家得寶 (HD) 2009 Q2 法說會逐字稿

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  • Operator

  • Good day, everyone, and welcome to today's Home Depot second-quarter earnings conference call.

  • Today's call is being recorded.

  • (Operator Instructions).

  • Beginning today's discussion is Ms.

  • Diane Dayhoff, Vice President of Investor Relations.

  • Please go ahead, ma'am.

  • Diane Dayhoff - VP, IR

  • Thank you, Augusta, and good morning to everyone.

  • Welcome to the Home Depot second-quarter earnings conference call.

  • Joining us on our call today are Frank Blake, Chairman and CEO of the Home Depot; Craig Menear, Executive Vice President, Merchandising, and Carol Tome, Chief Financial Officer and Executive Vice President, Corporate Services.

  • Following our prepared remarks, the call will be open for analysts' questions.

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

  • This conference call is being broadcast real-time on the Internet at homedepot.com 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 to, those factors identified in the release and in our filings with the Securities and Exchange Commission.

  • Today's presentations also include certain non-GAAP measurements.

  • Reconciliation of these measurements is provided in the financial statements included with our earnings release.

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

  • Frank Blake - Chairman & CEO

  • Thank you, Diane, and good morning, everyone.

  • Sales for the second quarter were $19.1 billion, down 9.1% from last year.

  • Comp sales were negative 8.5%, and excluding the charges related to the EXPO business closings, diluted earnings per share were $0.67.

  • Despite the negative sales environment and difficult market conditions, there were some significant positives for us in the quarter.

  • As Craig will detail, we had positive comp transactions in the US for the first time in more than five years.

  • We also had the largest gain in total marketshare that we have seen in five years, and we saw improved comp rates in some of our most important and most hard-hit markets like Florida and California.

  • Craig and his team drove terrific values in innovation in core DIY projects, and we achieved positive comps in paint and had a strong selling season in outside garden.

  • We continue to make improvements in the underlying business.

  • Since our last earnings call, we have opened two new RDCs, one in Houston and one in Cincinnati.

  • As of today, we have eight RDCs serving approximately 800 stores or more than 40% of our US store base.

  • Mark Holifield and his team by the end of this quarter will basically be opening an RDC every month.

  • This is an impressive maybe unprecedented pace for a large-scale supply chain effort.

  • Marvin Ellison and the store operations team have brought more focus and better execution on customer service, and we see that through our net promoter scores, which take the percent of our customers who rate their experience with us as a 9 or a 10 and subtract from that percent of customers who rate their experience as a 6 or worse.

  • Our net promoter score has improved approximately 1000 basis points year over year and is now at 62.7%.

  • It is particularly significant for us that our scores went up in the second quarter versus the first quarter since frequently there can be a deterioration of performance as foot traffic increases.

  • On the international front, our business in Mexico produced another solid quarter with positive single-digit comps in the face of a contracting economy.

  • We had negative comps in both Canada and China, but I should point out that the SAP implementation issues that impacted our Canadian business over the last several months have been largely resolved.

  • The Canadian team is now focused on the business, not on system implementation.

  • We had good expense control across the board and managed inventory levels effectively by achieving flat inventory turns year over year.

  • All-in-all relative to our plan, we had a solid second quarter.

  • As Carol will detail, based on our first-half performance, we are lifting our earnings-per-share guidance for the year.

  • But the larger question for us is when will we start to see a broader market turnaround.

  • We are now in the fourth year of a major correction in the housing and housing-related markets.

  • Private, fixed residential investment as a percent of GDP is at 2.4%, the lowest it has been in over 60 years and down 30 basis points from the first quarter, which previously set a record low.

  • To understand the current trends across the country, we can look at the comp performance of our top 40 markets in the second quarter versus their comp performance in the first quarter.

  • There is some encouraging news here since nearly 75% of the markets performed better in the second quarter than the first, and as indicated, we have seen some significant improvement in California and Florida.

  • In California double-digit negative comps turned to single-digit negative, and in Florida, while we still have some double-digit negative comp markets, the percentage comp decline is about half what it was in the second quarter last year.

  • But caution is still appropriate.

  • We have some short-term sales headwinds in the back half of the year as we anniversary hurricane activity from last year and commodity inflation in fuel-related categories.

  • More importantly, while the performance across most of our regions is better, we are still not seeing positive comps in any areas other than the areas impacted by hurricanes last year.

  • And while there was improvement in hard-hit markets like California and Florida, we remain concerned by the high level of foreclosure activity, which we believe continues to put pressure on the housing markets in those areas as reflected in lower sales of basic building material products.

  • With the Dunn Humvee tools, we are also getting a clearer look at customer behavior across different segments of our shoppers.

  • Again, there is a mixed picture.

  • Some clear strength on the Consumer side as basic DIY activity picks up, but these tools also allow us to see some areas of stress with greater clarity.

  • For example, we have traditionally said that pro-sales represent approximately 30% of our business.

  • That turns out to be accurate as a statement of the past.

  • What has happened in the downturn is that our Pro business has declined more rapidly than our Consumer business.

  • As an indication of that, Pro sales are now down to about 27% of our overall business versus approximately 32% at this time last year.

