business Development and Corporate Operations
Well, we should see some financial benefit from the change.
But probably most importantly for us is, it gives us more flexibility with our credit program.
And we think it is going to give us better data and access to data around, which we can market and better serve our customers.
David Schick - Analyst
Thanks a lot.
Robert Nardelli - Chairman, President, CEO
Okay, David.
Operator
Our next question comes from Matthew Fassler with Goldman Sachs.
Matthew Fassler - Analyst
Thanks a lot.
Good morning.
Carol Tome - EVP, CFO
Good morning.
Matthew Fassler - Analyst
I've got two questions.
First of all, Carol, if you could revisit the gross margin comment that you made, talking to this third quarter's difficult comparison.
If you can just look back to the year-ago period and talk about any unique or unusual dynamics that might have driven an unusually high third quarter gross margin.
And as you think about the fourth quarter, as well, it sounds like you feel that that comparison is not quite as daunting, if you could give us some similar insights on the year-ago numbers and your expectations for later in the year?
Carol Tome - EVP, CFO
Sure.
If you look at our gross margin guidance since the beginning of the year, we've told that you we anticipate moderate gross margin expansion.
Matthew Fassler - Analyst
Right.
Carol Tome - EVP, CFO
And if you look at what we're up against over the next couple of quarters, our gross margin grew by 146 basis points in the third quarter, and 114 basis points in the fourth quarter.
The reason we had such great gross margin expansion in the last two quarters of last year were because of all the great efforts of our merchandising organization to drive out costs.
We're starting to anniversary that.
And so we anticipate as we anniversary those great savings, gross margin will come in.
Matthew Fassler - Analyst
Not to put too fine a point on it, but do you think it is feasible, now thinking about the back half and the aggregate, that you hold margin, or would there be things that you did last year that you might do this year that would cause market to come in against those levels?
Carol Tome - EVP, CFO
I'm sorry could you repeat your question?
Matthew Fassler - Analyst
Yes, is it -- given that the -- given the tough comparisons, do you think it is feasible to hold margin with year-ago levels, or would you expect that margin would actually need to come down from year-ago levels against those comparisons?
Carol Tome - EVP, CFO
We really are just guiding on an annual basis, as you know, Matt.
So, for the year, we anticipate that our gross margin year-over-year will have moderate expansion.
Matthew Fassler - Analyst
Gotcha.
Second question relates to the timing of openings, and remodels.
It seems like you have a slightly greater proportion of stores than I had forecast opening in the fourth quarter than in the third quarter, and similarly, it sounds like the remodels will be finished later in the year.
How much of that is intentional and premeditated, if you will, and how much of that reflects, you know, just pure slippage in terms of execution, if any?
Robert Nardelli - Chairman, President, CEO
Matt, let me try to respond to that.
Again, we meet on a regular basis, every 30 to 45 days with our real estate team, and as you might imagine, you know, making sure that we're getting geographic preferable sites is part of the challenge.
And we want to make sure as we work through, particularly, you know, Carol has mentioned before, the opportunities in the Northeast, where we're already outstoring our competition about two to one, real estate becomes challenging there relative to permitting and so forth.
So this is not something that, quite honestly we're concerned about.
This is really part of our plan.
It is within the range of the forecast Carol has reconfirmed.
So I would not read anything more into this than, the fact is, we are rear-end loaded.
Second, as Carol indicated, we have completed 6.
We've got a significant number in progress.
And we're trying to manage that schedule, making sure that we're incorporating the latest thinking, and that we are avoiding disruption to customers, and making sure that we don't make some of the mistakes we made in the past relative to just the resets within the stores.
Matthew Fassler - Analyst
That's helpful.
Thank you so much.
Robert Nardelli - Chairman, President, CEO
Thank you.
Operator
Thank you.
And we will now hear from Allen Rifkin with Lehman Brothers.
Alan Rifkin - Analyst
Couple of questions, if I may.
With respect to the resets and the remodels, can you maybe provide some color on the costs associated, and that whether or not they are coming in at plan or maybe slightly below?
And do you feel like you're becoming more efficient in the remodel and reset process?
