家得寶 (HD) 2004 Q1 法說會逐字稿

Good day everyone and welcome to today's Home Depot first quarter earnings conference call.

As a reminder today's call is being recorded.

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

Please go ahead, ma'am.

Good morning and thank you, Greg.

Welcome to The Home Depot first quarter earnings conference call.

Joining us today on our call are 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 Merchandising 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 provide insight into our merchandising efforts while Frank will discuss the opportunities and progress of our service business and The Home Depot Supply Companies.

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

Following our prepared statement we'll open the line 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, please.

Our media relations department will be available for media questions following the call at 770-384-4646.

This conference call is being broadcast real time on the Internet at www.homedepot.com. with links on both our home page and under the Investor Relations section.

The replay will also be available on our site.

Before I turn the call over to Bob 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, 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 the overall condition of the U.S. economy, stability of costs and availability of sourcing channels, conditions affecting new store developments, the company's ability to integrate the businesses it acquires, 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.

Undue 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 on the company's periodic filings with the Securities and Exchange Commission.

Now let me turn the call over to Bob.

Thanks, Diane, and good morning everyone.

Thanks for joining our call.

We started the year off strong as we continued to build from the momentum that we created in 2003 by staying focused on our strategy.

That strategy of enhancing the core, extending the business and expanding our markets.

We continue to execute the transformation of our business and through these efforts generated record sales and record earnings performance.

From store modernization, innovation and distinctive merchandise, to improving in our operations and to advancements in technology we're making progress.

This was a very strong quarter for The Home Depot, and I couldn't be more proud of the performance of our associates.

Let me start with sales.

Sales of 17.6 billion for the first quarter of fiscal year 2004 were up 2.4 billion, a 16% increase over last year.

Gaining market share, same-store sales or comps of 7.7%, made this the best first quarter performance in five years.

We experienced strength in a number of key markets across North America including Montreal, Quebec, Monterrey, Mexico, New York, Greensboro, North Carolina, Orlando, Las Vegas, Milwaukee, Phoenix, Sacramento, and Seattle.

This contributed strong sales growth helped us achieve record net earnings of 1.1 billion, demonstrating very favorable leverage in the first quarter of 2004, and an earnings per share of 49 cents or 6 cents ahead of First Call.

Now, Carol Tome will take you through the details later in this call.

Our efforts on enhancing the core are working to improve customer shopping experience.

Numerous merchandising enhancements are adding distinctive and innovative products that are meeting customers' aspirations.

Customer satisfaction survey of over 130,000 customers confirms significant progress in meeting customer aspirational needs including an enhanced shopping experience.

Our focus on emphasizing opportunities in merchandising is resulting in positive results.

In the first quarter, our average ticket increase of 7.4%, or $3.82 to $55.11 is a new company record.

We saw ticket increase in every category.

Our selection of top well-known national, exclusive and proprietary brands remains unrivaled in home improvement industry.

John Costello will discuss our merchandising accomplishments later.

We continue to make progress with our technology initiatives.

In the first quarter, we completed the rollout of our new human resource system to allow all of our stores continuing the digitization of The Home Depot.

Additionally, in the front end of our stores, we have completed the 12-month conversion of all of our registers onto a new single point of sales platform.

We now have self-checkout in 822 stores with 34% of our transactions in these stores going through these registers, and we've seen wait times are down 40%.

Our online product lookup is now installed at every register and cordless scan guns are in use in all of our stores.

All of these efforts are improving convenience, speed of checkout, and a more ergonomically friendly work environment for our associates.

Speaking of our associates, they continue to deliver on our key business transformation priorities.

They are the key ingredients in The Home Depot's success and we continue to invest in them heavily.

This year, we'll provide more than 23 million hours of learning, a 10% increase over last year.

The learning forums and other leadership development programs we launched in the first few years are paying off.

After hosting learning forums for our district managers and our store managers, this year approximately 5,500 assistant store managers will have attended our learning forums.

The payoff comes in the form of higher associate know-how and satisfaction.

Which, of course, translates into improved customer service and higher sales.

Now, beyond enhancing our core, we are extending our business, and, of course, expanding our market.

We're building momentum both in our stores and throughout our enterprise to provide us with new platforms for growth.

We're experiencing continued success in our service business which grew 42%.

And you'll hear more about this from Frank Blake later in the call.

We expect to continue to build our brand and our geographic coverage in North America.

Last week we announced our intent to acquire Home Mart, a home improvement retailer in Mexico.

We're expanding our market opportunities through The Home Depot Supply business.

Home Depot Supply posted strong double-digit growth during the quarter, and we believe we have a huge opportunity in this $410 billion market.

