家得寶 (HD) 2012 Q2 法說會逐字稿

Good day, everyone, and welcome to today's Home Depot second-quarter 2012 earnings conference call.

Today's conference is being recorded.

(Operator Instructions)

Beginning today's discussion is Ms. Diane Dayhoff, Vice President, Investor Relations.

Please go ahead.

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.

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 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 our experiences and projections.

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 may also include certain non-GAAP measurements.

Reconciliation of these measurements is provided on our website.

Now let me turn the call over to Frank Blake.

Thank you, Diane, and good morning, everyone.

Sales for the second quarter were $20.6 billion, up 1.7% from last year.

Comp sales were positive 2.1% and our diluted earnings per share were $1.01.

Our US stores had a positive comp of 2.6%.

From a geographic perspective, all three of our US divisions had positive comps.

As expected, comps for the Northern division, our largest division, were below the Company average because of this year's early spring, which pulled seasonal sales forward into the first quarter.

We continue to see recovery in the markets that were hit hardest in the downturn, particularly Florida and California.

Their comp performance improved from the first quarter, and they were among our best comping regions in the second quarter.

For the half, we had solid performance across the country, with only one of our top-40 markets with negative comps, and that was just barely negative.

As Craig will detail, we see strength in the core of the store, and customers continue to engage in simple decor projects.

Our customer transaction growth was down sequentially from the first quarter, but that's largely a reflection of the seasonal shift from the early spring.

Our pro business grew in the quarter.

This is another positive sign, because pro sales faced a difficult year-over-year comparison with last year's strong roofing sales due to storm repair.

We also had double-digit growth in our services business with strong growth in our kitchen installation business, where Marvin and his team have focused on improving the customer experience.

Our customer satisfaction surveys now show that we can deliver an installation experience that consistently hits at or above 9 on a 1-to-10 customer satisfaction scale.

Our services business has now seen seven consecutive quarters of growth.

Much like the pro customer, this business was under disproportionate pressure during the downturn.

On the international front, our Canadian business posted positive comps for the third consecutive quarter, with comps above the Company average in local currency.

And our Mexican business had another quarter of positive comps, making it 35 quarters in a row of positive comp growth.

As we discussed at our investor and analyst conference in June, we have a number of strategic initiatives underway to position our business for a best-in-class interconnected retail experience.

These initiatives touch every part of our organization.

On the dotcom side, we've relaunched our mobile website for HomeDepot.com.

Our upgraded mobile site provides significant new functionality including the ability to buy online and pick up in store, and this now represents over 35% of our mobile sales.

The in-store execution of Buy Online Pick Up In Store is a focus for Marvin and the store operations team.

We take surveys from our customers on our performance, timeliness, completeness of orders, ease of transaction; and Marvin has set the same objectives for constant improvement in customer satisfaction as we have for our in-stock business.

We are also preparing for the launch of Buy Online Ship To Store this year, which will significantly expand the range of options available to our customers.

On the merchandising side, Craig and his team continue to expand the breadth of SKUs available online.

And organizationally we have integrated online and in-store data, pricing analytics, and product-line review teams along with our merchant teams.

This may not sound significant, but it's a key step in driving our own interconnection, as those teams are now responsible for thinking through the full customer experience regardless of whether it begins in a store, on a computer, or on a smartphone.

Last week we opened a new call center in Utah to support our interconnected business, and we will open another call center in Georgia this quarter.

We have also begun the development of new distribution centers to support direct-to-customer fulfillment and expect to complete this effort over the next two years.

You may have noticed the addition of new decor offerings as part of our usual second-quarter storage event.

We are leveraging the capabilities of our Home Decorators Collection business, which began and continues as a decor-oriented catalog and online business, but which also adds a design capability for us that we are now using for branded in-stock products.

In the quarter, we also launched our first pilots with our Redbeacon platform.

