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Operator
Good day, everyone, and welcome to today's Home Depot fourth quarter earnings conference call.
Today's conference is being recorded.
(Operators Instructions)
Beginning today's discussion is Diane Dayhoff, Vice President Investor Relations.
Please go ahead.
Diane Dayhoff - VP IR
Thank you, Felicia and good morning to everyone.
Welcome to the Home Depot's fourth 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 it if the participants would limit themselves to one question with one follow-up please.
This conference call is being broadcast real time on the Internet at http://earnings.homedepot.com.
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.
Reconciliations of these measurements is provided in the financial statements included with our earnings release.
Let me turn the call over to Frank Blake.
Frank Blake - Chairman, CEO
Thank you, Diane, and good morning, everyone.
Sales for the fourth quarter were $14.6 billion, essentially flat to last year.
Comp sales were positive 1.2% with our US stores posting a negative 1.1% comp for the quarter and our international stores contributing a positive 2.3% comp.
Our diluted earnings per share from continuing operations were $0.18.
As Carol will detail we had some unusual items impact our fourth quarter earnings, in particular the write down of our remaining equity interest in HD Supply.
Adjusting for the impact of HD Supply, earnings per share from continuing operations were $0.24.
Our business improved more than we expected in the fourth quarter.
Of our top 40 markets in the US, all but two showed improvement in the fourth quarter on a comp sales basis.
Every one of our regions showed comp sales improvement in the fourth quarter versus the third quarter and our northern division, our largest division with eight regions, had a positive comp for the quarter.
We also saw sequential improvement in California and Florida with a return to positive comps in some of the markets there.
Our business also performed very well in Canada in the fourth quarter with double-digit positive comps.
This was a function of four things.
Better performance by the business, recovery from a rocky start last year with the new enterprise IT implementation, improving economic conditions, and a government stimulus program designed to support homeowners updating their houses.
And in Mexico, the business once again achieved positive comps for the quarter and the year despite a very tough economic environment.
We also made solid progress on our key initiatives.
Last month we opened our 12th rapid deployment center, or RDC, in Topeka, Kansas.
RDCs now serve over 65% of our US store base, and we're on track to reach our goal of serving 100% by the end of 2010.
Craig and the merchandising team continue to develop and integrate our merchandising tools, and we can already see some of the benefits of improved assortment management and forecasting in our inventory and markdown control.
As Matt Carey, our IT leader has described, we are years behind other retailers in these areas, but we are on a path to catch up over the next five years.
Given the success we've seen with our internal tools, we're not contemplating any third party US-based enterprise wide system.
Marvin and our store operations team made a significant statement last year by retraining all of our associates, everyone, on customer service, launching our customer FIRST program.
Our net promoter score improved 800 basis points over the year and is now at an almost 70%.
We gained over 100 basis points of market share for the year, something we have not done in quite awhile.
So all of this gives us some cause for optimism in 2010.
At that time same time, we recognize that we have more work to do as a company and that the economy is not out of woods yet, particularly in our market.
So we're not projecting robust growth.
Private fixed residential investment as a percent of GDP has stopped its dramatic and historic decline, but still remains well below the 60-year average.
The housing industry remains at distressed levels, mortgage defaults continue to increase, unemployment remains high and our pro customers are still under pressure.
Our expectation is that 2010 will be a transitional year.
For the year we are anticipating approximately 2.5% sales growth and 15% growth in earnings per share from continuing operations.
We expect to see relatively flat growth in the first half of the year with more momentum in the second half.
Calling the year transitional doesn't sound very exciting, but we've been waiting for this transition for a long time.
We made the decision three years ago to focus on our core business and invest in our stores and associates during a difficult economic environment.
We've returned to the core values of our business, and we're proud of the fact that even in the tough economic environment of 2009 we had record success sharing for our hourly associates.
In fact, for the second half of 2009, 93% of our stores qualified for success sharing.
Going forward, we will continue to invest in our associates and our business.
And we will also continue to focus on disciplined capital allocation and increasing shareholder return.
Today, the board of directors and I are pleased to announce our first dividend increase since third quarter 2006, reinforcing our confidence in the business and our commitment to our shareholders.
And it is our intent to continue to increase our dividend every year.
Further, it is also our intent to use our excess cash to repurchase shares again evidence of our disciplined approach.
I want to thank our associates for all their hard work in 2009 and their commitment and dedication in the year ahead.
With that let he me turn the call over to Craig.
Craig Menear - EVP Merchandising
Thanks, Frank, and good morning, everyone.
We're pleased with our continued progress in the business and performance in the fourth quarter.
We saw significant improvement across many product categories and regions as well as key performance metrics including comp sales, transactions, and big ticket sales.
Kitchen and bath, paint, flooring, and plumbing delivered a positive comp, and we flat comped in building materials, garden, and millwork.
Lumber, hardware, and electrical reported negative comps.
Total customer transactions were 288 million in the fourth quarter, up 2.1% compared to last year.
Transactions for tickets of $50 and below, roughly 20% of our business in the US, were positive 3.2%.
This increase was driven by continued strength in basic DIY repair and maintenance products such as plumbing, cleaning, and light bulbs.
In addition, we saw strength in simple decor projects which led to positive growth in categories like ceramic tile, carpet, interior paint, faucets, and bath fixtures which also contributed to our overall transaction growth in the quarter.
