家得寶 (HD) 2003 Q4 法說會逐字稿

Good day everyone and welcome to todays' Home Depot fourth-quarter earnings conference call.

As are reminder, today's call is being recorded.

Beginning today's discussion is Miss Dianne Dayhoff, Vice President of Investor Relations.

Please go ahead, ma'am.

Thank you, Brenda, and good morning.

Welcome to The Home Depot fourth-quarter earnings conference call.

Joining us on our call is Bob Nardelli, Chairman, CEO and President of The Home Depot;

Carol Tome, Executive Vice President and Chief Financial Officer;

John Costello, our Executive Vice President of Merchandise and Marketing; and Frank Blake, our Executive Vice President of Business Development, along with other Home Depot executives.

Bob Nardelli will begin today's discussion with a review of our business.

John will then provide insight into our merchandising efforts, while Frank will then discuss the opportunities and progress of our services business and The Home Depot Supply companies.

Carol will complete our prepared statement and discuss our financial results.

Following our prepared statement, we will open the lines for questions.

Question and answers will be limited to analysts and investors and as a reminder, we would appreciate it if the participants would limit themselves to one question with one follow-up.

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.

The replay will be also be available on our site.

Before I turn the call over to Bob, let me remind that you 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; store initiatives and capital expenditures for fiscal 2004.

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 U.S. economy; stability of costs and the availability of channels; conditions affecting new store developments; our ability to implement new technologies and processes; the company's ability to track, train, and retain highly qualified associates; unanticipated weather conditions; and the impact of competition and regulatory and litigation matters.

Undue reliance should not be placed on such forward-looking statements, such as 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 let me turn the call over to Bob Nardelli.

Thanks, Dianne.

Good morning, everyone.

Last year, I told you our focus for 2003 was going to be very simple.

That we were going to focus on sales, on service, and, of course, on execution.

We completed the year with strong sales growth and earnings performance while making major enhancements to our shopping experience.

We've made good progress in demonstrating that the transformation of our business is really working.

So by any measure, whether it is sales, or service, or execution, our associates stepped up to the challenge and their efforts delivered strong financial performance.

Our strong sales growth helped us achieve net income of $951 million in the fourth quarter of 2003.

For fiscal year 2003, net income was $4.3 billion or 6.6% of sales.

Now I am proud to say that both of these are records for The Home Depot.

Our diluted earnings per share for 2003 increased 21% to $1.88.

And, again, proud to say that is another company record for The Home Depot.

Fourth-quarter diluted earnings per share was 42 cents, or 40% higher than last year and 3 cents ahead of the First Call consensus.

Our sales of $64.8 billion for fiscal year 2003 were $6.6 billion higher, or an 11.3% increase over last year.

And our annual same-store sales, or comps, of 3.8% were the best in three years.

In the last three years of The Home Depot.

For the fourth quarter, comps were 7.6%, which is, I believe, proof positive that our strategy is working.

We had strong results across North America, including several key markets, such as Baltimore, Cleveland, Los Angeles, Monterrey, Mexico, Montreal, Quebec, Nashville, Toronto, Ontario, and Washington D.C.

We recognize double-digit sales growth in Home Depot Supply businesses during the year and are well positioned for continued growth in this market.

Our strategy for sustained growth is to enhance our core, while extending our business, and continuing to expand our markets.

We are adding distinctive and innovative products to our stores that not only enhance the customers' shopping experience, but also meet customers' aspirational needs.

For 2004, we will remain focused on sales, on service, and, of course, execution as we continue to build off the momentum both inside our stores and throughout our entire enterprise.

From a merchandising perspective, we saw strength across the store.

For the year, our average ticket increased to $51.15, the highest level in our company history.

Our marketing and advertising efforts continue to drive great visibility for The Home Depot brand.

We improved both the strategy and the execution of our marketing and advertising in 2003 as we focused on fewer, bigger, and better events.

Since 2001, we have made significant investments in modernization and improving our stores.

As a group, the merchandising categories that we have reset outperformed the company for fiscal year 2003.

Now John Costello will furnish you with more details on our merchandising accomplishments in a moment.

But I would like to focus on technology and customer service now.

We continue to put a high priority on improving the customer experience and service levels through technology in our stores.

Last year, alone, we laid more than 5,000 miles of cable, installed more than 90,000 devices, and at the end of fiscal year 2003, we had 777 stores with self-checkout ,with 33% customer utilization and a 40% reduction in queue time.

So as of today, we have also installed cordless scan guns in 1300 stores, and our new touch-screen registers in 1640 stores.

The customer response continues to be very positive.

I want to add the highlights of our service business.

Now this business grew 40% in fiscal 2003, exceeding our expectations.

We continue to see great opportunities for business, given the changing demographics and the consumer trends.

And you are going to hear more about our growth opportunities in this area from Frank Blake later in the call.

Now we ended the year with over 1700 stores in key strategic locations throughout North America.