One of the advantages of the online space is that it gives us the ability to experiment, expand offerings, and test the leverage we can generate from the combination of our physical and virtual presence.

As we look into the back half of the year, there are positives from the first and second quarter that give us some confidence.

Weather aside, we see strength in the core of our store, stabilization within the hardest-hit housing markets in California and Florida, and signs of gradual improvement within the overall housing market.

Housing now is a contributor to GDP growth, rather than a drag; and private fixed residential investment as a percent of GDP improved in the quarter.

As we previously discussed, we view our business as more correlated to GDP growth than the housing market, given the current depressed levels of housing-related spend.

Consensus GDP estimates have been revised downward lately, which would indicate more downward pressure than upside opportunity in our sales guidance.

But as Carol will discuss, given our outperformance in the first half, we are maintaining our sales growth guidance and are raising our earnings per share guidance for the year.

Let me close by thanking our associates for their hard work and dedication.

Based on this quarter's results, all of our US stores, every one of them, qualified for our first-half Success Sharing.

As a reminder, Success Sharing is our profit-sharing program for our hourly associates.

This is a record level of participation for us, with the highest-ever Success Sharing payout.

And we are very proud of that result.

And with that, let me turn the call over to Craig.

Thanks, Frank, and good morning, everyone.

We finished the second quarter with solid results.

There were three main drivers to the quarter's performance.

First, the core of the store delivered in line with expectations.

Second, as we shared with you in the first quarter, record-setting weather in February and March pulled forward activity that otherwise would have occurred in the second quarter.

Third, we lapped the impact of significant roofing repairs made in the same period a year ago.

The departments that outperformed the Company's average comp were decor, lumber, kitchens, paint, electrical, tools, bath, flooring, and plumbing.

Hardware, lighting, and millwork performed positively, while sales in garden and building materials were down.

The impact of the weather and drought-like conditions caused our garden business to be slightly negative.

And comp sales in building materials were down due to tough year-over-year comparisons in roofing.

Last year we experienced several storms in the Southeast and repair activity in the North which drove our roofing sales.

In the quarter, the core of the store continued to perform.

Maintenance and repair categories such as light bulbs, appliance parts, safety and security, wiring devices, plumbing repair, pipe and fitting, and builders hardware performed above the Company average.

Project completers such as power tools and accessories, electrical tools, tape, adhesives, lubricants, and fasteners also positively comped.

As I have shared in the past, the customers continue to spend on simple decor updates for their home.

We saw double-digit positive comps in spray paint, laminate flooring, and area rugs.

Wall decor, organization, paint, bath accessories, special-order carpet, door locks, hard window treatments, and wood flooring all performed above the Company average.

Total transactions grew by 0.6%, while average ticket increased 1.8% for the quarter.

The average ticket growth was positively impacted by commodity inflation, which contributed approximately 50 basis points in comp, as well as strength in larger ticket categories.

Transactions for tickets under $50, representing approximately 20% of US sales, were down 0.7% in the second quarter.

We believe this is a result of the pull-forward of seasonal sales into the first quarter.

Transactions for tickets over $900, also representing approximately 20% of our US sales, were up 3.4% in the second quarter.

The drivers behind the increase in big-ticket purchases were strength in HVACs, appliances, kitchens, and flooring.

Now let me turn our attention to the third quarter.

In addition to the GDP headwinds Frank mentioned, we will also face tough sales comparisons resulting from the impact of last year's Hurricane Irene.

The impact from lapping this storm is factored into our plan for the third quarter.

We are pleased with the outstanding offerings, incredible values, and special buys our merchants have created to drive business in the third quarter.

Recently we announced an expanded appliance line including Electrolux, Whirlpool, and Frigidaire.

These appliances are available online through HomeDepot.com and can be ordered in all of our stores.

Additionally, in over 100 stores we plan to expand the footprint of our appliance showroom to display the broader brand presence.

Coming this fall, our Husky brand will experience several product upgrades.

