家得寶 (HD) 2008 Q2 法說會逐字稿

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.

Thank you, Augusta and good morning to everyone.

Joining us on our call today are Frank Blake, Chairman and CEO of The Home Depot.

Craig Menear Executive Vice President, Merchandising and Carol Tome, Chief Financial Officer and Executive Vice President, Corporate Services.

Following our prepared remarks the call will be opened for analysts questions.

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

This conference call is being broadcast realtime on the Internet with Home Depot.com, with links on the home page and the investor relations sections.

The reply will also be available on our site.

If we are unable to get to your question this morning during the call, please call 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 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 factored identified in the release and in our filings with the Securities and Exchange Commission.

Now, let me turn the call over to Frank Blake.

Thank you, Diane and good morning everyone.

Sales for the second quarter were $21 billion, down 5.4%.

Comp sales were negative 7.9%.

As Carol will describe, sales for the quarter were negatively impacted by about $160 million because of the seasonal shift associated with 53 weeks in fiscal 2007.

Adjusting for that, comp sales were negative 7.2%.

Diluted earnings per share were $0.71.

I think you all are well aware of the difficult environment in the housing and home improvement markets, so what I would like to discuss the areas where we are focused on for execution and give you a sense of the progress we are making and the ground we still have to cover.

For the past 18 months, we have been working on our five key priorities, associate engagement, shopping environment, product excitement, product availability and own-the-pro.

I won't go through each of these, but I will highlight some of the key items.

On the product and merchandising side of the business we've made significant progress.

We've had better execution across the board.

Craig and his team are implementing a portfolio approach to our merchandising efforts and this is already providing significant benefits.

In a time of increasing price pressure, they are managing through the areas where we need to protect critical price points for our customers and at the same time they are addressing areas where we need to recognize the cost increases that some of our vendors are facing.

We are also managing our seasonal business more effectively.

This allows us to redirect funds that would have been used in margin dollar eroding promotions and instead drive more coherent better price points for our customers.

On product availability or supply chain, we have three rapid deployment centers or RDCs serving 300 stores.

Although our current RDCs are meeting or beating most of the measurements of performance that we've set out for them, we believe that full roll out will be more effective when we have improved some of the key processes in the facilities.

That is what we have been focused on over the last 90 days.

Obviously we'd have prefer to keep to our initial roll out plan and to have hit no bumps in the road.

But this is a bump, not a detour, it impacts the timing in 2008, but not our overall timing.

We remain committed to our RDC roll out strategy.

Our core retail pilot in Canada is now live in 36 stores with 20 coming online yesterday.

It is going well and remains on track to be completed in all Canadian stores by year end.

Most important, we continue to make progress with customer satisfaction.

Whether we measure through our voice of the customer surveys or other third party measurements.

One additional indicator that we have looked at is something known as the net promoter score.

The net promoter score looks at the percentage of customers who rate their shopping experience as a nine or a ten and subtracts from that the percent of customers who rate the experiences a six or worse.

The theory behind this is that the best way to grow is get more customers who are promoters and fewer who are detractors.

Our net promoter score has improved 480 basis points year-over-year and is now at 52.9%.

Industry benchmarks say the best in class remain retailers have net promoter scores of over 50%.

We still have a great deal of room to improve, but it is encouraging that the investments we are making in the business are starting to make a discernible impact with our customers.

On share performance, we have stabilized our share loss rate, but we have not yet turned the corner on total share gain.

Of the 13 major categories we look at, we believed we gained share in five, but in some of the categories where we lost share, flooring for example, we believe that we will reverse that loss in the remainder of the year.

Long term we believe there's a benefit to our customers and our shareholders in driving to a compelling everyday value proposition even if there are short term share fluctuations.

As we look forward into the second half of the year, we see continued pressure in our markets.

Housing and home improvement spend as a percent of GDP, is now at 3.5% versus the 60 year historical average of 4.75%.

From this data point on its own, you could foresee a near term bottoming of the housing market, but there are also pressures on the consumer from constriction of credit availability and increased costs of basic goods.

So we remain cautious about our market in the back half of this year, and into the first half of 2009.

From our own results, we see modest improvement in some of our markets.

For example, we look at the percent of our top 40 markets that have positively comped in the quarter.

In the third quarter of 2007, 20% of our top 40 markets positively comped.

In the fourth quarter of last year, that percentage was 12.5%.

In the first quarter of this year, the number was zero.

This past quarter, the number improved to 7.5%, and two-thirds of our top 40 markets have better comp performance in the second quarter than the first.

That is good news directionally.

But some of that is undoubtedly due to the economic stimulus in the second quarter and may not be sustainable.