  • A key element to returning to positive comps for us will be the recovery of this important segment.

  • Whatever the timing of a return to positive comps, our associates are doing an excellent job of laying the foundation for the future success of the business.

  • We intend to reflect the heritage of this Company by setting the standard for customer service and product authority in our market.

  • It is a source of great pride for the Company that even in these tough times we will have record success sharing in the first half with 96% of our stores participating.

  • Now let me turn the call over to Craig.

  • Craig Menear - EVP, Merchandising

  • Thanks, Frank, and good morning, everyone.

  • As expected, our second-quarter comp showed an improvement over the first quarter, and we posted a positive comp in paint.

  • The department set outperformed the Company's average comp for paint, seasonal, building materials, flooring and plumbing.

  • Millwork, hardware, kitchens, lumber and electrical underperformed the Company's average comp for the quarter.

  • We were very pleased with the progress we made in driving customers to our store during the quarter.

  • Our total customer transactions were positive for the first time in two years at positive 0.3%, and comp transactions were flat year-over-year.

  • In the US our comp transactions were up 0.4%, and this is the first time since the second quarter of 2003 that we have not had a comp transaction decline in the US.

  • This increase was driven by innovative new product, enhanced customer service, and our continued commitment to drive value for our customers.

  • We saw a marked improvement across several departments with lumber and building materials showing a material improvement in transactions, along with paint and seasonal businesses which experienced positive growth in transactions.

  • For average tickets of $50 and below, roughly 20% of our business in the US, transactions were up 3% year over year.

  • This is the second consecutive quarter of positive transactions for tickets under $50.

  • The primary drivers of this were the continued strength of basic repair and maintenance categories, paint and our seasonal garden business.

  • However, despite a slight improvement from the first quarter, average tickets of $900 and above, which also represent approximately 20% of US sales, transactions remain double-digit negative.

  • Here the weakness continues in high dollar discretionary spend categories.

  • Our overall seasonal business results were mixed in the quarter.

  • The usual summer heat never came in parts of the US with June temperatures averaging their lowest in five years and July the coolest in 18.

  • As a result, products like air conditioners and fans underperformed compared to last year and negatively impacted US comps by approximately .5 point.

  • On the positive side, we were very pleased with our performance in Lawn and Garden.

  • During the second quarter, we saw positive comp growth across several product categories like live goods, fertilizers, chemicals, seed and landscape products.

  • In Outdoor Power Equipment, sales significantly outperformed the Company average, and we grew share on the strength of our exclusive product offerings with Toro, Honda, Cub Cadet, Ryobi and Homelite.

  • Paint is another area contributing to our positive transactions in the quarter.

  • Guided by our portfolio of strategy, the major investments we have made in our paint department are clearly paying off.

  • With the help of Matt Carey and his IT team, we completed the rollout of new paint tinting equipment across all of our US stores, making the process more efficient for our associates and driving inventory efficiency by simplifying the tint basis required.

  • We also launched innovative product.

  • There's Premium Plus Ultra, a paint and primer all-in-one; Rust-Oleum Ultra 2X product, which delivers twice the paint in the can for about half the cost of competitive products; relaunched Glidden; and reset our applicator program, simplifying the offering for our customers.

  • As a result of these actions, the department showed a positive comp as we improved the total project sales and gained market share.

  • The downward pressure on ticket continues in construction categories and big-ticket discretionary spend.

  • In total, our average comp ticket for the second quarter was down 8.5%.

  • In the US our average comp ticket declined by $4.11 or 7.3%.

  • Key contributors to the decline in average ticket were commodity categories such as lumber, building materials and electrical.

  • Framing lumber and structural panel remains down about double-digit from a year ago.

  • Similarly, copper prices are still running on average about 40% lower than the same time last year.

  • These impacts were partially offset by inflation in roofing.

  • Finally, in the second quarter, big-ticket discretionary projects like Kitchens and Millwork contributed over $1.00 reduction of the year-over-year average ticket decline.

  • Overall we are continuing to make progress through the implementation of our portfolio strategy and the use of our new tools.

  • We are committed to deliver value to our customers while managing the business in a tough environment.

  • The team delivered a solid performance in inventory and gross margin dollar productivity as you will hear from Carol.

  • These efforts resulted in the Company achieving total share gain during the quarter, despite having closed our EXPO business and significantly slowed new store growth.

  • Six of our 13 departments grew share in the second quarter compared to last year, and additionally several key classes saw unit share gains such as carpet, hand tools, hardware, toilets, molding and cleaning to name a few.

  • As we exit the busy spring selling season, we remain focused on providing value to our customers every day.

  • Our organization and storage business is off to a great start.

  • We have invested in a new merchandising set that provides an expanding offering of energy-efficient CFLs and LED bulbs.

  • We are providing online tools to educate customers on the importance of weatherization and simple projects like caulking.

  • We are helping customers take advantage of the government-sponsored tax credits on weatherization products like storm doors.

  • And we are well positioned to offer energy and money saving products along with fall project know-how.

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

  • Carol Tome - CFO & EVP, Corporate Services

  • Thank you, Craig, and hello, everyone.