We are introducing new lines of Husky hand tools for both the pro and DIY customers.

The new assortment offers industry-leading quality and innovation.

Husky products are exclusive to The Home Depot.

We have ramped up our air compressor mix to feature up to nine new Husky SKUs, and we will complement the Husky hand tool mix with new Husky tool storage solutions.

We continue to bring innovation and value to Husky soft-sided storage.

And in the third quarter, excited to reintroduce our line of Husky steel storage products, including a new mechanics tool chest designed with 50-pound ball-bearing drawer slides, heavy-duty casters, and lid reinforcements with gas struts.

We also will be the exclusive home-improvement launch partner of the new Delta brand toilets.

This new line of product includes innovative features such as SmartFit tank-to-bolt connections and integrated supply lines.

Also from Delta, 16 new SKUs of Foundations branded faucets will be added to our assortment, a brand that resonates with our pro customers.

Innovation in key technologies is also part of our leadership strategy.

We continue to be innovative in LED, and we will be introducing 15 new lightbulb SKUs in the third quarter.

These lightbulbs are the second generation of product from our original line of EcoSmart LED bulbs and will deliver a new look, improved efficiency, and better lighting experience.

Also we will be launching 41 new LED fixtures in stores during the third quarter and will continue to offer an enhanced selection of over 1,000 LED fixtures online.

And finally, with capabilities created through our supply chain transformation, our merchandising execution team, and partners in operations, we will be setting Holiday at the end of the third quarter in half the time previously needed.

This improvement will allow us to extend our fall cleanup selling season.

With this activity, we believe that we will deliver within sales within our expectations.

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 $20.6 billion, a 1.7% increase from last year.

Comps or same-store sales were positive 2.1% for the quarter, with positive comps of 3.4% in May, negative 0.4% in June, and positive 3.1% in July.

Comps for US stores were positive 2.6% for the quarter, with positive comps of 3.6% in May, positive 0.2% in June, and positive 3.8% in July.

The variability in our monthly comps was due in part to year-over-year comparisons and the impact that weather and storms had on our sales.

Our total Company gross margin was 34.2% for the quarter, an increase of 17 basis points from last year, of which 15 basis points came from our US business.

In the US, we experienced 4 basis points of gross margin expansion arising from lower costs within our supply chain; and the remaining 11 basis points of gross margin expansion was due primarily to a change in mix of products sold, most notably in lower penetration of roofing sales this year versus last year.

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

In the second quarter, operating expense as a percent of sales decreased by 98 basis points to 21.7%.

Our operating expenses declined $125 million from last year due primarily to the following factors.

First, in the second quarter of 2011, we had $42 million of expense related to the impairment of Chem-Dry and natural disasters.

That did not repeat.

Second, this year we experienced $42 million of favorability in our workers comp reserves.

And third, our credit card expense was $40 million lower than last year, reflecting lower debit card fees and a higher penetration of private-label credit sales, coupled with a lower cost of private-label credit.

For the year, we expect expenses to grow at approximately 10% of our sales growth rate on a 52-week basis.

Interest and other expense for the second quarter was $151 million, a slight increase from last year.

Our income tax provision rate was 36.6% in the second quarter; and for the year we expect our tax rate to be approximately 36.5%.

Diluted earnings per share for the second quarter were $1.01, an increase of 17% from last year.

Moving to our operational metrics, during the second quarter we opened one new store in Mexico for an ending store count of 2,255.

At the end of the second quarter, selling square footage was 236 million, and total sales per square foot were $350, up 2.2% from last year.

Now turning to the balance sheet, at the end of the quarter inventory was $10.9 billion, up $150 million from a year ago, reflecting purchases made for our upcoming Holiday season.

Inventory turns were 4.7 times, up from 4.4 times last year.

We ended the quarter with $42 billion in assets including $2.8 billion in cash.

