家得寶 (HD) 2009 Q1 法說會逐字稿

Welcome to today's Home Depot first quarter earnings conference call.

Today's call the being recorded.

(Operator Instructions)

For opening remarks and introductions I'll turn the conference over to Ms.

Diane Dayhoff, Vice President, Investor Relations.

Please go ahead.

Thank you.

And good morning to everyone.

Welcome to the Home Depot first 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, Merchandising; and Carol Tome, Chief Financial Officer and Executive Vice President Corporate Services.

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

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

This conference call is being broadcast realtime on the Internet with links on both our home page 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 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 the those factors identified in the release and in our filings with the Securities and Exchange Commission.

Now let me turn the call over Frank Blake.

Thank you, Diane.

Good morning everyone.

Sales for the first quarter were $16.2 billion, down 9.7% from last year.

Comp sales were negative 10.2% and excluding the charges related to the Expo business closings, diluted earnings per share from continuing operations were $0.35.

The external environment remains difficult.

Private fixes are dental investment as a percent of GDP is now at 2.7%.

This is down 40 basis points from the fourth quarter and is well below the 60 year average of 4.8% and also below the previous 60-year low of 3.2%.

We've referenced this number previously as an indicator of the health of our market, and we've seen a substantial contraction from a few years ago when the percentage reached as high as 6.25%.

We believe that most of the correction on this index is is now behind us, but there remain mixed signals elsewhere within the market.

On the positive side, year-over-year 21 markets out of our top 40 markets are showing a lower rate of decline.

We positively comped in our Gulf region principally because of storm recovery and major markets in the Ohio Valley region returned to positive comps.

We have seen significant improvement in comp transactions.

As Carol will detail, we had a very soft February in the US with particular weakness in our western division.

But saw improvement through the remainder of the quarter.

We are concerned about accelerating rates of foreclosures particularly in the western part of the country where there is already high density of houses in foreclosure.

In the fourth quarter of '08, we saw foreclosures decelerate in areas of California and along with that an improvement in our comps.

Those trends reversed this past quarter which provides a cautionary note on signaling a recovery prematurely.

One out of every 54 households in California is in foreclosure.

That is the highest it's ever been and before we see real improvement we believe we need to see sustainable deceleration in foreclosures.

Overall, it's important to emphasize that most of our markets that are improving versus last year are only showing a slower rate of decline not positive comps.

Getting to less fat is not the same as getting to recovery.

Whatever the longer term significance of these different signal, we continue to focus on improving our business.

We have a lot of opportunity there and I think we made some significant progress.

In the first quarter we gained share in seven of thirteen departments, reduced inventory by over $1 billion and maintained a strong instock position in our stores.

We also drove footsteps into our stores through our portfolio strategy and our new lower price program.

Our comp transactions were down only 2.6% year-over-year, which is the best performance on transactions we've had in seven quarters.

Our customer service continues to improve.

Our store operations team has rolled out new customer first training to all our store associates and support staff and has brought simplification and focus across the business.

We are seeing the benefit of this in the improved customer service ratings.

Our net promoter score which is calculated by taking the percentage of our customers who rate their experiences as a nine or ten and subtracting from that the percent who rate their experience as a six or worse has improved 790 basis points year-over-year and is now at 61.5%.

That is a meaningful improvement.

About a month ago, we opened our sixth RDC in Valdosta, Georgia.

This is an important milestone because it is the first of our RDCs that is mechanized and the planned future state of our RDCs is as mechanized facilities.

We are very pleased with the performance of our RDC network and RDCs now service approximately 600 of our stores and the rollout will continue.

We are also making significant progress on our merchandising tools in the US and that is reflected in the performance in the first quarter.

These tools are helping us better control inventory in general as well as clearance and markdown management.

Our core retail efforts in Canada however have experienced some difficulties.

A software implementation of this scale often entails some setbacks.

What we are seeing is that the effort itself diverts attention from the core business.

It also takes time from merchants and operators to effectively utilize unfamiliar tools and some of the tools themselves require tuning.

Some of Canada's under performance over the last few months is attributable to these factors.

These issues will get resolved and we're fortunate to have a very dedicated Canadian team to take on the twin challenges of a major system implementation and market correction at the same time.

Also on the international front, our Mexican business again posted positive comps while our business in China posted low single digit negative comps reflecting the decelerating environment.

Next month the Home Depot will celebrate its 30th anniversary.

It is as true today as it was 30 years ago that our associates and culture set us apart.