Two weeks ago we announced our intent to acquire White Cap.

This acquisition is part of Home Depot's strategy to expand its professional customer base with value-added products and services.

We have numerous opportunities to grow this business on several fronts including product expansion, and our geographic reach.

And you're going to hear more about these acquisitions again, later in our call.

We also remain encouraged about the strength in the home improvement sector.

The home remains the largest asset for consumers in North America.

The installed base is growing and interest in starting home improvement projects is higher than last quarter and one year ago.

Consumers are expressing a greater interest to use pros installed sales.

About 31%, or almost twice that of one year ago.

All of these trends point to solid opportunities in the do-it-yourself or do-it-for me and pro sectors of our business.

We believe we are well positioned to benefit from these trends and continue to grow in these current economic environments.

We remain focused on our commitment to stay on strategy to enhance our core, to extend the business and expand our markets and to create value for our shareholders.

We have one of the strongest balance sheets in retail with $38 billion in total assets including over $4 billion in cash and stockholder equity in excess of $22 billion.

So now I'd like to turn the call over to John Costello for his comments on our merchandising results.

John.

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.

Our results reflect strength from five areas.

Growing our core merchandise, a steady stream of new innovative and distinctive products, conversion in average ticket growth, store modernization, and our tightly integrated marketing and merchandising programs.

Let me review each area.

First, growing our core businesses.

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

Well-known national brands comprise over 85% of our mix.

These are enhanced by exclusive retail brands such as Anderson windows, Louisville ladders, John Deere, Toro, Lithonia and Ralph Lauren paint, and leading proprietary brands such as RIDGID, Ryobi, Ortho Basic Solutions and Hampton Bay.

Our first quarter sales were strong across a broad range of merchandising categories.

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

Let me provide you a few examples.

Lumber and building materials continued to be a significant business driver in the quarter.

Commodity prices have increased for certain merchandise categories such as steel, copper, and lumber.

While commodity pricing contributed approximately 200 basis points of the improvement in comp sales, we continue to use our scale and our buying power to minimize price increases to our customers.

We are working closely with our vendors to minimize the impact to our customers for products derived from these commodities.

Our appliance business delivered strong double-digit comp sales performance.

We've created a compelling offer through our appliance showrooms and posted strong increases in both units and average ticket.

According to an independent third-party research company The Home Depot has grown market share year-over-year faster than any other retailer.

We also saw strength in our kitchen business.

Our new design place showrooms continue to drive above-average performance in cabinets, countertops and sinks.

Hard service flooring categories such as ceramic tile, laminate and wood flooring continue to show increases in comp sales performance and average ticket as we enrich our mix and introduce new lines of products such as DuPont RealTouch laminate flooring.

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

We're rolling out the new GE Adora line of appliances that were developed exclusively for The Home Depot.

The Adora line is positioned between standard GE appliances the GE Profile line and is designed to attract customers who want innovative features, superior performance and great design at an attractive price point.

We continue to add to our recently launched line of RIDGID pro power tools.

This spring we launched the new RIDGID Compressor program offering innovative products at a great value.

We experienced above-average performance in ceiling fans driven by fashion-forward designs and average ticket expansion.

Capitalizing on this success and emerging decor trends we're introducing distinctive new designs in our Hampton Bay Gallery Lighting series with direct home delivery also available.

Additionally, we're pleased that an independent consumer testing group has named our Vermont Casting Grill and Toro Personal Pace mower the number one rated product in their respective classes.

New additions of fashion-forward upper end stainless steel sinks have driven strong double digit comps and a higher average ticket for the category.

Elkay's exclusive Signature Plus line featuring an offset double stainless bowl and Kohler's new stainless Staccato and Staccato sinks combine style and function at a mid to upper price point.

Third, conversion in average ticket growth.

The introduction of our exclusive new line of Hampton Bay patio furniture has driven double digit comp growth by offering higher end product with greater value which has increased our average ticket in addition to driving strong unit sales growth.

This success also illustrates our ability to leverage our proprietary mega brands, like Hampton Bay across related categories.

Influenced by weather, our seasonal business experienced a slower start in 2004 compared to last year, however we are encouraged by recent trends in outdoor categories such as power equipment, landscape and outdoor chemicals to name a few as warmer weather has arrived.

Fourth, store modernization.

In the first quarter of 2004 collectively the categories that have been reset continue to outperform the stores.

We'll double our investment in store modernization in 2004 to $1 billion.

This program will touch all of our stores within three years with new signing, lighting, paint and floor finishes.

We're developing an overall shopping experience that addresses our customers' aspiration and builds differentiation for The Home Depot.

