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Operator
Good day, everyone, and welcome to today's Home Depot second quarter earnings conference call.
As a reminder, today's call is being recorded.
Beginning today's discussion is Ms. Diane Dayhoff, Vice President of Investor Relations.
Please go ahead.
Diane Dayhoff - VP, IR
Thank you, Gwen, and good morning to everyone.
Welcome to The Home Depot second quarter earnings conference call.
Joining us on our call today are Bob Nardelli, Chairman, CEO, and President of The Home Depot;
Carol Tome, Executive Vice President and Chief Financial Officer;
John Costello, Executive Vice President of Merchandising and Marketing; and Joe DeAngelo, President of The Home Depot Supply; along with other Home Depot -- other Home Depot executives.
Bob will begin today's discussion with a review of our business.
John will provide insight into our merchandising efforts, and Joe will take us through The Home Depot Supply platform.
Carol will complete our prepared statement with a discussion of our financial results.
Following our prepared statement, we'll open the line for questions.
Questions 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.
This conference call is being broadcast realtime on the Internet at 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 today's press release and presentations made by our executives include forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995.
These statements are subject to risks and uncertainties.
These risks and uncertainties include, but are not limited to, those factors identified in the release and in our filings with the Securities and Exchange Commission.
Now, let me turn the call over to Bob Nardelli.
Bob Nardelli - Chairman, CEO, and President
Thanks, Diane, and good morning, everyone.
We completed our second quarter with strong financial results.
Sales for the second quarter were $22.3 billion, a Company record.
Our comps were 4%, and net income was $1.8 billion, another Company record.
Earnings per share were $0.82, representing a 17% increase.
Our results are indicative of strong sales and our continued focus on process improvement and cost control.
Now, in the second quarter, we demonstrated the Company's ability to drive top-line growth, through solid comp sales, the addition of new stores, and strategic acquisitions.
And at the same time, we have become a more nimble Company, and we're seeing the early benefits of our technology investments, process improvements, and better execution.
These achievements would not have been possible without the hard work and dedication of our associates.
And Carol Tome will walk you through our specific financial results in a few minutes.
Our strategic focus on enhancing the core has led to an average ticket growth of approximately $10 over the past four years, achieving a record second quarter average ticket of $57.54.
And you'll hear more about this from John Costello later.
Our technological initiatives helped drive operational execution.
We're seeing continuing positive results from our improvements to the front end of our store, and self check-out and upgrades to our POS systems have really improved our customer shopping experience.
To that point, every week, on average, over 200,000 customers provide us with feedback on their shopping experience.
Let me share with you some results from our customer surveys.
For each of the past seven quarters, we've seen an increase in our overall customer satisfaction scores.
In the second quarter, specifically, the biggest improvements we saw were -- helpfulness of associates, up 13%; associate availability, up 6%; improvement in the time to check out was up 4%.
Our front-end initiatives have improved the shopping experience and also increasing our store execution and efficiency, allowing us to redeploy about 40 hours per week per store to the sales floor.
In 2005 the Company's focus is to enhance the receiving process.
Now, a year ago we told you that we were piloting back-end scanned receiving process and systems.
We call these initiatives BEAR, which today is in more than 1,000 stores and will be in all U.S. and Canadian stores later this quarter.
BEAR will enable us to redeploy an estimated 40 to 60 hours per store per week back to the selling floor.
We expect to begin to realize these efficiencies by year-end, once BEAR is fully integrated into our stores.
Now, the combination of the front-end and the back-end initiatives result in about two to three additional associates on the selling floor per store per week.
Our second key strategy is to extend our business.
It resulted in services growing by 28% in the second quarter.
We saw strong installation sales in roofing, countertops, kitchens, windows, and soft flooring.
In the second quarter we expanded our services platform through the acquisition of Viplex Industries, a leading company in window and siding installation market in California.
We are extending our product offerings through in-store special order, homedepot.com, and inspirational catalogues, including categories such as tools and lighting and decor.
We now offer 25,000 products online, providing our customers with a broader selection of merchandise to select from, either online or in our stores.
Now, we're very pleased with our sales performance in these areas.
Our third key strategy is to expand our business through new geographies and new markets.
We continue to expand our presence internationally and now have 170 stores in Canada and Mexico.
By the end of the year, we'll open our 50th store in Mexico.
Now, Home Depot Canada is a number one home improvement retailer in Canada, with annual sales of approximately $4 billion.
In Mexico, Home Depot has also achieved market leadership and is well on its way to being a $1 billion business.