Transactions for tickets of $900 and above, which also represent approximately 20% of US sales, were down less than 1%, a significant improvement compared to the double digit declines in previous quarters in 2009.
This improvement was largely driven by a stronger than anticipated response to outstanding values in categories such as appliances, water heaters, and windows.
We are also pleased with the positive trend in our installed sales.
Our total company average ticket for the fourth quarter was $50.01, down 1.7% from last year.
Our comp average ticket declined by 1%.
The improving trend in total average ticket was driven by the improvement in big ticket transactions as I mentioned earlier.
The average ticket also benefited from strong sales in Canada, resulting in part from the Canadian tax relief on a large selection of home improvement projects.
However, while our trends are getting better, we continue to experience pressure in big ticket construction related categories such as dimensional lumber, concrete, gypsum, pneumatic tools and fasteners.
We are executing our merchandising transformation to provide great everyday value to our customers.
From where we started, we are a third of the way through the implementation of our portfolio strategy and the continued use of merchandising tools allows us to enhance and optimize our performance.
This coupled with our supply chain transformation to get the right product in the right place at the right time was the foundation behind our solid quarter's performance.
The success of our seasonal business is a great example of how we leveraged our merchandising and supply chain transformation during the quarter.
The combination of better planning tools and solid execution drove strong performance against our plan in products such as snow removal, fireplace and decorative holiday.
We finished the year in a clean inventory position in seasonal goods while having spent less on markdowns compared to last year.
Investments in our portfolio strategy, merchandising tools, supply chain development and customer service drove continued market share growth in the quarter.
Our US market share has grown over 100 basis points on a rolling 12-month basis.
Despite closing our Expo businesses in early 2009.
Based on an independent third party tracking of consumer activity we gained unit share in six of our 13 departments during the quarter.
As we look forward to 2010, we are well positioned across the entire store.
We will meet our customers' needs in energy efficiency and conservation by offering them products such as the best rated CFL bulbs on the market or water-sense rated faucets across our entire product line up.
For indoor and outdoor projects requiring power tools, we offer the leading cordless brands for pros with DeWalt along with a strong exclusive power tool lineup including Milwaukee, Makita, Rigid, and Ryobi.
In decor, we provide our customers with the number one paint in Behr Premium Ultra as recently rated by a leading consumer magazine.
Additionally, the Martha Stewart program has been expanded into patio, cleaning, and paint.
Finally, as customers get ready for Spring we have a fantastic lineup of seasonal product offerings to meet their lawn and garden needs with leading exclusive brands of Honda and Toro mowers, Cub Cadet tractors, Echo, Ryobi and Homelite portable power products, and Proven Winners, the most recognized live goods by garden enthusiasts.
Over the past three years we have redefined our merchandising strategy which includes the repositioning of our brand, creation of new tools to drive efficiency and implemented new capabilities.
And we're not done.
There's more to come.
As we look forward to 2010, we are well positioned to deliver quality and value for our customers.
And now I would like to turn the call over to Carol.
Carol Tome - CFO, EVP Corporate Development
Thank you, Craig, and hello, everyone.
Our financial results for the quarter are distorted by a few factors that I would like to discuss and get out of the way before I cover our results.
First, we reported $41 million of earnings from discontinued operations primarily related to our working capital settlement with HD Supply.
For the purpose of today's discussion, we will focus our remarks on earnings from continuing operations.
Earnings from continuing operations were impacted by a $163 million write-down of our investment in HD Supply, which is reflected in other expense.
We hold a 12.5% equity investment in HD Supply, but have written that investment down to zero as we believe it has been other than temporarily impaired.
Also, as you may know, we had a reduction in force in the fourth quarter, and announced plans to close three non strategic locations.
The financial impact of those actions was not significant.
So with that, in the fourth quarter, sales were $14.6 billion, a 0.3% decrease from last year, reflecting fewer stores than one year ago.
Comps or same-store sales were positive 1.2% for the quarter.
A weaker US dollar drove 130 basis points of comp growth and positive comp sales in our Canadian and Mexican businesses drove 100 basis points of comp growth in the quarter.
This combined international comp growth of 2.3% was offset by negative comps in our US stores of 1.1%.
Total Company comps were positive 1.2% in November, negative 0.2% December, and positive 2.2% January.
Comps for US stores were positive 0.3% November, negative 2.3% in December, and negative 1.5% in January.
For the year our sales declined 7.2% to $66.2 billion.
Excluding the impact of sales related to the wind-down of our Expo businesses, adjusted sales for the year declined 7.5% to $66 billion.
For fiscal 2009, total company comp sales were negative 6.6% and comps for US stores were negative 6.2%.
In the fourth quarter our gross margin was 34.4%, an increase of 45 basis points from last year.
Our gross margin expansion was due to the following factors.
First, our US business reported 33 basis points of margin expansion in the quarter due primarily to lower markdowns than last year.
Our holiday category alone contributed 21 basis points of margin expansion in the quarter.
Second, we realized 12 basis points of margin expansion from our Canadian business as we didn't repeat certain promotions and we left the disruption we experienced last year when we implemented SCORE or SAP.
For the year, we experienced 22 basis points of gross margin expansion.
Turning to operating expenses, for the quarter and the year it is easiest to compare our year-over-year performance by looking at adjusted operating expenses as a percent of sales.
When I say adjusted operating expenses, we adjust expenses for strategic charges taken in 2008 and 2009.