This wide geographic reach will continue to serve us well as we add additional services and adjacencies and provide unparalleled access -- unparalleled access for the home improvement customer.

We have stores in areas ranging from Thunder Bay, Ontario to Mexico City.

Our store locations, with 183 million square feet, provide real customer convenience and are a competitive advantage.

We are encouraged about the strength and home improvement sector.

The Home Improvement Research Institute predicts a compounded average growth rate of 4 to 6% for home improvement products and services over the next several years.

The home remains the most important consumer asset in North America, and we believe the home improvement industry is the most attractive retail sector today.

We have a solid market-backed approach to home improvement, and we believe we are well positioned to continue our growth in this current economic environment.

Our associates have been, and were, key to our strong 2003 performance.

And I am pleased to announce that our success sharing incentive payout for the second half of 2003 will be $29 million, 40% higher than the first half of the year.

This brings the total payout to $45 million for the year.

This program was designed to benefit the associates on the floor of our stores.

Now recently, we announced our second national hiring partnership.

The first, of course, was with the Department of Labor and now with AARP.

Our goal with the AARP is to utilize the 35 million members to attract, motivate, and retain a senior worker as either part-time or full-time associate in our new or existing stores across the country.

At Home Depot, we believe that knowledge, experience, and passion never retire, and this will support our efforts to continue to attract qualified and skilled individuals to work as associates in our stores.

In 2003, Home Depot spent countless hours giving back to our communities.

Through Team Depot we contributed a million - millions of hours of volunteerism to many important projects, including disaster relief efforts, such as the fires in California, Habitat for Humanity ,and we'll continue our strong volunteerism culture going forward.

So in closing, we remained encouraged by the significant progress in our business and in our strong sales growth and earnings performance.

As evidenced by financial performance, the business transformation is working as we remain focused on sales, service, and execution.

We are staying on strategy by heavily investing in our core, extending our business, and continuing to expand our markets with a keen focus on creating value for our shareholders.

Now I would like to turn it over to John for his comments on merchandising and some of the progress that they have been making.

Thank you, Bob, and good morning, everyone.

Our merchandising and marketing objectives remain very focused on winning customers and driving total and comp store sales by leveraging the power of our brand, the strength of our experienced merchandising team, and the dedication of our 300,000 associates to provide the most compelling customer experience in home improvement.

Our transformation and store modernization efforts are on track and building momentum.

Our results reflected strength from four areas: First, growing core merchandise.

Second, a stream of innovative and distinctive new products.

Third, store modernization.

And fourth, the most tightly integrated marketing and merchandising program in our history.

Let me review each one.

First, growing our core merchandise.

We continue to offer a robust merchandising assortment of well-known national brands which make up over 80% of our mix.

Exclusive retail brands like TRANE, Thomasville and Ralph Lauren and leading proprietary brands, such as RIDGID, Husky and Hampton Bay.

This strong assortment of national brands, exclusive brands, and proprietary products provides value for our customers and differentiation for The Home Depot.

Our fourth-quarter fiscal 2003 sales reflects the impact of this broad-based merchandising and marketing strategy.

Average ticket increased in all 11 merchandising departments while comps were positive in 10 of the 11.

Let me provide with you a few examples.

Lumber was a significant sales driver, impacting comp sales by approximately 150 basis points in the fourth quarter and approximately 65 basis points for the total year.

This category experienced significant cost inflation as seasonal demand and lumber mill closings converged in late summer.

Our new Color Solutions Center is another example of our strategy with leading brands such as Bear, Glidden, Disney and Ralph Lauren.

Proprietary paint matching technology and attractive easy-to-shop environment and compelling marketing.

Its introduction in early 2003 has produced solid mid single-digit comps in interior paint.

We also benefited from growth in sales of related items like pressure washers.

In the fourth quarter, lawn and garden benefited from winter related sales of snow throwers, snow shovels and chemicals such as ice melt.

Lawn and garden posted mid single-digit comps for the year, the result of a number of initiatives across the department, including the John Deere introduction; lawn and garden power equipment; chemicals; and strong sales in patio furniture and related items as consumers continued to focus on outdoor living.

Kitchen and bath posted comps above the company average for both the fourth quarter and the total year.

Supported by strong double-digit increases in appliances and the impact of our Designplace rollout.

Our commitment to adding appliances to the majority of our stores within two years is paying off.

During the fourth quarter we added appliance centers to 319 stores, for a total of 1569 stores at year end.

According to an independent third-party research company, we have achieved a solid number three position after only a few years of focus.

I would like to now turn to my second point, innovative and distinctive new merchandise.

Our new line of RIDGID Pro power tools is off to a great start.

We have experienced strong sales overall while maintaining our position with a broad assortment of other national pro brands.

An improvement in the selection of our exterior and patio doors has resulted in mid single-digit increases in our average ticket in each of these class.

Our Feather River doors are also experiencing strong unit gains.

These doors offer wood-like appearance at only a fraction of the cost for customers.

Third, store modernization.