The first quarter also benefited from continued strength of "You can do it we can help" advertising and a tightly integrated spring marketing program, sustained expansion of our Home Depot.com and direct marketing initiatives and continued marketing productivity efforts.

So in summary the first quarter of 2004 reflected strength from five areas: Our core merchandise initiatives, a steady stream of innovative and distinctive new products, conversion in average ticket growth, continued store modernization and a tightly integrated marketing and merchandising program.

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

Thank you, John, and good morning.

The first quarter was another very strong quarter as we continued to enhance the core, extend our business, and expand our markets.

Our total service revenue grew 42% in the quarter to $800 million.

The major portion of this growth was in our residential services business where we continue to grow existing programs and introduce new offerings for our customers.

We now have 23 national programs.

We are seeing sustained double-digit growth in our more traditional categories such as countertops, HVAC, kitchens, windows, roofing and siding and our new program launches such as fencing, interior shutters and decking are also performing very well.

Let me pause here for a brief progress report on the two service companies in windows, siding and roofing that we bought at the end of last year.

With every acquisition we spend a great deal of time and attention on integrating the companies, including quarterly reviews with Bob.

In this case, we've realized synergies from consolidating branches, integrating call centers, merging corporate offices and combining purchases.

More important we have increased revenues year-over-year by 45% and have added critical project management skills to our organization.

We are bringing the same kind of focus across our service businesses to our customer service performance.

We have ongoing initiatives to measure, monitor and manage our service execution, and we are seeing continued progress on our key customer service metrics which have improved by over 10%.

Let me now turn to another major area where we are extending our business, the pro customer, and in particular I'd like to give some additional details around our pending acquisition of White Cap.

White Cap is a leading distributor of specialty hardware, tools and materials, targeting large and medium-size professional contractors.

It has 70 pro distribution branches located primarily in the western part of the United States.

With revenues of approximately $500 million it is the largest, and we believe the fastest growing, company in this space.

It will serve as a platform for future growth.

We have a terrific leadership team in place.

Ted Nark, the CEO of White Cap, has a record of achieving sustained profitable growth with business to business companies.

His senior leadership team has over 60 combined years of experience serving the needs of the pro contractor.

We are excited to have the continuity of this seasoned team driving this business going forward.

They will be part of the group led by Chan Galbato who joined The Home Depot Supply last year from Armstrong where he was President and CEO of Armstrong Flooring.

In addition to a strong leadership team, we have a great market to target.

Of the $410 billion pro market approximately $175 billion is foundation and construction related.

Of that 175 billion, 25 billion consists of the tools, the fasteners and connectors that are higher margin and are the core of White Cap's business.

Currently this is an extremely fragmented market with literally thousands of small regional players.

This business is an excellent fit with Home Depot.

Its customer base is complimentary, focusing on the larger pros.

Its product base is complimentary, with many of the same vendors but at different range of products.

And its service and fulfillment capabilities are complimentary with a strong sales force and service mindset.

We believe that there will be synergies both inside and outside the orange box and that we will be able to grow this business on several fronts, including product expansion and geographic reach.

Finally I'd like to discuss our efforts to expand our markets.

We continue to build on our strength in North America.

Today we have over 100 stores in Canada.

Last week we announced our intent to acquire Home Mart, a home improvement retailer in Mexico with annual sales of approximately $200 million.

This transaction increases our presence in Mexico to better serve our customers and in particular in Mexico City where large retail space is difficult to acquire.

Less than four years after our entry into this market we are pleased with our number one position in a large and growing $15 billion opportunity.

Along with the acquisition of Home Mart, we have raised our new store opening guidance from 175 to 185 stores including the 20 stores to be added to the Home Mart transaction, and 10 stores with 2004 opening dates now scheduled to open in 2005.

So let me conclude.

We have a large and growing market throughout North America.

Today, while we are the market leader, we have only a modest share and see multiple opportunities to grow.

We are developing the business platforms to capture that growth and to better serve our existing and new customers.

Thank you very much.

And I'd now like to turn the call over to Carol.

Thank you, Frank, and hello, everyone.

As you've heard from my colleagues there is a tremendous amount of momentum at The Home Depot and the best measure of this momentum is our financial performance.

So let me take a few minutes to review the details of our financial results.

In the first quarter, our sales grew 16% to $17.6 billion.

Comp sales for the first quarter were 7.7%, and each month in the quarter posted strong results, 8.8% in February, 6.1% in March and 8.1% in April.

We are the leading retailer in the home improvement industry, and we are constantly focused on growing our market share.

This means that we will deliberately cannibalize our own stores to gain share.

