家得寶 (HD) 2011 Q2 法說會逐字稿

Good day, everyone, and welcome to today's Home Depot second-quarter 2011 earnings conference call.

Today's conference is being recorded.

(Operator Instructions).

Please note that any prompts entered before this time may not have registered in our system.

Beginning today's discussion is Ms.

Diane Dayhoff, Vice President of Investor Relations.

Please go ahead, ma'am.

Thank you, Alicia, and good morning to everyone.

Welcome to The Home Depot's 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 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 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.

Now before I turn the call over to Frank, let me remind you that today's press release and the presentations are made -- 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 that could cause actual results to differ materially from those in the forward-looking statements.

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.

A 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.

Thank you, Diane, and good morning, everyone.

Sales for the second quarter were $20.2 billion, up 4.2% from last year.

Comp sales were positive 4.3% and our diluted earnings per share were $0.86.

Our US stores had a positive comp of 3.5%.

From a geographic perspective, we saw positive comps at all but three of our top 40 markets with particular strength in our Midwest and South Atlantic regions.

We were also encouraged that soft housing markets like California, Florida, Arizona, and Nevada were positive in the quarter and the spread of performance across our major markets continued to narrow.

As we discussed in our first-quarter call, we expected to see an improvement in sales in our Northern division following a very difficult spring season and after a soft May, we did see that, with our Northern division posting our strongest positive comps in the US.

Our Southern and Western divisions were also positive, again reflecting a stabilizing environment across the country.

As Craig will detail, we saw strength in the core merchandising areas of our store, particularly in hardware, tools, building materials, and electrical.

We had a return to positive transaction growth in the quarter as well as an increase in average ticket.

On the international front, our Canadian business had flat comps for the quarter and our Mexican business had another quarter of positive comps, making it 31 quarters in a row of positive comp growth.

For the quarter, we also continued to invest in our core initiatives.

Matt and our IT team along with Craig and the merchandising team made significant progress on our special order initiatives.

We have now digitized all of our flooring and lighting catalogs and expect to have the rest of our catalog assortment digitized in the third quarter.

This will allow more accurate order entry for our associates and it will also provide the foundation for a new special order sales dashboard that will give visibility into the sales performance of specific special order SKUs, a capability that will enable our merchants for the first time to have direct line of sight into their best and worst performing special order items.

We are continuing with the rollout of our buy online pickup in store, BOPIS, capability.

We have over 100 stores with BOPIS now and our rollout will be complete in the third quarter.

Even without marketing, we are seeing a strong interest in this capability, about 30% of the visitors on our website who use our check inventory functionality make a purchase in the store within two days.

We also see that a significant percent of BOPIS orders result in an additional purchase on the day of pickup.

On the store operations side, Marvin and his team continue on the path of switching tasking hours to customer-facing hours.

We have piloted a new scheduling system for our associates that will eliminate approximately 30 hours per store per week of manual scheduling activity.

The system has been very effective at both reducing the time required to create schedules and in making the schedules more visible and predictable for our associates.

With the time saved on scheduling activity, we can increase the time allocated for customer-facing activity.

We will have this rolled out throughout the US by the end of the year.

Our supply chain efforts are delivering significant benefits to the business as we leverage supply chain expenses even in the face of increasing fuel costs.

We have more opportunities to pursue particularly in optimizing our supply chain with a flow of international product and we are beginning the process of optimizing our supply chain in Canada as well.

Balanced against the positive performance in the quarter and our progress against key initiatives, the US housing market remains under stress.

Private fixed residential investment as a percent of GDP continues to set a 60-plus year low of 2.2% and the key measures of health in the housing market starts, turnover, and pricing, remain depressed.

As we have discussed, we see our businesses more correlated to GDP growth and housing statistics at the moment but while our sales for the first half were consistent with our expectations, GDP growth was less than we expected.

We do not expect any meaningful improvement in the housing market for the back half of 2011 and events here and across the globe would suggest that there are more risks to the downside than the upside on GDP growth.

But both of those conditions were also true for the first half and we saw steady strength in the core of our store.

We have no reason to change that expectation for the back half.

As Carol will detail, we are maintaining our sales guidance for the year and increasing our earnings guidance to reflect our second-quarter results.

And we will continue to invest in and position our business for recovery.

I want to thank all of our associates for their hard work in the second quarter.

Due to their efforts, 92% of our stores will be eligible for success sharing, our profit sharing program for our hourly associates.

We are very proud of that accomplishment.

With that, let me turn the call over to Craig.

Thanks, Frank, and good morning, everyone.

We had a solid performance in the second quarter driven by three factors.

First, the seasonal business and outdoor project; second, the repair business from harsh winter and spring storms; and finally, the continued strength in our core departments.

