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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, Senior Vice President of Investor Relations.
Please go ahead, ma'am.
Diane Dayhoff - SVP, IR
Thank you, and good morning to everyone.
Welcome to the Home Depot second quarter earnings conference call.
Joining us on our call today are Frank Blake, Chairman and CEO of the Home Depot; Craig Menear, Executive Vice President of Merchandising; and Carol Tome, Chief Financial Officer and Executive Vice President, Corporate Services.
Following our prepared remarks the call will be open for analysts 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 homepage and the Investor Relations section.
The replay will also be available on our site.
If we are unable to get to your question during the call, please call our Investor Relations department at 770-384-2387.
Before I turn the call over to Frank let me remind you that today's press release and the presentations made by executives including 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 those factors identified in the release and in our filings with the Securities and Exchange Commission.
Now, let me turn the call over to Frank Blake.
Frank Blake - Chairman, CEO
Thank you, Diane and good morning, everyone.
Let me start by saying that I realize that many of you want to know where we stand on the sale of our HD Supply business.
Unfortunately, I have no new details to add.
We remain in discussions with the buyers and I'm not in a position to answer the very reasonable questions you may have about what is the likely outcome.
What I can talk about this morning is the performance of our core retail business.
Our market continues to be a challenging one.
You're familiar with the statistics, housing starts are down 22%, existing home sales are down 12%, inventory of homes for sale is at 8.7 months, a 15 year high and the home builder index is at 24, a 16 year low.
In addition, the issues around the subprime market continue to intensify and this is an important concern both for the financial markets generally and for housing specifically.
Since subprime mortgages accounted for 24% of the dollar volume in the mortgage market last year.
So this is a difficult time and our performance reflects that.
Sales were $22.2 billion, down about 2% for the quarter.
Comp sales were a negative 5.2%.
Diluted earnings per share from continuing operations were down 6% at $0.77.
Despite the difficulties there were some positive signs for us.
First, on the comp sales side, we did see strength in regions of the country with our Southwestern and Ohio Valley markets posting positive comps.
Second positive sign is that our transactions grew year-over-year.
While we still had negative comp transactions, this was our best comp transaction performance in awhile, and as Craig will review with you, we also believe that we gained share in some key product categories and for our overall market, we have reversed our market share loss or in other words we're not losing market share as fast as we were.
But as that last phrase indicates, we have a long way to go to get to where we need to be.
We don't want to be losing less share.
We want to be gaining share and outperforming our market.
So we will continue to invest in our stores and in our associates to improve customer service.
In addition, we'll continue to look for more cost effective and productive ways to manage non-customer facing activities.
Here is a quick update on the progress we've made on our five key priorities.
We are restructuring the way our associates are compensated, recognized, and rewarded to make it clear that taking care of our associates is one of the core values of the Company.
As an example, one program we restructured was Success Sharing, an incentive program for our hourly store associates driven by individual store performance.
Seventy four percent of our stores or over 200,000 of our associates will receive a Success Sharing payout for the first half which compares to 33% of our stores or about 86,000 associates in the first half of last year.
The payout on Success Sharing is nearly three times what it was last year.
We want to recognize and reward our associates for the hard work they're doing and we believe this is contributing to the improvement we are seeing in associate retention.
We have picked up considerable momentum in our Master Trade Specialist Program and we now have over 700 licensed electricians and plumbers in our aisles.
We've reallocated our resources putting more at the division and regional levels and it pushed more decision-making closer to the customer to take greater advantage of unique regional opportunities across the country.
In our Merchandising Organization, we have created three new Senior Vice President positions reporting to Craig and have staffed two positions with Home Depot Veterans and are conducting an internal and external search for a third as well as another Senior Vice President position that's open in merchandising.
In our Supply Chain organization, Mark Holifield has added leaders with experience developing and implementing large scale retail systems and comprehensive retail Supply Chain strategies.
We have dedicated a regional Vice President, a Merchandising Vice President, and a Logistics Vice President to our U.S.
Core Retail Project Team to ensure this effort gets the focus that's required for successful implementation.
We are past the halfway mark for the year on planned maintenance projects such as restroom remodels, floor polishing, relamping and lot striping and these efforts are reflected in higher voice of customer scores compared to last year.
For example, we've seen year-over-year improvement in our store environment, clearing uncluttered aisles as well as associate availability and likelihood to recommend scores.
Now let me address our international business.
Our international businesses, Canada, Mexico, and China, performed well during the quarter.
Our Canadian stores posted positive comps and our Mexican stores posted double digit positive comps in the quarter.
We've been in China less than a year and we continue to be excited about the opportunities this market presents.
Let me finish with this comment--the second quarter was more difficult than disappointing.
As Carol will go through our results for the most part were in line with our expectations.
We expect continued difficult conditions in the back half of the year but our investments are not for the short-term.
They're for the long term health and growth of the business and we believe we are seeing signs of progress.