And then secondly, Carol, you mentioned that your cap ex for this year is going to decline by $200 to $400 million.
Where is that incremental decline coming from?
Robert Nardelli - Chairman, President, CEO
Let me just -- just a general category, again, we -- as part of this transformation, we are introducing a lot more process rigor, and John Costello and Millard Barron and his group review with us every Monday at our QMI, our quick market intelligence call, and we are getting more efficient in resets.
We are becoming, again, I think, more capable at doing these resets than we were a year ago.
The speed, and particularly if you look at kitchen and some of the proprietary technology that we have applied for patents, has significantly reduced the amount of time, and it has improved significantly the disruption in the stores.
So as we launch and learn, I am pleased with the progress we are gaining in doing this more efficiently.
And then it will become normal course as we go forward.
We won't have this dwell period of where we went for years with, really, not reinvesting appropriately to maintain the fashion-forward, and being as contemporary as we need to be in our stores.
Carol Tome - EVP, CFO
Now in the cost of Type A remodels is about $4.5 million and we're tracking on our budget.
That is the capital costs, and, obviously, the cost for Type C remodels, with are repaint and repair, is significantly less.
If you look at our total forecast for capital spending in 2003, the delta between our original plan and what we're projecting today rests in two areas, timing of new store spending and timing of remodel spending.
As you know we can't accrue for capital.
We're backend weighted and we the bills as we get them, so our projection is that some of the spending will occur in 2004.
Alan Rifkin - Analyst
Okay.
And then one more follow-up, if I may.
What is the size of the GSA contract?
What potential do you think it holds?
Robert Nardelli - Chairman, President, CEO
Well, again, we look at, Al, if you look at it, and you can break it into a couple of different categories, but we see this as anywhere between $10 to $15 billion market.
And it depends on the categories within that, as direct military, federal spending, et cetera.
We're very excited about a new organization that we were able to attract, General John Phillips to run our government business as part of our Home Depot Supply.
We're excited about, again, meeting all of the regulatory requirements, so that we are totally compliant to be able to serve the government now.
And, so we think it is a great opportunity.
We see this market, quite honestly, about the same size as the Mexico market, which we told you before is about a 12.5 billion market.
And we are very pleased with the progress that Ricardo and that team is making in Mexico.
Alan Rifkin - Analyst
Okay.
Thank you very much.
Robert Nardelli - Chairman, President, CEO
Okay.
Operator
And with Prudential Securities, Wayne Hood.
Wayne Hood - Analyst
Yeah, Carol, I actually had a question for you and Bob.
If you looked at the second quarter and were you to strip out the increase in the worker's comp increase that you pointed to, what happened to the selling store expense rate and payroll rate?
Were you able to lever that or no?
And because you think about the third quarter, why do you think those -- that worker's comp is going to moderate?
Because you're going to need some leverage there to offset that gross margin comparison.
And a question for Bob about the cash balance.
Carol Tome - EVP, CFO
Well, as you know, I would like to talk about payroll for a second because it is the biggest investment that we have in our company.
Our wage rate was up year-over-year, the number of hours we had in the stores was up year-over-year, and our labor productivity was up.
We measure labor productivity, sales per labor hours, and it was up year-over-year.
So we're getting a really nice return on the investments that we're making in our store associates.
If you back out worker's compensation and general liability, our selling and store operating expenses would have been basically flat for the year.
Now why do we think it will moderate?
Because we spent a lot of time talking with our actuaries, looking at the actuarial assumptions that are built into our models, and based on their forecast for the year and our forecast, we believe it will moderate.
Wayne Hood - Analyst
Is this mostly California driven?
Carol Tome - EVP, CFO
You know, California is a big piece of it.
And it is rising medical costs, as you know.
Wayne Hood - Analyst
And then Bob, I had a question for you.
Just how long do you -- are you willing to sit there with that amount of cash on the balance sheet?
Because some could argue that it is good that have you it there but it has been there for a while, and there's really nothing come along that you, you know, other than maybe something small, you could acquire, the balance sheet is underleveraged.