During the quarter we saw strong sales across many of our key departments with [all] performance of the Company average comp in building materials, electrical, kitchens, indoor garden, outdoor garden, and tools.

Hardware performed at the Company average.

Paint, plumbing, and flooring delivered positive comps but less than the Company average.

Comps in lighting were flat while comps in lumber and millwork were negative for the quarter.

As spring arrived, customers focused on garden and outdoor projects.

This business was especially strong in the Northern division.

Examples of categories that delivered solid comp performance were exterior paint, exterior stains, live goods, landscape, fencing, and concrete.

In addition, customers continued to respond to great values and innovation in grills and patio products.

We leveraged the capability of our merchandising tools at a new level in the first half.

Category assortments were planned at a more detailed level than in the past.

Using outdoor patio category as an example, we planned not only dining and seating combinations by local store but also cushions, umbrellas, and chairs.

Another capability merchants had was the ability to more quickly identify trends at a local store level.

This allowed merchants to make assortment adjustments during the selling season and before the season was over.

These capabilities continue to add value for both our customers and shareholders.

Widespread heat as the quarter progressed drove strong performance in ceiling fans, air conditioners, and portable fans.

Our air movement product categories saw double-digit positive comps and contributed approximately 30 basis points to US comps in the second quarter.

Watering and irrigation products also delivered positive comp performance especially in our Southern division.

Additionally, we had good performance in appliances driven by outstanding values and in part by refrigeration sales due to increasing replacement needs caused by soaring temperatures.

We anticipated the need for repairing damage done by harsh weather.

As North America came out of the winter thaw, customers needed to repair or replace snow damaged roofs, gutters, lawns, and live goods.

Violent tornadoes and storms in the spring increased roof and repair sales to customers in the Southern division.

In addition, floods across the country resulted in the purchases all of cleaning supplies, pumps, and pressure washers.

Performance in our core departments of electrical, hardware, paint, and plumbing continued to be encouraging.

Products such as portable power, [power tool] accessories, hand tools, fastening tools, conduit boxes, circuit protection devices, adhesive tapes, and compressors were positive performers in the second quarter.

Based on independent third-party tracking of consumer activity, we gained unit share in five of 13 departments during the second quarter, flooring, plumbing, electrical, lighting, and kitchens.

At the end of the first quarter, we chose to carry more inventory to keep our stores fully stocked with seasonal products.

This was the right decision.

Improvements in the weather combined with our merchandising tools and enhanced transportation network allowed us to end the first half with inventory turns flat to last year.

The cornerstone of our end-to-end supply chain transformation, the 19 rapid deployment centers, is performing better than we had planned.

We are improving delivery and service to US stores and at the same time leveraging the cost of moving goods.

While we expect the RDCs to continue to provide cost leverage, we have several more supply chain projects underway in the US, Canada, and Mexico which will improve the efficiency and handling of our goods.

Our average ticket increased 3.3% and total customer transactions grew by 1.1%.

At the beginning of the year, we believed transaction improvement would lead to sales growth in the first half of the year and improvement in average ticket would be more sustaining in the back half of the year.

However, average ticket was more of a driver in the first half of the year than we anticipated due both to mix and price.

For example, transactions of tickets over $900 representing approximately 20% of our US sales were up 5.4% in the second quarter.

In regard to price, we have talked to you in the past about how we manage retail price through a portfolio strategy and our approach to addressing vendor cost increase requests.

In situations where we took a cost increase and pushed it through to the retail price, it had some impact on ticket growth but was not the principal driver.

We are well-positioned to drive average ticket and transactions in the third quarter.

Being the pioneer of vanity and sanity, our bath event is in stores now and has been expanded to include great values in faucets, toilets, tile, and lighting.

During the third quarter, customers will also be offered great values and special buys during our fall cleanup season.

Innovation plays a big role for us in driving sales.

For our professional customers, we are rolling out Dewalt hand tools exclusive to The Home Depot and Dewalt's new line of 20 volt lithium ion power tools.

The new 20 volt lithium ion battery has 35% more run time and is approximately 35% lighter than its current lithium product.

Hand tools including to Dewalt's utility knife features blades 35% sharper, 20% stronger, and 75% longer lasting than traditional utility blades.

We also have new product introductions in our decor lineup.

We are introducing Home Decorators Collection premium faux wood blinds at great value with added features.

Innovation also extends beyond just the product.

Our new blind cutting machines simplifies the cutting process, saving our associates time and better servicing our customers.

We continue to be the leader in paint for our customers.

We introduced Martha Stewart Living specialty finishes in metallic paints and glazes, glitter paints, and texture paints, along with specialty applicators.