Now, let me turn the call over to Craig.
Craig Menear - SVP-Merchandising
Thank you, Frank, and good morning, everyone.
While comp sales in the second quarter continued to be negatively impacted by the current housing environment, we made progress in executing our merchandise strategy resulting in sequential year-over-year improvements in sales growth, gross margin expansion, and inventory velocity.
In the second quarter, four departments outperformed the Company's comp--Garden, Flooring, Paint, and Plumbing.
Six departments performed below the Company's comp--Hardware, Lumber, Kitchen/Bath, Lighting, Building Materials and Millwork.
Commodity deflation of lumber as well as softness in certain big ticket categories impacted average ticket which was down 2.8% from last year to $58.30.
Over the past several years, we have seen a benefit from the sale of appliances in our average ticket.
This quarter the average ticket benefit from appliances remain the same as last year.
Despite the challenging selling environment we made progress this quarter.
Our comp transactions while down 2% were better than we've seen many years.
Our total transactions were up 1%.
We saw market share improvements in key areas resulting from the merchandise actions we've been taking in the most recent quarters.
We have shared with you that we've been taking action to turn around our Flooring business.
Our Merchandising teams efforts have started to gain traction as we saw market share gains in both hard and soft flooring in the second quarter.
For example, carpeting is an area where we gain share in a flat market by accelerating our product line review process and improving our assortment with the addition of 40 new styles each offering 12 color choices.
We also improved the overall shopping experience by enhancing our merchandising displays.
Our investment in Flooring displays and resets have made a positive impact on the customer's ability to shop this category.
Finally, by creating a tighter association between our install services program, our merchandise and marketing, we simplified the installation offers to our customers which drove sales and positive gross margin results.
Our market share of paint sales grew this quarter primarily driven by innovation, seasonally relevant products like our exclusive Behr Nano Guard exterior paint that requires no priming.
We believe this quarter's paint performance was supported by the positive customer response to the Behr Challenge marketing campaign where our customers were invited into our stores to compare Behr's outstanding performance and value to other brands.
Behr has been consistently rated Number one in independent product testing for the past four years.
As customers expand their homes to the backyard, outdoor living continues to be a major trend with patio and grills leading the way in bringing customers affordable luxury.
We saw significant gains in grills this quarter driven by the success of the Charm Glow brand.
In patio, we expanded our assortment to focus alternative, casual seating groups, our selection in seating and table top dining sets helps cement our success this season.
We gained significant market share in Patio furniture and further extended our leadership in this category.
In a shrinking appliance market, we continue to gain share this quarter building on the gains that we've seen for the last few years.
Customers continue to be pleased with the innovation, style, and design we offer in appliances.
Second quarter results were driven by sales of innovative washers, dryers and refrigerators such as the Maytag Bravo's high efficiency top-load washers and matching dryers and the GE Adora refreshment center side by side refrigerator, both found exclusively at the Home Depot.
The professional customer remains a key focus for us.
We're pleased with the quarter's market share results in areas like gypsum, windows, and power tools.
Gains in the power tools are driven in part by the products such as the new Nikita magnesium lightweight more powerful circular saw which was well received by our professional customers.
Our execution this Spring led to good results in Seasonal categories with particularly strong results in live goods.
We're also pleased with our performance over key holidays like Memorial Day, 4th of July, and Father's Day where we had strong weekends.
We're making progress but we still have a lot of areas where we have opportunity.
In the second quarter we lost share in kitchen and millwork and let me share with you some of the actions we're taking in these areas.
We are in the midst of replacing the ready to assemble kitchen cabinets in most markets that we have carried this product for over 20 years.
We accelerated the exit of this category by taking markdowns in the second quarter to bring a new line of assembled cabinets into the majority of our stores by the end of the third quarter.
This product offering better address the needs of our pro and serious do-it-yourself customers than ready to assemble product.
We will continue to offer ready to assemble cabinets in those markets where it remains important to our customers.
In Millwork we updated our door program by introducing new products at great prices and enhancing our regional mix.
During the quarter we introduced a number of new wood grain collections and glass styles in our Feather River fiberglass door program.
These additions continue to expand and update our fiberglass offering to show the latest trends and styles in decorative exterior doors.
Looking to the third quarter I'm really excited about the new products that you'll see in our stores.
First, we'll continue to bring affordable luxury to our customers by introducing products such as our exclusive line of Arietta designer range hoods which offers the style and quality of premium brand designer hoods at half the price.
In addition, we're excited about our new LG Kitchen Series tat's being introduced right now.
This is a high end suite of kitchen appliances that includes a stain dishwasher.
Second, we'll introduce several products that will bring Pro features to the do-it-yourselfers such as home lights lightweight backpack leaf blower or in door locks we'll introduce Kwikset smart key door locks that makes rekeying simple and easy for our homeowner.
This exclusive launch will be great for our DIY and our pro repair and maintenance customers.