  • In the second quarter, sales were $19.1 billion, a 9.1% decrease from last year, reflecting negative comp or same-store sales of 8.5%, plus the net impact of fewer stores due to the closing of our EXPO businesses.

  • While total Company comps were negative 8.5%, we experienced great variability during the quarter, principally due to weather with negative comps of 6.8% in May, negative 10.7% in June and negative 8.1% in July.

  • 1.6% of our comp decline is attributable to our international businesses, principally due to a weak sales environment in Canada and a considerably stronger US dollar.

  • Comps for US stores were negative 6.9% for the quarter with negative comps of 4.7% in May, negative 9.8% in June and negative 6.5% in July.

  • Earnings per share for the second quarter were $0.66, down 7% from last year.

  • During the quarter we had $20 million of expenses related to the closing of our EXPO businesses.

  • Excluding the EXPO-related expenses, adjusted earnings per share were $0.67.

  • Our gross margin was 33.5% in the second quarter, an increase of 32 basis points from last year.

  • Our US stores reported 38 basis points of margin expansion in the quarter, driven principally by two factors.

  • First, we had lower markdowns than last year as we anniversaried clearance markdowns that we did not need to repeat this year, and second, favorable shrink performance.

  • Through our focused [safe] portfolio approach, our US merchants continue to introduce new lower prices while growing overall gross margins.

  • The US gross margin expansion was offset by 6 basis points of margin contraction arising from our non-US businesses due to certain higher costs.

  • Now you may recall that in the first quarter our Canadian business experienced significant margin contraction as it worked through inventory and other adjustments related to our score or SAP conversion.

  • I'm pleased to report that our Canadian team worked diligently to resolve these issues, and our Canadian gross margin rate is back on track.

  • Operating expenses increased by 43 basis points to 23.9% for the quarter.

  • As a percent of sales, our expense deleverage reflects the impact of negative comp sales.

  • We experienced another solid quarter of expense control with expenses coming in roughly $20 million under our plan.

  • We are seeing some benefits from some fundamental changes we have implemented to improve spending efficiency in our business.

  • For example, earlier this year we introduced an automated checkbook in our stores.

  • This is a great tool that allows our store managers to manage their expenses on a real-time basis.

  • Managers can see how their expenses are trending relative to their plans and make on the spot adjustments.

  • Essentially this tool gives our associates the power to control what they can control in order to run a better business.

  • As a general rule of thumb, we expect to deleverage expenses by about 10 basis points for every point of negative comp.

  • Year-to-date we are running much better than that due to our strong expense control and the impact of a lower-cost of private label credit.

  • As we previously discussed, the year-over-year benefit arising from our private label credit renegotiation will be more pronounced in the first half of the year than the second half.

  • Additionally the weighting of our sales distribution is higher in the first half than the back half.

  • About 68% of our expenses are fixed.

  • So we would expect more expense deleverage in the back half than the first half of the year.

  • For the year we believe that our general rule of thumb of approximately 10 basis points of expense deleverage for every point of negative comp holds true.

  • Our operating margin was 9.6% in the second quarter, down 12 basis points from last year.

  • In the second quarter, our income tax provision rate was 33.3%, down from 36.2% last year, due primarily to a favorable foreign tax settlement.

  • This settlement reduced our tax expense by approximately $50 million for the quarter and provided approximately $0.03 per of earnings-per-share benefit.

  • As a result of the settlement, we now expect our effective tax rate to be approximately 35% for the year.

  • Now moving to our operational metrics, during the second quarter, we opened three new stores and closed one store in China for an ending store count of 2240.

  • At the end of the second quarter, selling square footage was 235 million, down 8/10 of 1% from last year.

  • Reflecting the sales environment, total sales per square foot for the second quarter were $322, down roughly 8%.

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

  • At the end of the quarter, inventory was $10.8 billion, down approximately $1.1 billion or 9% from last year.

  • On a per store basis, inventory was down 8.3%.

  • Inventory turns were 4.3 times, flat to last year.

  • We ended the quarter with $44 billion in assets, including $3.1 billion in cash and short-term investments.

  • This is an increase of approximately $2.6 billion in cash and short-term investments from the end of fiscal 2008, reflecting cash generated by the business of approximately $3.7 billion offset by $353 million of capital expenditures and $762 million of dividends paid.

  • As a reminder, we have a $3.25 billion, A2/P2 commercial paper program that is 100% backstopped by a committed long-term bank line of credit.

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

  • We have approximately $11.4 billion of outstanding debt, of which $1 billion comes due in the third quarter and $750 million comes due in the fourth quarter 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, return on invested capital was approximately 9.3%.

  • On an adjusted basis, excluding charges related to our 2008 store rationalization actions and the closing of our EXPO businesses, return on invested capital was 10.3%.

  • We continue to control what we can control.

  • We are focused on executing our strategic imperatives, and our financial results reflect the success we have had thus far.

  • Our results for the first half of the year were better than our plan, but, as Frank mentioned, the external signals call for caution.

  • We are comfortable with the sales guidance we gave at our June investor conference as we still believe sales will be down roughly 9% for the year.