With specialty finishes and a few simple tools, do-it-yourselfers can transform a plain wall with texture, dimension, and light to make the whole room look as if it were professionally decorated.

In addition, we are introducing innovative trim and door paint by Glidden, another exclusive to Home Depot.

This paint has unique gel flow technology that will not drip and does not leave brush marks while drying with a high-gloss glasslike finish.

We are real excited about the products and values we have to offer our customers in the upcoming months and with that, I would like to turn the call over to Carol.

Thank you, Craig, and hello, everyone.

In the second quarter, sales were $20.2 billion, up 4.2% from last year.

Comps or same-store sales were positive 4.3% for the quarter with 1.8% comps in May, 6.2% comps in June, and 4.9% comps in July.

Comps for US stores were positive 3.5% for the quarter with US comps up 0.8% in May, 5.7% in June, and 4% in July.

In the second quarter, our gross margin was 34%, an increase of 8 basis points from last year of which 11 basis points of growth was driven by our US business offset by 3 basis points of contraction arising from our Canadian business.

In the US, benefits arising from our supply chain transformation drove 26 basis points of margin expansion.

This expansion was offset in part by 15 basis points of gross margin contraction arising primarily from a shift in the mix of products sold.

As Craig described, in the second quarter our strongest selling categories were lower margin categories like building materials, outdoor garden, and appliances.

For the year, we continue to expect modest gross margin expansion.

Operating expenses as a percent of sales decreased by 70 basis points to 22.6%.

Our expense leverage reflects about 50 basis points of leverage arising from positive same-store sales, the majority of which was in hourly payroll.

The remaining 20 basis points of expense leverage can be explained by the following factors.

First, we realized 12 basis points of leverage in medical expense due to a lower cost per participant, among other factors.

Second, we realized 13 basis points of leverage in depreciation expense arising from fully depreciated assets.

And third, we experienced 11 basis points of leverage arising from favorable casualty estimates.

These three items were offset by 16 basis points of expense deleverage arising from a $32 million asset impairment charge.

In the second quarter, we wrote down our investment in a non-core carpet cleaning and cabinet refinishing business.

It is our intent to sell this business.

Based on our first-half results, we don't believe we will have as much expense pressure as we thought at the beginning of the year, especially in the area of medical and payroll tax expense.

For the year, we now expect total expenses to grow at approximately 30% of our sales growth rate.

Interest in other expense for the second quarter totaled $146 million, about the same as last year.

Our income tax provision rate was 36.5% in the second quarter.

For the year, we expect our effective tax rate to be approximately 37%.

Earnings per share for the second quarter were $0.86, up 19.4% from last year.

Now moving to our operational metrics, during the quarter, we opened one new store in Mexico and closed one store that was destroyed by a tornado in Joplin, Missouri for an ending store count of 2,245.

While our Joplin store was destroyed, we do have a temporary structure serving the community and have already begun construction on a replacement store.

At the end of the second quarter, selling square footage was 235 million and total sales per square foot were $343.

Now turning to the balance sheet, inventory remains in good shape.

At the end of the quarter, inventory was $10.8 billion, down $3 million from a year ago.

Inventory turns were 4.4 times flat to last year.

For the year, we anticipate a small improvement in inventory turnover.

We ended the quarter with $42.3 billion in assets including $2.6 billion in cash.

On the capital structure front, a few items of note.

First in the second quarter, we repurchased $1 billion or 28.1 million shares of outstanding stock.

Year to date, we have repurchased $2.3 billion or 63.4 million shares.

Second, we ended the quarter with approximately $10.7 billion of outstanding long-term debt of which the earliest maturity is $1.3 billion coming due in December 2013.

And finally, computed on the average of beginning and ending long-term debt and equity for the trailing four quarters, return on invested capital was 13.5%, 200 basis points higher than the second quarter of fiscal 2010.

In February, we told you that our 2011 capital spending plan was $1.350 billion.

We now believe that our 2011 capital expenditures will be $1.275 billion primarily as a result of fewer new stores in the new store opening pipeline.

As of the first half of 2011, we have spent $469 million in capital as our spending plan was weighted toward the back half of the year.

In the second quarter and for the first half of 2011, our sales performance disconnected from the US GDP growth.

We expect that certain quarters will exhibit such a disconnect as there are factors such as weather-related sales, storm damage-related sales, and event-driven sales that on a short-term basis can't be matched to any specific economic statistic.

Because of these factors, we still project that our fiscal 2011 sales growth will be approximately 2.5%.

While there may be more downside risk than upside risk to this forecast, our business continues to perform to our expectations and comp sales thus far into August are quite positive.

From an earnings per share perspective, remember that we guide off of GAAP.