In power tools we will enhance our current line up of lithium ion products with new Black and Decker and Ryobi tool lines.
The Black & Decker lithium ion line offers great design features and value to the eco boomers who are just buying their first set of tools.
Our current Ryobi one plus assortment will be enhanced with lithium products that offer professional performance at outstanding values.
With products like these and our focus on executing merchandising fundamentals, we bring excitement to our stores and deliver greater value to our customers and now I'd like to turn the call over to Carol.
Carol Tome - EVP, CFO
Thank you, Craig and hello, everyone.
Before I discuss the results of the quarter, let me remind you that we are now reporting the results of HD Supply as a discontinued operation.
Any reference we make to continuing operations is a reference to our retail business only and as you review our financial statements, please note that the operating results of HD Supply are found in a one line item on the income statement entitled earnings from discontinued operations and HD Supply assets and liabilities are noted on our balance sheet as assets and liabilities of discontinued operations.
In the second quarter, sales were $22.2 billion, a 1.8% decrease from last year reflecting negative same-store sales of 5.2% offset in part by sales from new and non-comp stores.
Consolidated store sales were a negative 3.1% in May, negative 5.4% in June, and negative 6.8% in July, as we did not repeat last years highly promotional activity in July.
Now, given the state of the home improvement market, we had planned for negative comp sales in the U.S.
And our actual results were for the most part in line with our expectations.
For our stores outside of the U.S., comps were positive.
Now, one last comment about comps.
For the first two weeks of August, our comps are running in the negative 3% area.
In the second quarter, our gross margin was 33.1%, an increase of 9 basis points from the same period last year.
Contributing to the year-over-year increase in our gross margin were the following factors.
First, as expected, our gross margin benefited from lower interest costs associated with our private label credit card financing program.
In the second quarter, we realized 38 basis points of margin expansion due to lower interest cost.
Second, on a net basis, we gave up roughly 16 basis points of this expansion due to a change in mix of products sold and markdowns taken to allow us to transition into new products, including the kitchen cabinet program that Craig mentioned.
Finally, we experienced higher shrinkage than one year ago and this negatively impacted gross margin by about 13 basis points.
While shrink was higher in the second quarter, it has since returned to the levels we experienced last year.
As a percent of sales, total expenses grew by 147 basis points to 21.6%.
Our expense deleverage reflects the impact of negative sales where for every point of negative comp we expect to deleverage expenses by about 20 basis points.
Our expenses also reflect investments we are making in support of our five key priorities.
We continue to view payroll as an investment.
As a percent of sales, total payroll increased by 79 basis points over last year.
This reflects investment in store labor as well as the impact of our success sharing and other store bonus plans.
One last comment about expenses.
While we are committed to our five key priorities, it doesn't mean we aren't taking action to control costs in this negative comp sales environment.
In the second quarter, our expenses were approximately $140 million less than our plan.
As a result of the factors I just mentioned, our operating margin for the second quarter was 11.5%, down 137 basis points from last year.
Net interest expense was $145 million in the second quarter, up $47 million from last year reflecting higher levels of outstanding indebtedness.
Our long term debt to equity ratio at the end of the second quarter was approximately 43% compared to approximately 25% last year.
In the second quarter, our income tax provision rate for continuing operations was 36.9% compared to 39.6% last year.
Last year's tax provision rate reflects the impact of an assessment we received from the Province of Quebec.
Earnings from continuing operations were $1.5 billion as compared to $1.7 billion last year and continuing earnings per diluted share were $0.77 down 6.1% from last year.
Diluted shares for the second quarter were 1.97 billion shares compared to 2.1 billion shares last year.
The reduction in outstanding shares is due to the share repurchase program we began in 2002.
Through the end of the second quarter of 2007, we had re purchased a total of 454 million shares.
Earnings for our discontinued operation, HD Supply, were $66 million compared to $161 million last year.
Included in this quarter's earnings is a discrete tax item of approximately $60 million arising from the timing of the sale of HD Supply.
Excluding this discrete item, earnings from discontinued operations were approximately $126 million.
The discrete tax item should reverse itself in the third quarter.
Moving to our operational metrics, during the second quarter we opened 33 new stores, including three relocations for an ending store count of 2,200 stores.
Today, 232 stores representing approximately 11% of our store base operate in Canada, Mexico, and China.
At the end of the Second Quarter, selling square footage was 230 million, a 5% increase from last year.
The average square footage per store was 105,000 square feet, the same as last year.
Reflecting the sales environment, total sales per square foot were approximately $383 for the quarter, down 6.9% from last year.
Now, turning to the balance sheet.
At the end of the quarter, retail inventory was $12.3 billion, an increase of $200 million or 1.6% from last year.
On a per store basis, inventory was down 4% from last year.
Inventory turns were 4.6 times, slightly lower than last year.
Computed on the average of beginning and ending long term debt and equity for the trailing four quarters, return on invested capital was 15% as compared to 20.7% last year.