  • On the earnings front, based on our first-half performance, we are lifting our guidance and are calling for fiscal 2009 earnings per share from continuing operations to be flat to up 7% for the year and adjusted earnings per share from continuing operations to be down 15% to 20%.

  • Thank you for your participation in today's call, and we will be happy to take your questions.

  • Augusta, we are now ready for questions.

  • Thank you.

  • Operator

  • (Operator Instructions).

  • Maggie Gilliam, Gilliam & Co.

  • Maggie Gilliam - Analyst

  • I'm wondering if you could please talk a little bit more about Canada and the SAP initiative, whether you have learned anything from it yet regarding adopting it in the United States?

  • Also, what kind of merchandising initiatives are you pursuing vis-a-vis Canada and the US, Canada being a place where you are selling more decor products?

  • Frank Blake - Chairman & CEO

  • Thanks very much for the question.

  • Actually Matt Carey is here and probably in the best position to talk about some of the SAP implementation points.

  • I will say to the latter part of your question in terms of the merchandising initiatives that one of the great things about having the Canadian business is that they do go out and do some things a little bit differently than we do in the US.

  • And, as you said, some of their stores are significantly more project focused and decor project focused, and the Canadian team has had great success with that.

  • The Canadian team actually was early on adopter of Eco Options, which we then took that program, and, as you know, we are running with it in the United States.

  • So a lot of the things that they do in Canada in terms of merchandising initiatives we are then able to transplant here.

  • So it is terrific to have that group working on different ideas.

  • SAP implementation was very much a part of that in terms of being able to use the Canadian business to understand what an effort of that magnitude might look like for us.

  • So with that, let me just turn it over to Matt to make a couple of comments on the SAP implementation.

  • Matt Carey - EVP & CIO

  • What I would tell you is that we said in the past we are going to continue to monitor and watch this SAP performance.

  • The implementation of that system has kind of smoothed out from my perspective and I think from the Canadian team's perspective.

  • We have obviously learned a lot of things about how to do change in our environment, and we will continue to apply those learnings as we modify systems in the chain.

  • We also have found a few things that we would like to bring to the US around labeling and signing, as well as things in the US that we would like to put in Canada around data maintenance and some of the other things.

  • So we're going to continue to share best practices where appropriate, and we will continue to look at the SAP implementation in Canada as a learning lesson that might inform us about future decisions.

  • Frank Blake - Chairman & CEO

  • I would also just make a general comment on that, Maggie, that as we think about the SAP implementation, there are really two sets of issues.

  • There is first what is the performance in Canada and what do we learn from that performance.

  • And then also what do we do in the US and what have we learned over the last year in terms of what we are capable of doing in the US without a major implementation like that.

  • And we have seen a lot of progress in the last year on that side of the ledger.

  • Operator

  • Stephen Chick, FBR.

  • Stephen Chick - Analyst

  • A couple of questions.

  • I guess on -- I appreciate the clarity that you provided on the Pro commercial percentages.

  • You know, 27% I think for this quarter down from a year ago 32% if I got that down right.

  • Can you give us an idea of what the trajectory of that has been, and can you confirm do you think of that as higher profit margin business relative to the noncommercial, or is it the other way around?

  • Frank Blake - Chairman & CEO

  • Okay.

  • Thanks, Steve.

  • First, on the trajectory it is interesting because -- and this is, frankly, a lot of these trends we might not have seen but for a better understanding of some of our underlying data -- a significant difference in how the Pro business reacted post-September 2008 versus the Consumer business.

  • And when you think about it, it actually makes some sense that the Pro business was under more pressure from September 2008 going forward.

  • The Consumer business was also was under pressure; it was just the Pro business was under more pressure.

  • So that is the trajectory that we have seen kind of pretty much following if you kind of do October 2008 on.

  • In terms of the margin performance, what you would see with the bulk of our Pros is they shop the whole store.

  • So the margin performance around the Pro is not that dissimilar from the consumer.

  • Craig, do you want to add anything on that?

  • Craig Menear - EVP, Merchandising

  • Steve, I would tell you that from a ticket standpoint, our Pro average ticket, as you might imagine, is a higher average ticket, and, of course, their frequency to shop is higher than our average customer.

  • So those are both downward pressures against those metrics.

  • Stephen Chick - Analyst

  • Okay, that is helpful.

  • And then second, if I could, I think related to maybe Craig's comments on ticket sales above 900, I just want to make sure I took it down right.

  • It is a double-digit decline.

  • Is that a lesser -- I think last quarter I thought you had said down 15%.

  • Is it down less than that rate, or is it more?

  • Is the geographic makeup of your sales, like the improvements in California, has that helped that metric?

  • Craig Menear - EVP, Merchandising

  • The metric is still double-digit negative, and it has improved slightly from the first quarter.

  • And in the first quarter, it was down approximately 15%, and it is really driven across several areas of the business.

  • As we see it, we had transaction improvements in our lumber and building materials areas.

  • Part of that was driven to outdoor projects.

  • Part of it was just driven to DIY projects.

  • But I would not say that it was specific to one area.

  • Stephen Chick - Analyst

  • Okay.

  • It is just interesting because your competitor said I think the opposite, but I'm not sure why that is.