Moving to our share repurchase program, in the second quarter we received 2.8 million shares related to the true-up of an accelerated share repurchase, or ASR, program we initiated in the first quarter.

Additionally, in the second quarter we repurchased $1.5 billion or 23.6 million of our outstanding shares.

This included 2.1 million shares repurchased in the open market and 21.5 million shares repurchased through an ASR program.

For the shares repurchased under the ASR program, this is an initial calculation.

The final number of shares repurchased will be determined upon the completion of the ASR program in the third quarter.

Computed on the average of beginning and ending long-term debt and equity for the trailing four quarters, return on invested capital was 16%, 250 basis points higher than the second quarter of fiscal 2011.

As we look ahead, we see signs of slowing US economic growth, but housing appears to be a bit of a bright spot.

August has started off in line with our expectations.

Based on our year-to-date results and our outlook for the balance of the year, we continue to project fiscal 2012 sales will increase by approximately 4.6% on a 53-week basis.

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

We exceeded our earnings per share plan in the second quarter and, with that outperformance, we are lifting our earnings per share guidance for the year.

We now project fiscal 2012 diluted earnings per share to increase approximately 19% to $2.95 on a 53-week basis.

This earnings per share guidance includes $2.6 billion of share repurchases completed in the first half and our intent to repurchase an additional $1.4 billion of outstanding shares in the back half of the year.

So, we thank you for your participation in today's call.

And Alicia, we are now ready for questions.

(Operator Instructions) Dan Binder, Jefferies & Company.

Hi, good morning.

I was wondering if you could just share with us maybe a little bit more color on your Web sales performance, as you have been making investments in that area of the business.

If you could discuss a little bit about what is selling best, what has happened as you have made price investments in that area, what the average ticket looks like and the margin behind that versus the store.

So, Dan, this is Craig.

We were very pleased with the direction of our business online.

We do view this as total commerce, because there's many projects that actually start online and actually complete in-store.

When we look at -- we have made significant investments in our online business.

We upgraded to WebSphere 7; big effort behind that; improved speed dramatically for our customers, as well as features that allow the customer a better a shopping experience online overall.

So we are very pleased with the performance.

We were approximately 2% of our sales, roughly, come through our online business directly.

Then as a follow-up, could you discuss a little bit about how the pro customer is doing versus the consumer in terms of comps by group?

So, Dan, this quarter the pro customer sales growth was lower than the consumer.

But as I noted, if you take out -- we did have, and you heard it both in Craig and Carol's comments -- we did have some tough comparisons on roofing.

When you take out roofing they were pretty much the same, same level of growth between the pro and consumer.

So we are very pleased with that.

Because as you know, this is one of the indicators for us of our business recovering.

Great, thank you.

Budd Bugatch, Raymond James.

Good morning.

Congratulations and thanks for taking my questions.

I guess I want to talk a little bit about the SG&A performance, which was terrific, and I think the best SG&A ratio since maybe the second quarter of '06.

Carol, you called out I think three items that explain the difference between this year and last year.

And you talked about what you thought would be the ratio or the growth going forward.

But can you give us maybe the callouts as to what you think affects the third and fourth quarter?

Do the working capital reserves?

Is that a true-up that still affects third and fourth quarter and the credit card expense?

How do you think that will fare for the rest of the year?

I'm happy to do so, Budd.

We were pleased with our expense performance in the second quarter for sure.

And as we look out for the back half of the year, we do expect expenses to be higher in the back half of the year versus last year, relative to expenses being under the first half of the year for a couple of reasons.

We talked to you about the fact that we are investing in interconnected retail, and that includes the new call centers that Frank mentioned, broadband expansion inside of our stores, delivery for dotcom.

So we are making some investments in the back half of the year which will cause our expenses to be higher than they were last year.

But we should see continuing benefit coming off of our credit card.

And as it relates to workers compensation expense, you will recall that during our Investor Day we called out an expense opportunity with regard to our casualty reserves.