It is also important to bear in mind that our guidance assumes modest improved comp performance though still negative through the back half of the year, if only because of the easier comparisons from the back half of 2007 and 2006.

One of the positives we see in 2009, as Carol will discuss shortly, is the renegotiation of our credit contract.

We have finalized a new deal with Citi that will reduce the volatility in our cost of credit.

On the international side of our business, Mexico remains very strong.

It has posted double digit positive comps for the 15th straight quarter.

That is an outstanding record and is a testament to Ricardo Saldivar and our great associates in Mexico.

Canada's performance was also solid, though some of the economic ills of the United States have impacted them and they have posted low single digit negative comps.

They were particularly affected in the areas impacted by the auto industry in the slowing economy in the western provinces.

In China, we saw positive double digit comp growth.

In that context, I'd like to recognize our 37 associates, competing in the Olympic and Paralympic games this summer.

We have men and women from across the business competing in everything from track and field to rowing and cycling.

We are very proud of these associates, as we are very proud and grateful to all of our associates.

We are transforming this business in the midst of a very difficult environment.

We are investing in the core, better controlling our operational and merchandising processes, and seeing significant improvement in customer service, all through the hard work and focus of our 300,000 plus associates.

We recognize our associates through a program called Success Sharing.

At the end of the first half, 75% of our stores were eligible for Success Sharing, and I am very pleased that we will be issuing Success Sharing checks in excess of $40 million, both Company records.

Now let me turn the call over to Craig.

Thanks, Frank, and good morning everyone.

In the second quarter, all selling departments reported negative comps.

Plumbing out performed the Company's average comp in seasonal and kitchen and bath were at the Company's average comp.

Lumber, building materials, hardware, flooring, paint, electrical and mill work were all below the Company's average comp.

With the softness in these project businesses, average ticket was down 1.2% from last year to $57.58.

Total Company transactions were $361 million, down 4.2% from last year.

Transactions in the $600 plus range comp down double digit, while transactions of less than $25 were down single digits.

Regionally we saw positive comp sales in the Southwest Region with every department in that region out performing the Company average.

The Northern Plains Region while still negative out performed the Company average comp in part due to the floods that affected the Midwest in July.

While these areas are performing well, we continue to see double digit negative comps in California and Florida markets for the fifth consecutive quarter.

Despite the challenging environment in the second quarter I am particularly proud of our execution.

We focused on controlling what we could control.

We managed our business by continuing to implement our focus bay approach, where every category has a specific roll and intent driving assortment, pricing and marketing decisions.

This along with the better tools that we developed this year, allowed us to tightly manage inventory and gross margin dollars during the quarter.

For example, with our forecasting tool we have gone from forecasting sales, margin and inventory for 13 departments on a monthly basis to forecasting 200 classes on a weekly basis.

This type of insight helps us make better decisions with greater speed, which is invaluable when every dollar counts during these challenging times.

In addition this quarter we continued to reduce promotions.

We were less promotional overall compared to last year and consciously focused on eliminating margin eroding promotions.

This is important as our customers are looking for great value everyday and we want to simplify their shopping experience.

We have continued to see cost pressure in the quarter from price inflation and products that are metal and petroleum based.

Our approach in dealing with this remains consistent, each request is being handled individually with each supplier since every situation is unique.

Our pricing philosophy is to provide everyday great value and our retail pricing is set based on what the market will bare in conjunction with our focus bay approach, not cost.

Our improved execution through our merchandising transformation helped us offset the impact from cost pressure in the market during the quarter.

Despite the calendar shift we saw solid sales and inventory performance in our seasonal businesses, as a result of enhanced assortment planning at store level and tighter inventory management.

Working with our new merchandising tools and logistics partners we planned and executed well in these businesses.

For example, our home comfort categories experienced double digit positive comp growth.

Sales of air conditioning units and fans were up significantly as a result of the early hot summer, experienced across much of the United States and we were able to respond effectively.

To put this in perspective, for the first half of the year our top seasonal classes, sales, gross margin dollars, and inventory productivity each performed two times better than the Company average.

An area of relative strength remains basic repair.

Customers are spending to maintain their homes.

For example, in plumbing every major repair class in that department performed above the Company average.

We saw unit share gains against the market in several categories including roofing, toilets, hardware, power tools and accessories and electrical on a rolling 12 months.

And all of these categories are essential to basic repair.

Additionally we know that customers are value conscious and some customers are shifting their buying patterns to more opening price point products.

We benefited by responding to our customers needs and added more opening price point products to our assortments during the quarter.

Energy efficient products also performed well this quarter.

In anticipation of high energy costs later this year, consumers are focused on energy conservation, and we are already seeing customers begin to respond to these challenges by preparing their homes with these products.