  • Operator

  • Matthew Fassler, Goldman Sachs.

  • Matthew Fassler - Analyst

  • Carol, if you could give us some specifics on the impact of credit to the expense line this quarter, and then also offer up color on what you are seeing in terms of turndowns and general use of the private label credit card and other credit-related forms of payment, that would be great.

  • Carol Tome - CFO & EVP, Corporate Services

  • Yes, I would be happy to.

  • First, on the expense line, year over year we had a $42 million benefit as a result of a lower cost of private label credit, and year to date the benefit is about $160 million.

  • Relative to what we are seeing with the consumer end credit, we are seeing a shift.

  • Total credit penetration -- and that includes not only our private label cards but Visa and MasterCard, etc.

  • Last year total credit penetration was about 65%.

  • This year total credit penetration about 62%.

  • So 300 basis point contraction, if you will, and that is all in our private label credit.

  • So private label credit has dropped from 28% penetration last year to 25% this year.

  • Now in terms of what we are seeing with our customers, for anyone who is applying for a private label credit card, about 76% of all applications are approved.

  • That is down about 50 basis points from last year.

  • In terms of the average credit line that is being approved, it is about $5200.

  • That is down $1600 from last year.

  • The through the door FICO scores, for those who are being approved, is about 712, up slightly from last year.

  • If you look at our existing cardholders, those who are just using the card within the store, the average FICO score is 677, which is about the same as it was last year.

  • So hopefully that gives you some color on the consumer.

  • Matthew Fassler - Analyst

  • And how does the 5200 compare with the average outstanding line?

  • I know that is kind of approved capacity, but where is the average line for your program.

  • Carol Tome - CFO & EVP, Corporate Services

  • It is a little north of $6000, and the average utilization is about 25%.

  • Matthew Fassler - Analyst

  • Only 25%?

  • So, in essence, the credit card companies are taking down risks, but not necessarily cutting off the actual spending needs of most of your customers?

  • Carol Tome - CFO & EVP, Corporate Services

  • Other than those who are defaulting, that is correct.

  • Matthew Fassler - Analyst

  • That is fair.

  • Okay.

  • Thank you so much.

  • Operator

  • Scott Ciccarelli, RBC Capital Markets.

  • Scot Ciccarelli - Analyst

  • Can you guys point to the reasons why you think California has improved, especially in the face of the unemployment situation in that state?

  • Do you think that is simply a function of improving housing turnover, or are there other factors at work?

  • Frank Blake - Chairman & CEO

  • Well, first, you do -- weather does play a role in our business, and we had a streak of some very nice seasonable weather out in California and in our Western division that helped with our outside garden sales.

  • I would say also as we have talked about before, you do have a churn of some houses as they go through the foreclosure process that drives things like paint, drives things like carpet upgrades and the like.

  • And that is balanced against a larger drag that we think there is as you go through exhilarating foreclosures, and that kind of slows down some of your basic building material business.

  • Does that help?

  • Scot Ciccarelli - Analyst

  • All right.

  • That is it.

  • Thank you.

  • Operator

  • Mike Baker, Deutsche Bank.

  • Mike Baker - Analyst

  • So two questions.

  • One is, so you said that you gained share in six of seven categories, yet it was your biggest share gain in five years.

  • I think in previous quarters you have gained in seven categories and then the quarter before that nine categories.

  • So I guess the way you reconcile those is, in those six categories where you gained share, the share gains must have been outsized bigger than they have been.

  • So can you discuss where that is?

  • Frank Blake - Chairman & CEO

  • Mike, I just first and I will turn this to Craig to address, but I would also offer this caution as we go through the share data.

  • Our market does not have a lot of really clear share markers.

  • And one of the things when we reference -- when Craig was referencing the six areas where we gain share, that was largely around the Consumer.

  • And then if you remember that we have a substantial percentage of our business that is also Pro and both the Pro and the Consumer data is reflected in the overall market share, which is the number I reference, you can see that you got some goes ins and goes outs there that don't always neatly fit together.

  • But, Craig, if --

  • Craig Menear - EVP, Merchandising

  • Yes, so the reference was that six of our 13 departments on the Consumer side gained share in the quarter, and that was around paint, hardware, plumbing, both our Lawn and Garden categories, both sides of that business, both in Power Equipment, as well as Nursery and Landscape, as well as Appliances gained share in the quarter.

  • And then if you look at the total that Frank was referencing and as we look at both Consumer and Pro and compare that, it was our largest share gain that we have had and we broke the 20% mark at the end of July.

  • Carol Tome - CFO & EVP, Corporate Services

  • And just to give a little bit more information on the market share, when we talk about overall total Company marketshare, we reference our performance against the NAICS 444, which is census data, and we think that's the best representation of both the Pro and the Consumer market.

  • Mike Baker - Analyst

  • Right.

  • Yes, I think that makes sense.

  • Okay.

  • Thanks for the color.

  • The one last just sort of maintenance question is, on the earnings guidance, so is the right base $1.42 from last year when we are thinking about flat to up 7%?

  • And then does that include the $0.03 -- I think it does include it -- but confirm, does that includes the $0.03 tax benefit you got this quarter?