This quarter we cannibalized about 15% of our stores and this had a negative impact to first quarter comps of approximately 2.5%.

Excluding the impact of cannibalization our comps would have been over 10% [audio difficulty].

During the first quarter, we opened 33 new stores, bringing our total store count to 1,740.

We opened 21 stores in February, three in March, and nine in April.

Sales from new stores and stores and businesses that have been opened for less than one year contributed 8.5% of our top-line growth in the first quarter.

As Frank indicated we are raising our new store count from 175 to 185 stores in 2004.

We own 86% of our stores and continue to believe our real estate ownership strategy is a competitive advantage.

Selling square footage increased 10.1% from last year to 186 million, and our average square footage per store is 107,000.

Customer transactions were 316 million for the quarter, an increase of 6.8% from last year.

Our average customer ticket increased 7.4% to $55.11.

While commodity price inflation did impact our average ticket we experienced average ticket growth in every category.

Our weighted average weekly store sales for the quarter were $775,000, compared to $753,000 last year, an increase of 2.9%.

Sales per square foot for the quarter were $376.80, an increase of 3.9%.

This is the third quarter of year-over-year improvement in this key productivity metric, demonstrating solid progress in the transformation of our business.

Now before I go to the income statement, I would like to discuss the impact of EITF 02-16 on our quarterly results.

With the adoption of EITF 02-16 in January 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, an increase in selling and store operating expenses with a corresponding decrease in cost of merchandise sold.

Due to EITF 02-16 in the first quarter our cost of merchandise sold was reduced by 155 million of advertising co-op allowances and we recognized $280 million as advertising expense.

The total impact to net earnings in the first quarter was $78 million, or about 3 cents per share.

In our press release, we provided you with a comprehensive table that reflects this impact.

The full-year fiscal 2004 earnings per share impact of EITF 02-16 is expected to be 5 cents per share and we expect to recognize the remaining 2 cents per share over the next two quarters.

Our gross margin for the first quarter was 32.87%, an increase of 90 basis points, which is directly attributable to the lower cost of merchandise associated with the advertising allowances I just mentioned.

Without this impact, our gross margin would have been flat to last year, reflecting some gross margin pressure arising from a higher penetration of lower margin commodity categories but more significantly, our strategic decision to reinvest gross margin benefits into growing our private label credit program.

This program provides long-term benefits, including higher average tickets and customer loyalty.

In the first quarter, we offered several credit programs to our customers who responded very favorably to our offer.

The cost of these programs was offset by gross margin benefits in other areas.

In the first quarter, we experienced a 28% increase in private label credit sales, bringing the penetration of these sales to about 25% of our total company sales.

Our selling and store operating expenses as a percent of sales increased 64 basis points in the quarter to 21.23%.

As I previously mentioned, we recognized $280 million of advertising expense in the first quarter due to the impact of EITF 02-16.

Excluding the EITF 02-16 impact we leveraged selling and store operating expenses by 96 basis points due to our strong sales performance and solid gains in operating efficiencies.

In the first quarter our sales per labor hour increased by almost 7% as 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.

Additionally, in the first quarter, we experienced some expense benefits from our private label credit card which carries lower discount rates than other forms of credit like bank cards.

Our operating margin for the first quarter increased 36 basis points to 9.95% of sales, a record first quarter performance.

As Bob mentioned, first quarter consolidated net earnings totaled 1.1 billion, another first quarter record and net earnings were up 21% from last year.

Earnings per share were 49 cents, up 26% from last year, and excluding the impact of EITF 02-16 earnings per share were 52 cents, up 33% from last year.

Diluted weighted average shares for the quarter were 2.25 billion shares compared to 2.3 billion shares in the first quarter last year.

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

Now let's review some other metrics.

At the end of the quarter, average inventory per store declined slightly from the prior year to 5.8 million.

For the quarter, inventory turnover was 4.9 times as compared to 4.7 times last year.

Computed on beginning long-term debt and equity for the trailing four quarters return on invested capital was 20.4%, up 220 basis points from last year.

Excluding cash our return on invested capital was 25.5%.

We ended the quarter with 4.3 billion dollars in cash and short-term investments.

This is an increase of $1.4 billion from the fourth quarter and reflects strong cash flow from operations offset by $680 million in capital expenditures, $157 million in dividends paid and $916 million used for the repurchase of common stock.

As you will recall, over the past two years our board has authorized $5 billion in share repurchase programs.

At the end of the first quarter we had repurchased $4.5 billion under these programs, representing 141.3 million shares.

We continue to strategically balance our capital allocation plans with our efforts on reinvesting in the business and returning cash to our shareholders.