We ended the quarter with $56.9 billion in assets, including $3 billion in cash and short-term investments.
This is an increase of approximately $2.4 billion in cash and short-term investments from the end of Fiscal 2006 reflecting generated by the business of approximately $5 billion offset by $1.6 billion of consolidated capital expenditures, $886 million of dividends paid, and $91 million paid for share repurchases.
In closing, we believe that residential construction and the home improvement market will remain soft throughout 2007 and into 2008.
We are committed to our reinvestment plans for the long term health of the business understanding that it will put short-term pressure on earnings.
We think our earnings per share from continuing operations on a 52 week basis will decline by 12 to 15% in fiscal 2007 with consolidated earnings per share down 15 to 18%.
Our earnings per share guidance does not include the impact of the 53rd week, the impact of the sale of HD Supply or the impact of our outstanding tender offer.
Thank you for your participation in today's call and Audra, we are now ready for questions.
Operator
Thank you.
(OPERATOR INSTRUCTIONS) We'll go to our first question from Matthew Fassler at Goldman Sachs.
Matthew Fassler - Analyst
Thanks a lot and good morning.
I want to focus--.
Frank Blake - Chairman, CEO
Hi, Matt.
Matthew Fassler - Analyst
I want to focus on the capital structure of I can.
I know that you're not inclined to comment on the specifics about the sale of Supply, but you still have I would think a range of opportunities perhaps depending on market conditions perhaps not.
Can you talk about your view and the Board's view about the recap in general given the range of outcomes that you might see on Supply?
Frank Blake - Chairman, CEO
What I'd say, Matt, is we remain committed to the recap strategy, and then obviously, this is something we're going to do with our eyes open looking at the market conditions that we're facing in terms of timing, size, and the rest.
Matthew Fassler - Analyst
If the Supply deal were not to get donor not to get done on a timely fashion, would you be willing to tap the bridge to do the tender?
Frank Blake - Chairman, CEO
Well, I'm cautious on answering kind of hypothetical questions on this, as just to put the connection, maybe the easiest way is to give one overview comment.
To put the connection between the Supply transaction and our recap and tender in perspective, what I'd say and this is an obvious comment and of course you all know it is that the 22.5 billion of included 10.3 billion from Supply in it, so if you take the Supply transaction out, you've got a different recapitalization size and then you got to look at the tender as it relates to a proportion of your recap strategy and that's basically what we would be weighing.
Carol Tome - EVP, CFO
This is Carol.
If I could just jump in.
From a liquidity perspective as you know we ended the quarter with $3 billion in cash, we have access to the A-2 P-2 commercial paper market and we do have a $10 billion bridge financing facility.
Matthew Fassler - Analyst
Got you.
And just for a very quick follow-up, and this will be a quick one, you talked about August comps to date.
Just looking at your last year's third quarter performance, August was actually your toughest compare.
So how should we think about the fact that business is tracking somewhat better in August?
Any color you could give us there?
Carol Tome - EVP, CFO
Actually, Matt, let me just call out the comps last year by month.
August was a negative 1.1, September was a negative 4.3, and October was a negative 8.7.
Matthew Fassler - Analyst
Yes.
So to the extent that August is your toughest compare and you're doing somewhat better in the first couple weeks, it would sound like a pretty impressive performance.
Frank Blake - Chairman, CEO
Matt, I just would add a caution that you have to look at last years comp numbers because they were compared to the prior year's numbers which were so influenced by the hurricane impacts.
Matthew Fassler - Analyst
Got you.
Frank Blake - Chairman, CEO
So I'd like to reach exactly the same conclusion you're reaching but we're cautious on that as we see this unfold.
Carol Tome - EVP, CFO
Yes, let's look at the third quarter comps, negative 5.1 last year, positive 3.6 the prior year, a positive 4.5 the year before that.
Matthew Fassler - Analyst
Got you.
Thank you so much.
Operator
We'll go next to Budd Bugatch at Raymond James.
Budd Bugatch - Analyst
Good morning as well.
I'd like to just ask a question about gross margin.
You had, Carol, in your remarks you had talked about the July comparison being down 6.8 because you did not repeat the last years promotional activity and yet when you went through the gross margin activity, gross margin results you were down 16 basis points for a combination of mix and markdowns and I would have thought if you had less promotional activity you might have actually seen a lift from that.
Can you maybe parse out mix and markdowns and give us a feel of how that worked out?
Frank Blake - Chairman, CEO
Well, let me ask Craig to address that in the first instance, Budd.
Budd Bugatch - Analyst
Thank you, Frank.
Craig Menear - SVP-Merchandising
Well, there's two things.
As Carol mentioned, number one, we were less aggressive in July from a promotional standpoint.
We shared with you that in first quarter we were too aggressive and that we would relook at that in second quarter which we did.
And then secondly, as we continued to work our assortment strategies and continue to focus on our line structure, we are aggressively moving product out that isn't performing to the standard that we would like it to see.