  • Carol Tome - CFO & EVP, Corporate Services

  • Yes, our guidance includes the $0.03 tax benefit that we got this quarter, and let's just use adjusted.

  • The adjusted earnings per share that we are guiding off of from last year is $1.78.

  • Operator

  • Gary Balter, Credit Suisse.

  • Gary Balter - Analyst

  • Two questions.

  • One is the crystal ball question about, when you look at all the macro data, should we be starting to think that we can actually see positive comps?

  • Frank Blake - Chairman & CEO

  • Well, Gary, I would say it will be some time we are thinking in 2010 and probably second quarter or back half of 2010.

  • Gary Balter - Analyst

  • Okay.

  • And the second is, you talked about power tools in some of the private label, and there has been some discussion about how well you are doing with some of your technology innovations.

  • Could you go into like an area like power tools in a bit of detail and then discuss, is that why you think you are gaining share in those categories?

  • Frank Blake - Chairman & CEO

  • Well, we really believe that we have a great lineup that services both our Pro and our DIY customer in power tools.

  • We certainly focus on key brands within that product category that our Pro customers want.

  • We have focused on launching and trying to be ahead of the game on lithium technology, which delivers more power, longer run time, better battery life for our Pro customers.

  • When you look at the innovation over the years that we have been able to bring with the Ryobi program on the consumer side with the lowest replacement cost of batteries pretty much in the market, it has become a great product for both our Pro and light-duty Pro and our DIY customers.

  • So we believe that the strong focus on brands that dominate the market and positioning ourselves with advanced technologies has helped us in that product category.

  • Gary Balter - Analyst

  • How do you get that message out to the customers, both Consumer and the Pro?

  • Frank Blake - Chairman & CEO

  • It is a great question.

  • It is something that we think we have opportunity to improve upon.

  • But we are obviously working with our suppliers on that, and we are working with our marketing team to enhance that messaging.

  • But it is an upside opportunity for us.

  • Operator

  • Dan Binder, Jefferies.

  • Dan Binder - Analyst

  • I was wondering if you could give us a little bit more detail on whether or not deflation across the entire box had a meaningful impact and whether or not you were able to grab a little extra margin as prices came down to you and any lag time that may have existed with that passing through to the customer?

  • Frank Blake - Chairman & CEO

  • So when you look at the big impacts, lumber was about a 39 basis point impact.

  • Wire was about 28 basis points, but that was offset by building materials to a degree at plus 29.

  • But from a margin impact, I mean the market moves with the cost market when it comes to retail.

  • So there is really not much of an impact on margin at all.

  • Dan Binder - Analyst

  • Okay.

  • And then secondly, you addressed the credit in quite a bit of detail.

  • I'm just curious are you starting to see any reversal or loosening of credit with your credit partner versus, let's say, six months ago?

  • Carol Tome - CFO & EVP, Corporate Services

  • No, we are not.

  • We are going to go back and talk to them now that you asked the question.

  • Dan Binder - Analyst

  • Okay.

  • And then just finally, is your big ticket exposure materially higher in Q3 and Q4 versus the front half of the year?

  • Frank Blake - Chairman & CEO

  • No, it really is not.

  • It is pretty consistent across the quarters.

  • Operator

  • Budd Bugatch, Raymond James.

  • Budd Bugatch - Analyst

  • Frank, I was really kind of very interested in your comments about the Pro versus the Consumer and that 32% and 27%.

  • If my math is correct and I applied it correctly, it looks like that the Pro business year-over-year in the quarter was down around 24%, while the Consumer business was down somewhere between 2.5% to 3%?

  • Am I thinking about that right?

  • Frank Blake - Chairman & CEO

  • Your math is very good.

  • Budd Bugatch - Analyst

  • And secondly then, can you give us some more color of what may be driving the Pro business or not driving it?

  • Is there a net promoter score that is attached to it?

  • Is there some color on ticket, or have you lost share on (multiple speakers) Pro or the number of Pros that you are being able to serve?

  • Frank Blake - Chairman & CEO

  • So I would say it -- and again, let me preface this by saying, if we had been looking at this with the data set that we had previously applied, we would have said the Pro and Consumer business were down roughly the same.

  • We have taken a different cut at the data set that looks more at buying behavior than an SIC code because the fact is Pros don't come in with a little badge that says, "I am a Pro." And that is what I referenced in terms of the Dunn Humvee data.

  • We are looking at buying behavior.

  • So maybe the single most accurate way of saying it is, people who bought like Pros in 2008 this time versus people who are buying like Pros in 2009 is down significantly.

  • And then when you think through why that would be, you know, first, you've got a lot of very basic things, which is you look at that private fixed residential investment number, which has a lot of what you would call Pro-related spend in, and you would see if anything our decline is less dramatic than the decline in that indicator, which would also be consistent with what we see in the share data.

  • But you have got high unemployment in the construction trades.

  • You have got a lot of pressure obviously in home building, a lot of pressure in larger projects that we think goes into that number, and I would say the other thing underneath it is we then subsegment that into different kinds of Pro-like buying behavior and look at the different patterns within that.