Based on our first-half results and our outlook for the balance of the year, we now project fiscal 2011 earnings per share from continuing operations to increase approximately 16% to $2.34.

In our earnings per share guidance, we are not including the impact of any additional share repurchases outside of those executed in the first half but it is our intent to use excess cash to repurchase shares and are targeting approximately $1.2 billion of additional share repurchases for the remainder of the year.

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

(Operator Instructions).

Christopher Horvers, JPMorgan.

Thanks, good morning.

First, since you opened up the dialogue, just curious if you could elaborate on what exactly quite positive means in terms of August trend.

Because obviously we are all very focused on if the market has had any impact to your sales.

And then my follow-up is on gross margin.

You know, a lot of questions after your competitors' call yesterday exactly what the pricing environment is.

Is it becoming irrational?

So in that, did you see any promotional pressure, unexpected promotional pressure?

Has the environment changed?

And also did you see any fuel pressure in your cost of goods?

Thank you.

I will start with an answer to your first question.

Based on the guidance that we have given you, it implies a 3% comp in the back half of the year, and that's where we are trending.

So from that perspective, it's quite positive.

This is Craig.

Overall from promotional activity, the market really seems to be pretty common to what we have seen so far in the year, haven't really experienced any big differences at all.

And as it relates to I think, Mark, if you want to talk about fuel pressure.

Yes in terms of the fuel pressure the 26 basis points of supply chain improvement came after offsetting 9 basis points of fuel pressure, fuel price pressure.

Thanks very much.

RBC Capital Markets.

Good morning, guys.

I guess my question is you have commented before that you feel like you've disconnected from the housing market.

Now it seems like you've disconnected from GDP a little bit.

I guess the question is what are you guys using as kind of a guidepost for your same store sales performance at this stage?

Scott, I'd say and to Carol's comments, I'm not sure -- we are not saying we are disconnected from GDP.

There are always some events within quarters that explain ups and downs.

So we think for our results it's still going to be very important that we see GDP growth.

At the same time, we also think our job with all of you is to report on what we are observing and we observed strength in the second quarter even as GDP was under some pressure.

Okay, that's helpful.

Any other color on the growth and transaction size would be fantastic, because obviously that's something that was a big driver of the quarter.

Thank you.

Yes, in terms of transactions, we talked about the fact that there would be a little bit of a bathtub effect in the half.

And as the garden business strengthened in the second quarter, that is obviously a significant part of the transaction growth that takes place.

Certainly in outdoor garden for example, a lot of customers were out making repairs, but we also saw strength across the store as well and the core of our store performed well, which was also a driver to transactions.

All right.

Thank you, guys.

Gary Balter, Credit Suisse.

Good morning.

It's Simeon Gutman for Gary.

Following up on the gross margin, how does the mix typically go from I guess a seasonal perspective?

Should the mix change from summer to fall be positive?

And does that mean in the context of gross margins being up modestly for the year, that maybe the 2Q gain will represent the low point?

Right.

If I could just tell you what our forecast is, year to date, our gross margin is up 16 basis points.

We would define 16 basis points as modest, so that gives you a feel for what the back half will look like.

Okay.

And then I guess a quick follow-up for maybe Craig or whoever.

Having gone through the process of trying to push through some of the price increases that you went through in the first half of the year and maybe now having a better understanding of the sensitivity to some of those, is there more room to optimize gross margin in the next couple of periods and should that be a positive flow through?

We are constantly focused on making sure that we are driving value for our customer every day.

My message to the merchant team continually is you are the customers advocate for value and we will deal with cost pressures as they come up individually supplier by supplier, do everything we can working with the suppliers to try to find ways to squeeze out unnecessary costs to maintain value for our customer.

And clearly, you can see the benefits of our supply chain.

This is Gary, just following up.

Congratulations on a very strong quarter.

On the distribution side, everything is in place now.

You're starting to see some of the benefits as you mentioned on the supply chain.

As you examine it, how much more is there than you thought there was when you first started the project?

Gary, as we've commented, we are very pleased with our supply chain performance and it is exceeding our expectations.

We have got a lot on the docket.

We are not done in terms of transforming supply chain.

One of the key benefits that we are seeing year-over-year is just an increase in the percent of goods that are handled by our central supply chain including our bulk distribution centers, etc.

So we've gone from about 50% centrally managed to now 63%.

So there's more room for opportunity here.

We're not ready to lift the guidance that we've given but certainly there's room for opportunity.

Thank you.

Alan Rifkin, Barclays.

Thank you very much.

Earlier this year you folks commented that you had been seeing stabilization with respect to vendor requests on increasing prices.

I was wondering if you can get us an update on what you have seen from the vendor community lately.