We detailed the financial impact of those charges in an exhibit to our press release which sets forth reported and adjusted results for both years.
So on an adjusted basis for the fourth quarter, operating expenses as a percent of sales were 29.4%, a decrease of 20 basis points from last year.
We leveraged expenses primarily because of positive same-store sales, but we also saw continued benefits from the changes we've implemented to improve spending efficiency across our business.
On an adjusted basis, for fiscal 2009, operating expenses as a percent of sales were 26.4% an increase of 18 basis points from last year.
For the year we deleveraged expenses by about three basis points for every point of negative comp, considerably better than we planned at that time beginning of the year.
Our income tax provision rate was 25.9% in the fourth quarter reflecting a $47 million benefit arising from global tax planning.
Our effective tax rate was 34.2% for the year which includes both the fourth quarter tax benefit and a favorable foreign tax settlement we reported in the second quarter of 2009.
Earnings per share from continuing operations were $0.18 for the fourth quarter, excluding the HD Supply write-down adjusted earnings per share from continuing operations were $0.24 for the fourth quarter.
For the year earnings per share from continuing operations were $1.55.
On an adjusted basis, earnings per share from continuing operations were $1.66, down 6.7% from last year.
Now, moving to our operational metrics, during the quarter, we opened three new stores and closed one store for an ending store count of 2,244.
At the end of the fourth quarter selling square footage was $235 million, a 1.3% decrease from last year.
Reflecting sales environment total sales per square foot for fourth quarter were $245, up 1.7% from last year.
For fiscal 2009, sales per square foot were $279.
Now, turning to the balance sheet, at the end of the year retail inventory was $10.2 billion down 4.5% from last year.
On a per-store basis, inventory was down 3.3% to last year.
Inventory turn-over was 4.1 times, up 0.1 from last year.
This was our first annual increase in inventory turnover since 2001, a true team effort.
We view this as solid performance as our in-stock position is at a record high level.
We ended the quarter with $41 billion in assets, including $1.4 billion in cash and short-term investments.
This is an increase of approximately $900 million in cash and short-term investments from the end of fiscal 2008 reflecting cash generated by the business of approximately $5.4 billion, offset by $1.8 billion used to repay senior notes that came due in September and December, $1.5 billion of dividends paid, $966 million of capital expenditures, and $213 million of share repurchases.
In the fourth quarter, we used excess cash to repurchase $115 million or 4.1 million shares of outstanding stock.
Computed on the average of beginning and ending long-term debt and equity for the trailing four quarters, return on invested capital was 10.7%.
On an adjusted basis, return on invested capital was 11.1%, 70 basis points higher than what we reported for the third quarter of fiscal 2009.
As Frank mentioned, we performed well against our internal expectations in 2009.
As we look to 2010, we expect our performance to improve as macroeconomic conditions improve.
We've detailed our guidance in our press release so let me just hit the high points.
First, let me remind you that we guide off of GAAP.
We based our working estimates on a number of external factors, and we are not expecting a robust recovery.
For the year, we project that our sales will increase by approximately 2.5% driven primarily by positive same-store sales.
We plan to open just six stores in 2010.
We expect sales growth to be flattish in the first half and stronger in the second half of the year in line with economic forecasts.
We're pleased with how we started off 2010, even with the extra winter storms, February sales are trending to our plan.
For fiscal 2010 we expect earnings per share from continuing operations to increase by approximately 15% to $1.79.
Included in our earnings per share guidance is modest gross margin expansion and expense leverage.
We continue to learn more about the fixed variable nature of our expenses.
For fiscal 2010, you should expect expenses to grow at approximately 60% of our sales growth rate and here we're talking about adjusted expenses.
Finally, we have not included the impact of share repurchases in our earnings per share guidance.
And we'll touch on share repurchases in just a moment.
For fiscal 2010, we project cash flow from the business of roughly $5.4 billion.
This forecast assumes we refinance $1 billion of senior notes that come due in August of 2010.
We will use our cash to invest in our business and return capital to shareholders.
Our capital spending plan for 2010 is $1.25 billion, reflecting $180 million for new stores, $635 million for our existing US stores and supply chain, $350 million for IT, and $85 million for our non-US businesses.
We just announced a 5% increase in our dividend, and we will use our cash to fund our dividend, which for the year approximates $1.6 billion.
We have $12.5 billion remaining in our share repurchase authorization.
It is our intent to use excess cash to repurchase shares over the course of the year.
Depending on the timing of our repurchases, we should see some earnings per share benefit arising from this activity in 2010.
The debt finance portion of our repurchase program remains on hold, principally because we're early in our recovery.
As our business gains momentum, we will revisit the debt financed portion of our share repurchase program.
So thank you very much for your participation in today's call, and we're now ready for questions.
Operator
Thank you.
The question-and-answer session will be conducted electronically.
(Operator Instructions) Let's go to Colin McGranahan of Bernstein.
Colin McGranahan - Analyst
Wanted to focus on expenses here.
Obviously a very strong performance throughout the year, another good performance in Q4.
Carol, it's helpful to think about expense dollar growth at 60% of sales growth.
That kind of implies 1.5% dollar growth for the coming year.
I guess my question is can you do better than that if the comp comes in flat?
Because obviously the performance over the past year has been far better than that.
And would you think that from here on would you -- from here on out you would need that?