We made major strides in 2003 in improving merchandising displays and store sets.

All of our stores were touched by some level of store modernization during the year, including resets, remodels, and new signing.

Of significant note, the categories that have been touched are collectively outperforming the company's comp sales.

We will also accelerate our store modernization program in 2004, designed to touch all of our stores within three years, with new signing, lighting, paint, and floor finishes.

We are developing an overall shopping experience that addresses our customers' aspirations, while maintaining the impact of the world's leading home improvement destination.

Fourth, our marketing and merchandising programs are more tightly integrated than ever before.

The fourth-quarter benefited from the continued strength of "You Can Do It, We Can Help" advertising; a new tightly integrated holiday marketing program that reinforced The Home Depot as the source for distinctive and practical gifts; sustained expansion of our homedepot.com and direct marketing initiatives and marketing productivity efforts.

We expect this momentum to continue into 2004.

We are preparing our stores for spring with a wide range of initiatives which include the continuation of our John Deere lawn tractor launch.

The average tractor consumer is in the market to buy a new tractor every seven years, so we have a whole new pool of customers to reach this spring.

We will supplement these new customer efforts with exciting new products like the exclusive John Deere trailer and new John Deere gater in select stores.

We will continue to build on our leading lawn and garden business with the best selection of live goods and first-rate service.

Our new certified horticulturalist program will be live this spring to provide customers with superior insight and help they expect from The Home Depot.

In just a few weeks you will begin to see our exciting new enhanced line of patio sets under the Hampton Bay brand.

We will also be rolling out our new Basic Solutions by ORTHO product line to widen our leadership in helping our customers get the lawn they want.

This effort to balance our merchandise for spring goes beyond lawn and garden.

Let me give you a few other examples of what our merchant team is doing.

We are going to continue our successful clinic events including our national "Do It Herself" clinics which attracted 180,000 attendees in the first four events.

In the flooring category, we are building on our success in hardwood and laminates by expanding product innovation, such as the introduction of DuPont real touch laminate flooring.

We will also be introducing a new line of Fashion Forward ceiling fans at great values which build off of the success we saw in 2003.

These introductions are the result of close collaboration between our merchants and supplier partners which enable us to provide innovative products with great customer value and attractive margins.

We are rolling out a new set of grills and broadening our assortment with exciting merchandise such as our exclusive new Charm Glow Grill that provides the quality and look of stainless steel at a great value.

Another exciting exclusive new product is our Anderson slide-away screen door.

In this innovative new product, the screen actually rolls up out of sight sight, making it easier for customers to change from screen to clear surface.

You have to see it to really appreciate the convenience and innovation.

Our new Glidden Easy Track ceiling paint goes on soft pink and dries to a bright white, which let's you see where you have already painted, offering speed, convenience, and a better finish for consumers.

Our exclusive new Clopey (ph) Coachman Series garage doors provide the strong visual appeal of carriage-house styles without the maintenance of wood.

As you can see, our merchandising and marketing teams have a lot going on.

These initiatives will drive customer differentiation, sales and average ticket.

So in summary, fiscal 2003 reflected strength from four areas: Growth in our core merchandise, a steady stream of innovative and distinctive new products; store modernization; and tightly integrated marketing and merchandising.

Thank you and let me now turn the call over to Frank Blake.

Thank you, John.

And good morning, everyone.

I would like to give you an update on our service business and some of the new growth opportunities that The Home Depot has both inside and outside of our existing store base.

Let me start with the services business.

We see this business as operating in a $200 billion-plus market.

This is an area of strong growth potential for the company that benefits from changing demographics including the aging baby boom population.

As Bob said, our total service revenue grew 40% in fiscal 2003 to $2.8 billion.

Part of this growth came from our business-to-business strategy.

In late 2002, we began serving the production homebuilder with installed flooring through the acquisition of three companies.

These companies form a solid complement to our core flooring business.

The homebuilder industry is consolidating and looking for larger, more sophisticated partners.

Our business is now expanding its offerings to more than just flooring for new homes.

Leveraging off of Home Depot's capabilities, providing countertops and other finished products.

We are now the largest builder design center partner in the nation and we believe we have significant competitive differentiations.

Our multimarket presence, our multiproduct capabilities, our design center capabilities, and our economies of scale.

With our recent acquisition of Creative Touch Interiors, we have relationships with 17 of the top 20 home builders and a presence in nine of the nation's top 25 markets.

I would now like to focus on our services that are provided directly to the homeowner.

We conduct this business primarily through our stores.

In 2003, we offered 23 national programs.

These programs performed very well collectively with double-digit sales growth.

To give you perspective, currently we handle over 10,000 installations a day with an average ticket of over $1400, including labor and materials.

Growth here comes in three ways: First, through the growth of our core existing programs like countertops, water heaters, and carpet.

Our countertop business, for example, is a relatively mature program, yet it is still growing at a 25-plus-percent compound annual growth rate.