And like we shared with you on the cabinet program, we made a decision to move quickly on that and accelerate the pace of the introduction of new product.
Budd Bugatch - Analyst
And in cabinets you had made a comment, Craig, between assembled and RGA, and that the overall cabinet business looked like it was down and under performing.
How did assembled do versus RGA?
Craig Menear - SVP-Merchandising
The assembled cabinets are performing very well as we get that into our stores.
Budd Bugatch - Analyst
Okay, and Frank, for you, my last question is talk about if -- and this is a hypothetical and I know you're going to love it -- if HD Supply is not sold for whatever reason, you had previously said that you wanted to integrate that into the stores as opposed to the silo type of strategy that was being employed before.
Is that still your view or would you relook at that original thought process.
Frank Blake - Chairman, CEO
The strategy, what I'd say, Budd, is it is very important to me strategically that we think of ourselves as a retail business because the value in this business is the retail Company.
So assuming a world with Supply, we'll adjust but it will still be within the framework of the dominant focus of our Company is going to be retail.
Budd Bugatch - Analyst
Okay, all right good luck on that and obviously we're all looking forward to seeing how this plays out.
Frank Blake - Chairman, CEO
Yes.
Operator
Next we'll move to Gary Balter at Credit Suisse.
Seth Basham - Analyst
Hi, good morning, it's actually Seth Basham for Gary.
Just a couple quick questions for you.
First, on the gross margin front again, is your guidance for the year still intact?
Carol Tome - EVP, CFO
Our guidance for slight margin expansion is still intact.
Seth Basham - Analyst
Okay.
And the reset cadence going forward, are you expecting less of a negative hit from markdowns related to resets?
Carol Tome - EVP, CFO
I think that as we look at our reset program going forward, we plan as part of that process for the change over and liquidation of inventory in that process and we expect that to be as we had planned it going forward.
Seth Basham - Analyst
Thank you, and finally just related to the expenses in the quarter, can you give us some more color as to what beat your plan this quarter?
I think you mentioned $140 million difference?
Carol Tome - EVP, CFO
Yes, I can give you some color.
We were laser focused on how we spend our advertising dollars and our advertising dollars came in under plan in our I'll call it our operations expense category.
There are lots of categories from the cost of the bags that you use when you check out at the register and if you go line by line by line we were just really, really controlled so when you added it all up, it was about 140.
I should point out in that 140 that it was about $20 million less in depreciation and amortization than we had planned.
Seth Basham - Analyst
Thank you.
Operator
Next we'll move to Steve Chick at JPMorgan.
Steve Chick - Analyst
Hi, thanks.
Good quarter under the circumstances.
Frank Blake - Chairman, CEO
Thanks, Steve.
Steve Chick - Analyst
I guess if I could ask some follow-up questions on Supply.
Based upon the data you gave, which was a little limited, I think EBIT for that business looks like it was about down year-over-year say $60 million.
And I was wondering if you could speak to what the sales trends were there and if it was margin versus sales and then secondly, as it relates to your willingness to restructure the terms potentially, is it the performance of the business or is it the credit market that are factors there?
Frank Blake - Chairman, CEO
Well, let me ask Carol to address the first and not surprisingly I'll pass on the second.
Carol Tome - EVP, CFO
Regarding HD Supply as you know, their business is heavily focused on residential construction and you know what's going on in the residential construction market.
So for the quarter, sales for HD Supply were down almost 7%, organic growth was down about 10%.
Their gross margins did suffer some contraction in the quarter.
They did a great job of controlling expenses in this environment but when you add it all up there was an operating margin contraction.
Steve Chick - Analyst
Okay--.
Carol Tome - EVP, CFO
I should point out, as we look at it from a market share perspective, we see that they continue to do a very good job in share gains.
It's just a tough market out there.
Steve Chick - Analyst
Okay, fair enough.
Can you speak to maybe, Frank, what the timing would be in terms of when we might hear what the resolution is on that process?
Frank Blake - Chairman, CEO
Again, I wish we could have, because everything is better off the fuller for your discussion we could have, but it's just genuinely these are issues in negotiation and I just wouldn't be comfortable talking about it.
Steve Chick - Analyst
Okay, second question if I could.
Just CapEx guidance.
It looks like you're back half weighted again this year for your cap spending.
Is that still on track?
I think your target refresh my memory, $4.5 billion and you still planned on hitting that in the second half?
Carol Tome - EVP, CFO
Thank you for asking the question.
This is the perfect opportunity to give clarity and update that guidance.
We were looking at $4.5 billion at the beginning of a year.
We're now looking at $4 billion.
The delta is in two big buckets.
The first bucket is HD Supply.
We spent some capital for HD Supply for the first half but we're not planning to spend any capital for HD Supply in the back half so that's about $100 million and the rest all is related to the timing of new store capital.