Based on this quarter's results, 85% of our stores would qualify for success sharing our program for rewarding our hourly associates.

We are proud of this level of participation and proud of the work our associates do day in and day out.

Now let me turn the call over to Craig.

Thanks Frank and good morning everyone.

Our sales reflected the ongoing weakness in the home improvement market.

For the quarter every merchandising department experienced negative comp sales growth compared to first quarter of 2008.

In the first quarter, departments that outperformed the Company's average comp were seasonal, building materials, paint, plumbing and flooring, electrical, millwork, lumber, kitchens and hardware under performed the Company's average comp for the quarter.

While we saw weakness across the stores in the US we identified four trends of relative strength across product categories.

First, seasonal categories related to outdoor projects like landscaping, live goods, fertilizer and seed showed flat or positive growth in the quarter.

We saw strength in vegetable and herb sales as more customers opting to grow their own vegetable gardens.

Second, as we've shared with you in past quarters, basic repair and maintenance categories remain resilient across the country.

Categories like caulk and water heaters and air circulation, fasteners, plumbing repair and roofing all performed at better than the Company average.

Third we saw simple remodel and decor categories gain some strength in the quarter.

These are categories that help customers update their homes in a cost effective way such as interior paint, special order carpet, instock carpet, vinyl flooring, ceramic tile and window coverings.

Finally, there's an increase in safety and security products.

We believe tougher economic times has made customers focus on safety.

Categories like door locks and exterior security lighting performed better than the Company average.

For average tickets of $50 and below, roughly 20% of our business in the US, sales were basically flat year-over-year.

And average tickets of $900 and above representing approximately 20% of our US business, sales were down around 15%.

In total average ticket for the first quarter was down 8.2% to $52.67.

Adjusted for currency average ticket was down 6.2%.

The pressure on ticket comes from the softness in construction and discretionary categories.

Products like dimensional lumber, concrete and wire performed poorly in the quarter.

Additionally we continue to see weakness in discretionary spend category such as lighting, appliances, replacement windows and closet system remodels.

We believe customers are remaining cautious about spending in this environment.

In general, commodity pricing has been more stable in the quarter.

Wire is experiencing significant deflation from the same period last year with copper cost down more than 50% from a year ago.

Lumber continues to be at historic lows but we see offsets to these through inflation in areas like roofing and fertilizer, despite soft sales our focus on improving merchandising processes and implementing improvements with our merchandising tools allowed us to better manage the business.

As a result, this quarter we delivered share gains, inventory improvement and solid gross margin in the US.

We have now experienced our sixth consecutive quarter of U.S.

gross margin expansion at the same time we introduced new bill of price.

For the total Company inventory was down over $1 billion and inventory turns were flat year-over-year.

And we did this while maintaining a high instock level.

While there are several economic factors affecting our results that we cannot control, we continue to focus on those areas that we can control.

Our portfolio strategy, an expanded use of our merchandising tools combined with excellent collaboration and execution across operations and supply chain helps provide market share gain.

Seven of our 13 departments experienced share gains during the quarter and we saw sequential share gain in our overall business each month of the quarter.

The continued focus on providing great value for our customers helped drive traffic into our stores.

Our merchants did an outstanding job heading into the spring selling season supplementing our great value with special buys which helped our supplies move product while creating excitement in our stores.

With the use of our forecasting and assortment tools we had great sell through on these products.

Additionally and most importantly this effort combined with great in-store execution on selling the project has resulted in good attachments on those special buys.

Boosting both sales and gross margin dollars.

The result of this can be seen in our comp transactions which were negative 2.6% in the first quarter compared to the fourth quarter of 2008 where comp transactions were a negative 5.8%.

We feel good about our execution as we head into the heart of the spring selling season.

We utilize our assortment management tools to refine our seasonal assortments and strengthen the value segments in the opening and middle price points.

We feel confident that we will aggressively drive value for our customers while maintaining a disciplined control over the business in this challenging environment.

And finally, I am pleased to announce that Bill Lennie has rejoined the team as Senior Vice President of International Merchandising and we couldn't be more happy to have him back.

And now I would like to turn the call over to Carol.

Thank you, Craig, and hello everyone.

In the first quarter sales were $16.2 billion, a 9.7% decrease from last year.

Comp store same store sales were negative 10.2% for the quarter with negative comps of 12.2% in February, negative 9.2% in March, and negative 9.7% in April.

Roughly 9% of our sales are from outside of the US.

Versus last year, we saw significant strengthening of the US dollar against all currency.