Second, through the continued rollout of our newer programs like HVAC, fences and decks.

We have discussed our HVAC business before.

This is a business that started as a $10 million business in 2001, and will be nearly $250 million in 2004.

And third, through new program introductions to The Home Depot like cabinet refacing and custom storage, these obviously start small but gain through the power of Home Depot's 1700-plus store locations.

And every year we roll out new services based on new customer demands.

We recognize the growth is the opportunity, but execution is critical.

We are making major investments in 2004 to further improve the infrastructure, technology, and processes to support this business.

Not included in the $2.8 billion number, but another form of service is our tool rental business.

Our tool rental centers provide a valuable service to both our pro and DIY customers.

With 825 tool rental centers, we have more rental locations, the newest equipment, and the most convenient store hours in the industry.

Again, this business demonstrates the power of our existing store base.

In 1999, we had only 150 locations.

The business has had a 75% compound annual growth rate in sales since then.

And it is also a good contributor to our gross margin.

We had strong double-digit growth in 2003 in our business-to-business group which we call The Home Depot Supply.

This group includes, among others, and here I am going to refer to them under the names you are probably familiar with: Landscape Supply, Maintenance Warehouse, and Your "Other" Warehouse.

We have 11 landscape supply stores at the end of 2003 and plan to add up to four more in 2004.

The concept is meeting our expectations and it is helping us address the pro lawn and garden market.

With Maintenance Warehouse, we are addressing the MRO, maintenance, repair, and operation supply market, which we estimate as a $100 billion market space.

Maintenance Warehouse has been growing at approximately a 25% compound annual growth rate since we bought it in 1997.

Altogether, we have sized The Home Depot Supply market opportunity as over $400 billion.

Growth in this business also has the advantage of being complementary to our existing core businesses.

You can see this fit in examples such as the special order kiosks in our stores, and the Maintenance Warehouse Catalog at our pro desks.

Overall, these businesses are less capital intensive and provide us with a solid return.

So let me conclude with a straightforward message.

We have large and growing markets to address, and a very small share of those markets right now.

We are establishing business platforms that are capable of setting and sustaining strong growth rates.

Thank you very much.

I would now like to turn the call over to our CFO, Carol Tome.

Thank you, Frank and hello, everyone.

Our transformation is working as evidenced by our financial performance.

In the fourth quarter, our total sales grew 14.5% to $15.1 billion.

Comp sales for the fourth quarter were 7.6% and each month in the quarter posted strong results. 7.5% in November. 6.8% in December.

And 8.3% in January.

Comp sales exceeded our forecast, which factored into comparisons to the previous two-year average.

For fiscal year 2003, sales increased 11.3% to $64.8 billion.

Our 2003 sales growth was driven by comp sales of 3.8% and sales from stores that have been open for less than one year.

This year is the first year since 2000 in which we achieved positive comps.

In 2003, 39 markets posted double-digit comps.

In the fourth quarter alone, 68 markets posted double-digit comps.

Now as you know, we deliberately cannibalize our stores.

As of the end of the year, we cannibalized about 17 of our stores and this had a negative impact to fourth-quarter comps of approximately 2.3%.

Excluding the impact of cannibalization, our comps would have been 9.9% for the fourth quarter.

As Frank mentioned, services revenue grew 33% in the fourth quarter to $757 million.

For the year, services revenue grew 40% to $2.8 billion driven by strength in a number of areas, including countertops, HVAC, kitchens and our flooring companies.

During the fourth quarter, we opened 64 new stores, including three stores in Canada, one in Mexico, and one Home Depot Landscape Supply store.

We opened 11 stores in November, 21 in December and 32 in January.

During the year, we opened 175 new stores, bringing our total store count to 1707, including 54 Expo stores.

In 2004 we plan to open 175 stores.

And while we are pleased with the positive financial performance of Expo, we plan to hold at the 54 store count in 2004.

We now own 86% of our stores.

Our real estate ownership strategy is a competitive advantage.

For the year, selling square footage increased by 17 million or 10% from last year to 183 million square feet.

Average square footage per store is 107,000 reflecting the changing mix in our store formats as we size stores to meet the needs of our market.

Customer transactions were $287 million for the quarter, an increase of 7.1% and $1.2 billion for the year, an increase of 7.3%.

Our average customer ticket increased in the fourth quarter by 7% to $50.62.

For the year, our average ticket grew by $1.72 to $51.15, as Bob mentioned the highest average ticket in our company history.

Our weighted average weakly store sales for the fourth quarter were $669,000 compared to $652,000 last year, an increase of 2.6%.

Sales per square foot for the quarter were $325.18, an increase of 4%.

This is the second quarter of sequential improvement in this key productivity metric.

Demonstrating solid progress in the transformation of our business.

Gross margin for the fourth-quarter of 2003 was 32.75%, an increase of 80 basis points.

For the year, our gross margin rate was 31.75%, the highest in our company's history, and 66 basis points higher than last year.