As we've looked at when we were going to pay for the purchase price of land, et cetera, some of that has gotten pushed off into 2008, so as it relates to the capital for our five key initiatives, we are spending and in the stores taking care of those five key priorities as we speak.
Steve Chick - Analyst
Okay, great.
Thanks.
Operator
Next we'll move to Colin McGranahan with Bernstein.
Colin McGranahan - Analyst
Good morning.
Frank Blake - Chairman, CEO
Hi.
Colin McGranahan - Analyst
Was going to ask you what your reserve price on Supply was but I'm afraid I wouldn't get an answer to that.
Seriously, I would like to focus on maybe the core retail implementation, and if I understand you're probably fairly close to the Canadian implementation.
Could you give us a quick update on where you are in Canada, any changes versus the timeline you've laid out and just a general update on core retail?
Frank Blake - Chairman, CEO
Absolutely, Colin, and actually Mark Holifield is in the room here so I'd turn this over to Mark.
Mark?
Mark Holifield - VP-Supply Chain
Thanks.
I'd say core retail is going very well with Score being our Canadian implementation there.
In Canada we're in the very heavy lifting phase of this right now where we're really deep into the implementation process.
We do still expect to pilot some stores in Canada this year and then rollout throughout 2008.
We've accelerated since our business plan in 2007 originally did not include U.S.
core retail.
We've actually accelerated our efforts there and we're in the process of planning our U.S.
core retail implementation with the folks that Frank talked about earlier.
Our RVP from stores and Merchandise Vice President and Logistics Vice President all working together to make the plan for U.S.
Core retail which will launch shortly after the heavy lifting efforts there.
Colin McGranahan - Analyst
So Mark, in Canada you're piloting a few stores this year.
When would you expect to have Canada completely switched over to SAP?
Mark Holifield - VP-Supply Chain
In 2008.
Colin McGranahan - Analyst
Just some time in 2008?
Mark Holifield - VP-Supply Chain
Yes.
Colin McGranahan - Analyst
So if we can't find any hammers in Toronto at some point, we know it's switched?
Frank Blake - Chairman, CEO
You'll find exactly the hammer you're looking for.
Colin McGranahan - Analyst
Okay, good luck with that.
And actually, Mark since I've got you on the line, can you talk at all about the logistics plan and any change there and how your strategy there is evolving as well?
Mark Holifield - VP-Supply Chain
Yes, we're working against the plan that we've laid out previously and we're pleased with progress there.
We've successfully hit some key milestones there on new systems and processes around Warehouse Management Systems and new distribution techniques.
So we've hit key milestones also on our Network Planning effort and we've got the plans for the new DC facility openings through 2008 consistent with that plan.
Colin McGranahan - Analyst
Great.
Thank you.
Operator
We'll move next to Mike Baker at Deutsche Bank.
Mike Baker - Analyst
Thanks, guys.
A couple questions, one just so if your SG&A, sounds like you're in line with your plan but your SG&A was better than planned, so was there areas where you were disappointed, was it just the comps although it sounded like that was about what you expected?
Carol Tome - EVP, CFO
The comment about our performance in line with the most of our expectations starts with the sales.
Our sales were very close to our plan.
We continue to see weakness in areas like South Florida and in California.
That's weaker than what we planned.
You back those areas out and we would have been right on our plan, so that's really where my comments rested, I think as you go down the rest of the income statement we did a pretty good job as well.
Mike Baker - Analyst
Okay, thanks.
That makes sense and then is there more SG&A opportunity for some of the belt tightening that you talked about or is that something we should continue to expect?
Frank Blake - Chairman, CEO
Well, look.
We're always looking for opportunities to do things more effectively and more productively, and we have those opportunities, so we'll continue to work on that.
Mike Baker - Analyst
Okay, and then I'll take my shot at Home Depot Supply question.
So in my mind, a tender in the Home Depot Supply were linked to the extent now that you can do the tender, you can buy the same number of shares for less amount of money.
Does that make it easier for you to be able to accept less for the Home Depot Supply because again in my mind it was essentially trading Home Depot Supply for 250 million shares or is that just too simple?
Frank Blake - Chairman, CEO
It's not exactly how I'd say certainly I look at it.
I look at Supply as we've said right from the start, we're taking a look at creating shareholder value with our Supply transaction and what's the best way to do that.
The linkage to (inaudible) how does that tie into the share price on the tender offer, I mean it's there but it's not, that is not what's in our line of sight.
Carol Tome - EVP, CFO
Supply was linked to the size of the recapitalization plan.
Mike Baker - Analyst
Okay, that's good.
Thanks.
Operator
Next we'll move to [Parham Behras] at Evergreen Investments.
Parham Behras - Analyst
Yes, I have a question kind of on your debt funding.
You kind of seemed very confident you were going to be able to place a lot of debt after you placed a lot of debt last year, and then kind of hit everybody with a four notch downgrade.