In fact we have called out that we thought we could get about $100 million between now and 2015.

So we were pleased with the benefit that we saw in the second quarter.

I wouldn't expect that to repeat in the back half of the year, but I would certainly expect to see continuing benefit between now and 2015.

Okay, thank you.

And as a follow-up, just as a quick follow-up, I go back long enough to remember when you used to parse out the operating expense by store expense and G&A expense.

Can you maybe give us a little bit of a read of how that affects or how that looks today?

Yes, well as Frank pointed out, we are so thrilled that 100% of our US stores are in Success Sharing.

So if you think about what that means for bonus payments, bonuses are up year on year, and we are thrilled with that.

But we are able to offset that cost through cost-outs in other areas.

We didn't spend a lot of time going through it, but we continue -- Marvin and his team are doing a masterful job of leveraging payroll by moving hours away from non-selling tasks to selling.

And it's working very beautifully for us.

Okay.

Thank you very much.

Congratulations and good luck for the second half of the year.

Aram Rubinson, Nomura.

Thanks and good morning.

A couple things.

One, at your Analyst Day you gave us a breakout of four different product categories.

One that you would want to own in the store; one that is online know-how and in-store pickup -- and in-store experience; one that has grown across channels; and one that is more more of a defend share.

I am wondering if you guys look at comps or sales trends by each of those buckets, because of the online significance in there.

And curious how that has trended year-to-date.

Aram, I would say that candidly we look at the comps across each of the businesses.

I haven't exactly totaled them by those four categories, but inside of those we certainly look at it.

If you remember the categories in the red at highest risk, actually right now we are performing very well in those categories.

We like that.

Areas in the yellow were growth opportunities both in store and online.

And some of those are some of our stronger growth areas that we are seeing, particularly in our online expansion as we broaden the assortments in a lot of the simple decor categories.

Then if you recall the lower left-hand side, which was the more maintenance and repair and things that we felt would have less pressure, we experienced some pressure in that business as it relates to garden with the pull-forward from first quarter and the drought conditions and the drought conditions that impacted things like live goods and so on.

Well, I am very impressed that you remembered all those buckets offhand.

Thanks for that.

Then one quick follow-up.

Your DSOs were flat -- I'm sorry, your DSIs, your inventory days, were flat.

Wondering if you can characterize the balance inside the mix and whether or not having the lawn and garden being outsourced really helped save the margins, or how that would have looked otherwise?

Thank you.

Well, we were very pleased with our inventory performance.

Turns were up year-on-year, that is how we look at it.

And as we mentioned on the call, we have made purchases for our Holiday season.

Many of those purchases come from outside of the United States.

We have paid for those, but the inventory is on the water, making its way to the stores.

You don't feel heavy anywhere is what you are saying?

I feel really good about inventory levels.

Don't you, Craig?

Yes, I feel very comfortable with where we are at overall in inventory.

Yes.

Thanks so much.

Have a good Q3.

Kate McShane, Citi.

Hi, thanks.

Good morning.

I was wondering if there was any more detail you could give behind your Buy Online Pick Up In Store and how that may be contributing to the comp, and what you're expecting the contribution to be from the Buy Online Ship To Store going forward?

Kate, it is still a very, very small -- I mean it is a fraction -- a fraction of a small part.

But it's important; it is important directionally for us because we really do believe, if you look out over the next five to 10 years, that interconnecting the virtual/physical presence is going to be a key differentiator.

So right now -- and then also by the same token if you looked at comp performance on Buy Online Pick Up In Store sales, very high growth, but it's small base.

Okay, thank you.

Michael Baker, Deutsche Bank.

We will move on to the next question.

Colin McGranahan, Bernstein.

Good morning and thank you.

First question for Carol, just back on SG&A.

Understanding those three -- those buckets, and that was helpful understanding how they look going forward.

But if we strip those out, SG&A dollars would have been still pretty flat on sales per square foot and comp sales store sales up.