These results were driven by the following factors: First, changing customer preferences and continuing benefits arising from our centralized merchandising group.

Second, improved shrink.

Third, margin benefits associated with our import products.

And finally, benefits from tool rental centers.

We leveraged a total expenses in the fourth quarter by 89 basis points, due to our strong sales performance, solid gains in operating efficiencies, and good expense controls.

For the year, total expenses were 11 basis points higher than last year.

Selling and store operating expenses as a percent of sales decreased 75 basis points in the fourth quarter to 20.53%.

This decrease was driven primarily by higher sales per labor hour.

Our associates are becoming more productive through the use of technology and other initiatives.

By removing certain tasks from the stores, our associates are better able to assist our customers with sales transactions.

As a result, in the fourth quarter, sales per labor hour increased 6.9% from last year.

Selling and store operating expenses also reflect strong expense control and some incremental benefit associated with our new private label credit program.

While we expect continuing benefits from our new credit program, our plan is to invest those benefits for future growth in the business.

With the adoption of EITF 0216 in January of 2004, which changed the way we account for certain vendor allowances, we no longer net certain advertising co-op allowances against advertising expense.

The result is an increase in selling and store operating expenses and a corresponding decrease to cost of merchandise sold.

Due to EITF 0216, in the fourth-quarter of 2003, our cost of merchandise sold was reduced by $40 million of advertising co-op allowances, and we recognized $47 million as advertising expense.

This had an immaterial impact to net earnings.

In fiscal 2004, we expect approximately $820 million of our $1 billion advertising co-op allowance to be reflected in cost of merchandise sold and we expect approximately $1 billion of advertising expense.

We estimate the net impact of EITF 0216 to be approximately 5 cents per diluted share in fiscal 2004.

This is consistent with our earlier guidance.

Now going back to the fourth quarter, general and administrative expenses declined 14 basis points as a percent of sales to 2.02%.

Operating margin for the fourth quarter of 2003 increased 169 basis points to 9.98 percent of sales.

For fiscal 2003, our operating margin increased 55 basis points to 10.56%, a company record.

Fourth-quarter consolidated net earnings totaled $951 million, up 39% from last year.

As Bob mentioned, diluted earnings per share was 42 cents, up 40% from last year.

Diluted weighted average shares for the fourth-quarter 2003 were 2.27 billion shares, compared to 2.31 billion shares in the fourth quarter last year.

The reduction was due primarily to the effect of our share repurchase programs.

Earnings per diluted share for the year was $1.88, an increase of 21% over 2002, exceeding our guidance.

In 2002, we announced and we completed a $2 billion share repurchase program.

In 2003, we increased our authorization by another $2 billion.

In 2003, we purchased 47 million shares, for approximately $1.6 billion at an average price per share of $33.76.

In total, over the past two fiscal years, we have purchased 115.6 million shares, returning $3.6 billion to our shareholders.

Now moving on to the balance sheet, cash and short-term investments totaled $2.9 billion at the end of fiscal 2003.

Since the end of fiscal 2002, our cash balances increased by $600 million, reflecting strong cash flow from operations and cash used in the following ways: $3.5 billion in capital expenditures; $1.6 billion for the repurchase of common stock; $600 million in dividends paid; and $600 million for the repayment of financing transactions.

At the end of the year, average inventory per store decreased by 2.3% from the prior year.

For fiscal 2003, inventory turnover was five times, as compared to 5.3 times last year.

While turnover was below our expectations, we are very comfortable with the quality of our inventory.

This is a year-to-date calculation, and does reflect the sales performance in the first half of the year.

At the end of fiscal year 2003, our total debt-to-equity ratio remained the lowest in our industry at 6.1%.

Computed on beginning long-term debt and equity for the trailing four quarters, return on invested capital was 20.4%, up 160 basis points from last year.

Excluding cash, return on invested capital for the year was 22.8%.

We spent $3.5 billion in capital in fiscal 2003, as compared to $2.7 billion last year.

The majority of our 2003 capital expenditures reflects spending for new store growth, but also reflects investments in technology and store modernization.

Our 2004 capital spending plan is $3.7 billion.

2003 was a solid year for The Home Depot, with sales, earnings, and cash flow at or ahead of our guidance.

We are encouraged about our outlook for 2004 as we have started off the year strong.

Our guidance for fiscal 2004 is to grow sales by 9 to 12%, and we project earnings per share growth of 10 to 14% before the impacts of EITF 0216.

With the impact of EITF 0216, we project earnings per share growth of 7 to 11% for the year.

Thank you for your participation on today's call.

Operator, I believe we are now ready for questions.

Thank you.

The question and answer section will be conducted electronically.

If you would like to ask the question, please signal by pressing star 1 on your touch-tone speakerphone.

If you are on a speakerphone, make sure your mute function is turned off to allow your signal to reach our equipment.

Once again, to ask your question, press star 1 now.

We'll go first to Bill Sims of Smith Barney.

Good morning.

Thank you.