This is a trend we expect to continue in the third quarter.

Products such as weather stripping, caulk, CFL lightbulbs, air circulation, pipe insulation all performed well.

In the Northeast, we are already seeing strong sales in our fireplace category as customers are stocking up on pellet fuel before the cold weather arrives.

As we head into the back half of the year we are going to continue to pay attention to the trends in energy conservation as consumers further prepare to offset rising energy costs.

We are introducing several new products including the exclusive Eco Smart dimmable CFL lightbulbs, Water Sense water saving faucets and toilets and an innovative wall flush mount programmable thermostat from RiteTemp.

In addition we will continue to offer relevant energy start products such as appliances, windows, furnaces and water heaters.

2008 is going to continue to be challenging, but the merchandising organization will remain focused on driving everyday great value for our customers, using our enhanced merchandising tools and our focus bay approach.

Now I'd like to turn the call over to Carol.

Thank you, Craig.

Good morning.

In the second quarter sales were $21 billion a 5.4% decrease from last year, reflecting negative same-store sales of 7.9%, offset in part by sales from new stores.

Earnings were $1.2 billion compared to $1.6 billion last year.

Earnings per diluted share from continuing operations were $0.71 versus $0.77 last year.

Comps or same-store sales were a negative 7.9% for the quarter, with negative comps of 7.3% in May, and negative 8.1% in each of June and July.

Our comp sales were slightly higher than our plan, reflecting we believe some benefit arising from the economic stimulus package.

In 2007, we had 53 weeks in the year.

This shifted our 2008 fiscal calendar.

Because of this shift and given the seasonal nature of our business, second quarter sales on a like for like calendar basis were negatively impacted by approximately $160 million.

Excluding the calendar shift, our like for like comp for the quarter was negative 7.2%.

In the second quarter, our gross margin was 33.2% an increase of nine basis points from last year.

Our gross margin reflects higher supply chain costs that negatively impacted gross margin by 18 basis points.

As Craig mentioned, our gross margin expansion reflects better merchandising execution across all stores and this drove 23 basis points of margin expansion.

And we have some benefit from running fewer credit promotions in the quarter, and that added four basis points to our gross margin.

In the second quarter, operating expenses increased by 188 basis points to 23.4% of sales.

In the second quarter, we recorded an $18 million charge related to the store rationalization decision that we announced in the first quarter.

Excluding the store rationalization charge, we deleveraged expenses by 179 basis points in the quarter.

Our expense deleverage reflects for the most part, the impact of negative sales.

Generally, we expect to deleverage expenses by about 20 basis points for every point of negative comp.

In the second quarter, our expense deleverage per point of negative comp, was closer to 13 basis points, as we experienced favorability in expense categories like advertising, medical, and workers' compensation among others.

Further as expected, in the second quarter, we experienced about 73 basis points of expense deleverage, due to a higher cost of credit associated with our private label credit cards.

And while we are on credit, let me comment on our private label agreement.

Last week, we executed a new contract with Citi, our third party service provider.

The contract will go into effect on January 1, 2009, and run through January 2017.

We are very pleased with the terms and conditions of this agreement.

We are moving from a profit sharing agreement to a fixed fee agreement with some upside opportunity.

Effectively the new agreement removes the volatility in our cost of credit and puts a cap on our costs.

We are estimating that our future cost of credit, as a percent of private label credit sales, will be in the 1% area and in no event will it exceed 1.5% in any one year.

We will also receive an up front cash payment of $220 million, which will be recognized as income over the life of the contract.

Now our operating margin was 9.7% in the second quarter, down 180 basis points from last year.

Net interest expense was $157 million in the second quarter, up $12 million from last year reflecting a decline in interest income due to lower investable cash balances, offset in part by lower interest expense arising from a favorable tax settlement.

In the second quarter, we had a favorable settlement with the Province of Quebec.

Which reduced interest expense by $20 million and tax expense by $8 million.

In the second quarter, our income tax provision rate was 36.2%, due primarily to the favorable tax settlement, as well as lower state and foreign effective tax rates.

We expect our tax rate to be approximately 36.4% for the year.

Diluted shares for the second quarter were 1.69 billion shares, compared to 1.97 billion shares last year.

The reduction in our outstanding shares is due to our share repurchase program and includes the tender offer we completed last September.

We didn't repurchase any shares during the quarter.

And as we have discussed we plan to complete our debt financed recap once the markets stabilize.

But in the meantime we may use excess liquidity to repurchase shares.

Now, moving to our operational metrics, during the second quarter, we opened 15 new stores including one relocation.

And as planned closed 15 stores for an ending store count of 2,257.