Now, we've also identified about $410 billion market opportunity that we could tap into through a set of platforms that would provide unparalleled service to the professional contractor.
Today, these platforms refer to The Home Depot Supply business.
During the second quarter The Home Depot Supply achieved strong double-digit sales growth, and now represents about 4% of Company's total sales.
Joe DeAngelo is going to provide an overview of The Home Depot Supply and walk you through those acquisitions we completed or announced in the second quarter.
I am very pleased to welcome companies like National Waterworks, Utility Supply of America, Brafasco, Williams Brothers, Contractors' Warehouse, Crown Bolt and Viplex to The Home Depot family.
We look forward to working together with their strong management teams and associates, and, of course, welcome our new customers.
The Home Depot is building off a strong retail base and we will never lose our focus on the core.
As we shared with you over the past few years, we are evolving into a Company with multiple platforms for growth.
Over time we expect an increasing penetration of our businesses in the professional contractor space.
Consistent with our growth strategy going forward, you shouldn't be surprised when we make strategic acquisitions like National Waterworks.
In line with our balanced approach to capital allocations, over the past four years we have invested over $17 billion back into our businesses.
We've more than doubled our dividends since late 2002, and have spent $8.6 billion to repurchase 250 million shares, or over 10% of our outstanding shares.
Now, as I look towards the balance of the year, I feel good about our prospects and our ability to execute.
As a result, we are raising our full-year 2005 earnings per share growth guidance from 10 to 14%, to 14 to 17%.
And now, I'd like to turn the call over to John.
John Costello - EVP, Merchandising and Marketing
Thanks, Bob, and good morning, everyone.
Our merchandising and marketing teams remained focused on driving sales through sustained momentum in key categories; a steady stream of new, innovative, and distinctive products; and an in-store experience that meets our customers' needs.
Results for the quarter were driven by growth across our core merchandising categories; the arrival of hot, seasonal weather; and continued progress in introducing innovative, new products.
Let me review each area.
First, growth across our core merchandising categories.
Nine of our ten departments had positive comps, with only lumber posting negative comps, due primarily to lower commodity prices.
Seasonal categories delivered solid results across the board, driven by new products, improved assortments, and the arrival of seasonal weather across most major markets.
Live goods, barbecue grills, water-related merchandise, walk-behind mowers, gas trimmers, and related accessories, along with patio furniture, helped deliver the performance.
Our enhanced grill lineup of Charm-Glow, Char-broil, and our new Ducane grills, and our expanded lineup of our proprietary Hampton Bay brand of patio furniture, which showcases the latest outdoor fashion trends, delivered double-digit comps.
Strong comps in hardware were driven by new products and hurricane-related products.
The advent of hurricane season drove demand for generators, flashlights, and other related safety products.
Also, sales of pro-grade products performed well across the board.
Building materials posted a strong comp increase through the sales of gypsum, concrete, roofing, and insulation, due, in part, to increased commodity prices.
Kitchen and bath comps were driven by appliance sales, as well as sales of vanities and kitchen and bath installations, influenced by new styles such as our Pegasus line of vanity sets.
Sales of portable air, air circulation, and water heaters also helped drive comps.
We experienced strength in our molding, windows, and Feather River fiberglass door business, as consumers continue to upgrade and respond to our assortment.
New product offerings in our interior door business led to strong performance in the quarter.
Finally, lumber dollar sales were below last year, given the large commodity price declines in the industry.
Lumber prices negatively affected comp sales this quarter by about 40 basis points, compared with a positive contribution of more than 100 basis points last year.
During the quarter, as part of our on-going efforts to refine our product mix, we made the strategic decision to exit from the in-store wallpaper business.
This will open up several bays of space in our store for other products.
Long-term gross margin trends remain positive, with gross margin for the first six months of the year at 33.3%, 20 basis points over year-ago results.
The second area is success from new, innovative, and distinctive products.
Working closely with our supplier partners, we continue to introduce new merchandise.
Let me provide a few examples of how we are differentiating the customer experience and driving sales.
Sales of appliances continue to gain momentum.
On a 12-month rolling basis, for the quarter, we grew our core market share by 150 basis points, or 17%, to 8.8%.
Our results were driven by a steady stream of innovative, new appliances and an attractive shopping environment.
The introduction of new LG appliances in our stores is off to a very strong start.
We experienced continued momentum with our exclusive, new Ryobi One+ portable power system.
Tools for the professional contractor also performed well, driven by demand for our new Rigid pneumatic nail guns and staplers, and our extensive lineup of power tools.
A steady stream of new products across our entire power tool lineup, including Black & Decker, DeWalt, Techtronic Industries, Irwin, and Milwaukee will continue momentum in this category.