Congratulations on another solid quarter.

By our estimate, new store productivity showed significant improvement in the fourth quarter.

Can you tell me how have you characterized locations of your new store openings during the quarter?

You know, urban versus rural, and was there anything different about the stores during this quarter in terms how you opened them versus previous quarters?

And then quickly, what would you attribute January's comp strength to?

And then lastly, what was the one negative comping category?

Bill, I thought I said one question. [ LAUGHTER ]

That was one long question.

I apologize.

Let me give you a kind of an overview response, and then we could go a little bit deeper if we want to.

The first part of your question, again, I think we have -- we have shared with you before that Frank Blake and the real estate committee are working closely with both operations and merchandising.

We continue to find geographical areas that allow us to get better penetration to really serve customers that we may not be serving and in some cases with new formats.

As Carol mentioned, we consciously cannibalize ourselves because customer survey data says, number one, of importance is convenience.

So we believe that the 1707 stores truly gives us a competitive advantage, consistent with the programs that John and I have talked about of an unparalleled commitment to store modernization.

Last year we spent a half a billion dollars.

This year we're gonna spend a billion dollars.

We will spend another half a billion dollars in technology.

We will continue to accelerate in the area of innovation and distinction in merchandising.

And finally, the foundation of this company and what we think is a huge competitive advantage is, we'll do well over 23 million hours of -- of learning and investing in our associates.

Thank you.

Could you mention the other two -- the January comp strength?

Yes, we can.

Carol.

We saw strength across the store in the month of January, Bill, in all categories.

For the quarter and for the year, we talked about one negative comping category, and let me tell that you is a category with less than 2% penetration for our company.

It's blinds and wallpaper.

If you look at the comp performance for the year, we have five departments that out comp the company average.

All right, thank you.

Thanks, Bill

We'll go next to Mark Mandel of Blaylock & Partners.

Thanks.

Good morning, everyone.

Carol, can you go over with us the impact of expensing options, not just in 2003, but the projections for the next two years?

Thanks.

Mark, we talked about it at the beginning of the year.

We did adopt FAS 123 which is expensing of options.

We forecasted the impact of 2003 would be as much as 2 cents a share, and that's a true statement.

As you know the way the accounting works, it builds up from there, so every year we'll have incremental expense associated with stock options.

We are totally committed to that and we think it is the right thing to do.

We grant stock options to all salaried associates in our company, that means the assistant store manager on the floor of our store can receive stock options.

So 2 cents increment both in '04 and '05 as well then?

Would that be correct?

You want to build your model that way, that's fine.

Okay.

And if I can just ask a little follow-up.

Any currency impact that is material on the results?

No material currency impacts to our results.

As you know we have business in Canada.

The Canadian dollar has been very strong but it's not material to our overall results.

Thanks a lot.

You are welcome

We will go next to Dan Wheeler of CIBC World Markets.

Good morning.

Question for Frank.

On the at-home services and the different installation services that you have acquired.

Are there any success stories you had of cross selling new projects into the businesses that you have purchased?

Let me make sure I understand the question.

On the -- on the companies we bought for the flooring installations to the production homebuilder, are we cross-selling into our core Home Depot?

I was also thinking for at-home services for the -- not for the new home market, but rather home improvement projects for your customers existing homes.

I believe one of the rationale for acquiring these businesses is that you could -- you know, once you get the project manager in the home, you can cross-sell other projects as well?

And I have been confused as to whether or not there has been much progress made there or not.

Well maybe -- I hope I am answering your question.

There were two different sets of service-related acquisitions that may be relevant to your question.

One we bought -- we call this our alphabet soup companies, IPUSA and RMA.

Those companies were, in fact, bought because they brought project management capabilities to us, and they are 100% linked to our stores.

That's why we bought those companies, because of what they add in terms of competency for additional services within our stores.

There are the flooring -- then the second part of the flooring installation companies to the production home builders on new homes.

And there the leverage that we see with Home Depot is not so much on the direct services side,but rather from, as I mentioned, the economies of scale of being the largest carpet purchaser in the world, et cetera.

We are able to use those synergies for those acquisitions.

If that answers your question.

I think so.

And just on the follow-up.

Either for Bob or Carol.

You noted that 46% of your earnings in the last three years have been either reinvested in the buy-back program or in the way of cash dividends.

Curious as to how you measure the benefit of the shareholder of either a buy-back or dividend as one preferable to the other and whether there is a chance you will increase the portion going to cash dividends in the future, perhaps at the expense of the buyback?

No, Dan, let me just give -- you are exactly correct.

We have returned over 46% of our -- of our earnings back to our shareholders.

That's well above the average of 20%.

We have taken a pretty balanced approach in that return, and we will continue to look at that approach in 2004 and beyond.

We don't heavily weigh one over the other.

We think there are benefits on both sides of that, and I think you will see us acting as we have in the past very responsibly in returning value to our shareholders.

Great.

Thank you.

Yes.