A little bit more on what might drive to you exceed those expectations.
Again, given the strong performance you've already had and expense reductions that have already been taken.
Carol Tome - CFO, EVP Corporate Development
First, thank you regarding your comments on expense control.
We have taken out over $1.3 billion of costs, so thank you for that.
As we look forward to 2010, there are a couple of things that you need to think about aus think about expenses.
First, as you know, payroll is our biggest expense, and we do have an activity-based model.
As we build out our plan for 2010 we assume early on in the year more of the sales growth will come from transactions than ticket, then as the year progresses we will see more of the sales growth coming from ticket.
Transactions drive payroll in the stores, as you can appreciate.
So clearly depending on the composition of the sales growth, we have some opportunities to leverage payroll.
We do have some expense pressure coming at us in 2010 that we didn't have in 2009.
For example, our medical costs are increasing by about 9% in 2010.
We'll do everything we can do to mitigate that pressure, but we've planned for that because we think that's what it may be.
We have some other cost pressures coming at us.
States are hungry for money.
We know they're coming at us for more property taxes.
We've got some computer maintenance costs coming at us because of all the IT investments we've made.
So we've factored all those cost pressures coming in at us.
We can be pretty nimble on the expense structure as you've seen us.
So we'll always strive to do better, but we're giving you our best estimate of costs for 2010.
Then one last comment, and I know I'm going on and on, but one last comment about expenses.
If sales growth is better than the guidance that we've given you, we should do better on the leverage.
Colin McGranahan - Analyst
Right.
Okay.
That was very helpful, Carol.
One quick follow-up.
You had said you gained market share in 6 of 13, again implying you lost in seven of 13 yesterday.
Lowes said they gained in 10 of 20, implying they lost in 10 of 20.
Who is gaining share if the two of you are even to losing more share than you're gaining at a product category level?
Craig Menear - EVP Merchandising
Colin this is Craig.
It really varies based on the category itself.
It could be independence; it could be other home center type operations.
It could be a multitude of different retailers.
So it really varies by it category.
Colin McGranahan - Analyst
Okay, thank you.
Operator
We'll go next to Deborah Weinswig of Citigroup.
Deborah Weinswig - Analyst
Good morning.
I just wanted to focus on the gross margin side.
Carol, can you maybe dive into some of the guidance for 2010 -- I think your guidance is for modest expansion.
Does that have to do with some of the pressure from fuel and also inflation?
Also I would think there's some opportunities as we look to additional private label and exclusive opportunities, but maybe if you can flush through some of that for us.
Carol Tome - CFO, EVP Corporate Development
Right.
So if you think about the operating margin that we guided to for 2010, 8% operating margin, that's about a 50 basis point improvement year-over-year if you look at our adjusted operating margin for 2009.
Of that 50 basis point improvement year on year, about 20 basis points will come from our gross margin expansion, about 30 basis points from expense leverage, more or less.
As you think about the gross margin expansion, it's really coming from our focused bay portfolio approach and all the the efforts that Craig and the merchants and logistics teams are doing to drive out costs.
So we are getting smarter about our approach to merchandising.
It's driving the margin expansion and we're pleased with the expansion that we reported the past couple years.
This is in line with our past.
It continues to reach our long-term operating margin target of 10%.
So we feel real good about.
Craig, I don't know if you want to give more color.
Craig Menear - EVP Merchandising
Carol, I think you are right.
It really is the continued implementation of our portfolio strategy, working to build better line structures, leveraging the opportunity that we have with supply chain transformation, and utilization of new tools that allows us to do a better job of forecasting and putting the right inventory in the right place, and therefore we're not spending unnecessary markdowns to liquidate product, and we're doing a better job, particularly on the seasonal side to make sure that the product is in the right place, and that drives efficiency for gross margin.
Deborah Weinswig - Analyst
I think, Craig, you had stated at the analyst meeting that the tools were about 25% of the way rolled out.
I think on the call today they were about one-third of the way rolled out.
In that time frame, what have been some of the changes that have been implemented, and what would the customer have seen in that time frame?
Craig Menear - EVP Merchandising
It's the continued on-boarding, if you will, of our categories to our assortment maintenance tool which allows us to sort below market level in a much easier way.
It's the continued development in terms of understanding how to use the tools that we have and continue to get better at our forecasting with the new tools.
So as we go along, while we're about a third of the way, we continue to learn each year.
Our seasonal businesses, for example, have now been through four planning cycles, and we learn each year how to improve upon that.
I think our holiday decor performance this year was a great example of that.
Deborah Weinswig - Analyst
If I can sneak one more in, can you talk about the size of the on-line business and the opportunity there?
Craig Menear - EVP Merchandising
The on-line business, as we look forward, is an important business overall.
It's still small in the scope of Home Depot in total, but it's an important element for us to continue to develop and integrate with our orange box business.
Carol Tome - CFO, EVP Corporate Development
And we look forward to the day when it's sizable and we can talk to you about.
Deborah Weinswig - Analyst
Me, too.
Great.
Best of luck in 2010.
Operator
We'll go next to Jaison Blair of Rochdale.
Jaison Blair - Analyst
Good morning.
Thanks for taking my call.
As you said conventional wisdom is that we're not going to experience a robust recovery and US industry in general has been focused on lean inventories and cost structures.
However, it seems we're starting to see signs of life in bigger ticket and potentially the unwinding of pent-up demand across the economy.