Our paint category performed well in both interior and exterior paint, and we remain an authority in this space.
Our Color Solutions Center remains a big hit, along with strong demand for new, innovative products, such as designer kits, application products, and the recent introduction of Ralph Lauren Metallics paint, which helped drive both sales and average ticket for the category.
We continued our store modernization program in the second quarter.
For example, our new sign package rollout is on track and is now in over 1,100 stores, and we have installed new LG appliance sets in virtually all of our stores.
Average ticket increased by 5.1%, or $2.81, to $57.54 in the second quarter, a second quarter record, as customers continue to respond to our innovative products and complete assortments.
We experienced average ticket growth across the store.
Customer transactions were $372 million for the quarter, an increase of 3.6% over last year.
We continue to be pleased with the effectiveness of our advertising and marketing efforts, as we implement innovative ways to communicate The Home Depot's message to our key customer groups.
The launch of our exclusive New Movers and AARP 50-Plus programs are generating good average ticket and response rates.
In the second quarter, our Company team took a proactive approach to ensuring that our stores were fully stocked with key products tied to hurricane preparedness.
We conducted a special event in Florida where we matched the state sales tax holiday to encourage our Florida customers to prepare early and avoid the last-minute rush for products as a hurricane approaches.
As part of this, I'd also like to take a minute to thank our associates who served our customers and communities during the recent hurricanes, particularly in Mexico and in Florida.
So, in closing, our performance for the quarter was driven by growth across our core merchandising categories and continued success from new, innovative, and distinctive products.
I'd now like to turn the call over to Joe for his comments.
Joe DeAngelo - President, The Home Depot Supply
Thank you, John.
Today we would like to walk through the strategy of The Home Depot Supply, the mission of our business, and the success we've experienced to date, including an update on a recent acquisition activity.
As Bob mentioned, The Home Depot Supply strategy is to go after the $410 billion U.S. professional market and compliment our core business.
The opportunity for us at The Home Depot Supply revolves around expanding our relationship with professionals by focusing on providing products and services that satisfy specific needs.
In the last several years, The Home Depot Supply has built leadership positions in a range of markets, serving business-to-business customers such facility, maintenance, and repair professionals; home builders; and large construction contractors.
We run The Home Depot Supply on a portfolio basis, and have a very disciplined approach to growing the business.
We have established three macro platforms for growth, which include -- one, Maintenance, Repair, and Operations; two, Builder; and, three, Professional Supply.
All of our Home Depot Supply businesses have several common attributes and are tied back to our retail business.
First, they have clear market leadership, supported by significant management team talent with the drive and desire to stay with the business and accelerate future growth.
Second, they have a fragmented customer base.
Third, the businesses provide speciality products and services for their particular customer where there is margin opportunity and a value-add component.
Fourth, we focus on select geographic locations, concentrating the business on the highest areas of market opportunity.
Fifth, we look for businesses which add value, by integrating into our customers' work flows, for example, helping them to price out a project and track any changes to their original quote.
Lastly, we look for businesses that operate using superior and extendible systems and processes.
These attributes are creating a successful growth story, as we use best practices to enhance execution across The Home Depot Supply.
We are pleased with our progress.
And for both the first half of 2005 and for the second quarter, The Home Depot Supply reported strong double-digit sales growth.
Let me update you on the progress we are making in these businesses.
In our Maintenance, Repair, and Operations, or MRO platform, our facilities' maintenance business had an outstanding second quarter.
This business focuses on residential and institutional MRO, and continues to secure share gains in the multi-family housing and hospitality markets.
With 20 distribution centers nationwide, this business goes to market with an extensive outside sales force and industry-leading catalog.
In our Builder platform, Creative Touch Interiors is one of the largest design center partners to national, regional, and local home builders.
CTI offers comprehensive design center services, along with sales and installation of multiple interior finish options, including flooring, countertops and window coverings.
This business continues to grow rapidly with their existing customer base and in new geographies.
Today, Creative Touch Interiors operates 33 branches in 15 states.
In our Professional Supply platform, our White Cap business delivered terrific growth, as we furthered the build-out of our national platform servicing the professional construction contractor.
This business made two acquisitions in the quarter, expanding our presence in the Washington D.C. and Chicago areas.
At end of the quarter White Cap had 89 branches in 21 states, and is on its way to become a $1 billion business this year.
Every acquisition affords us the opportunity to capture a greater share of wallet from the professional customer.
Equally important, these acquisitions add powerful talent, industry knowledge, and new ideas to our team.