Today, 251 stores representing approximately 11% of our store-based operate in Canada, Mexico and China.

At the end of the second quarter, selling square footage were $237 million a 3% increase from last year.

Reflecting the sales environment, total sales per square foot were approximately $350 for the quarter, down 8.6% from last year.

Now, turning to the balance sheet, at the end of the quarter, retail inventory was $11.9 billion down 3.4% from last year.

On a per-store basis, inventory was down 5.9%.

Our merchandising supply chain and operating groups have all worked hard to manage inventory, while maintaining high in stock rates and their efforts paid off.

But based on the sales environment, our inventory turnover was 4.3 times, compared to 4.6 times last year.

Computed on the average of beginning and ending long term debt and equity for the trailing four quarters, return on invested capital for continuing operations was approximately 10.7%.

But excluding the store rationalization charge, return on invested capital was 11.6% down 210 basis points from last year.

We ended the quarter with $45.1 billion in assets including $1.1 billion in cash and short term investments.

This is an increase of approximately $605 million in cash and short term investments from the end of fiscal 2007 and it reflects cash flow generated by the business of approximately $4 billion offset by $960 million of capital expenditures, $760 million of dividends paid and $1.7 billion used to repay outstanding commercial paper.

In June, we told you that our 2008 capital spending plan was $2.2 billion.

We now believe that 2008 capital expenditures will be $2 billion primarily as a result of the timing of 2009 new-store openings.

As of the first half of 2008, we have spent 48% of our $2 billion forecast.

Relative to our plans, we had a solid second quarter.

Our financial results reflect the Company that is had managing its business in a difficult environment.

The economic environment remains very challenging.

Based on our first half results, and our view of the back half, we believe that fiscal 2008 sales will decline be approximately 5% and fiscal 2008 earnings per share from continuing operations will decline by approximately 24%, consistent with the low end our previous guidance.

Now, please note that our 2008 earnings per share guidance does not include the store rationalization charge.

So, thank you for your participation in today's call and Augusta we are now ready for questions.

Thank you.

(OPERATOR INSTRUCTIONS).

We will pause for just a moment to assemble the queue.

Dan Binder with Jefferies has our first question.

Hi.

Good morning.

I was wondering can you give us a rough idea of what you think the tax rebate stimulus may have done for your sales in the quarter, either in dollars or in a growth rate basis?

Then also if you can quantify the benefits you think you may have seen from the Midwest recovery efforts due to the floods?

So first on the tax rebates, this is -- we don't have a clear line of site into it, but I will give you kind of the ball park of how we look at it.

And we, this is, we look at the 500 plus million shift in the first quarter, the 160 million shift in the second quarter, one to the negative, one to the positive.

Go okay there's $400 million there and we think about three-quarters of it.

So $300 million of probably related to the stimulus package.

Okay.

And in terms of the impact on the Midwest that's, that's really, it is at a level of immateriality, probably around $10 million.

Okay.

And then two other questions.

Was the, what was the contribution from international on the comps, on the total comp store sales?

And then can you just remind us, Carol, what the cost of credit is this year so we can kind of figure out what the year-over-year benefit should be next year when you come down to something closer to 1%?

So international was around 140 basis points.

Carol, on the credit.

The cost of credit we estimate this year will be in the 2% area.

And next year do you think next year will be closer to the one or the 1.5?

Dan, we will give you a better idea as we get into the year.

Okay.

Thanks.

I appreciate it.

Thank you, Dan.

Our next question will come from Christopher Horver of JPMorgan.

Thank you, good morning.

Good morning.

Can you talk about, it seems like it was a really good seasonal year here, you had the stimulus check, you had the weather, drought recovery.

Is there a way to look at your comps and say well in the third quarter if every category comped the same, how would your total comp change given the mix change?

Well.

That's, I mean every quarter has a different profile in terms of some categories go down, obviously, seasonal goes down a little bit in the third quarter and other categories go up.

So, I'm not, I'm not quite sure how to get a handle on your question of what, Craig do you want to give a shot at how that might look.

Yes, if you look at our, just the garden business for example, there the penetration actually shifts from slightly over 21% to slightly over 13%.

But at the same time, then you have things like fireplace that comes up, other seasonal businesses that actually kick in.

So I don't know that I, I can give you an exact number but there's certainly a change as a result of just the penetration of our garden business in the back half of year.

Is that helpful to you?

I'm not sure we are answering your question.

Yes, it is.

Maybe if you could say if you think about, everything you do in your backyard in early spring to early summer, any sense on how those categories comped relative to the rest of the mix?

Those categories actually performed above the Company average in the quarter.

Overall as I mentioned, we look at our core seasonal businesses for the entire season, the first half if you will, they actually were two times better than the Company average.