Fluctuating exchange rates negatively impacted our total Company comp by approximately 190 basis points.

This was offset by a 30 basis points benefit arising from comp sales growth outside of the US.

Comps for US stores were negative 8.6% for the quarter with negative US comps of 11% in February, negative 7.2% in March, and negative 8% in April.

Our financial results include the impact of several strategic actions in both the first quarter of 2008 and the first quarter of 2009.

We detailed the financial impact of those actions on an exhibit to our press release which sets forth reported and adjusted results for both quarters.

For the first quarter of 2009, our financial results were impacted by the closing of the Expo businesses.

Sales from liquidated inventory were $221 million.

Gross profit on those sales was $29 million and the operating expense of the stores including our closing cost was $146 million for a net reduction in operating profit of $117 million.

Earnings per share for the first quarter of fiscal 2009 were $0.30, up 43% from last year.

Excluding the Expo impact, adjusted earnings per share were $0.35 compared to last year's adjusted earnings per share of $0.41.

In the first quarter, our gross margin was 33.7%, a decrease of 22 basis points from last year.

Our US stores reported 29 basis points of margin expansion in the quarter driven by margin improvements in certain commodity classes, some shift in sales penetration and improved shrink performance.

Through our focused May portfolio approach our US merchants continue to introduce new lower prices while growing overall gross margin.

The US gross margin expansion was offset by two key factors.

First, and as expected, the margin rate on Expo merchandise was considerably lower than last year as we liquidated the Expo business.

Markdowns taken as part of our Expo closing negatively impacted gross margin by 24 basis points.

Second we realized 27 basis points of margin contraction arising from our non-US businesses principally Canada as we continue to work through inventory and other adjustments related to our score or SAP conversion.

On a reported basis, we leveraged expenses as a percent of sales by 220 basis points but the numbers are distorted because of the strategic charges in both quarters.

On an adjusted basis, operating expense as a percent of sales increased by 23 basis points to 27.1%.

For the year, we expect to deleverage expenses by about 13 basis points for every point of negative comp, based on this, you would have expected us to deleverage expenses by about 133 basis points in the quarter.

We were 110 basis points better than that due to a couple of reasons.

First, we were $80 million under our expense plan in the quarter.

And that explains about 40 basis points of the difference.

Some of this was timing such as advertising and some of this was just better expense control such as utility.

As anticipated, the remaining 70 basis points is explained by our private label credit card.

The year-over-year expense reduction due to our contract renegotiation will be more pronounced in the first half of the year than it will be in the back half of the year.

We still believe that our general rule of thumb of approximately 13 basis points of expense deleverage for every point of negative comp holds true for the year.

Now moving to our operational metrics, during the quarter we opened five new stores and closed 41 Expo businesses for an ending store count of 2,238.

At the end of the first quarter, selling square footage was $235 million.

Reflecting the sales environment, total sales per square foot for the first quarter were $273, down roughly 10.5%.

Now turning to the balance sheet, inventory remains a good news story.

As you heard from Craig, at the end of the quarter retail inventory was $11.4 billion, down 9.6% from last year.

On a per store basis inventory was down 8.8% to last year.

Inventory turns were 3.9 times flat to last year.

We ended the quarter with $43.8 billion in assets including $2.2 billion in cash and short-term investments.

This is an increase of approximately $1.7 billion in cash and short-term investments from the end of fiscal 2008 reflecting cash generated by the business of approximately $2.3 billion offset by $172 million of capital expenditures and $381 million of dividends paid.

As a reminder, we have a $3.25 billion A2P2 commercial paper program that is 100% back stopped by a committed long term bank line of credit.

As of the end of the first quarter, we had no outstanding commercial paper.

We have approximately $11.4 billion of outstanding debt of which $1.8 billion comes due in the latter part of 2009.

At this point, it is our intent to repay the debt maturities as they come due using cash generated by the business.

Computed on the average of beginning and ending long-term debt and equity for the trailing four quarters adjusted return on invested capital was approximately 11%.

We are controlling what we can control.

Our results in the first quarter were better than our plan.

As Frank mentioned the external signals are mixed.

We are comfortable with the guidance we gave at the beginning of the year.

We are calling for fiscal 2009 sales down at 9% with negative comps in the high single digit area.

Earnings per share from continuing operations down 7% and adjusted earnings per share from continuing operations down 26%.

We continue to expect the first half to be softer than the back half of the year.

We are holding our investor conference on June 10, and look forward to covering our business in more detail with you at that time.