You own over 80% of the real estate.
That's good news but it doesn't point to a necessarily good balance sheet management.
How long are you willing tosit with that amount of cash in the balance sheet?
Robert Nardelli - Chairman, President, CEO
Well Wayne, as Carol indicated in her comments, you remember a year ago, we had $4 billion and we elected to take $2 billion and reinvest it in the form of stock repurchase, which we think was a pretty efficient way of returning value to our shareholders.
We announced, with the board's support, a second buy back.
Last year, as you know, we increased our dividend 20%.
So we think that we are finding a pretty efficient use of our cash.
To your point, Wayne, we've made some very strategic opportunistic acquisitions.
They certainly have been supportive.
And Carol's comments about growing our services 45%, we've bought 3 of the top 10 flooring companies that gave us access to a market prior to this we did not have access to, and that's new construction, mass home building.
We now are able to go in and do flooring, and we're very pleased with the progress that business is making.
So Frank Blake and his team are -- again, we've introduced a pretty rigorous process whereby we're looking at strategic opportunities.
We're looking at, as you know, the stock repurchase, we're looking at dividends.
We think we have a pretty effective method by which we will redeploy this cash back into the business for predictable and sustainable growth.
Wayne Hood - Analyst
Great.
Thank you guys.
Robert Nardelli - Chairman, President, CEO
Okay, Wayne.
Diane Nayha - VP Investor Relations
Laura, we have time for one more question.
Operator
Thank you.
We will take that question from Greg Mallick with Morgan Stanley.
Greg Mallick - Analyst
Hi, thanks.
A couple questions.
One is on the promotion side.
Were you guys doing more, sort of, promotional activity in terms of advertising or 0% financing during the quarter?
And if so, where do you see that directionally going forward?
And then a follow-up on the worker's comp.
Is it fair to say that it was such a big change versus a year ago that it was the entire SG&A increase?
That there may have been some over provisioning or some catch-up there and that's why it may come down the second half?
Are we thinking about that the right way?
Robert Nardelli - Chairman, President, CEO
First of all, let me comment about promotional.
As Carol indicated in her comments, we were significantly less promotionally driven in the second quarter of this year versus second quarter of last year.
That is why we were, quite honestly, pretty pleased with the overall performance in the comp area and top line.
You remember a year ago, we started the quarter with a very aggressive clearance program to make sure that our inventory was fresh and that we were cleansing ourselves of some of the change over as a result of resets.
We did not have to do that this year, which bodes well for inventory management and the merchandising and stores teams.
So we felt, quite honestly, we were less promotional.
And again, I think it harkens back to our strategy of sales, service, and execution, and really focus on the primary assets of this company, enhancing the core.
We are spending a considerable amount of time as a leadership team working on enhancing the core.
We're continuing to look at extending and expanding -- extending our business and expanding our market.
So, I think you will continue to see the work that John Costello and his team have brought to us, relative to, I think, a very solid marketing campaign.
We are getting increased, through improved efficiencies, more media time, more ride-time radio.
The quality and the execution of our catalogs, our tabs, and, quite honestly, the merchandising in those catalogs and tabs.
So we're getting significant process improvements, which is allowing us to get more visibility than we got a year ago.
Carol Tome - EVP, CFO
And on the worker's compensation and general liability side, we don't need to beat this to death, but I think, if you think about actuarial estimates, they look at claims that are open and they apply medical costs to those claims.
Claims aren't closed out immediately.
And if you look at what has happened to medical costs we've had significant increases.
And so based on the actuarial estimates of these open claims, that impacted what we booked in the second quarter.
As we look out for the remainder of the year, we believe that we won't have this same behavior.
I think it is very important to note that our frequency is down.
So this is just about rising medical costs.
Greg Mallick - Analyst
Okay.
Diane Nayha - VP Investor Relations
Thank you for your questions.
And thanks, everyone, for joining us.
We look forward to talking to you next quarter.
Operator
Thank you, everyone.
That does conclude today's conference.
We do thank you for your participation.
You may now disconnect your line.
On behalf of Home Depot, everyone have a great day.