Growth in our Maintenance, Repair, and Operations platform took a giant strategic leap with the announcement to acquire National Waterworks.
As we discussed on our July 19th conference call, National Waterworks delivers a full line of pipe, fittings, valves, meters, fire hydrants, and service and repair parts used to transport clean water and wastewater between reservoirs and treatment plants.
National Waterworks' products are integral to building, repairing, and maintaining water and wastewater systems.
They serve as the municipal infrastructure required to support population and economic growth and residential and commercial construction.
National Waterworks operates a tremendous customer-facing, cost-leadership business model, which will be adopted to drive enhanced efficiency and execution throughout The Home Depot Supply businesses.
National Waterworks is the number one player in this space.
With sales of $1.5 billion in 2004, they hold a 14% share of this $11 billion market through a network of 136 branches and 36 states.
Selling directly to municipalities and to waterworks contractors, they have a highly fragmented customer base.
No one customer makes up more than 1% of sales.
This market has had consistent growth characteristics of 7% since 1975, and demand is ever increasing, due to new infrastructure projects and aging infrastructure repair and replacement needs.
Harry Hornish, the founder of the business, will continue to lead National Waterworks, along with his established management team, who plan to close the transaction by the end of August.
As we continue to focus on non-asset intensive businesses, such as National Waterworks, The Home Depot Supply should, over the long-run, generate returns slightly above that of our retail business.
Within the MRO platform, we also recently required Utility Supply of America, which is the number one catalog supplier to the water treatment industry.
Bill Graham, the founder of Utility Supply of America, will continue to lead the business, and will work with National Waterworks to cover the water transmission and treatment plant market.
Lastly, for our MRO platform, we acquired Brafasco, which is a branch-based industrial fastener business that operates primarily in Canada today.
Within our Builder platform, at the end of June we acquired Williams Brothers, which is focused on providing structural products and services.
Williams Brothers Lumber Company was founded more than 80 years ago in Atlanta and operates 16 locations throughout Georgia.
They sell exclusively to professional, residential, and commercial builders and offer a full line of lumber, trusses, siding, roofing, mill work, windows, doors, and associated building products.
Williams Brothers' executive leadership team of Jerry Johnson and Sonny Calhoun, who have built an incredible reputation in their industry, will continue to run the business and rapidly build out this new growth platform.
Within our Professional Supply platform, we acquired Contractors' Warehouse on May 31st.
Contractors' Warehouse operates a low-overhead, cash-and-carry business focused solely on the small contractor remodeling tradesmen.
They have drive-thru lumber yards, offer multiple job lot quantities, and are very locally focused in terms of product selection.
Contractors' Warehouse currently operates seven stores in West Coast markets, under the continuing leadership of its founder, Rich Feaster (ph).
Our plan is to organically expand this business model to capture this critical market segment opportunity.
Finally, we are supporting all of our businesses through the recent acquisition of Crown Bolt, a distributor of fasteners, hardware, and other related products.
They have been a key supplier to us for 20 years.
This acquisition will create greater profitability and availability of quality products to The Home Depot.
Crown Bolt is being led by Paul Iderosa (ph).
We are very proud that through the tremendous efforts of all of our teams, all of our acquisitions are exceeding base case expectations for sales, profitability, and return, and organic execution in all existing businesses is soundly exceeding market growth rates.
We are clearly off to a strong start.
Now I'd like to turn the call over to Carol.
Carol Tome - EVP and CFO
Thank you, Joe, and hello, everyone.
In the second quarter, our sales grew 11.7%, to $22.3 billion.
Consolidated net earnings totaled $1.8 billion.
And diluted earnings per share were $0.82, an increase of 17.1%.
Against a 4.8% comp in the second quarter last year, comp or same-store sales for the second quarter of this year were 4%.
Sales from stores that have been open for less than one year, as well as sales from our newly-acquired businesses contributed 7.7% to our top-line growth in the second quarter.
Our gross margin rate was 33.2% for the second quarter, a decrease of 15 basis points from the same period last year.
The decline in our gross margin rate was primarily attributable to our strategic decision to exit wallpaper and use this space in our stores for higher growth opportunities.
As a result, at the end of the quarter, we provided for the markdowns that will be necessary to sell through the wallpaper inventory.
Our gross margin rate also reflects the seasonal nature of our business, where really hot temperatures and an early hurricane season drove an increased penetration of lower-margin products like live goods, generators, and air conditioning units.
This mix change put some downward pressure on the margin, as did the cost of our deferred credit programs.
But the majority of that combined downward pressure was offset by lower shrink than we experienced one year ago.