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

(Operator Instructions) Our first question will come from Scott Ciccarelli with RBC Capital Markets.

Can you talk a little bit about some of the issues you ran into with the Canada in terms of the systems you mentioned and what that may mean for the US system conversions and process conversions?

Sure, Scott.

And also Matt Carey is here and he'll address that as well.

I'd say there are a couple of important learnings for us in the effort.

The first is when you think about it, I mean we really started this back in 2007 in the second half of 2007, and for now almost two years, that's what our Canadian team has been focused on.

They've been focused on getting this basic system in place.

At the same time on the US side, Craig and his team with the IT team has been adding merchandising tools over that period of time.

So when you look at the relative degree of control and sophistication on the tools, what you actually see is all that effort focused on the foundational work, you kind of lose some ground.

And then second as I've said, these are big efforts, and they dominate the mind share within the business.

And again it's something to be expected and a good learning for us that the business tends to focus on that implementation rather than some of the other issues coming at it.

Again we think we can work through it, but it's cautionary as we think about the prospects of doing something like that more broadly in the Company and certainly in the US.

Matt, do you want to make some comments?

I'd say two things Frank.

One is, as you mentioned, when you change the tools set out from underneath the business like we did with SAP, you got a significant change in management process you have to go through and a lot of folks to train.

That's really one of the challenges that we are having right now.

The second is when you implement a system in this large at this scale, you always have tuning and stability issues that you have to deal with, and that is really what we are dealing with right now.

And then the third thing I'd say is that we are going to continue to monitor the results of the SAP implementation in Canada but at the same time we are going to continue to enhance our tool set in the US such that we can get benefits immediately for our business.

Okay.

Thanks a lot guys.

Thanks, Scott.

We'll move on to Michael Lasser with Barclays Capital.

The spread between your US comp and Lowe's comp widened a bit in the first quarter compared to where it was in the fourth quarter last year and that is despite an improvement in some of your customer satisfaction scores.

So given that late last year that you had some positive PR from pricing changes you made and some advertising expenses from this quarter were pushed out, do you think that your share of voice, your marketing message needs to be stronger in order to communicate to consumers that they should come back into the stores, or what's the philosophy there?

Michael, a couple of comments on that.

First, it's a fair comment on the advertising weight and the share of voice.

We did some reprofiling in the quarter, and pushed it out later, and maybe that's some of the reflection in terms of our February results.

So that's a possibility.

Again the other thing I'd comment on is we look at our business in its entirety.

We have lots of different competitors.

We've gained share overall in our market, and as I've said gained share in a number of our departments as Craig referenced, and I think while our target is always to beat every competitor the other thing I'd point out is sequentially quarter-over-quarter is a better performance for us.

absolutely.

One quick follow-up question to the comment you made Frank, about seeing some experience in the western states, particularly California slip a little bit and the thought that it's tied to foreclosures, are you seeing anything specifically that would lead you to believe that the moratorium on foreclosures late last year led to some better results there?

It would almost suggest that as long as people are staying in their house and not fearful of losing it that they are spending a little bit on the property?

Yes.

I don't know on the moratorium.

What I can say and it was the reason for the cautionary flag in the comments was California is an important market to us.

It's a hugely important market within the country, and what we saw -- when we had this call in the fourth quarter, we were kind of saying, hey, we think California is on an improving trend.

That reversed for us in the first quarter of '09, and one of the things we see and it's not unique to California, it's in other states, is where you see this accelerating rate of foreclosures, you see pressure on comp performance.

And if you look at California for a while it was getting better.

If you were working through the problem, and now it has regressed, and as I say we just take that as a cautionary note.

Very helpful.

Thank you very much.

We'll now move on to Dan Binder with Jefferies.

Two part question.

The first is if you can quantify the April/March shift impact on the comps and then the second part of the question as it pertains to the type of expense leverage that we could expect on credit in Q2 and how much of the expense is shifted out of Q1 into Q2?

Right, Dan.

Well, let me give you the Easter answer first.

Looking at US comps, our reported comp was a negative 7.2 in March and negative 8 in April, adjusting for Easter we were negative 8.7 and in March negative 7% in April.

Then to answer your question about the benefit from our private label credit card, I think we told you before we expect the year-over-year expense reduction to be about $250 million.

We realized about $120 million of that in the first quarter.

So hopefully that helps with your model.

And I can pick out a few of the expense deleverage we experienced last year by quarter, so you can see that it gets progressively easier.