We plan to spend $3.7 billion in capital expenditures in 2004 and as Frank touched upon earlier we will use some of our cash to move strategically into new adjacent market opportunities such as the recently announced acquisitions of White Cap and Home Mart.

The acquisition price for these two companies will not materially impact our cash position, and we still expect our 2004 ending cash balance to be in the range of 3 to $3.2 billion.

We had a solid first quarter, with sales and earnings growth ahead of our expectations.

Our momentum continues as we have seen strong sales in the first two weeks of the second quarter.

Now, there's been a lot of speculation about the impact of potentially rising interest rates on our business.

We just updated our macroeconomic model and ran a regression analysis of our sales results against interest rates over a ten-year period.

The analysis shows no statistically significant correlation between the two.

Our performance is the result of our efforts.

The home improvement industry a healthy and our business is strong.

As a result, we are lifting our sales and earnings guidance for 2004.

Our updated guidance for fiscal year 2004 is to grow sales by 10 to 12% and we project earnings per share growth of 10 to 14%.

Excluding the impact of EITF 02-16 we project earnings per share growth of 13 to 16% for the year.

Thank you for your participation on today's call.

Operator, I believe we're now ready for questions.

Thank you.

Our question-and-answer session will be conducted electronically.

If you would like queue up for a question today, please press the star key followed by the digit one on your touch-tone telephone.

If you are on speaker-phone please make sure that you turn off your mute function to allow your signal to reach our equipment.

Additionally, please limit yourself to asking one question.

Once again it is star one.

We'll hear first from Dan Wewer with CIBC.

Carol your work on interest rates and the impact on your sales is very similar to our findings.

The one difference is that Depot has a much larger exposure to the pro market or the contractor market due to these acquisitions than you did say in 1994 or 1999.

I was curious, Frank, from your research on the different companies that you've bought, as to their sensitivity in their business to a possibility of further interest rate increases?

Let me first address White Cap.

White Cap is actually interesting, because its business extends across the industrial and construction and foundation related work.

So some of it is residential home, some of it is infrastructure building, some of it is commercial and industrial, and what we've seen and what the numbers would suggest is that those different parts of its business respond differently in different economic climates.

So we actually don't see that as an issue.

On the new home building side, with the acquisition of the flooring installation companies, two things.

First, obviously the new home sales and starts, even if they moderate slightly are still at record levels.

Second, those businesses sell principally to the production home builders, and what you're seeing in the new home market is consolidation around those particular builders.

So we feel well positioned on both of those counts.

Okay.

And then, just as a follow-up, you had noted that commodity inflation added about two points to your same-store sales growth.

There's been some confusion as to the gross margin implications and expense implications of this rate of inflation.

So, Carol, if you could elaborate as to what the profit contribution from this rate of lumber inflation is looking like.

Certainly, Dan.

As we mentioned in our prepared remarks, we did experience some gross margin erosion because of the higher penetration of these lower margin categories.

But that actually was offset by gross margin benefits in other areas, so net-net we're fine.

So it is the gross margin rate on lumber improve or decline or stay constant?

It's interesting.

The gross margin rate in lumber itself increased.

The rate increased, but the margin is lower than the company average, so with the penetration increase you can see the dilutive effect it would have

Thank you.

You're welcome.

And as a reminder to our participants today, due to the interest in time please do limit yourself to asking only one question.

And moving on to Bud Bugatch with Raymond James.

Good morning and congratulations on a terrific quarter.

Carol can you kind of give us some feel of the sustainability in the SG&A performance as you go forward?

You did talk a little bit about the leverage from sales and some of the operating efficiencies, and can you kind of give us a little more flavor?

I know sales per labor hour was up 7% but how does that factor through for the rest of the year?

And your guidance would imply that you're not getting any improvement for the rest of the year.

Is that the way I should read that, or am I missing something?

Well we're delighted with the expense productivity that we reported in the first quarter.

And as you know payroll is the biggest expense that we have and our associates are just a lot more productive than they were a year ago.

Bud, I think it's important to remember that 2004 is a year of continued investment into The Home Depot, both in terms of technology and store modernization.

There are expense and capital dollars, but there are a lot of expense dollars associated with those investments.

We think that's the right thing to do for our company to grow the top-line, so that investment is implied in the guidance that we've given.

But the improvement in this quarter was pretty substantial in leverage.

Can you kind of parse that maybe from, what would you think was responsible from sales and what was it from the operating side of the equation?

We saw expense productivity in every line item in our company.

The biggest driver is sales, of course.

The second biggest driver is productivity by our associates.

Okay.

Thank you.

And moving on to Teresa Donahue with Neuberger Berman.