As John mentioned, our year-to-date gross margin is up 20 basis points, and for the year we continue to expect modest gross margin expansion.
In the second quarter total operating expenses as a percent of sales were 20.5%, or 59 basis points lower than last year, reflecting continued strong expense control and gains in operating efficiencies.
Our expense story is a good news story.
We continue to see benefits from our private label credit card.
And through a real focus on cost take out and waste elimination, we are seeing leverage in most our major expense categories.
We will maintain our focus here, while continuing to invest in our business enablers like technology, store modernization, and growth.
Operating margin for the second quarter was 12.75% of sales, an increase of 44 basis points compared to last year, and a Company record for operating return on sales.
During the quarter we opened 44 net new stores, including the acquisition of seven Contractors' Warehouse stores in California.
Four stores were opened in May, 17 in June, and 23 in July.
Now, let's turn to EXPO for a moment.
Last quarter we told you we planned to dispose of 20 stores.
On August 7th, we closed 16 EXPO stores and began the conversion of the other four stores to The Home Depot store format.
We now have 34 very profitable EXPO stores.
As you know, we strategically cannibalize our stores in order to grow market share and top-line sales.
In the second quarter we cannibalized 17% of our stores, which had a negative impact on comps of 1.4%.
When we cannibalize a store, it causes a negative impact on comp transactions.
Excluding the impact of cannibalization, comp sales would have been 5.4%.
At the end of the quarter, selling square footage was 206 million square feet, an 8.4% increase from last year.
Our average square footage per store was 105,000 square feet.
For the second quarter, weighted average weekly store sales were $855,000, and sales per square foot were $421, both about flat to last year, reflecting new store openings in strategic and international markets.
While we carefully watch these metrics, we run our business on a portfolio basis, with a focus on return on invested capital, where we lead the industry and where we see quarter-after-quarter improvement.
Now, let's see -- review some other metrics.
At quarter end, total inventory was $11.3 billion, an increase of 14.2% from last year, reflecting inventory growth in our stores and inventory in newly-acquired businesses.
Inventory turns were 5.1 times, about flat to the second quarter of last year.
On a per-store basis, inventory levels were up approximately $175,000 compared to last year, as we prepare for what has been predicted to be a very active hurricane season.
We feel very good about the quality of inventory in our stores.
Our effective tax rate for the first six months of the year was 37.3%, a 30 basis point increase from last year.
We currently estimate that it will remain at 37.3% for the balance of the year.
Return on invested capital, which is computed on beginning long-term debt and equity for the trailing four quarters, was 23%, an increase of 260 basis points from last year.
Excluding cash and short-term investments, return on invested capital was 27.2%.
We continue to drive increasing rates of return on the capital we employ, using our portfolio approach previously described.
When it comes to capital allocation, as Bob mentioned, we balance our allocation between investing in our business and returning cash to our shareholders through dividends and share repurchases.
In the second quarter we repurchased 12.9 million shares.
Since our share repurchase program began, we have repurchased 250 million shares and spent $8.6 billion under our $10 billion authorization.
Financially, we are a very healthy Company.
We ended the quarter with $42.7 billion in assets, including $2.3 billion in cash and short-term investments.
This is a cash increase of $153 million from the end of fiscal 2004, which reflects strong cash flow generated over the last six months, offset by $1.8 billion in capital expenditures, $846 million paid to acquire new businesses, $431 million in dividends paid, and $2 billion spent for the repurchase of common stock.
In August, we issued $1 billion in 4.6% notes due in 2010.
This was an opportunistic financing, and we intend to use a portion of the net proceeds, together with cash on hand, to finance our acquisition of National Waterworks.
With this debt issuance, our debt-to-equity ratio increased from approximately 9% to approximately 13%.
Now, regarding our acquired businesses, note that when you are modeling them for 2005, they will be nominally accretive to earnings.
Over the long-term, these businesses will be accretive both to earnings and return on invested capital.
Our Home Depot Supply businesses are much less capital-intensive than our retail business, but, clearly, when we acquire them, we pay an acquisition premium.
These acquisition premiums will be paid for with the synergies that Joe described, as well as our portfolio approach to managing our business.
For each company acquired, we build an acquisition case.
All new businesses that we've acquired are proving to be NPV positive.
Second quarter results showcased our steady and continuous progress on the strategy we outlined four years ago.
Now, more than ever before, we are positioned for predictable, sustainable, and profitable growth.
Based on our results for the first six months of the year and our view of the back half of the year, we reaffirm our 2005 sales growth guidance of 9 to 12%.