We delevered expenses in the first quarter last year by 96 basis points because of credit in the second quarter, 73 basis points, in the third quarter, 70 basis points and then in the fourth quarter, 28 basis points.

Okay.

Thanks.

Thank you.

We'll hear from Chris Horvers with JPMorgan.

Good morning.

A follow-up on the expense question, first, on the $250 million and the $120 million realized, that wasn't the advertising portion that you referred to.

I was curious how much of that is swinging -- how much swing in Q1 and is it showing up in Q2 and maybe, Carol, if you can help us on the math, with the 13 basis point rule of thumb, you saw that 2 basis points per point in the first quarter, you have the 70 basis points in the second and third quarter on the credit side.

Would this suggest that by the time you get to the fourth quarter you would be deleveraging at more than 30 basis points per negative point of comp to arrive at 13 basis points for the year?

Let me answer your first question first, if I may.

The private label card benefit, $250 million for the year, $120 million for the first -- or recognized in the first quarter that is the private label credit card.

We were $80 million under our expense plan.

Some of that was timing.

Some of that was just better expense control, candidly.

I call that advertising as a timely manner.

We will spend that.

We were $10 million under our advertising plan in the first quarter.

We will spend that in the second quarter.

So hopefully that is helpful to you.

Then as you look to the second part to your question about how the quarter progressed, our rule of thumb of 13 basis points is for the year.

It gets increasingly worse as the quarters go on.

So, yes, in the fourth quarter we will have more expense deleverage than the rule of thumb.

But for the year, we think the rule of thumb holds true.

Okay.

And then one follow-up then.

So if there was about 40 basis, $80 million under advertising and utility, so what portion of that is utilities and how much of that do you think is sustainable?

I called out just two of the unders.

We had a lot of unders.

Utilities, to give you the exact dollar amount was $15 million under plan.

A lot of that was usage, actually.

We got smarter about how we ran utilities instead of our stores.

So that is probably a permanent reduction.

Okay.

That's very helpful.

You're welcome.

We'll move on to Budd Bugatch with Raymond James.

I was -- it was hard to hear about the improvement in the logistics in the RDC and the mechanized RDC.

Can you talk about the timetable for rollout now?

You have got 600 stores operating.

What is the timetable?

Is there any change in that?

No.

There's no change in the timetable.

We are going to continue if rollout and expect to have it basically done by the end of next year.

Mark is here, our head of supply chain.

Mark, if you want to give us more color around that.

Sure.

We are pleased with the performance of the overall supply chain and that includes our RDCs as many of them go through their first spring peak.

The network is performing well.

We feel good about our instock.

Our inventory turns, our logistics cost and most importantly the RDCs are serving the stores with timeliness, quality and accuracy of shipment.

In terms of the mechanization, while we are pleased with our performance in the nonmechanized facilities, the mechanization is really just the next natural progression.

As we are in our accelerated supply chain evolution here and what we have implemented in Valdosta's industry standard technology, we've got some higher speed conveyor there, some automated scanning and some automated labeling technology.

The intent of this is to improve the accuracy and productivity even further based on what we've seen, we are pleased with the initial results.

So we'll open a couple more nonmechanized facilities while we learn about mechanization a bit before before we open the next mechanized facility.

But it is in our plan and it is just the natural step of our supply chain evolution.

Just one quick follow-up.

The net promoter score growth was also pretty heartening.

Is there any color you can add to that Frank in terms of originality or measurement stats that you are using ad your percentage that you are measuring?

I guess the additional background I'd give on that is we are very heartened by that and that is one number that we think -- it's always hard on these customer survey data to exactly pin down your improvement, but that's a pretty good metric for improvement.

I think it just has a lot to do with what Marvin and the store operations team are doing in terms of simplifying our focus and really focusing on the customer.

And Marvin is here, you might -- Marvin, why don't you comment on that because I do think this customer first training that I referenced that we trained the entire Company on is a very important, and we did that in the first quarter, it's a very important thing for us.

Budd, this is Marvin.

We did a couple of things, to Frank's point.

We took an aggressive step to train every associate in the Company including Mexico, China and these store support areas on customer service expectations by position.

In the past we've made a general statement about the importance of service.

This time we took it one step further with the learning team under HR and the operations team partnering together and by position we outlined specific priorities for each associate to serve customers.

So the net promoter score increased as a direct result of better engagement.

Another data point I'd give you is, as you know, we get over a hundred thousand voice of customer data points each and every week.

So we have a good data set and as a result of that every division around the country even some of these very, very densely populated urban metro areas, we are seeing engagement ratings over nine in these locations which we've never seen that before.