How do you make sure that you balance these lean inventories with the very low operating rates of manufacturers and challenges they may face meeting the surge of demand?
Does it make sense to begin to start to take up your assumptions when you are planning your inventories and can you bake times into those assumptions?
Frank Blake - Chairman, CEO
I think that's a great point.
It's something that Craig and his merchants spend a lot of time working with our vendors on to make sure that they understand what our projections are and that they're facilitized to meet those projections.
Craig, if you want to comment.
Craig Menear - EVP Merchandising
There is a lot of capacity there in our supply base and they're just looking to have the opportunity to drive the utilization of that capacity up.
As Frank said, collaborative planning and strong communication is the key to making sure we're able to take care of an upswing.
Jaison Blair - Analyst
Doesn't it take some time to ramp up that capacity, and if the entire supply chain decides to restock at the same time is there a risk of that, that you miss the boat?
Craig Menear - EVP Merchandising
First of all, the ramp up in most product categories isn't all that significant, and then, again, you have to remember that we're sitting with a good inventory position today.
And so you're really talking about ramping up the incremental.
Jaison Blair - Analyst
Thank you.
Operator
We'll go next to David Schick of Stifel Nicolaus.
David Schick - Analyst
Good morning.
You talked about bigger ticket demands appearing to be improving, your competitors did as well.
You're without Expo for the first time in over a decade.
So do you plan to bring any different approach to an installed business or any Expo practices into the orange box?
Craig Menear - EVP Merchandising
David this is Craig.
As we, again, work to implement our portfolio strategy, we are continually looking for opportunies, I should say to drive line structure improvements.
When you look at the percent of business in any given category that's done between OPP, mid price point and upper price point, as you see growth within that category, it's the merchant's job to continue to try to push that curve and see if you can move up in the structure.
We have seen some success in certain categories, probably the most prominent example of that is our Behr Premium Ultra, which is at the end up end of our paint product offering.
Just doing a phenomenal job with the customer because it delivers great value for what it actually does for the customer.
It is something that we're monitoring and watching and we'll move as the market warrants the movement.
David Schick - Analyst
So no explicit plans to go up market, but watching it real-time?
Craig Menear - EVP Merchandising
Correct.
David Schick - Analyst
Got it.
Thank.
Operator
We'll go next to Alan Rifkin, Banc of America.
Alan Rifkin - Analyst
Thank you very much.
Frank, as the housing market hopefully continues its recovery throughout 2010, how are you going to balance the additional cost of potentially hiring associates to meet those increases in volumes?
In other words, will you need to see an increase in your comps and revenues first, or will you proactively add associates on the floor as your outlook for the housing environment changes throughout 2010?
Frank Blake - Chairman, CEO
So Alan, as Carol described, we have an activity based labor model, and as our projection calls for more transactions, we add the labor in anticipation.
So Marvin Ellison is here.
Marvin, you want to comment on that as well.
Marvin Ellison - EVP US Stores
Alan, the one thing that we talked about when we got together at the analyst conference is we're trying to shift payroll from what we call a task or non customer facing locations to customer service locations.
Just in the fourth quarter, we're able to take almost 70 hours of payroll from back office-type positions to the sales floor.
So incrementally we added no hours, but to the customer service part of the business it felt like we added almost two full-time associates because we took them from the back room to the sales floor.
So not only are we going to look to ramp up staffing based on our sales projections.
We're going to continue on our mission to eliminate as much cash, auditing, and process that we can shift to an automated process by leveraging Matt Carey's team's innovation and put associates on the sales floor so we can kill two birds with one stone.
Alan Rifkin - Analyst
Thanks you very much.
Operator
We'll go next to Gary Balter of Credit Suisse.
Gary Balter - Analyst
Thank you.
You had a really strong performance, and that was with the investment in the distribution centers which at the meeting you had in Georgia you talked about will continue into this year.
Can you somehow quantify the costs that are embedded in both the 2009 and 2010 guidance, and as we look out to 2011 the benefits we can see from that?
Carol Tome - CFO, EVP Corporate Development
Gary, we really have never broken out the costs of the supply chain transformation because it's all part of what we're doing from a merchandising transformation perspective.
We've given you long-term perspective on where our margin is going to go.
We are well on the path to reach those long-term targets that we've given.
So as the facilities come on-line, they start to pay for themselves, we are adding more facilities, obviously, to build this out throughout 2010.
We should be able to cover those costs effectively in 2010.
The real margin opportunities are going to show for us in 2011, once it's up and running.
And it's not just the margins.
While we've done a really nice job on inventory we've got some inventory opportunities coming at us in 2011, too.
Gary Balter - Analyst
When you talked, 20 to 40 basis points that Mark was highlighting, we're not seeing that at this stage because of the investment.
Carol Tome - CFO, EVP Corporate Development
We're not seeing that, that's right.
We've had some benefits from fuel, some other things that you might say are supply chain related, but we're on path to deliver the long-term targets that we gave.
Gary Balter - Analyst
Then just a follow-up, how much did lumber pricing impact comps, and what are your thoughts about lumber pricing going forward?
Craig Menear - EVP Merchandising
Gary, this is Craig.
If you look at lumber in the quarter, certainly the lumber market did increase during the time frame, both on framing lumber and panel, with significantly more driven on framing than in panel.