And as Bob stated, we are raising our earnings per share growth guidance from 10 to 14%, to now 14 to 17%.
Thank you for your participation in today's call.
Gwen, we are now ready for questions.
Operator
Thank you. [OPERATOR INSTRUCTIONS.] We'll go first to Daniel Binder with Buckingham Research.
Dan Binder - Analyst
Hi, it's Dan Binder.
Couple questions.
Carol Tome - EVP and CFO
Gwen, we can't hear the questions.
Dan Binder - Analyst
I'm sorry, I had a couple of questions.
First, I was wondering if you could quantify what you thought the benefit was from the hurricane activity?
And the second question, with regard to the decision to exit the wallpaper business, oftentimes we've seen retailers exit certain businesses, not necessarily anticipating the impact on other parts of the business.
I'm assuming you guys have gone through a detailed analysis of that.
Just wondering if you could provide a little bit more color on what drove that decision?
And, then, lastly, if you could discuss what the traffic looked like in the stores this quarter?
Bob Nardelli - Chairman, CEO, and President
Carol, why don't you handle the hurricane question?
Carol Tome - EVP and CFO
Yes, Dan, thanks for your question about hurricanes, wallpaper, and traffic.
Regarding the impact of hurricanes, it really didn't have a material impact to our business in the second quarter.
It certainly helped out the Floridians, though, in the impacted area, which took care of our customers.
Bob Nardelli - Chairman, CEO, and President
And as it relates to wallpaper, John?
John Costello - EVP, Merchandising and Marketing
Dan, we evaluated the long-term sales trends in the category, as well as the connection to other categories in our business, and really concluded that we have much more attractive uses for that space.
There also is relatively little attachment to other categories, so we really aren't forecasting much loss on the water -- on the water -- on the wallpaper category itself or any adjacent businesses, and are confident we can fill that space with more productive merchandise.
Carol Tome - EVP and CFO
And as we disclosed in our press release, customer transactions for the quarter were 372 million -- billion -- million -- 372 million --
John Costello - EVP, Merchandising and Marketing
Billion.
Carol Tome - EVP and CFO
-- up 3.6%.
Dan Binder - Analyst
I guess I was trying to narrow it down on a comp basis.
Carol Tome - EVP and CFO
On a comp basis, as we mentioned in our prepared remarks, Dan, we cannibalize our stores, and the impact of cannibalization impacts transactions in our comp stores.
So in our comp stores, transactions were down, but that's by design.
We deliberately cannibalize our stores.
Dan Binder - Analyst
Okay.
And are there any other categories other than wallpaper that you're sort of looking at as being, sort of, maybe, lower-productive categories that you would want to change out for something else?
And does this argue for a larger store size?
John Costello - EVP, Merchandising and Marketing
Dan, this is John.
We feel comfortable with our current store size.
We are -- our merchant team is constantly evaluating the sales per square foot and the productivity on all of our categories, and are continually adding space to high-impact categories, just like we cut in appliances several years ago and continue to prune the current assortment.
So it's really part of an on-going process.
Dan Binder - Analyst
Great, thank you.
Operator
We'll go next to Matthew Fassler with Goldman Sachs.
Matthew Fassler - Analyst
Thanks a lot.
Good morning.
Carol Tome - EVP and CFO
Good morning.
Dan Binder - Analyst
A couple of questions.
I'd like to focus on, sort of, incremental investment.
If you could give us a sense as to the amount of capital you plan to spend or to expend this year on new stores versus acquisitions, and compare the return profiles of each of those investment outlets?
Carol Tome - EVP and CFO
Well, on the capital front, for the first six months of the year, we spent $1.8 billion on capital, 64% of that is directly related to new stores.
And as we told you, for the full year, we're projecting a capital spend of about $3.7 billion, again, about 64% directly related to new stores.
The acquisitions, we told you, for the first six months, we spent about $846 million.
We've gotten, now, one point five billion -- $1.35 billion scheduled for National Waterworks.
So we'll be opportunistic from an acquisition perspective.
It's a real balanced approach.
And from a -- as you know, we run our business from a portfolio perspective, with a goal to increase the return on capital, and as you can see, quarter-after-quarter we're doing that.
Dan Binder - Analyst
I guess, which of those who alternatives, though, offers the stronger return for you?
Carol Tome - EVP and CFO
Well, it's a synergistic approach, isn't it?
If you think about Crown Bolt, for example, that acquisition is going to benefit the stores more than it benefits Home Depot Supply.
So if you look at it, as we look at it, from a portfolio perspective, we're getting it out of the entire enterprise, not one over the other.