We are going to continue to execute well.

We are going to continue to staff around traffic levels and we are pleased with our progress thus far.

So we are going to keep moving forward and keep enhancing what we are doing.

Thank you Marvin, that is heartening.

We'll hear from David Strasser with Janney Montgomery.

First question, when you talked about the trends of the $900 and the trends of the $50, has that something that's changed a lot recently or has that been the case as we've seen this negative comp trend for the last 11 quarters or so?

David, this is Craig.

When you look at the transactions below $50, that actually has been an improving trend over the past few quarters.

When you look at transactions in big ticket greater than $900, it's not improving.

As a matter of fact, it was slightly worse than it was in the fourth quarter.

Is that the way you are kind of modeling going forward, the continued trend that you just said?

Right now, that's how we are viewing it as a continued pressure is on big ticket and discretionary spend.

And one kind of quasi, not really follow up, but when you were doing all the sharing assets and so on with Expo and Yardbirds and all, where does China come into that thought process?

Is that something you remain committed to or is that something you still kind of feel like you can continue to focus even more on the core?

I think as you look at China, first, it is our core business.

These are stores that we just had a net return -- President of Asia over there with Bill Lennie, who as Craig said is here now as our International SVP Merchandising, and these look like Home Depot stores.

So it is in our core business.

I would also say we've had these stores for two years.

We are still working on finding the right model that is a profitable model that we can then roll out across the country.

We are not there for the sake of having 12 stores.

We are there because we think there's a model to find and then roll out.

And that's really our focus.

It's a little bit different from some of the other businesses.

Thank you very much.

I appreciate it.

Thank you.

We'll move on to Stephen Chick with Friedman Billings Ramsey.

Thanks.

I guess two questions and the first one is kind of maybe two parts, but relative to sales, Carol or Frank can you just confirm that the $221 million in liquidation Expo sales is actually excluded from the comp?

And then secondly related to sales, as we look into the second quarter, I was wondering if you could speak to recycle?

I think some tax rebate stimulus of a year ago, I know you're not doing quarterly guidance but should we think about the comp steadily and sequentially showing improvements from what you reported in the first quarter?

And then I have a follow-up question on your California comments, Frank.

Okay.

Yes, I will confirm that the $221 million is excluded from the comp and as we look at the second quarter, yes, we do expect improvement and I will tell you that May is trending better than April.

Okay.

And is that trending better than April on Easter adjusted basis I guess?

So in the US I think you had said, remind me what you said about April.

April is down 7?

On the Easter adjusted basis that is correct and our trend is in line with our Easter adjustment and better than reported.

That helps.

And then second if I could, Frank, your comments about California reversing trend or course there, by my calculation I think California, the sales were down I think in the fourth quarter something like 9%, and you had indicated in some of your comments back then that you were seeing stabilization.

They had comped better than the Company average back then.

Are they in line with the Company average is my first question and then secondly, with foreclosures, can you talk about the, I guess dilemma of that being bad for the comp maybe the economy and housing, but I don't want to say good but stimulating if you will, with the renovation and the pent up activity that I would otherwise think might flow through a home improvement retailer if that makes any sense.

Yes.

The first, the first part of your question, right, California for the first quarter was worse than the Company average.

And so as I've said, there was a reversal.

We saw it from an improving trend to a worsening trend and now it is worse than the Company average.

In terms of how -- I'll just give you the way we are thinking on the foreclosure side.

The data that tracks foreclosures and whether they are accelerating or decelerating, when a house is actually sold out of foreclosures, it gets out of that data set.

So on a positive side for our business is obviously you see an uptick in transactions in some of these areas as houses get sold out of foreclosures, but you got sort of a overwhelming negative as more houses get put in is basically what the data is saying.

So you got a little bit of an uptick because you have got some turn over increase and then a little bit of a down -- and then you have some significant pressure as the acceleration of foreclosures goes.

If I can just jump in there are 13 states in our country that have high density of foreclosures, seven of which we see the foreclosure rates accelerating.

And in those seven states our comp sales are worse.

Okay.

So I guess if we can, it's obviously a goal--?

So, Steve, we have got to share the time with some other analysts.

Okay then.

We can follow-up later.

Thank you.

We'll now move on to Deborah Weinswig with Citi.

Good morning.

With regards to the merchandising tools, can you please provide us with a sense in terms of the adoption rate by the buyers and also how should we think about gross margin benefits thus far and what additional opportunities are there in the future?