We were certainly above what we anticipated in the quarter for those businesses.

We actually exceeded our plans.

Okay.

That's very helpful.

Then just one follow up, Carol.

How should we think about the rest of the shift unwinding, the what was it 290 basis points in 1Q, you show about 70 basis points in 2Q, how does that play out in the back half do you think?

It should be negligible.

Most of the shift is behind us just because of the nature of our seasons as you were just pointing out.

Okay.

Thank you very much.

Thank you.

Mitch Kaiser with Piper Jaffray has our next question.

Thanks, guys.

Good morning.

I was hoping you could give us a little more detail on what you are going to do and the processes around the RDC and then maybe what we need to see before you -- I think overall you were taking that to 20 over time?

If you just give us a little more color on that, that would be helpful.

You bet.

We have Mark Holifield here in the room.

I will turn that question over to Mark to address.

Good morning everyone.

Yes, we are slowing our 2008 openings, but we feel we are on track for a 2010 completion where we would serve 100% of our stores.

Our focus at this point is really insuring a seamless roll out going forward, doing the right thing for our stores and our customers.

The key things that we are focused on improving the in stock at the stores, we are pleased where with we are there, the RDCs have improved the in stock for the SKUs that are covered by RDC.

We are improving our accuracy of shipments, the quality and timeliness of loads delivered to our stores and then our throughput productivity.

Those are the things we are focused on as we go forward.

I would expect to see one or two openings between now and the end of our fiscal year.

Okay.

And I think you have set a goal that 75% of your cogs will go through either the lumber DC stocking DCs or RDCs.

Is that still consistent with what you are looking for over time?

Yes, our end goal is to have 70 to 80% of goods covered through central distribution.

Keep in mind though that that includes as you have said, other DCs, besides RDCs to get there.

Okay.

Thanks, guys, good luck.

Thank you.

We will go next to Budd Bugatch with Raymond James.

Good morning, everyone.

Carol you said that the second quarter or relative to your plan was solid.

Can you give us maybe a little bit more color on that and hopefully quantify some of that?

Did you beat your own internal forecast in the second quarter, and if so what line items?

Budd, we did beat our internal forecast.

We beat our sales forecast, we beat our earnings forecast.

We did get a benefit from the Quebec settlement that I pointed out, which was $0.01 of earnings better than our plan but we had a solid quarter.

And it's not just on the income statement, we were pleased with the performance of inventory.

We are managing inventory in a very difficult environment.

So X the Quebec settlement, can you give us an idea of how much you may have beaten your plan by?

Budd, this is Diane, we don't give that type of information.

I know you don't give quarterly guidance, I was trying to get to where you were on a look backward basis.

Okay.

We're looking forward.

One other question I have is just, Craig when you mentioned the performance to the comp average on all the categories you only had one that was above the Company average in the quarter.

Can you kind of elucidate on that maybe how much above or how that could work mathematically?

Yes, again, plumbing was the one that was above the Company average and seasonal and our kitchen and bath businesses were performing at the Company overall.

And when you look at the balance, we continue to see challenges in the project businesses.

And around those projects that are significant discretionary spend, in particular or large projects, so that the reference that I made is related to answer actions above $600 that's where we still continue to see the significant amount of challenge.

Budd and I think just on the math you have got the higher penetration on our outdoor business.

So if when that's at the Company average.

That's how the math works.

Right.

Okay.

Thank you, Frank.

Thank you.

That you Craig.

We will go next to Matthew Fassler with Goldman Sachs.

Thanks a lot and good morning.

Hi, Matt.

I want to get a little color, Frank and Carol on comments you made about what you expect for the rest of the year.

I think you said that your expectation is that comps will be a bit better in the second half of the year than they were in the second quarter.

If you flow that through the P&L, I believe that the operating margin has to come under a little bit of incremental pressure versus what you saw in the quarter.

So I guess given your macro caution I'm a bit surprised that you are as optimistic as you are on sales and at the same time I am wondering why the operating margin wouldn't improve a little bit from the implied guidance?

Well, Matt as you pointed out we do believe our comps will be slightly better in the back half than they were in the first half.

And on the margin side, we have, there are components of margin, first starting with gross profit.

We said our gross profit margin would be flat to slightly positive for the year, for the first six months I think we are up 14 basis points.

I wouldn't anticipate we would repeat that in the back half.

And from an operating expense perspective, we did have some expense favorability in the second quarter we do don't think will repeat in the back half of the year.

So when we added it all together, we thought a realistic view of our business for the back half was consistent with the guidance that we had previously given, which is sales down approximately 5% and earnings per share down approximately 24%.

Got you.