But the total impact to our business in the quarter was six basis points.
You have to remember, this is -- it's, right now, the supply is offset by lack of demand, if you will.
So there's not a lot of demand out there, obviously in the construction industry.
So what used to be a low teens penetration is around a 7% penetration today.
It is really not a huge impact at this point certainly in the quarter.
As we look forward, we'll continue to monitor and watch.
But today the rising cost really is due to smaller log decks that are out there because there's just not a ton of demand.
There are wet forests in the south which make it difficult to pull out, then you have pulp and paper mills competing with saw mills for what product is available.
So that's helping to drive the cost side of the market and we'll see what happens on the demand side.
Carol Tome - CFO, EVP Corporate Development
I want to go back to your question one more time Gary, but I want to make sure I give you as much color as possible.
If you think about our overall gross margin expansion target, it was 120 basis points that included the 20 to 40 from supply chain.
Craig and I have been talking about it.
Today we think we've enjoyed about 40 basis points.
We just guided another 20 basis points for 2010, so that gives us 60.
We should be half the way through by the end of 2010.
Supply chain comes on-line big time in 2011 and that's when you should see the rest between 2011 and whenever, but it is coming.
Gary Balter - Analyst
Thank you.
Thank you very much.
Operator
We'll go next to Laura Champine of Cowen and Company.
Laura Champine - Analyst
Another question on your gross margins.
Is there any implication, a material positive implication for product costs from ramping up your sourcing out of the RDCs?
Frank Blake - Chairman, CEO
Not beyond the guidance that we've given in terms of our total merchandising transformation and supply chain.
Over a period of years, we see 120 basis point expansion, but beyond that no.
Laura Champine - Analyst
And as we go through this year and demand starts to improve, what's your outlook for overall product costs?
Carol Tome - CFO, EVP Corporate Development
There's no pricing pressure out there.
Inflation is very low.
We aren't seeing any pricing pressure.
Laura Champine - Analyst
Thank you.
Operator
We'll go next to Budd Bugatch, Raymond James & Associates.
Budd Bugatch - Analyst
Good morning and thank you for take my question.
Frank, I would like to explore the pro business again.
You did you a couple quarters ago.
You said that a recovery has to be based and have a significant impact from the pro and I think you had told us at that time that using dunnhumby this data had gone from 32% of sales to 27% of sales.
I'm curious if any way you've updated that, if you've gotten any color on the pro and are you seeing any competitive intrusion in the pro business?
Frank Blake - Chairman, CEO
Data would tell us is the pro business is still more down, particularly compared to the consumer business.
But where the rate of decline had been in the 20 plus range, it's now more in the teens, mid to low teens.
So it's still down, and definitely one of the things that is implied in our 2010 guidance is we see the pro business strengthening as we go through the year and being much stronger in the back half of the year.
Budd Bugatch - Analyst
Okay.
As my follow-up, Marvin talked about changing task hours for customer facing hours.
Could you give us an average of where we are in terms of payroll in the stores versus task versus customer facing and where it might be at the end of next year?
Marvin Ellison - EVP US Stores
Budd this is Marvin.
We're approximately at about 55% service to task.
When we started out on this, we were on the other side of that.
We had probably 40% service and majority in task.
We've taken a lot of steps.
One big move we made this past quarter, we took our vault room, or back office associates that balances the register tills, and we worked with Matt Carey seeing we automated that process.
We're able to take almost 40 hours of payroll from a back office position and we put that pay roll directly on the sales floor.
We allow the stores to determine, based on their department penetration of hardware, garden, paint, where we put those payroll hours to drive sales.
That was a direct impact to the service levels in our stores.
We started to see immediate responses from our customer service survey.
As you know, we get over 100,000 customer service surveys each and every week, and our net promoter scores Frank mentioned, is at a 800 basis point improvement.
These initiatives are a key contributor to that improvement.
Budd Bugatch - Analyst
Where do you think it will be, what do you think your goal is for next year, Marvin?
Marvin Ellison - EVP US Stores
Our goal is to get to 60/40, and that is 60% service, 40% task.
We're going to give a good shot to try to get there at the beginning of 2011, but there are a lot of factors that will contribute.
That's the goal we're going after.
Budd Bugatch - Analyst
Terrific.
Congratulations.
Great luck in 2010.
Frank Blake - Chairman, CEO
Thank you.
Operator
Matt Fassler, Goldman Sachs.
Matt Fassler - Analyst
One question and one follow-up.
First of all, on the principal question, you guided to 8% operating margin in 2010 which is certainly faster than we initially thought you would get there.
Has your performance, both on a cyclical basis and also with some of the initiatives you've put in place, led you to reconsider the normalized targets that you've discussed in the past?
Frank Blake - Chairman, CEO
No, I would say we're still on those targets, Matt.
Matt Fassler - Analyst
And second question, you spoke about improvement in Florida and California, I guess with some scattered signs of positive comps.
Can you talk about the pace of improvement that you saw in those troubled markets relative to the pace of improvement that you saw for the Company overall?
Frank Blake - Chairman, CEO
Yes, Matt, I would say -- only a few markets positive, but if you would say the pace may be a little bit more of a pickup in California and to some extent in some of the markets in Florida, and that's obviously a positive for us.
Matt Fassler - Analyst
Is there a lot of difference among markets in those regions?
Frank Blake - Chairman, CEO
There is.