Yes, that did stable outs in the second quarter.

There are still requests that come in but prior to the beginning of the year, those requests were on the rise and we actually saw that stable and flatten out in the second quarter.

Okay, so the 3% comp forecast that you are guiding to for the second half, does that include any inflationary element in it?

It really doesn't.

The way that we get to the 3%, to Frank's point about observation is we disconstructed the sales in the second quarter backing out some of the weather-related sales, heat weather-related sales and that takes our US comp to slightly under 2%.

And then we walk back up over 2% because of some additional storm-related sales, some event-related sales.

Remember as you know, we are now anniversarying lumber price inflation so lumber prices are up year-on-year.

So we get to a US comp that's north of 2% and you add to that some currency benefit in you are at 3%.

One more if I may.

We certainly appreciate your modesty with respect to sales disconnecting from GDP as well as PFRI, but to be fair, putting the weather issues aside, it appears that your business is at the core strengthening.

Would there be anything that you guys are seeing other than the obvious effects of weather that would lead you to believe that maybe going forward your sales can continue to disconnect from GDP and PFRI as they certainly have been doing in the first half?

Again, I would say we have not reached a conclusion that our sales disconnect from GDP.

We still think our business -- when you think about it, we need GDP growth.

We need the economy doing well.

Obviously the discretionary purchases from our consumers is a key driver of our business.

So we don't -- again Carol kind of walked through there some unique things that happened within quarters, but we would not be saying that our business grows regardless of what's happening with GDP.

Okay, thank you and congratulations.

Matthew Fassler, Goldman Sachs.

Thanks a lot and good morning.

I would like to focus in first if I can on your improvement in average ticket over the course of the quarter or rather from quarter-to-quarter that kind of stands in contrast to what one would expect from the macro backdrop.

So if you could talk about the drivers, that would be great.

Sure, Matt, this is Craig.

To start with, really we saw improvement across the store quite frankly with the exception of lumber and millwork.

So it really was somewhat broad-based across the store.

And was that within categories or was it more reflective of mix?

It was a combination of mix as well as within category.

Examples of within category would be things like inside of patio, inside of grills were we actually saw a benefit inside the mix of sale.

Got it.

And then my second question follow-up if you will relates to your fourth quarter -- the third quarter compare looks a lot like the second quarter compare and it sounds like you have good visibility to the start of the quarter.

Last year you promoted pretty aggressively on some holiday (inaudible) categories early in the season and wondering how you are thinking about the marketing plan to cycle that as you move into Q4 of '11?

We feel very good about our key holiday businesses.

Things around holiday decorating, around our gift centers and we have actually bought up double-digit in those areas.

Does that include the appliance business?

No.

We have a different model in appliances.

Fair enough.

Thanks so much.

Michael Lasser, UBS.

Good morning.

Thanks a lot for taking my question.

Frank, the business really seems to be humming recently.

Do you take this as an opportunity to maybe take a couple of bigger swings either on the promotional front or the inventory side?

Is there any way you could use this time as a way to expand the competitive mode and further distance you from the competition?

Michael, I guess I would say more we have got a basic business strategy that we run consistently.

You know, we are obviously pleased with the results of the quarter, but that just says we keep at it.

It's -- we just keep at it.

So I don't -- there's nothing where we are saying okay, now let's take some swing for the fence.

No real change in posture, nothing -- you can't (multiple speakers) Okay.

Then on the longer-term outlook, it's obviously very confusing especially with the prospect of subpar GDP growth and this is what seems like a societal movement towards renting a home versus owning a home.

So what are you -- under those type of conditions, do you think that the home-improvement market can generate a 2% to 3% long-term growth rate if maybe overall GDP is closer to 2%?

Well, with respect to the homeownership and renting, we have seen a decline in the percent of the population that owns homes but people who rent also do upgrades.

The folks who own those rental units have -- there's actually a lot of wear and tear on rental units and we can fill some of that need.

I would also say one of the comments just on the general market is there has been a huge upsurge, several millions of folks now living in multi-generational homes.

That is just a kind way of saying kids living with their parents.

That is not a great long-term solution I'm sure from either the kids' or the parents' perspective, so they are looking to go out and have new places to live as the economy improves.

I imagine you have some [GenXers] that might disagree, but that's a fair comment.

I appreciate it.

Fair enough, fair enough.

Deborah Weinswig, Citi.

Thanks so much and congratulations on a great quarter.

So in terms of the pro customer, can you talk about the strength here and anything particular to note in terms of the trends?

So Deborah, a couple of points on that and then I will turn it to Marvin to give you some comments on what we are doing operationally.