On the tools, I would say that the adoption rate is very good by the merchants.

Our merchandising operations team and IT team actually have been working hand in hand with the merchants to develop these tools based on what they need.

And so it's almost a pull versus a push environment, and we see that these tools are a piece of what is helping us drive the productivity at the same time that we are becoming more competitive in market, lowering prices, and it will be a key component of us continuing to deliver the margin as we've projected for the year being slightly up year-over-year.

Thanks.

And then last question.

Frank, (inaudible) can you please provide some color to the changes in your advertising and marketing campaign since you've joined?

And are you doing anything differently in terms of reaching out to your credit card customers?

Well, first on the marketing side, a couple of changes I'd say.

Organizationally, just highlight one thing we have now marketing reporting into merchandising so Frank reports to Craig which is, I think improved significantly the coordination on our marketing side with our merchandising team, and that is both due to organizational change but also just the way Frank Bifulco works.

And the second thing is you've seen the change in our tag line, and I hope the spirit of the Company I think is going to be better reflected and the culture of the Company is going to be better reflected in our marketing and advertising efforts going forward.

Craig I don't know if you want to comment on that as well.

Part of our job as a merchandising team is to be the advocates for the customer and we are really focused on driving value, and Frank and his team and marketing are really focused on doing a better job of communicating the value proposition of Home Depot and that is a big change.

And just lastly in terms of doing anything different with your credit card customers?

We enjoy a robust CRM as a result of our credit card population, and we do do targeted mailings to them to invite them back into the stores.

Interestingly, we are seeing a shift in our private label credit card sales.

We are down about 300 basis points from a penetration perspective year-on-year.

I guess that's not surprising.

I think most retailers are seeing a shift in credit.

But if you look at cash, check, debit card, anything that is cash equivalent as a penetration of sales it's increased from 36% last year to 39% this year, and the year-over-year change is all in our private label credit card.

Thanks so much.

I appreciate the color.

We'll now move on to Wayne Hood with BMO Capital.

Do you expect the 27 basis points of gross margin erosion caused by the nonUS business to improve or worsen as the year progresses and I guess what degree of predictability do you have in that nonUS rate given the implementation of SAP?

And then I had a longer term follow-up question for Frank and Craig.

Yes, Wayne, we saw marked improvement in Canada in the month of April and the good news about the SAP implementation is we get to see margin every day.

So now we're into May and we see continued improvement.

So the year-over-year noise that we've been experiencing both in the first quarter of this year and the fourth quarter of last year, that's going to abate and the guidance that we've given for gross margin for the total Company of flat to slightly positive for the year holds true.

Okay.

Great.

And then Frank or Craig or both of you, I guess as I look back at the industry over the last ten years, we put on a lot square footage, bigger stores, more vignettes, to kind of go after the bigger ticket business as it kind of grew.

I was just wondering if you've given any thoughts to maybe secular changes that are afoot here with respect to big ticket purchases and any recovery we have maybe longer or more prolonged and if it is longer or more prolonged, are we sitting there with a store base that's so big that needs to be recalibrated for slower rates of growth and big ticket to improve returns over the long term?

And if so, how do you recalibrate it?

Well, certainly, Wayne, we've recalibrated to the extent of saying new store growth is not our principal activity, and our principal use of capital.

So that comment -- your comment is reflected at the broadest strategic level in the Company in terms of how we are allocating capital.

Within the store, you see some shifts in terms of how we allocate days, but that's more incremental and evolutionary.

Is that helpful?

I think we all understood the new store, but I'm just thinking the existing square footage that is still out there with expanded vignettes, that if that business doesn't come back beyond the payroll, how do you reallocate that square footage to make it proper productive to get returns moving again in the right direction.

I don't think on that side and I'd like Craig comment as well that we see a need to dramatically remodel our stores in any way.

We feel pretty comfortable with the space that we've allocated to each part of our business.

There will be as you suggest and we've actually done that on the store operations team under Marvin's leadership, there is adjustment on labor hours in the store as an example.

So you shift some hours away from some of the specialty higher ticket activity to some of the more everyday repair activity.

So at least right now for us it has much more of a labor impact than how we apply our associates than it does on any big changes in store structure.

Great.

Thanks Frank.

We'll now move on to Colin McGranahan with Bernstein.

Good morning.

I would like to focus on gross margin.

First in the US the 29 basis points is pretty good performance there.

Can you break that down Carol, just in terms of the benefit from the things that you mentioned shrink, mix and commodity benefit and then also just comment more broadly on any positive or negative around the promotion environment on mark downs?