You're exactly right, Matt.
There's a lot of difference.
Northern California is different than southern California.
Orlando is different than Miami.
Each of the markets is its own story.
Matt Fassler - Analyst
Got it.
Thanks so much.
Operator
Peter Benedict, Robert Baird.
Peter Benedict - Analyst
Hi.
Thanks.
I got cut off.
I apologize if you mentioned this, Carol.
Did you give us what the US store traffic did for the quarter year-over-year?
US comp stores.
Carol Tome - CFO, EVP Corporate Development
I can give you the US comps if that's what you're looking for Peter.
Peter Benedict - Analyst
I was more interested in US comp store traffic or comp transactions.
I assume they were --
Carol Tome - CFO, EVP Corporate Development
Comp ticket?
Peter Benedict - Analyst
Yes.
Carol Tome - CFO, EVP Corporate Development
The US comp transactions, I'm going to get it for you right here, was 2.1% and the ticket was down 3.2%.
Peter Benedict - Analyst
Thank you.
With the better average ticket trends that you have have seen of late, how are you thinking about this Spring's riding mower outlook?
Any adjustments?
Craig Menear - EVP Merchandising
No, I think we feel like we're well positioned for the Spring business.
I think the industry projections, again, for 2010, not going to be dramatically robust in that particular product category, still a big ticket transaction.
So we're hopeful, if you will, but not looking for robust growth.
Peter Benedict - Analyst
Okay, thanks.
Good luck.
Operator
Gregory Melich, Morgan Stanley.
Gregory Melich - Analyst
Hi.
Two questions.
You mentioned inventory was down.
I believe that was a global number, or US?
If, so if you expect comps to pick up this year, why would the inventory be down?
And I have a follow-up.
Carol Tome - CFO, EVP Corporate Development
That is a total company number we shared with you.
Part of the decline was Expo, but only about $133 million was related to Expo.
So we did rationalize inventory based on the sales environment.
We will be building inventory in support of the sales guidance that we've given you.
Gregory Melich - Analyst
So we should expect inventory to start to grow in the US business similar to the comps you expect?
Carol Tome - CFO, EVP Corporate Development
About 50% of the growth rate.
Gregory Melich - Analyst
Got it.
And then in terms of credit, has it helped you much of this year, could you tell us what that helped in the fourth quarter, if at all, and what you are planning for 2010?
Carol Tome - CFO, EVP Corporate Development
Absolutely.
When we sat here a year ago we told you that we expected about $250 million of expense benefit in 2009 as a result of our renegotiated private label credit card agreement.
We actually enjoyed about $300 million of expense benefit, so we did better.
And in the fourth quarter, the year-over-year benefit was about $91 million, and that included $22 million of an expense true-up that we hadn't counted on.
So we were pleased, obvious, with the performance.
As we look towards 2010, we're not going to repeat this.
So if you look at -- in a simple way of thinking about it, what will your cost of credit be next year.
The cost of credit next year will be about 1.2% in line with what it was in 2009.
Gregory Melich - Analyst
So it starts to be flat, and that's pretty much through the year?
Carol Tome - CFO, EVP Corporate Development
Yes.
Gregory Melich - Analyst
Great.
Thanks.
Carol Tome - CFO, EVP Corporate Development
You're welcome.
Operator
Dan Binder, Jefferies.
Dan Binder - Analyst
Hi, good morning.
Couple questions.
First related to Colin's question earlier about share gains, just curious if you continue to take share in roughly half the categories, is that, in your view, sufficient enough to allow gross margins to keep rising, or do you think once you sort of get to that level you have to rethink how much you reinvest in price?
Frank Blake - Chairman, CEO
Let me first off make a more global comment about share and share gain, because we referenced two different things during the course of our discussion this morning.
One is an entire US market that's the NAICS 444, and that looks at everybody in the lumber and building and garden center area.
Then there are discrete third-party surveys of share that tie to what Craig was referencing in terms of particular product category.
So we picked up 100 basis points of share overall as measured by the census bureau, or whoever measures it, and then as Craig said, on individual items we had six where we gained share.
In terms of your broader question, our intent is to gain share in every category, then Craig and team, consistent with the overall portfolio approach, figures out how we go about doing that.
So we're never happy if we show ourselves losing share anywhere.
Dan Binder - Analyst
Okay.
Second question is related to store growth.
It's pretty modest, as expected, for next year.
I'm just curious, if we get into a situation where comps start to get back into material positive territory, call it mid single digits or so, would you consider or rethink the store growth strategy for out years?
Frank Blake - Chairman, CEO
I think it's important to keep in mind for our business that we are significantly smaller at the end of 2009 than we were at 2006.
And our sales per square foot are significantly lower at the end of 2009 than they were at 2006.
So even with a strong market recovery, or a modest recovery, whatever the recovery is going to be, we see an enormous opportunity in building up the productivity of the existing stores we have and getting back to the numbers we had in terms of sales per square foot several years ago.
There will always be geographic opportunities to add stores where growth is in a different area than it used to be, or you have to reposition yourself, but there's a lot of sales to absorb in our existing store base.
Carol Tome - CFO, EVP Corporate Development
We have such a disciplined approach to capital allocation.
As we have talked to you about, we want to show increasing rates of return on our return on invested capital, not decreasing rates of return.
So if we see opportunities to increase the rates of return, we'll take those opportunities.