Brenda, we are ready for the next question

We will go to Budd Bugatch of Raymond James.

Good morning and my congratulations as well.

Can we get a little additional color, if it is available, on the remodeling?

I know that you've touched so many departments.

We have the class A remodels that have been done, and you are going to accelerate that over the next couple of years as well, I would think.

Can you give us any feel as to how they are doing?

Yes, Budd.

Let me just again -- I want to re-emphasize that the success we experienced last year, relative to investing $500 million, I think, is -- is kind of reflective in our confidence in the benefits to our customers by doubling that this year to a billion dollars.

John mentioned while last year we touched every store in one form or fashion, we are going to increase this year our commitment to refreshing stores, certainly with lighting, new sign packages and flooring, but we are also significantly increasing our -- our commitment in the major remodeling area.

Carol can give you some specific numbers in line with that.

Well, in terms of a performance of the remodels, we have completed 14 as of the end of the year.

And we are very pleased with the performance that we are seeing within those 14 stores.

Now that we have had longer time to analyze the performance.

So as Bob mentioned, the finance results and the customer receptivity prove -- in solid support of the billion dollars that we are spending next year.

We also have 50 remodels in the queue.

That's another point of support in our commitment to doing the right thing for our stores and our customers.

Okay.

And just one follow-up, if I could, on -- on power tools.

I didn't know whether I caught this or not.

Did that comp at above the company average -- how did you do with new RIDGID program and do you have any quantification on that?

Budd, what we said specifically is we were very pleased with the new RIDGID Pro line.

That it has a very significant start, while at the same time, we have seen equal performance across our entire selection.

So I -- I think the point of this for us, Budd, is we don't preselect for our customer.

We believe in having the broadest selection of power tools with tremendous national brand recognition.

And by having features and appearance at value pricing, it allows our valued customer to select based upon their application, their unique -- their unique trade, and this strategy has served us very well.

Our goal is to grow market share by offering a combination of the best national brands supplemented with proprietary brands that you can't get anywhere else.

Okay.

Thank you very much.

Congratulations again.

Thank you, Budd.

We'll now go to Jack Murphy of Credit Suisse First Boston.

Good morning, Jack.

I wanted to follow up along the same lines as Budd.

With the million dollars in remodeling expense, did the major renovations --

A billion dollars.

No, no.

I am talking about per remodel -- the incremental million dollars on hitting the operating expense line per major renovation that you talked about at the investor conference.

Yes.

As you know, we are committing a billion dollars.

Just to help frame your question, Jack.

We are committing $1 billion of store modernization funding in 2004 of which 86% is capital.

The remainder is expense.

And on the major remodels, we can have as much as a million dollars of expense per store.

So with that as a starting point, with that extra million in the first year, do -- is the model such that major renovations, the type A renovations break-even the first 12 months, or the return sort of longer tail -- you have to wait three, five years to really get the bottom-line incremental EBIT out of the renovations?

Well, we have got 14 completed today, as you know.

As we continue to analyze their performance, through the balance of 2003, we are becoming increasingly more positive on the financial performance and the returns.

And, as you know, this isn't just about doing the right thing, it is also about creating value for the shareholders and based on the financial performance of the remodels, we are getting the right return.

Okay.

And I guess, along the same lines, there was a comment I think John made about the store modernizations having -- the categories that are touched by store modernization having higher-than-average comps.

Would you say -- you know, how much greater that might be?

Or if not, just sort of give some sort of differentiation between the different categories?

Well, in 2003, we actually included reset or touching of 24 different categories within our store.

Collectively, these categories are significantly out comping the entire company.

Now for competitive purposes, we will not give you the exact amount, but we like what we see.

And that's why we continue to commit the kind of dollars that Bob talked about for store modernization.

Okay.

Great, thank you.

You are welcome.

And David Schick of Legg Mason has our next question.

Hi, good morning.

Good morning.

A question on the pro customer in the store.

Frank talked about efforts to the pro customer or different commercial customers outside of the store.

Could you talk about what the -- what you are doing with the pro customer in the store?

What results you have been seeing and thoughts for 2004?

Yes.

I -- first, it's a very, very important segment for us.

It is somewhere around a third of our sales.

As you know, we have rolled out pro desks in over 1300 stores.

We are seeing a very good connection with that pro customer base, through the pro desk.

As you may also know, we are bringing in a new person to lead that business starting in a couple of months, Joe DiAngelo.

This is going to be a major point of emphasis for us, it has been for the last several years and will continue for the next several years.

Will you expect that customer to grow in excess of the typical comp that a store would put up in '04?

Is your plan for that customer to grow quicker than your customer overall?

No, I don't think -- we've got -- we've got good growth plans for both segments of our customer base.

It's based on the sales growth guidance for the year of 9% to 12%.

That reflects growth throughout the entire company and through every category.

Great, thanks.

Thank you.

We will now go to Don Trott of Jeffries & Company.

Good morning.

I was wondering if you could give us some insight into how many stores you have now in the 25 largest markets.