You know, we had for a period of time some very definitive statistics around what was happening with our pro customers and that was when we were using dunnhumby for data analysis.

We've taken that in-house but it's taken a while for us to kind of replicate the same who is a pro and the whole data crunching effort there.

So we don't have very good specific data yet on kind of year-over-year or month-over-month pro sales performance.

We hope to have that very soon but we are doing a lot operationally that we think is working and working well.

And I would ask Marvin just to comment on that.

Thanks, Frank.

Deborah, we went back and we did a lot of surveys of our key pro customers, so just understand what they wanted from a retailer to better serve them.

We rolled out something we mentioned a while back called First for Pro, a take on of our customer service initiative.

The good news is that our greatest customer service improvement in the store happened in the pro side of the store in the second quarter.

Our net promoter score increased by 270 basis points.

Our wait to check out was dramatically improved.

Our helpfulness in loading, just across the board.

So we feel really good about pro and good about the service model that we put in pro.

The key goal for us this year is to continue to engage our customers, understand the projects they are working on, and more importantly give them a very convenient retail environment to shop in because time is money and they want to get in and out fast.

As Frank mentioned, we will have a better view on the overall sales trajectory as we continue to crunch the data in-house but we feel very pleased with our progress thus far.

Great, thanks so much.

And then for my follow-up question, Craig, you talked about the ability to identify trends and make adjustments in season.

Can you maybe share some color on some of those adjustments that were made in season?

Yes, we did look at things happening inside of our outdoor living categories.

For example, we made assortment adjustments in our grills at a store level.

We made assortment adjustments within things like outdoor power equipment.

Great, thanks so much and best of luck.

Greg Melich, ISI.

Thanks and great job in the quarter, guys.

Could you give us some detail on the comp traffic in the US?

I think you gave the transactions number but it sounded like a global number and also what inflation or deflation did in the quarter?

Right.

So the comp traffic in the US was about 0.9% and in terms of inflation or deflation, it's hard to really quantify that, as you can appreciate.

We could comment a little bit about our commodity categories.

That might be helpful.

So lumber, you may remember a year ago we had about 100 basis points of benefit from lumber price inflation.

This year we had about 70 basis points of comp contraction because of deflation.

But that was offset for the most part by inflation that we saw in copper.

So when you look at commodities in total, we say it was basically flat.

Got it, thanks.

And then as a follow-up, trying to get that ticket back -- I know the consumer has been at least up until the last quarter or two very hesitant to use credit again.

Did that turn around in the quarter?

Do people want to use their Home Depot credit cards?

What was credit penetration up to?

Yes, well, we saw a slight uptick in our private label credit penetration, which we were happy about of course because it is our lowest cost of tender.

So that private label penetration as at the end of the second quarter is 21.5%.

Great.

So you did see a tick up.

And that was -- did you do anything special on the card to change there especially given what your competitor is up to or you are still the same?

No.

As you know, we view broad-based discounting with caution.

We use our card as a financing tool.

We certainly think our card is a great value proposition and we do try to shop that out every day but it is a financing tool.

Great.

Thanks a lot.

Budd Bugatch, Raymond James.

Good morning, thank you for taking my question and also congratulations.

Just you gave the over 900 comp.

You usually give the under $50 comp too.

Just for completeness, can you do that?

Sure, it was basically flat.

Okay, and you talked, Craig, about kitchen being strong and I think you also talked about appliances or refrigeration being strong.

Can you kind of maybe go into that a bit?

Because with the economy the way it is and that overall industry feeling some pressure, I'd love to see what you did there.

Sure, when we look at our kitchen business in total, we did have positive growth in our kitchen business.

I think that's a result of the hard work the team has put in over the past few years to be able to really offer a wide range of kitchen options for our customer, anything from an assembled cabinets, take it home, start today to if you want to refinish or simply replace doors and fronts, all the way to semi-custom.

And the customer has responded well to that value proposition and those options in the market.

And we did see growth in our appliance business.

There's always a little bit of a spike in the summer timeframe against refrigeration because heat puts pressure on the obvious mechanics of older refrigerators and we did well in that product category.

Okay, thank you.

Just one more just if I can sneak it in.

The net promoter score, what was it in the quarter?

The net promoter score was a 68.7 and that's an increase of 210 basis points and I have to note that that's on top of a 530 basis point increase same quarter last year.

(multiple speakers) progress.

Thank you very much.

Eric Bosshard, Cleveland Research Company.

Good morning.

In terms of merchandising, Craig, earlier you mentioned vanity and sanity.

And I am interested in what your thoughts are about your merchandising and promotional strategy into the back half of the year.

And then also interested obviously over the last two years, you have made a great deal of market share progress relative to the prior six or seven years.