Just to amplify those a bit, Carol, is the gross margin or the expectation of some gross margin erosion a function of product price inflation or is there something else impacting that outlook?

It is a function of a number of factors including mix changes.

And in terms of expense favorability, are there any call outs that would get in the way, of what would get in the way that is in the second half of the year?

Nothing that is material, Matt.

It is a lot of onesie, twosie basis points type of activities.

Got you.

The second question that I have jut to for us to dig a bit deeper into the distribution question.

It sounds like the facilities that you have are doing okay versus your plan.

You spoke about where you are going to focus you are the working existing DCs.

I guess what was it that you saw that led you to slow down the roll out?

There must have been something in your performance or in your analytics that suggested you needed to do some more work here.

Yes, here -- I will give you my view on that, Matt and also invite Mark to add his comments.

As we have talked about before, when we opened the Dallas RDC, we saw that that had some significant operational issues in terms of what we had planned.

And then we go back and you look at our pilot project in Brazelton, the roll out in Chicago and Dallas and you go, gee there are some significant process improvements that it would be good to make.

And you have a choice.

You can say I want to make those significant process improvements as we go and keep to the original schedule or you go gee, this would be a good time to pause, get the operational improvements in now, and then roll.

And to be candid, we had a lot of discussion about that amongst our senior leadership team and the advantage of a roll out like this, in my view is you've got, we have three RDCs up, it is kind of a perfect time to have that pause, get things really the way you want them, before you continue the roll out.

Just, and Mark can comment on this, and we have said it before, this is a big undertaking.

I mean we are trying to do in a very short period of time what other retailers would take, 2X or 3X the amount of time to do.

It is valuable to, the more you can replicate what you are doing and not have to make improvements on the run, the better off we think we will be in the roll out and the easier the integration with the store side of this and the merchandising side.

That was the thought process and I'd ask Mark if he has some additional comments to add.

I think Frank summed it up very well.

I think we are sure the concept is sound based on what we have seen and we have been pleased with some of the initial indications of success.

The work we are doing right now is really to insure that we can do a fast roll out and achieve our 2010 objective.

Got you.

I didn't mean to cut you off, Mark, but there are any financial consequences positive or negative in the short run from the change in timing here?

Not included in the guidance that we have given.

Clearly we have secured some real estate that we are not optimizing, it is empty right now but that's factored in the guidance that we gave.

Thanks so much.

Thanks, Matt.

Our next question will come from Colin McGrahanan with Sanford Bernstein.

Good morning.

First just on market share it sounds like maybe a little bit of the improvement in the momentum you had has stabilize here.

It sounded to me like maybe the flooring category.

Do you think that was just a function of some of the promotions that was run in the space, and if you could comment just a little bit more broadly on the general market share direction, especially relative to some of the competitive closings that we are starting to see from the independents?

And just your general outlook on where you think market share goes from here?

Yes, first your comment on flooring that is how, that is how we look at it, and we see that in some other categories, I mean, again I would emphasize that one of things Craig and the merchandising team are doing is really putting some discipline around driving to everyday compelling value propositions, trying to pull ourselves off of a lot of the promotional activity that we were doing.

And that's going to drive some short term fluctuations in share, but we think the long term direction is right.

I think, versus some of our competitors, we look obviously at there are differences by quarter and we are particularly pleased in the second quarter if you kind of look at historically where we have been in the second quarter, we think we have picked up ground from where we have typically been.

Okay.

And then just second briefly on the cost of credit.

Assuming that you are down to 1% next year, my math would say that's like a 30 basis point positive impact for next year.

How did you -- that is excluding the three bips of the 200 million, how did you possibly get a $200 million cash payment out of Citi at this point?

I think that's a -- thank you.

Look.

I think both sides, Colin, this is I think this is an instance where we've had a good partnership with Citi over the last several years and we both sat down and worked out a new agreement, that I think hit a lot of the concerns that they had, frankly with our prior deal and addressed some of the concerns that we have.

Carol and her team did just an excellent job on, I think, setting the right path for the Company on our credit agreement over the next, from 2009 through 17.

Did you shop that competitively then?

Colin, we don't shop it competitively but we utilized a third party advisor who is an expert in this field, to ensure that the terms and conditions of our agreement with market are better.

And as Frank pointed out we really had the benefit of an open book with Citi over the past five years, which allowed us to mutually come to agreements that work really well for both of us.

Okay.

Thank you.

Thank you.

Your next question will come from Michael Lasser with Lehman Brothers.

Good morning.

Thanks a lot for taking my question.

As you look at today, what percent of sales are related to basic repair items?

You've talked about relative strength in those areas for the last few quarters.