Good morning, everyone.

I'm just a, could you provide a little more clarity on the impact of credit on gross margin?

I would have assumed that would be handled by your partner at this point, and what would be the flow-through you'd anticipate in future quarters?

Teresa, as we mentioned in our prepared remarks, the cost of some of the credit programs that we ran in the first quarter had an impact, a negative impact to our gross margin.

That cost, however, was covered completely by gross margin benefits in other areas.

Our merchants continue to do a great job of taking costs out and we strategically decided to reinvest that cost benefit into our private label credit program because of the long-term benefits that program gives us.

But forgive me.

I guess I'm not quite clear on the cost saving arrangements with CitiGroup as to why and how much of that cost would you bear.

Sure.

There are two elements of the cost.

In the gross margin line the cost that we incur is the deferred interest cost associated with credit promotions that you may have seen, no interest, no payment for a period of time.

On the transaction cost, that's in selling and store operating expenses.

Right.

Our private label credit card is the cheapest form of credit that we've got.

We love it.

That part I understand.

So the 0/0 stuff is your responsibility?

That's correct.

Thank you.

You're welcome.

We'll hear now from Matthew Fassler with Goldman Sachs.

Thanks a lot.

I'd actually like to begin by following up on Terry's question.

As you think about the cost of executing the 0% financing, how sustainable, or how sustained do you expect this effort will be, and did you ramp it up in the first quarter versus prior periods?

Two parts to this Matthew.

One is, obviously we wanted to be market competitive, and we thought we did that in matching some of the offerings that were put out into retail in the first quarter.

We want to make sure that our customers were just as advantaged as others.

We are, we're going through this in obviously a very methodical and prudent manner, and we are testing the consumer reaction to the 0/12-month deferred programs and I think you'll see us use it effectively and certainly not dilute it from the standpoint of overexposure.

What we are seeing on this and either John or Frank can comment, we are seeing a very good reaction, a positive return, positive ROI.

As Carol indicated we couldn't be more pleased with this new relationship, and the benefits not only on fee structure, but the overall administration and the data we're able to mine through this private label, and the increased expansion that Carol mentioned, we see not only on the short-term, higher average tickets, certainly with each transaction of a private label credit card but John or Frank you may want to expand on the program.

As Bob mentioned, we get a positive ROI, it drives average ticket and loyalty among current customers and also provides an important new source of customers acquisition as well.

So as Bob mentioned, we're committed to be market competitive, but also perform very careful ROI analysis on both new and existing customers and feel very good about the return on these programs.

And does the cost of the capital that you use to finance that business, or the implicit cost of offering 0% financing change if the interest rate environment moves around?

Is that something that could impact your decision to move forward with this particular program?

We have an agreement with CitiCorp to manage the interest rate exposure that's inherent with the portfolio.

As you can appreciate when we entered into this agreement we locked in some very cheap long-term money.

So in other words the profitability of this program is not closely linked to short-term rates?

We run on a portfolio basis and we're very comfortable with where we are and where we're going.

Great.

Okay.

Thanks so much.

Our next question comes from Danielle Fox with Merrill Lynch.

Thanks.

Good morning.

I was hoping you could talk a little bit more about the store refreshing program, sort of where you are, you know, how you're managing the process, what you're seeing in terms of any disruption, and how you're measuring the benefits that you're seeing at the stores.

Sure, Danielle, let me start and then Frank can chime in.

We're very pleased with what we're seeing in terms of our store refreshing process.

As you know we have stores that are going through complete remodels.

Since we started the program over 21 have been completed, we have 100 in the queue, very, very pleased with the performance that we're seeing and each time we attack a store we get better and better.

We also have over 300 stores where we plan to refresh them with new signing, new painting, new lighting, new floors, very, very pleased with the performance there.

We wouldn't be spending the kind of capital that John talked about, $1 billion of capital and expense, we wouldn't be spending that if we didn't like the financial returns and the customer returns that we're seeing.

Danielle, we talked about the 130,000 customers survey results.

Frank can certainly elaborate on it, but to Carol's point, we are very pleased, and we are encouraged with the response of cleaner, brighter, certainly more navigable stores, better visual merchandising, along with John's comments about distinction and innovation.

So we're continually encouraged and we're learning all the new stores we're opening of course have the new sets in them.

I think you're seeing the benefit of that, and new stores sales and productivity Carol mentioned, but we're solidly positioned.

As you know we went from a half a billion last year to a billion this year in our store modernization program, Frank, wouldn't you agree?

Yes.