I'm wondering as you look back at that and look forward, what you think is driving that and if there are specific things you are doing to sustain or expand that?

So starting with the progress, obviously, Eric, we implemented a portfolio approach a few years ago really looking hard at what we wanted to stand for, where we wanted to invest.

That then dictated what we had to do as it related to really looking at decisions around assortments, breadth of assortment, go to market strategies, how we presented the products in the store, and that has served us well.

We have worked hard to work on the productivity of our assortments inside the base and we will continue to remain focused there as we go forward.

If you think -- look at things like our vanity and sanity again, start with what I said earlier, our focus says merchants has to be the customers' advocate for value.

A long traditional history inside of Home Depot is to drive value for our customers, to look for opportunities to work with our suppliers to drive productivity in their factories, creating things like special buys that helps them leverage productivity, gives us a chance to give the customer a great value.

And that's what we see in things like vanity and sanity and we will continue to look for those opportunities.

We have several of them in play for the fall season to continue to drive the business and drive urgency within the business.

Craig, you would agree that market share gains have come about not just with merchandising but also with the great customer service delivered by the (multiple speakers) operators.

Our in-stock position is as good as it has ever been, so as a company working together I think we are really making some progress.

Yes, Eric, to Carol's point, retail is really candidly like baking a cake.

You got to get all the ingredients right to really drive the business and I think Carol is absolutely correct.

It's all of those things combined.

Okay.

Thank you.

Laura Champine, Cowen and Company.

Good morning, guys, and a great quarter again.

In flooring, where you are taking share, what changes have you made there?

Do you think those share gains are being driven by values or by a broadened assortment?

I think it is a combination of both.

We have been working hard on our assortments over the past several years in our flooring business, outstanding values with our Platinum Plus and Martha carpet program.

We've worked hard on our assortments in tile whether that is in ceramic, porcelain, mosaics.

So wood, laminate, combinations of enhancing assortment as well as driving special buys.

So it's really a combination of all of those things that has allowed us to really improve that business over the years.

In flooring but more as an overall follow-up, do you find yourselves using more vendors or leveraging your size with fewer vendors?

I would say it really varies by category.

And in some categories, we have actually expanded the vendor base.

In other categories, we have actually contracted.

And can you comment specifically on flooring?

Flooring is pretty much the same.

Thank you.

Dennis McGill, Zelman & Associates.

Good morning and thank you.

Frank, I guess just big picture what you've talked about with comps and sort of the different macro factors, it seems like the business is sort of in this 1% to 2% range now for several quarters even though the housing market has been pretty choppy and we've seen the economy slow down.

The consumer certainly seems to be under more pressure recently.

Yet you haven't necessarily seen that impact on your business.

So is that another way of saying that we are sort of at a maintenance type level of spending and would suggest that there's less sensitivity to a downturn?

Just wondering if you agree with that or your thoughts around the topic.

And then along those lines if we are in a situation where the consumer spending declines next year, maybe we double dip modestly, can you just talk about the ability to manage expenses and how we should think about operating margin in a down comp environment?

First, Dennis, on the question of whether we are at the maintenance spending level, I would say we are still very cautious before we would say something like that.

Again, there's just -- it's still kind of early and as I've said before in answers to the other questions, we still think that there's a connection between our business and GDP growth.

So I wouldn't want to suggest that regardless of what's happening in the general economy that our business has hit sort of the basic maintenance spend.

For sure it's encouraging that as in this past quarter we see kind of the core of the business hold up strong.

It's encouraging that we see the spread narrowing across the country in terms of performance.

So you are not seeing these dramatic swings that we have been seeing in prior years.

So those are all encouraging signs, but I would just provide some caution in looking at them and we still think the general economy is important to us.

In terms of -- I don't want to get into a hypothetical on what would happen with a double-digit -- double-dip recession, so for our business, we always have opportunities to improve, so we will look at that regardless of what the economy throws at us.

Okay, fair enough.

Thank you.

Joe Feldman, Telsey Advisory Group.

Good morning.

I wanted to ask a little more on the expense control, which has been very good, and you are still planning to grow expenses at 30% of sales for the year or that's even better than what it had been before.

I guess our concern was you had made a comment that you still think total sales there's more risk to the downside and as much as we know trends are good right now, let's say they do fall off.

I guess within that 30%, how much of that I guess is fixed versus variable?

Where do you -- do you have enough room to keep adjusting to maintain that 30% level?

Well remember that our largest expense is payroll and we do have an activity-based model, so we can adjust payroll based on the activity we see in our stores.

The other components of expenses that are variable would certainly be advertising and that would also flex relative to where our sales are going.

So we feel very comfortable about the guidance that we have given to you today.