So, I am curious if you trend that relative strength out for the foreseeable future, at what point does the mix shift toward those categories drive overall growth in the, in the total sales?

Because at some point you comp negative on top of negative and the basic repair items will continue or non discretionary items will continue and that should drive positive growth at some point?

Michael, this is Craig.

We -- I can't give you an exact percentage as it relates to our business in total because these repair categories cut across several of our reporting departments.

But, but certainly, our focus, our main focus is to continue to certainly drive the project business overall which drives attachment sales.

And as a result, right now we are seeing the consumer is certainly under these circumstances that they're facing with cost pressure in their own lives, basically focusing on doing things that they need to do to maintain their homes.

So whether it is replacing water heaters or replacing a roof or patching a roof when something happens to their home, they're certainly making those kind of decisions.

But over the long haul, it is about driving the project business, which is what will then achieve attachment sales and drive comp performance over time.

Okay.

Thank you.

As a quick follow up as part of the new credit agreement, will any of the terms for new or existing card holders be changed such that the availability of consumer credit under your private label program will be reduced next year?

Not per the terms of our new agreement.

But I will tell you that this year we have made some changes, we being the collective we.

For example where we saw delinquencies in the past we had not reduced the credit line.

This year we reduced the credit line to the amount of the outstanding, because we thought that was prudent in the current environment.

Further, if we saw significant erosion in FICO score, and Citi pulls a credit report every month, if there was significant erosion, there were some credit line reductions.

But the more important aspect of all of this I believe is that we approve 68% of all credit card applications.

So that continues to show us that the portfolio is robust.

Yes.

Can you quantify, in anyway, what sort of impact the, the change in terms or the change in philosophy might have had on either the sales result or the portfolio?

We don't think the change in terms has had a material impact to the portfolio other than it has helped to bit on the profitability side.

We are being more selective in the type of promotions that we offer.

Our everyday value proposition is if you use our private label credit card and spend $299 on that card, it is no interest, no payments for six months.

From time to time we offer 12 months no interest no payment programs and we have cut back on those programs a little bit.

Have they had an impact on sales?

We can't tell, but we have cut back on the programs a bit.

Sounds great.

Thanks for the commentary.

Best of luck.

Thank you.

We will go next to David Strasser with Banc of America.

Thank you.

I know you had talked about the impact of gross margin on inflation and so on with vendors.

But just from a bigger picture not so much numbers, what are you seeing with your customers and your ability to pass that through and what is, and where are you with your vendors?

And as you sort of look out either into the back half of this year or early 2009, do you think that gets to be a bigger issue for you guys or do you think you are seeing kind of the most of it, most of it now?

So David, let me make a couple of general comments and then turn it to Craig.

It is so, what we have seen so far is, is you really almost have to take it category by category and vendor by vendor.

So, that is the both in terms of how Craig and the merchants approach the vendor requests, as well as what we see on the customer reaction.

And one of the things I think Craig and team are doing very good job at is as he indicated, focusing on opening price points and also focusing, as there are necessary price increases and trying to add value in the product, along with the price increases.

Craig maybe you want to add some commentary to that.

Yes, I think what we are really trying to do is obviously work as Frank said individually with our suppliers because each situation is unique but at the same time, really trying to apply our focus bay approach in terms of how and where we might pass on retail.

And it is important to understand that, from a merchandising direction that we are giving in our team is your retails aren't linked to your cost.

Retails are linked to what's happening in the marketplace and what our portfolio strategy says that we want to get done.

And then we worked the balance of that, cost obviously is independent of that.

And so right now as we look forward, again certain, certain things seem to be, to be making moves lumber is starting to stabilize it appears at this point.

Framing lumber is not significantly different than last year.

Copper is pretty much flat to last year.

Still obviously when you look at comparatives as it relates to steel or petroleum, there's certainly pressure against, against last year and I think that pressure will continue as we go through the back half.

I'm not seeing anything right now that would indicate that we will see a dramatic fall off in that.

Just along those lines I mean looking at lumber, it is a good one.

I mean, not only is it stabilizing it actually seems to be going up in price just from when we look at it as a lot of other commodities seem to be declining in value.

Any thoughts to why that would be happening?

Is there anything you are seeing from a demand standpoint that would be driving that?

Well, demand in the market overall, with the current housing environment is down.

So it is, it is kind of a, it is strictly a supply and demand type of issue.

So, folks out there are trying to get what they can for the product that they are producing.

So you are right.

I mean you are seeing sheet goods actually at a higher rate than the previous quarter.

Dimensional lumber hasn't quite reached that point but it is close.

Yes.

It is just surprising to see that I guess in this environment where you see housing, so I figured I would see.

Anyway, thanks a lot.