Dan Binder - Analyst
Fair enough.
And second question.
At the outset of the year, you indicated that you expected White Cap to start contributing to your reported same-store sales growth in a pretty meaningful way as you cycle that deal in the second quarter.
Can you talk about whether, in fact, it did contribute substantially to the 4% comp?
Carol Tome - EVP and CFO
The Home Depot Supply businesses, in totality, contributed about 80 basis points of the 4% comp reported in the second quarter.
Dan Binder - Analyst
That's great color.
Thank you, very much.
Carol Tome - EVP and CFO
You're welcome.
Operator
We'll go next to Colin McGranahan with Bernstein.
Colin McGranahan - Analyst
Good morning.
Bob Nardelli - Chairman, CEO, and President
Good morning.
Colin McGranahan - Analyst
Was hoping you could just give a quick update, nothing too broad, on the overall systems initiatives and where you stand on the implementation of merchandising systems, specifically with the SAP implementation?
Bob Nardelli - Chairman, CEO, and President
Carol, why don't you talk about SAP, which was tremendously successful, given the largest system in the world.
Carol Tome - EVP and CFO
Yes, Colin, you'll recall a year ago, we implemented SAP Financial Systems here for our core business, and that went very, very well.
We are in the process of putting SAP into Mexico, and are very pleased with the progress that we're seeing there.
Regarding our core retail systems, we selected SAP as the platform for core retail.
We had established the team that will be addressing that.
We put together our project plan, and we're very encouraged by the progress that that team is making.
Early on -- early in, as you can appreciate, but we're very pleased with the progress that we're making on core retail.
Bob Nardelli - Chairman, CEO, and President
I would just say -- I would say, overall, I would attribute a lot of our cost leverage, one, in our ability, Colin, as I said, to redeploy between two to three associates per store per week on the floor, to our commitment in the area of technology and digitization.
We've been on track now for a couple of years, and we're really starting to see the benefit.
We focused on the front end first, from a customer back, self check-out.
We're moving our way, Carl and his team are really working their way back into the store with BEAR.
We see -- we're seeing the benefit early on in our pilots on SOSI.
I mean, there's a whole host of technology initiatives that are giving us long-term platforms, and we're also seeing some short-term quick hits.
Colin McGranahan - Analyst
And just specifically in terms of supply chain and the SAP-R3, will there be any modules that you anticipate going live this year?
And are you still roughly on track to have a fairly complete conversion of supply chain and merchandising systems by the end of next year?
Carol Tome - EVP and CFO
Colin, there's nothing that will drop live this year, but we're very pleased with the progress that the team is making.
This is a monumental project for our Company, but it's -- we're doing a nice job with it.
John Costello - EVP, Merchandising and Marketing
We're also seeing benefits of some of the early applications rolling out in the planogramming and mark-down management areas that we continue to apply on a department-by-department basis.
Colin McGranahan - Analyst
Okay.
Thank you, very much.
Good color.
Operator
We'll go next to Dan Wewer with CIBC.
Dan Wewer - Analyst
Hi, good morning.
Carol Tome - EVP and CFO
Good morning.
Dan Wewer - Analyst
Just wanted to follow up on the return on capital and operating margins for Home Depot Supply.
I know that, historically, Depot would demand that its new businesses generate returns that are equal to, if not higher, than the Company average.
Given that your return on capital is now in the low 20% rate and easily the best in hard-line retail, is it feasible for these new businesses to be ROI accretive?
And, perhaps, we should be focusing more on businesses EVA positive and not necessarily accretive to this 23% return on capital?
Carol Tome - EVP and CFO
Well, Dan, as we've mentioned in the past, Home Depot Supply businesses are much less capital-intensive than the retail business.
So while their return on sales are lower than the retail business, return on capital is actually higher.
Dan Wewer - Analyst
Higher than 23%?
Carol Tome - EVP and CFO
That's what we've seen.
Dan Wewer - Analyst
Wow.
Carol Tome - EVP and CFO
Now, clearly, we've got an acquisition premium that we have to pay for.
That is paid for over time.
Return on capital is measured in a point of time.
That acquisitions premium is paid for over time, but to the synergies of the entire enterprise, we see increasing rates of return on the capital we employ.
To your point about EVA, we look at that metric too, of course.
We cut it every different way, because we're all about creating economic value for our shareholders.
But from return on capital perspective, we feel very good about where we are.
Bob Nardelli - Chairman, CEO, and President
I just want to come back and reinforce our strategy that we laid out about four years ago, I think is proof positive in what we're delivering today, is coming to life.