That is part one focusing on the US margin.

And then part two on the gross margin question, I still don't, in all fairness, still don't really have any understanding of what exactly happened that caused the gross margin pressure in Canada?

Did the system buy too much inventory and you had markdowns?

Was there out of stocks?

What exactly went wrong there that caused the gross margin pressure in Canada?

Right.

The first part of your question, in the US, up 29 basis points.

Shrink added 9 basis points, or contributed 9 basis points of that 29 basis points.

The remainder was really primarily due to a shift in mix.

We had a lower penetration of lumber.

Lumber is one of our lowest margin categories.

We had a lower penetration of appliances.

Appliances one of our lower margin categories, that helped.

We had a higher penetration of paint.

Paint one of our higher margin categories, so that helped.

So most of that 20 basis points was due to a mix in penetration.

On Canada, Colin, what I would say again put this in two comments.

First comment take an overall comment that you have got a team that is very focused on implementing a very big process change with all the cultural change that Matt described.

That's on the one bucket.

On the other bucket you have got an economy that is starting to reflect the same pain as in the US and on top of that a currency issue where the Canadian currency is devaluing.

So that is the big backdrop.

Underneath that you then look at okay, what is your cost and price change process, what are your forecasting tools, what's the visibility that you have through the system into those, and what you get is maybe in part a reaction time that is slower than it might have otherwise been and in part reaction that is not fully addressing the issue that you've got.

So I'd say it's a combination of your focus gets taken off a little bit, and then the tools are unfamiliar tools and you're not exactly sure how to work through with these new tools to get the desired result.

As Carol said, look, we feel a lot better on where that's going.

I think we all acknowledge these are big activities to take on.

This isn't a wheels off issue.

It was a -- a couple of things didn't go just as perfectly as we'd like to see them go.

Is that helpful?

Yes.

I'll follow-up afterwards.

Okay.

We'll now move on to Matthew Fassler with Goldman Sachs.

Thanks a lot.

Good morning and a couple of follow-ups.

First of all, can you talk about how the big ticket trend versus the small ticket trend if you will relates to the strength in any given market?

In other words, in those markets which are recovering or are stronger for you in absolute terms, are you seeing big ticket act better in relation to the broader mix than you are in markets that are weaker?

Matt, this is Craig.

If you look at areas of the country where housing overall has been more stable from the very beginning, less speculative if you will, big ticket has done slightly better in those markets.

If you look at areas like California where it has been difficult, the big ticket construction and discretionary categories are still running significant double digit negatives.

And have those turned the corner at all?

I guess, there could be two kinds of sales improvement, there could be sort of traffic driven whether it's driven by seasonal outdoor or a revival of smaller ticket, less project oriented purchases or there could be what would probably be a slower but more significant turn which would be the big ticket business getting less bad as well.

Are you seeing that happening?

At this point in time the big ticket, for example, in the West Coast we are not seeing a significant change in terms of improvement.

As a matter of fact it actually got a little more difficult from the fourth quarter as Frank had mentioned earlier.

Got it.

And then just a follow-up question on appliances.

You haven't addressed it that explicitly but it came up in the answer to a couple of questions ago that somewhat lower plants mix I believe you said contributed to the gross margin improvement.

I also know that that had been a football category in the fourth quarter.

Promotionally just any update on what you are seeing there and also, related to that whether you see any strategic vendor opportunities during this downturn in that space?

In appliances have remained relatively promotional.

It's a product category that historically has driven up promotion.

And we see that -- we see that continue for sure.

As far as supplier, we don't see anything significant.

Great.

Okay.

Thank you so much.

We have time for one more question.

We'll take our last question from Laura Champine with Cowen.

Good morning.

I was hoping you could drill down a little more into share gains of the I think you mentioned 7 out of 13 categories.

What generally is driving share gains and what is your outlook for that going forward?

From a share standpoint, overall the things that are driving are line structure improvement, so overall assortment improvement, utilizing our merchandising tools to get below market level and assorting more at a store level.

We have used our portfolio strategy to focus in key areas in driving the right value proposition for our customer as well and quite frankly, these are things that we continue to focus on as we continue to learn and educate our merchants on the use of the tools.

And we expect that to continue in terms of the improvement in share.

Thank you.

I would like to thank everyone for joining us today, and we look forward to talking to you next quarter.

Thank you.

Ladies and gentlemen, that does conclude today's conference call.

We thank you for your participation.