Thanks, David.

Our next question will come from Eric Bosshard with Clevelands Research.

Morning.

Hey, Eric.

Two questions.

I guess the first for Craig.

On the EDLP focus you talked about or the comment was made that you gained share in five of 13 categories or I guess lost share in eight of 13.

Can you just talk about the rationale benefit pay back and commitment to continuing with this strategy and how you think that's going to play out in that market share performance as we move forward?

Again we feel pretty strongly that listening to what our customer is saying through various research that we do.

The customer is looking for us to simplify their shopping experience.

The promotional activity complicates that for them.

It focuses them into periods of time where they need to buy to feel like they have got the best deal.

It also puts pressure up through the supply chain through our suppliers when you have that kind of activity.

So we feel pretty strongly that over the long term, by providing a great value to our customer everyday and having them understand that we have that great value everyday it will drive the confidence level for them to shop with us.

And so I think over the long haul that should in fact pay out in share for The Home Depot.

And how long is the long haul do you feel?

How long does it take until this process starts to really incrementally create value for you?

It is a journey, Eric.

I don't know that I can put fix a date out there, as we really work our focus bay approach and recognize that we have both assortment, marketing, pricing, elements to fix as we put those in place.

This is a journey that we are going to take over the next, probably couple of years.

Okay.

And then second question on SAP.

I understand that you had 20 stores put up and running but I guess prior to yesterday you still had 16 up and running.

It seems like the roll out in Canada has been more deliberate which makes sense, but understanding how deliberate it has been up until yesterday, what gives you the confidence that you get through all of Canada by the end of the year?

And are there any experiences that have caused you to move at such a measured pace to this point?

It is actually pretty consistent with what we had planned.

I mean the way the pilot was, kind of the geography of the pilot was you do a couple of stores, do a dwell time, do a limited number of stores, have a dwell time and then you start hitting a more rapid roll out pace of 20 to 25 stores at a clip.

And that was always the way it was laid out.

So, and again it is not that dissimilar from the RDC in terms of how you structure your pilot and initial roll out.

There's a little bit of pause at the start as you shake out the bugs and make sure you have got something that can really withstand a 20 store clip.

Now we just turned those 20 stores on, on Monday, so that's yesterday.

So, we are so far, so far so good.

And if you can do 20 at a clip you can move it up to 20, 25 and easily make the end of the year.

And through the first 16, has the feedback or implementation been basically where you thought it would be?

Yes.

Okay.

Okay.

Thank you.

[Augusta] we have time for one more question.

Thank you.

That will come from Gregory Melich with Morgan Stanley.

Hi.

Thanks.

Carol, you mentioned before that there were a few things in SG&A that were favorable this quarter that you didn't see sticking in the back half.

Could you sort of call those out or another way to look at the 3% growth in SG&A dollars, is that a rate that we can maintain or is it going to go back to the more 5% or 6%?

Well we talked about favorability in a number of expense categories like advertising, medical, and workers' compensation.

I don't see that favorability continuing into the back half for example.

Okay.

And if we were to look at the growth from a dollar perspective do you think the first quarter was more representative or is there, because I mean 3% growth in dollars is impressive.

We should be thinking about it as the fact that they grew a couple hundred bips more would be more normalized?

I think the first quarter is more representative than the second quarter.

Okay.

Great.

The second question is the payables year-over-year.

I mean the inventory looks nicely controlled.

Also saw the payables come down.

Is there something that was driving that uniquely or just the timing at the end of the -- or just fewer receipts, how should we look at that drop in payables?

Sure.

The way you should look at it and our payables ration at the end of the second quarter was 60%.

So, that's pretty good.

But it is down from about 63% a year ago and that's actually because of some transition disruption we had a year ago.

We outsourced all of our payable function to India and ran into a bit of disruption as a result which we don't like.

We are back in line now in terms of our service level agreements with the third party in terms of our on time payments with our suppliers, and that 60% ratio is the one that we would like to maintain.

Of course there's a seasonal element to that as you know.

It will always drop off at year end but then it should come back up to the 60% range.

Okay.

Great.

And just one last as a follow up to the first question.

If you talk about that 20 bips of deleverage that you have used historically, as you go into next year, if it is another down year, do you think that's still the right number or do you think that could end up being higher?

We have just started our 2009 planning activities, as you can appreciate.

And we are working off of that same 20 basis point rule of thumb.

As we get close to the end of the year and we firm up our plans, we will give you some more color.

Okay.

Great.

Thanks.

Thank you.

Thank you.

Well, thank you to everyone for joining us today.

And we look forward to talking to you next quarter.

That does conclude our call.

We'd like to thank everyone for their participation.

Have a great day.