And just on the process side of it, we now have dedicated teams that work between merchandising, store planning, construction, and store operations that are focused on exactly this part of our business, as we see continuing emphasis on it going forward, and we are just getting better and better every time going through this process.

And just how are you measuring the comp benefit and the return on your invested capital for those stores?

As you can appreciate it we look at it every month.

As John pointed out in his comments collectively the categories that we have reset have outcomped the company.

So we're very pleased.

We look at it every month, Danielle, and we're very pleased with what we're seeing.

Okay.

Thanks very much.

We'll hear now from Eric Bosshard with Midwest Research.

Good morning.

First of all, in terms of store count with the acquisition in Mexico you adjusted your full-year growth but it basically means you're going to open less stores in the U.S. than you originally targeted.

Can you talk a little about that consideration and where the thinking is going forward on the growth of the traditional box stores in the U.S. market?

Eric, let me just give you an overview and then Carol or Frank can jump in, but as you know, the Mexico acquisition we announced 20 some stores in that acquisition, and quite honestly, part of those acquisitions overlap sites that we had predetermined that if the acquisition didn't go through, we were going to open independently because it was an attractive market.

So obviously what we'll do is take advantage of the speed to market through the acquisition and we'll let several of those Mexican new store sites float into 2005.

So what you're seeing here, again, I think is a very responsive and prudent approach to rather than just cavalierly go forward because we have the site, take advantage of speed to market through an existing site primarily around Mexico City which is a tremendous break through for us as you might guess because of the limitation in real estate, take advantage, speed to market and then slide those into early part of 2005.

Frank, is there --

No, that's it exact.

We looked at the overlap within the Mexican market and then what made sense in terms of the profile for 2004 and also thinking about the profile for 2005.

The entirety of it is where a store opens that were slated for Mexico there were no other U.S. opens?

Eric, there may have been two or three but the majority of it you're exactly right, was Mexico overlap.

We had 18, we'll be adding, so we're almost doubling our position in Mexico.

Frank talked about a $15 billion market.

We couldn't be more pleased with the leadership team down there, and again, the ability to reach customers who are really eager to gain The Home Depot shopping experience.

Thank you.

We'll hear now from David Poneman with TIAA-CREF.

Thank you.

Congratulations.

Terrific quarter.

Could you help me reconcile the 7.7% same-store sales gain, or comparable store sales gain with the 3.9% increase in average sales per square foot?

I think it's an apples to oranges measure, David.

We're looking at sales increases for stores that have been open for just one year versus sales per square foot which is measuring the productivity of our entire enterprise.

So I think that explains the difference.

That calculation would include the 180 million square feet which represents stores that have been opened less than one year as differentiated from comp stores which are one year plus, Carol, I believe is, if that answers your question.

That's right.

I think we just have different ways of looking at it.

Obviously sales per square foot includes the 10% increase in square footage that we recognize quarter-over-quarter looking at a set of stores versus a total enterprise so hopefully that helps, David.

Thank you.

Yes.

Our next question comes from David Schick with Legg Mason Equity Research.

Hi, good morning.

Good morning, David.

Your comp like many retailers right now is largely coming from ticket, and you've put a lot of technology into upfront uses to get people through the store faster.

Could you talk about what you expect to see on throughput and whether we could expect to see transaction count change going forward with the initiatives you put in, or, you know, how to expect that the traffic ticket balance as it would affect comp through the rest of the year for your outlook?

Thanks.

David, first of all, let me say that I am very pleased with the progress the team is making relative to average ticket.

We talked about it at the annual analyst meeting and we recognized, if you look at the industry that we had an opportunity to do so.

We've worked with our merchants, we've got average ticket targets by department, by category, and I think the team has really responded, obviously not through price but through distinctive and innovative merchandising that, you know, meeting the needs, the aspirational needs of our customers.

We're listening, and we're responding to new products and new merchandise, and I won't go through all of them, but it's a plethora of merchandise in every aisle and every category.

Clearly, if you look at our strategy it's very transparent.

It's market-focused, it's customer-back.

Our technology in the stores, it's not an accident starting at the front.

Customers said, survey data said, we love the fact that 1,740 stores, you're more convenient than any other home improvement provider.

We love what you're doing on the appearance and the visual merchandising.

Get us out faster.

We kind of went, we went against popular opinion in the industry our self-checkouts, however, are proving to be very successful, over 800, 40% reduction in queue time.

We extended that and put in cordless scan guns.

Speed, accurate, ergonomically more friendly to our associates.

Bob DeRodes and his team worked tirelessly to put in a new POS touch-screen so that again, easy look-up, online merchandise.

And then that technology now will flow its way through from front to back with automatic replenishment, the [bear] program that Troy and his team are putting in place so.