Can you kind of expand on how you're planning on placing debt, when you're planning on placing it, and any changes to the terms of existing debtholders?
Carol Tome - EVP, CFO
Well, it sounds like you may be a fixed income investor or an Analyst and you know the debt capital Markets better than we.
They're extraordinary turbulent today.
We're watching them very carefully.
Our approach to raising capital is to be prudent and to be practical with everybody's interests at heart.
So we have not clearly determined nor articulated when we will go to market; how we will go to market.
We're looking at all of our opportunities.
Parham Behras - Analyst
So you don't want to expand on any of that today?
Carol Tome - EVP, CFO
I do not.
As Frank said think are some things we'll talk about today and some things we aren't.
Parham Behras - Analyst
When can we look for you to kind of put a plan together?
Because, I mean, it seems like you have a plan together for the stockholders but you really don't for the debtholders.
Carol Tome - EVP, CFO
We are thinking about our debtholders as stakeholders, very important to our company and our overall capital structure and as we continue to refine our plans we will certainly be articulating those plans.
Parham Behras - Analyst
Thank you.
Carol Tome - EVP, CFO
You're welcome.
Operator
Next we'll move to Frank Gallagher at Catalyst Funds.
Frank Gallagher - Analyst
My questions have been answered.
Thank you.
Frank Blake - Chairman, CEO
Thank you.
Operator
Thank you.
Next we'll go to David Schick at Stifel Nicolaus.
David Schick - Analyst
Hi, good morning.
Frank Blake - Chairman, CEO
Hi, David.
David Schick - Analyst
As we think about the existing home sales and obviously the pressure on the business and the way the consumer thinks about things differently.
And in the meantime, you've affected gross margin with some of the resets, et cetera, forget this year, even maybe forget '08.
Is the consumer, do you think, coming out or is this business coming out with anything different on what it should support from a gross margin perspective as you think about elasticities that you see as you work some of these things through?
Frank Blake - Chairman, CEO
Well, if I understand the question, let me take a general comment to that and then turn it to Craig.
I mean, I think if you look at how our stores reflect some of the trends in the market and how people think about their homes, you can see it in things like the outdoor living that Craig was referencing.
So now when you go into our stores you see an assortment around outdoor living for the home that frankly has opportunities for us on the gross margin side and I think is addressing what customers are interested in doing with their homes.
And I think you'll see that in other areas of the store as we buildout our product mix.
Craig, do you want to?
Craig Menear - SVP-Merchandising
Yes, I think two other things that I would add-on.
Number one is as we continue to drive innovation, that certainly should help us drive not only top line sales but then the resulting gross margin dollars.
And then the second key thing that we have to stay focused on to continue to drive the gross margin dollars for the business is project selling.
And as we stay focused on the overall line structure and selling projects, we can have a positive impact to the gross margin dollar generation.
David Schick - Analyst
Okay, so to sum up for myself with the pressure you're seeing -- there's nothing with the pressure we're seeing in the consumer to make you think five years from now gross margin should be lower in this industry than it is today, in fact perhaps higher based on things you can do?
Carol Tome - EVP, CFO
Oh, goodness if I could just jump in, if you think about what we're doing with core retail and logistics, our margins should grow through a cost out perspective.
David Schick - Analyst
I'm just trying to clarify sensitivity and elasticity.
Great.
Thank you.
Carol Tome - EVP, CFO
Sure.
Operator
Next we'll move to Eric Bosshard at Cleveland Research.
Eric Bosshard - Analyst
Good morning.
The retail profit looked like in the first half it was down around 18% and your guidance for the full year suggests that you don't expect much of a change in the profit degradation and retail in the second half on a year-over-year basis.
In other words down 18 first half, down 15 or 18 second half.
The comparisons are a lot easier in the second half so can you talk a little bit about why the rate of decline in retail is expected to continue to be at that level in the second half?
Frank Blake - Chairman, CEO
Well, I think as I said, we continue to see some pressure ahead for us.
This is -- if you were to ask in kind of a general perspective, the year-to-date in terms of the market I'd say has played out pretty close to our expectation.
The first quarter we had some weather impacts but it was pretty close to what we expected.
The second quarter has been pretty close to what we expected.
In terms of how we had developed our plans, we've had to adjust the third and fourth quarter are going to be more difficult, and frankly I'd say that's -- we're reflecting that additional difficulty that we see in the back half of the year versus particularly as compared to last year.
Eric Bosshard - Analyst
Is that reflective of concern with sales or with spending or with gross margin?
What's the--?
Frank Blake - Chairman, CEO
Sales.
I think the key point there would be sales.
Eric Bosshard - Analyst
Okay.
Secondly, is you talk about this is the year where you are spending more money to drive share progress which you've done successfully.
Can you talk about how you're thinking about balancing controlling expenses to generate earnings and with that investment how are you thinking about that?