As I said, we will never lose focus on enhancing the core.
We're building off a strong retail-based platform in this Company, but as we extend and expand, as Joe said, we are purchasing strategic platforms that we're able to use our financial strength to grow geographically, and then kind of move up the margin chain as we have early entries, for example, in flooring, and as we then advance to cabinets, countertops, porcelain, electrical, et cetera.
So this is a very thoughtful approach that gives us multiple platforms to respond to various economic cycles, which we think makes this business extremely healthy.
Dan Wewer - Analyst
And, Bob, a separate question real quickly.
On the Maytag, Whirlpool merger, if you think this could give you increased leverage to -- for Whirlpool to become a vendor to The Home Depot stores in the U.S.
I believe they already are in Mexico, but if this could be an opportunity to get access to that brand?
Bob Nardelli - Chairman, CEO, and President
Dan, our strategy -- we have great working relationship with all of our vendors, and our policy has been not to publicly comment.
We think it's inappropriate to comment publicly when companies are in discussions of acquisitions.
Dan Wewer - Analyst
Okay.
So I didn't know if the wallpaper could make room for the Whirlpool appliances, but -- ?
Bob Nardelli - Chairman, CEO, and President
Well, it's -- probably -- I give you high marks for trying, Dan.
But let me just say, specifically, on wallpaper, we have -- we have three, what we think, very, very good opportunities.
What you're going to see is a more neighborhood, family-friendly, more market-specific approach than one-size-fits-all.
So I'm encouraged with what the merchants have recommended.
It is something that you'll see relatively soon.
It's not going to be a lengthy reset.
And you're going to see multiple merchandising sets in those stores.
So I'm excited about, for the first time, really becoming more and more market-focused and market-specific.
Dan Wewer - Analyst
Great.
Thanks, and good luck.
Bob Nardelli - Chairman, CEO, and President
Thanks, Dan.
Diane Dayhoff - VP, IR
Gwen, we have time for one more question.
Operator
We'll take our last question from Bill Sims with Citigroup.
Bill Sims - Analyst
Thank you, very much.
Good morning.
I have two questions, if I may.
And first one is on the White Cap contribution in the third quarter.
If I remember correctly, you acquired White Cap in the middle of the second quarter last year.
Of the 80 basis points you saw, I presume only a portion of that came from White Cap.
Are we going to see a significantly higher contribution going into the third quarter?
Carol Tome - EVP and CFO
You're correct.
Of the contribution that we saw in the second quarter, only a portion of that was due to White Cap.
And, yes, as The Home Depot Supply businesses continue down their very solid performance path, we should see more contribution in the third quarter.
Bill Sims - Analyst
Okay, and the second question is regards to your wallpaper business.
Can you let us know, where does your inventory stand in that business?
Will the mark-downs continue into the third quarter?
And how should we look at the growth margin impact?
Carol Tome - EVP and CFO
Yes, we took the mark-downs at the end of the second quarter.
They'll hit the stores in the third quarter, and we're going to go deep.
We're going to get out of this category fast.
It's a slow-growth category for us.
As John mentioned, we want to bring in a high-growth category, so we're going to go fast.
John Costello - EVP, Merchandising and Marketing
Bill, I think if you look at the excellent job the team did on EXPO, that's the kind of nimbleness and the kind of speed we want to see in our Retail business.
I think it's a tremendous compliment to the team to have set a target, be broom-clean, and liquidated all of the inventory.
I think you're going to see the same thing in the wallpaper category, Bill.
Carol Tome - EVP and CFO
And just to be clear, Bill, because we took some markdowns in the second quarter, we will not have a financial impact in the third quarter, if that's helpful.
Joe DeAngelo - President, The Home Depot Supply
We'll go -- we're going to go immediately to deep mark-downs on that and we expect that to move the merchandise out very quickly.
Bill Sims - Analyst
Thank you, very much.
And are you willing comment on how sales are trending quarter-to-date?
Carol Tome - EVP and CFO
Yes, sure we are, of course.
We're up against Hurricane Charley this week.
And given what we're up against, we're very pleased with our sales performance.
We've given you our reaffirmation today of our sales growth guidance for the year.
We wouldn't have done that if we didn't feel really good about our business.
Bill Sims - Analyst
Excellent.
Congratulations, and good luck.
Bob Nardelli - Chairman, CEO, and President
Thank you, Bill.
Carol Tome - EVP and CFO
Thank you.
Diane Dayhoff - VP, IR
Thank you, Gwen, and we'll talk to everybody next quarter.
Operator
Thank you.
That does conclude today's conference.
And you may now disconnect.