Got it, thank you.

And then also if I could follow up, with the -- ticket and transactions have been good and I guess are you seeing customers that you haven't seen in a while or so-called new customers or new households coming back?

Especially with the way those trends are, it would seem that -- and with those promoter scores, it seems like things are really on an upswing and I'm just curious about that.

It's a good question.

We really don't have a way of judging that, so I can't give you a good statistic on who we think are returning customers versus new customers.

Joe, this is Marvin.

The general approach that we take is to just provide great service and we know that customers will traditionally shop for home improvement four to five times a year and we want those occasions to be with us.

We think by engaging them and giving them a great service environment we have a great opportunity to get them on that next shopping occasion.

So whether it's new customers or not we focus on our customers in a very aggressive service mentality, hoping that we can just retain them and continue to provide an opportunity for them to come back and shop with us again.

Got it, that's helpful.

Thanks, guys, and good luck with this quarter.

Mike Baker, Deutsche Bank.

Thanks, so just a clarity on the expense question, that 30% growth number relative to sales.

That is for this year.

Is that something that we should plan on ongoing as we look out ahead?

Then I guess a follow-up but related to that, are there more examples that you could provide where you are seeing some inefficiencies in the store that you can fix for instance, the labor scheduling that Frank alluded to earlier?

And I can know in the past you've talked about processing returns at the store level.

Are there still more examples of those where you guys can become more cost-efficient and keep that ratio down?

Thanks.

Regarding expenses, we have said as a general rule of thumb expenses would grow in the area of 50% of our sales growth.

Obviously we are doing better than that and there are some reasons for that.

While we thought we would have pressure from medical expense this year, we are actually seeing relief from the medical expense line, if you will.

So where that goes in outers years not sure, but we have certainly done some great things here in getting our associates to be more healthy and if they are healthy, our costs go down.

We will continue those efforts, so maybe our rule of thumb will change in the outer years, but right now, Michael, for your modeling purposes, I would use that for outer years.

And then in terms of what we are doing in the store, Marvin is on a path to get to 60-40, so you might talk about that.

Mike, we laid out a pretty aggressive plan a few years back to shift our payroll model from a task, what I call non-customer service activities, which was at 60%, to flip that and make that activity to be customer-facing over a period of time.

We are over 50% now, which is a great milestone.

When you think about some of the key initiatives, we have a new labor system that Frank mentioned that will really transform how we schedule, give associates the ability to reschedule from home, just a great piece of technology that we believe will make us best in class from a retail payroll management standpoint.

We have rolling out centralized return to vendor process.

Today we process returns individually in 2000 stores in the US.

We're going to create three large, central locations and all stores we process in those locations is going to be a huge productivity in payroll savings.

We are revamping our entire [tool-room] system which takes a transaction from eight minutes to approximately one minute.

That's going to happen this year as well.

Frank mentioned buy online pickup in store.

We waited a while to roll this out but we wanted to be a very good and have a process that will create differentiation.

We believe we have done that and we will have that rolled out within the next couple of months in our stores.

As Carol mentioned, we have a project plan for the next two years with projects similar to the ones I just outlined that we think will be very beneficial for us to continue to transform our store environment, drive payroll productivity, and just create a better service environment for the customers.

So it sounds like a lot of those are happening now or are still ahead of you.

Is that fair to say?

The ones I outlined are happening as we speak.

Okay, thank you.

Alicia, we have time for one more question.

David Schick, Stifel.

Good morning.

Frank, I would be interested in your thoughts on long-term five or 10 years out, how important is Mexico and the Internet or online sales to this business?

Well, two different answers.

First, we obviously think both are very important, but in different ways.

The Internet is going to be important for every part of our business.

Marvin was just going through one example with buy online pickup in store, but we have an entire focus here around what we call interconnected retail because we think online for us is not just a matter of selling online, customers' research online.

They get project knowledge online, so there's a lot of ways in which our bricks connect with our online presence and we want to make sure we have the best experience in all of retail for that.

On Mexico, Mexico has just been a great, great story for us.

The business has grown well.

We have also been able to learn a lot in terms of -- I mean, it is not just a matter of the team here helping in Mexico, but frankly we probably get more help coming back the other way.

Our Mexican business helps us think through customer, Hispanic customers in the US are obviously a huge demographic opportunity.

On personnel, we transfer personnel back and forth between the US and Mexico, which is great.

We do that both on the merchandising side, the operations side, the finance side.

We do that across the business, so we look at Mexico as just absolutely a critical part of the overall business and see continued growth for it.

Great, thanks.

Thanks very much.

Thank you for listening to us today and we look forward to talking to you next quarter.

That does conclude today's conference.

We thank you for your participation.