Frank Blake - Chairman, CEO
I'd say first the general point of view is we're investing in our stores, I mean, we want to see share gain because we think as the number one home improvement retailer we should be performing at our market and from where we are now, that implies improved share performance, but it is, we're investing in our stores because our stores really require the investment to meet the customer expectation, and we kind of start from that before we go to the is it a share gain play?
Is it an expense improvement play?
We've done a lot of work around what our customer expectations are and we know we just have to improve the shopability of our store and we know we have to invest to achieve that.
Eric Bosshard - Analyst
As you look at the second half plans at $140 million reduction in expenses in Q2, are we likely to see that follow through in the second half?
Have you lowered the planned spending in the second half already at this point?
Carol Tome - EVP, CFO
We're looking at every expense item that we can control, but not diluting our focus on our five key priorities, so I think what I'd ask you to do is just look at the guidance that we've given and expect us to deliver along that guidance.
Eric Bosshard - Analyst
Okay and then last question, Carol, on Supply.
You've talked about your performance versus plan on a lot of categories.
Can you talk about the Supply profit performance in the second quarter and how that related to the plan you had for the second quarter?
Carol Tome - EVP, CFO
I could, but given where we are, it's a discontinued operation and I think we've given enough color on the business.
Eric Bosshard - Analyst
Okay, thank you.
Operator
We'll go next to [Susan Hutman] at Alliance Bernstein.
Susan Hutman - Analyst
Hi, thanks for taking my questions.
The question is really for Carol.
I just want to clarify an answer you gave to an earlier question.
It was about whether the full tender would be completed even if Supply weren't sold and you made a strong point to note that you have CP Access and bank availability.
By my calculation, if you actually did complete the debt finance the full 22.5 billion, your lease adjusted leverage would be four times which is way above your 2.5 times target.
At the recent analyst meeting you stated your commitment to strong investment grade ratings and out at four times that you could hold your current high BBB which is already four notches below.
Would you say that your view on ratings has changed relative to your strong view netting to the recap?
Carol Tome - EVP, CFO
No.
Our view of ratings has not changed.
We have a targeted adjusted debt to EBITDA ratio of 2.5 times.
It's our intent to stay true to that ratio.
Now it will go up and down each time you measure it every quarter but nothing is changed on the rating.
My comment on the size of the recap at HD Supply is simply that we sized our recap based on $10.3 billion of anticipated proceeds from Supply and $12 billion of debt finance to be raised as soon as practical.
If HD Supply, if we have no proceeds from HD Supply and I'm not saying that's the case but if that were to happen our recap would be reduced to $12 billion.
Susan Hutman - Analyst
That's a lot clearer, thank you for that.
Carol Tome - EVP, CFO
Okay, thank you.
Diane Dayhoff - SVP, IR
We have time for one more question.
Operator
Okay we'll take that question from Danielle Fox at Merrill Lynch.
Danielle Fox - Analyst
Thanks, good morning.
Could you talk a little bit more about what drove the sequential improvement in transactions and should we be reading transaction as the equivalent to traffic?
It was a little bit surprising given that Carol you mentioned one of the things that you, one of the areas where you found some savings was in advertising.
So I'm wondering what you think drove the sequential improvement in the transaction count?
Frank Blake - Chairman, CEO
So I'd say, Danielle, first as an overall comment for the Company and then turn to Craig and Carol, we had very strong performance in our Garden and Live goods.
So when you think about transaction count and if you saw some of our stores, I think if you had the chance to walk them, I think you'd be very, very impressed this year with what we did in our D28 and I think that that accounted for a lot of the transaction growth, just the performance of Garden and Live goods.
Craig?
Craig Menear - SVP-Merchandising
Yes, I think as we shared with you early on in the year, we were really focused on our focused bay approach and we had a roll on a ten of categories and we've been working hard to implement that.
And part of that as we shared with you there were traffic driving categories and certainly in our Lawn and Garden area that was one of them.
I think the other piece of it is as we continue to work the merchandising strategy from our end, we're working very closely with Paul Raines and the operations team to make sure that we're doing everything we can to communicate to our store associates the advantages that we have in the marketplace.
And trying to communicate that to our customers both through our marketing and through our associates on the floor, and I certainly think that's having a benefit as well.
Danielle Fox - Analyst
Okay, and then just one quick follow-up.
I know you mentioned where you were tracking in August.
Carol, did you give us the monthly comps for this quarter, if I missed it I'll just go back through the transcript but I don't have that in my notes.
Carol Tome - EVP, CFO
For this quarter, I did.
I think I kind of stumbled through that description.
Danielle Fox - Analyst
Okay.
Carol Tome - EVP, CFO
Let me go through it one more time.
May was negative 3.1%, June was a negative 5.4% and July was a negative 6.8%.
Danielle Fox - Analyst
Thank you.
Diane Dayhoff - SVP, IR
Well, thank you to everyone who has joined us today and we look forward to talking to you next quarter.
Operator
And that does conclude today's conference.
Again, thank you for your participation.