So we clearly are committed to, you know, enhancing the core and that says modernization, it says distinct and innovative merchandising, talks about advances in technology and a commitment to our leadership team.

So as a follow-up, would you expect to see some progress over the next few quarters on the transaction count comp, if you will?

Carol can comment.

I mean we saw transaction count go up, and I would expect that as customers continue to enhance their shopping experience, and we offer a broad range from the standard commodities to the distinctive, clearly we're going to see more share, like we did this quarter.

We clearly gained share across the categories.

I would expect us to continue to see that in the second, third and fourth quarter.

Carol, would you --

I would agree, Bob.

Thanks.

We'll hear now from Gary Balter with UBS.

Thank you.

Bob, when you step back, you've had five really strong quarters in a row now, and your stock had an initial move and is kind of stuck here.

When you look at the world, what do you think investors are missing on the story, and how would you express your current views with Home Depot?

Gary, here's kind of where we are.

You know, this is a company with a tremendously proud past as you know, but you've heard me say many times a brighter future.

And in spite of economic cycles, consumer confidence, global unrest, exchange, we have stayed on strategy.

We've invested $10 billion in the past three years, we grew the top-line $19 billion, the last two years we turned in earnings growth of over 20%, we've increased dividends 20%, Carol said we've bought $4.5 billion of stock back.

Frank talked about two acquisitions, one each of the last two weeks, broadening our base.

We see our market, we see our playing field getting broader, not more narrow.

We see the opportunities for growth bigger, not smaller.

Carol talked about our econometric model where the future is more in our control than interest rate control.

We're aware of the modulation in interest rates in home, so it might be the second best year in the history of housing starts.

The home builders solution Frank talked about.

We're at the core level, so those volume peaks are kind of like the one-off pickup companies but we're sustainable, we're reliable, we're in the core, we're in the sweet spot of that, so look, Gary, we're going to stay on strategy, we're going to invest a billion back in store modernization, another half a billion in technology, and we believe that if we stay on strategy we stay focused, that the market will respond.

Thank you.

Just following up, on White Cap, are you planning to integrate that into Home Depot Supply or currently leave it on its own?

What's the game plan for how that's going to integrate with what you currently have?

Frank, want to handle that one?

Well it will be part of Home Depot Supply.

And as I indicated we spend a lot of time and attention on our integration planning, and we'll do that also with White Cap.

I would say that as I mentioned, the key thing we're looking for White Cap, from White Cap, is a platform for growth, and that's really the thing to be focused on in terms of what we do as we bring it inside The Home Depot Supply.

Gary, this is an exciting, I think, proof-positive example.

If you look at the quarter, we clearly can talk about how we enhanced the core.

We have demonstrated performance of both organic and inorganic now and extending.

Frank talked about 40% growth of services and in extending our markets, doubling Mexico.

So to me the strategy is working, it's exciting, the opportunity to add 70 distribution centers in 17 states through White Cap I think gives us a wonderful platform for expansion through efficiencies in those 70 distribution centers and geographic growth because of our financial strength.

Yeah, I'm familiar with it.

It's a really good company.

I think it's a great acquisition.

Gary, thank you for that.

Thank you.

Greg, we have time for one more question.

Our final question does come from Aram Rubinson with Banc of America Securities.

How are you?

Good.

First just a comment and then a question.

On the traffic comp I would presume when you cannibalize you only cannibalize traffic, you don't cannibalize ticket on the comp?

Is that a fair statement?

Correct.

And then the second question, I just wondered if you can you update us on some of the operational changes in the store, whether it's [bear], the status of the IMA's, automated replenishment, labor scheduling and just kind of help us understand what's going on in the heart of the store.

Troy Rice is in the room, Aram.

Troy, why don't you slide over here.

We've had a couple of reviews on [bear] and automatic replenishment and so forth.

Why don't you just comment to Aram's question.

Yeah, Aram, we're in the process of rolling out auto replenishment, it's in the third and fourth quarter of this year.

We see lot of benefits from that.

The IMA's will change their focus of working each individual order, and be focused more on making sure that the on-hand count is accurate.

So that rollout will come in the third and fourth quarter of this year.

Regarding [bear], we are rolling out process improvement first, and that's going to start in August of this year, and we are currently in pilot and scan receiving, but making some changes in scan receiving.

And we're going to rollout scan in the fourth quarter of this year.

So we see process improvement coming in August and scan receiving coming at the end of this year.

Thanks.

Thanks, Aram.

Well, thanks everyone for joining us today, and we look forward to talking to you next quarter.

That does conclude today's conference.

Thank you, and have a great day.

You may now disconnect.