But we're not going to spend just to dilute the return.
Dan Binder - Analyst
Great, thank you.
Operator
Ivy Zelman, Zelman and Associates.
Dennis McGill - Analyst
Hi this is actually Dennis McGill.
Good morning.
Couple categories you mentioned both on kitchen and bath space and flooring, can you talk about what the promotional environment looked like there?
Are you still having to pull the consumer to the store or are you seeing confidence start to improve for those categories?
Frank Blake - Chairman, CEO
I think -- let me start with kitchen and bath.
We're working hard there to try to drive that business and get to our everyday great value proposition for our customers.
We're not there yet in that product category nor is the industry.
So that is an area that we continue to see.
Likewise, appliances would be another category that still has promotional activity in it as well, and that's going to be one industry that's done it that it way for a long time.
So it will be a category that will be a challenge for us to try and break that cycle, but we'd certainly like to get to every day great value for our customer.
In the flooring business, it's different.
We're pretty well there on an everyday basis.
Part of our heritage in our Company is to go out and grab special buy opportunities that our manufacturers might have to bring some urgency to the business.
We do that in that industry.
But at the same time we're driving great value every day for our customers, and we see that pull-through as a result.
Dennis McGill - Analyst
Okay.
And then a follow-up question.
I know you have made foreclosures an initiative in some of the stores and some programs around the pro desk.
Can you talk about any benefit you're seeing there and the programs that you expect to have in place this year to benefit from what should be more foreclosure sales in the market?
Marvin Ellison - EVP US Stores
This is Marvin.
We started that focus in northern California.
And we reaped some benefit by simply talking to our customers.
As noted, the pro segment is under pressure, so a lot of pro contractors shifted their business focus to doing different types of projects and foreclosure properties became one of those.
So we have done a pretty extensive survey around the country identifying markets that fit a certain profile, and we've implemented these initiatives in the stores around certain product categories, that we brought in, around certain types of communication activities to these customers as well as educating them on the features and benefits of our contractor/pro desk in our stores.
So we've expanded this to areas in Florida and some areas in the midwest and we're hoping to see similar benefits that we've identified so far in the northern California area.
Dennis McGill - Analyst
Thank you very much.
Marvin Ellison - EVP US Stores
Thank you.
Operator
Michael Lasser, Barclays Capital.
Michael Lasser - Analyst
Thanks so much for taking my question.
With the home improvement market seem to be reaching an inflection point in the Company achieving so many improvements in the customer service during the downturn, how are you thinking the about the cost of drawing back customers that might have been alienated in the past?
Might you have to use either promotions or advertising, and have you contemplated that in the long term margin outlook and if it occurs more organically than perhaps you've assumed, might that provide up side to the margin outlook?
Frank Blake - Chairman, CEO
Well, we've been on a path over the last several years trying to draw our customers back by providing great customer service in our stores.
We've also taken a different tact on our marketing campaign and I think our marketing better reflects Home Depot and our values and what we bring to our customers.
It's truly one customer at a time.
I don't think there's any other way to do it.
Carol Tome - CFO, EVP Corporate Development
It's like, I wouldn't discount social media.
We have our own Facebook page.
We Tweet.
We're talking to customers in ways we have never talked to them before.
Marvin Ellison - EVP US Stores
This is Marvin.
We've also taken an unprecedented approach where we're actually surfing all these social media sites and we're identifying customer issues before they even come to us.
We are communicating and contacting customers before we hear and see of any negative chatter about the Home Depot or service experience and we are addressing those proactively.
As Frank mentioned in his opening statement, we took the aggressive step last year to retrain every single associate in our store on our new customer service expectation by position.
And our goal is simply this and Craig and I discuss this often, that as the merchandising and marketing team draw customers to the stores, it's our expectation the store convert those customers with improved systems.
That's been the goal, and we have work to do, but we think we have made some progress.
Michael Lasser - Analyst
Okay I'll to have sign up for Facebook and become your friend.
One other question on Canada.
Now that the tax credit has expired, have you seen perhaps a drop-off in demand that was consistent with your expectation?
I know Carol you said that February has been running according to your planning assumptions.
Is that true in Canada as well?
Frank Blake - Chairman, CEO
It's consistent with our expectations.
Michael Lasser - Analyst
Thank you very much.
Diane Dayhoff - VP IR
Felicia, we have time for one more question.
Operator
Thank you.
We will go to Stephen Chick, FBR Capital Markets.
Stephen Chick - Analyst
Hi, thanks.
Congratulations here.
Just a question, Carol.
What interest expense number are you assuming within your guidance for 2010?
Can you remind me, I seem to recall you had guaranteed debt on the part of HD Supply.
I just wanted to clarify if that's the case, the status of that given the equity write-downs.
Thanks.
Carol Tome - CFO, EVP Corporate Development
Sure.
We are estimating an interest expense of about $600 million next year.
And as it relates to the HD Supply question, we did guarantee a billion dollar senior secured note.
That's an amortizing loan, so the principal is something around $980 million right now.
And we have taken no action on the guarantee.
It doesn't expire until 2012.
There's nothing that has come to our attention that suggests that we should do anything differently.
Stephen Chick - Analyst
Okay, great, thank you.
Diane Dayhoff - VP IR
Thank you, everyone, for joining us today, and we look forward to talking to you next quarter.
Operator
That concludes today's conference.
Thank you for your participation.