  • And again, as you might anticipate it, the folks who are more maintenance, repair, operations-related Pros are responding differently than a general contractor Pro.

  • So I hope that color helps.

  • Budd Bugatch - Analyst

  • It does, and when you say responding differently, I hope they are responding better, almost more like the Consumer side of it.

  • So it is the heavier Pro that has really been more impacted because the MRO has got to go on anyway.

  • Marvin Ellison - EVP, US Stores

  • This is Marvin.

  • The Pros are pretty resilient, so that MRO customer now has become a maintenance repair kind of customer because they are trying to find a way to stay busy.

  • But again, just like the normal consumer, when this market gets more difficult, then they find different ways to spend.

  • Their spending patterns change, but they still have to try to keep business going.

  • And we spend a lot of time in the relationships that we have built with Pro customers talking to them about the different projects they are working on.

  • We try to make the necessary merchandising adjustments to give them what they need so they can, in fact, continue to stay busy.

  • Budd Bugatch - Analyst

  • I got you.

  • And if I could sneak in one more question for Carol.

  • You gave us the year over year are second quarter on credit and the year-to-date.

  • Could you remind us what your forecast was for the year on credit benefit, and is that still the same?

  • Carol Tome - CFO & EVP, Corporate Services

  • Well, we told you that are our cost to private label credit would not exceed 1.5% of credit sales, and we asked you to use a number of about 30% penetration.

  • Obviously our penetration is down, so we did not give you a clear dollar figure for the year over year benefit.

  • We might have guided around $250 million, something like that for the year.

  • Budd Bugatch - Analyst

  • And that is still intact?

  • Carol Tome - CFO & EVP, Corporate Services

  • Yes.

  • Operator

  • Chris Horvers, JPMorgan.

  • Chris Horvers - Analyst

  • First of all, a question.

  • Any comment on -- it seems like July seemed to have an earlier in July was tougher and seemed to recover towards the end of the month.

  • Any comment on how August is shaping up, particularly with some of the better weather in the Northeast?

  • And second, really bigger picture.

  • As we think about the back half of the year, seasonal mix does come down or at least the outdoor mix does come down as a percentage of sales.

  • I mean how do you merchandise into that, and how do you think -- how does the increased DIY trend that we have seen in the first half manifest itself in the back half of the year whether it is snow blowers or what have you?

  • Carol Tome - CFO & EVP, Corporate Services

  • Well, I can give you color on how we are performing in August, and then Craig can talk to you about what we are doing for the back half from a merchandising perspective.

  • As we built our plan, we told you that the comps in the first half of the year would be worse than the comps in the back half of the year, and we still think that to be true.

  • In the third quarter, there's a lot of noise in the third quarter because we are anniversaring hurricanes, etc.

  • So we don't expect the third quarter to be materially different than that of the second quarter.

  • We exited the quarter with a total Company comp of a negative 8.1% in July, and that is where we are running today.

  • So we're running at where we thought we would for the August period to date.

  • We've got a lot of good things going from a merchandising perspective.

  • Craig Menear - EVP, Merchandising

  • Yes, if you think about the seasonal business, as you were saying, the trend falls off as you move into the third quarter.

  • First, step back and recognize that that happens every year.

  • So our comparisons are the same, if you will, year over year.

  • And then we will really focus as we move into the third quarter on those things that become really important to the customer at that time frame.

  • The finishing up of outdoor projects that prepares their homes for the winter season as customers begin to think more about energy and focusing there on how to prepare their homes.

  • We will be focused in those areas.

  • Fall cleanup.

  • Those are all simple, easy projects that a customer can take on and be prepared.

  • And then, of course, there is the what I will call simple decor updates that will take place in the fall season as well.

  • We fully expect there to be continued pressure in the big-ticket discretionary spend, but the simple updates of the home are the areas that we will focus on.

  • Chris Horvers - Analyst

  • And just as a follow-up, is it all moot if California and Florida continue to sequentially improve?

  • I mean does the whole seasonal outdoor question really become a moot question?

  • Craig Menear - EVP, Merchandising

  • Well, I think when we looked at California in the second quarter, as Frank said, we certainly had some benefit from good weather, and that helped drive the outdoor business.

  • But also, when we look at the numbers, we are seeing a relatively solid performance in DIY projects.

  • Carol Tome - CFO & EVP, Corporate Services

  • It is really because of the seasonal nature of our business.

  • It is important to look at our business year-over-year rather than sequentially.

  • 55% of our sales occur in the first six months of the year, and that holds true in a down market as well as an up market.

  • Chris Horvers - Analyst

  • Right, right.

  • But I'm saying like assuming big ticket doesn't really come back right, right, and that remains under increased pressure.

  • If California and Florida recover, at the end of the day, that could overwhelm that aspect?

  • Frank Blake - Chairman & CEO

  • Certainly the recovery of California and Florida, if I understand your question, Chris, that would be helpful.

  • Again, understand that that is only a percentage of our business, but that would be helpful.

  • Operator

  • Eric Bosshard, Cleveland Research Company.

  • Eric Bosshard - Analyst

  • Two questions or basically one question.