And, also, what do you see as potential for further expansion within those markets?

John, it is a great question.

And in terms of the exact store count, we can get back to you with that exact store count because we don't have that at our fingertips.

In terms of growth, Frank --.

Yeah, no, actually, this is -- since we talked about before, those top 25 markets account for 55-plus percent of our spend -- of the nation's DIY spend.

As we've also indicated we out store our competitor in those markets by a substantial amount, and as you know, the bulk of our stores are located in those top 25 markets.

Right, but could you put a number on it?

Even a range as to roughly how many of your stores are in those markets?

Don, I will get back to you with that.

I don't have that on the fingertip.

How about the remaining opportunity?

Could you rephrase the question?

The remaining opportunity within those markets.

In other words, how many more stores do you think you will have the opportunity to expand in the future into those -- into those 25 --.

Let me just -- again, I think as we -- as Frank and I and the team have our monthly REIT meetings, real estate meetings, we continue to monitor family formation, population growth, and -- and the expansion.

For example, here in Atlanta, if you look at, again, it continues to be one of the fastest-growing markets.

We continue to look at the opportunity to put new stores, and to not only new stores, but infill stores.

So that's a very dynamic model that we think we are doing an increasingly better job of mirror imaging population growth and per capita income or family income, if you will, on a going-forward basis.

So as -- as the demographics change, geographics change, we -- we will be flexible enough to move in and out of there.

Frank, is that -- anything else you want to add to that one?

Yeah, one immediate example because we have obviously looked at it recently.

We sized just the Manhattan market as over $3 billion.

And obviously we are opening a couple of stores there is in '04.

Thank you very much.

Brenda, we have time for one more question

And that question will come from Aram Rubinson from Banc of America.

Hey, lucky me.

Hey, Aram.

Good morning.

Question on the average ticket.

Just looking at what LOWE's reported, there's about a $9 gap in their average ticket on a full-year basis and your ticket on a full-year basis.

If you multiplied that by the number of transactions that you do, that's about a $9 or $10 billion sales opportunity if you are able to kind of take care of that spread.

Can you talk about maybe what is structural in that spread that is unachievable to get from an average ticket standpoint?

And then I would have a follow-up, if you would let me.

Aram, I would say you captured the essence of why this is such a growth opportunity and such a growth company here at The Home Depot.

We are not even close to realizing our growth potential over the longer term.

I think what you heard today is reflective in our strategy going forward about distinction, about innovation, certainly bringing tremendous value at -- at very -- at -- you know, tremendous value in the merchandise at very attractive pricing.

I think the store modernization program that is -- is really targeted at not abandoning a gender but certainly serving both genders, male and female.

Frank talked about the pro, but equally, if you look at our commitment and the success we have seen in appliances, in the short period of two years to go from 0 to third.

If you look at growth in our Designplace centers and decor.

I think what your specific analysis is what gives us such tremendous confidence in the growth of this company.

And we see nothing structurally to limit our ability to continue to grow average ticket.

Can I ask a follow-up or do you need to go?

No, go ahead, Aram.

Your sales per labor hour you said was up 6.9%.

If you just do a little math, you back into the fact that hours, if I have the numbers that I need to, were up about 4.3% in '03 versus '02. "A," is that right?

And "B," can you talk about what the plan is for hours going forward maybe on a per week, per store basis or something like that?

Let me give you again two or three overarching comments and then I will refer to Carol.

But I think what you heard from Troy Rice and from Bob DeRodes of what we did last year, just turn the clock forward but more aggressively as I talked about 5 million miles of cabling, 90,000 devices.

We will start to see -- we will start to see productivity in the store, which gives us the opportunity to do two things, Aram.

One is, as I said at the analyst meeting, we can let it fall to the bottom line, or, in fact, we will reinvest it to increase our service on the sales floor.

As you know, with 777 self-checkouts, we elected to take on average between 40 hours to 60 hours per store and reinvest it on the selling -- on the selling floor.

We -- we are aggressively going after a program internally we call "task out."

And that's really to unencumber our sales associate so they can effectively provide better service.

You heard about the horticultural program, where we are investing heavily in better knowledge, more expertise.

We think -- we think that our program with AARP will attract a knowledge base and a maturity level.

So all of these things, Aram, I think as we move away from being somewhat technologically adverse in the past to really embracing the technology and digitalization and efforts.

Again, I think what you saw was a tremendous partnering between operations and information technology will manifest itself in 2004 and beyond.

Your numbers are correct.

The 6.9% lift that we experienced in sales per labor hours for the fourth quarter.

For the year the lift was about 4%.

And what that shows is the momentum we had as we introduced technology into our stores throughout the year.

Thanks, guys.

Good luck.

Thanks, Aram.

Thank you everyone for joining us today.

We look forward to having you join us when we discuss our first-quarter results in three months.

Thank you.

That concludes today's conference.

We thank you all for your participation.

You may now disconnect your phones.