  • The upside performance relative to plan on sales -- and I believe on gross margin -- can you identify or at least bucket what you think drove that or led you to accomplish that in the quarter?

  • Craig Menear - EVP, Merchandising

  • I think we have a continued focus, first of all, on driving value in the marketplace for our customers.

  • I think Marvin and the operations team have done an outstanding job of really focusing on customer service.

  • And then we believe that we are getting traction in terms of doing a better job through our new marketing campaign of beginning to communicate the value proposition that we have as a Company.

  • Carol Tome - CFO & EVP, Corporate Services

  • We did not plan for positive comp transaction.

  • Craig Menear - EVP, Merchandising

  • Right.

  • Marvin Ellison - EVP, US Stores

  • Yes, and I think, Eric, one thing to consider Carol cited the inventory reduction year over year, but we also are experiencing our best in-stock percent that we really have on record.

  • I have been here seven years.

  • We have measured it the same way for seven years, and we now have our best in-stock position in the stores with the degree of inventory takeout.

  • So you couple all those things together, and we feel very, very good about our progress.

  • Frank Blake - Chairman & CEO

  • And then secondly, as far as the expense leverage, obviously the marketshare performance would suggest you are adequately investing in the business.

  • But I would just be interested in a little bit of the thought process of limiting the SG&A or the expense growth to the degree that you are, if there is any concern that you might be underinvesting in the business?

  • Frank Blake - Chairman & CEO

  • No, we very consciously set out objectives we have for improving our business and have identified areas where we are and have been consistently investing.

  • There are other areas where we have been able to trim back, and we think they are largely non-customer focusing areas.

  • And we think those are appropriate and sustainable.

  • Carol Tome - CFO & EVP, Corporate Services

  • Right.

  • And on the capital side, we told you that we deliberately back-end weighted our capital spending given the economic uncertainty.

  • So you may say, well, are you a little light on capital for the first half?

  • No, this is what we said we would do.

  • We've got about $650 million remaining in our plan, and we will spend it by the end of the year.

  • Eric Bosshard - Analyst

  • Thank you.

  • Diane Dayhoff - VP, IR

  • I guess we have time for one more question.

  • Operator

  • Gregory Melich, Morgan Stanley.

  • Gregory Melich - Analyst

  • A follow-up for Craig and then Carol.

  • On the gross margin side, if one of the ways were able to get inventory, that great inventory performance and keep in-stocks up, are we taking down SKU counts?

  • Is that part of the focus they approach, and if so, how far are we in that process?

  • And then I had a follow-up for Carol.

  • Craig Menear - EVP, Merchandising

  • So, first of all, if you look at gross margin, we have been telling you that we have been working hard on process and the implementation of new tools, including forecasting tools and our assortment maintenance tool, which allows us to better position product in the right places.

  • That has begun to pay off for us, and, as we mentioned, we have not spent the money in clearance where we did last year.

  • Because we have gotten really inventory in the right spots.

  • Part of our portfolio strategy approach based on the specific role and intent of specific categories is, in fact, looking at the assortment breadth.

  • And we have where appropriate been reducing SKUs to simplify for our customers.

  • As a matter of fact, in the applicator reset that we just put into the stores, we had a fairly significant reduction in SKUs.

  • And that, to be honest with you, will be ongoing work, and it is category by category.

  • Some categories may actually expand in SKU count, while others will go down.

  • Marvin Ellison - EVP, US Stores

  • This is Marvin.

  • There's two other points I will make in-stock.

  • If you have frequented our stores over the years, you would notice that our overheads are much emptier today than probably ever before because there has been a concerted effort on improving the operational process in the stores.

  • But also the supply chain improvements allow us to take product from receiving to the shelf versus from receiving to the overhead as we have done over the course of the past few years.

  • So operational improvements in the store or supply chain improvements just allow us to have the inventory in the right place so customers can actually buy it.

  • Gregory Melich - Analyst

  • Okay, great.

  • And then, Carol, on the deleverage effect, the 10 basis points for 100 basis points of comp, as we go into the future into next year and beyond, is there something that has changed in the supply chain or the fixed cost structure that makes you think that that won't revert back to a 20 basis point per 100 once we cycle the credit and EXPO closing?

  • Is there something that has changed there, or is that --?

  • Carol Tome - CFO & EVP, Corporate Services

  • Our rule of thumb is in a negative comp environment.

  • Once we turn positive -- and we have heard from Frank that will happen next year -- once we turn positive, we would expect to see more than 10 basis points of expense leverage.

  • Now we are like all companies in corporate America are faced with rising medical costs, other costs that are coming with those.

  • So we have got to work those through our models before we can give you our general rule of thumb.

  • But where we sit today we would expect to see more than 10 basis points.

  • Gregory Melich - Analyst

  • Great.

  • And then, Frank, is that the -- in the second quarter, is that the first month of the second quarter or is that July?

  • Frank Blake - Chairman & CEO

  • Exactly.

  • I wish I knew.

  • Diane Dayhoff - VP, IR

  • Thanks to everybody for joining us today, and we look forward to talking with you next quarter.

  • Operator

  • That does conclude today's conference.

  • We would like to thank you all for your participation.

  • Have a great day.