So it sounds like you had some labor-dollar productivity improvement, given that bonuses were higher.

Understand the shifting of tasking to selling.

But can you comment a little bit about -- on what labor productivity looked like and maybe where are some of the productivity improvements are coming from?

And if there was anything else in the other SG&A bucket, advertising or anything else, that was favorable.

Yes, we leveraged hourly payroll by 21 basis points in the quarter, of which 18 basis points came from non-selling.

So that is really what Marvin is doing in terms of driving tasks out of the store.

A terrific performance.

And Colin, as you know, we have got a laser-like focus on cost out.

So I can go line by line to tell you we were down in common area maintenance; we were down in advertising; we were down in a number of other expense areas because we are just getting much better.

We are running a better business.

And, Marvin, maybe you want to talk about some of the activities that are going on inside the store.

Yes, Colin, if I can take you back to 2011, we rolled out centralized return to vendor, a big, big process change for us.

But if you think about it, every store in the chain had a minimum of 40 full-time hours in the backroom processing vendor returns.

We stood up (technical difficulty) central reverse logistics centers.

A big deal, great productivity for us.

In addition to that, we worked hand-in-hand with Matt Carey's team on labor productivity and scheduling.

We rolled out an enterprise-wide in the US scheduling system and payroll system for all stores.

Enabled us to take the schedule-writing process in some cases to three to five days to a matter of hours.

So I can go through a list of projects that we put in place to drive productivity in the stores.

We're excited about what we have done.

We have the 60/40 target that we hope to complete in 2013.

And as Carol mentioned, our goal is simply to figure out ways to take nonproductive, non-service-related payroll and shift it to the sales floor and also to continue to drive profits.

Great, that's helpful.

Sounds like a good process going on.

Second question for Frank, more strategic.

Just on acquisitions, maybe you can talk about what the rationale is behind U.S. Home Systems acquisition during the quarter.

And then thinking about a potential Loews acquisition of Rona, how would that impact your thinking and your strategic positioning in Canada?

So, on the first on USHS, as you know, really they were 100% dedicated to The Home Depot, or effectively 100% dedicated to The Home Depot.

And much like the acquisition we did earlier in MeasureComp, which was also a company that was 100% dedicated to The Home Depot, there are benefits to us to just making it part of the Company.

There are efficiencies we are going to gain.

We think there is a tremendous improvement in customer experience that we can drive as we connect our store experience with that in-home selling on USHS.

And I would also say on USHS, as you might remember, Colin, many years ago we bought another company that was exclusively dedicated to Home Depot on in-home selling that did roofing, siding, and windows.

Marvin and his team have been driving that business.

We like the experience that we can provide to customers on that, and we want to be able to do the same thing on USHS.

And on the second comment, our strategy will remain the same in Canada.

We are very pleased with how we are doing in Canada.

Okay.

Thank you very much.

Christopher Horvers, JPMorgan.

Thanks and good morning.

Can you share your latest thoughts about adding leverage?

Holding the trend into year-end seems like your adjusted leverage ratio will decline, maybe to bout 1.7.

Understanding you don't need the cash, but given the rate environment and you're a little bit more positive on housing, can you talk about the decision points on whether you would decide to let the ratio drift lower into year-end?

Be happy to.

Our adjusted debt-to-EBITDA ratio stands at 1.7 times today, against a cap of 2 times.

So we have a little over a $2 billion of borrowing capability pursuant to our guidelines, if you will.

As we think about when we will access the debt capital markets, we look at it really from an environmental perspective.

By that I mean the economic environment, which we would define as pretty volatile.

While housing is a bit of a bright spot, and that is good news, we wouldn't call recovery today.

We still think we are in workout phase, working towards recovering.

GDP forecasts have come down.

We've got an election ahead of us.

We have uncertain tax policy.

We don't know what's happening in Europe.

Chairman Bernanke has said he stands ready to take action if necessary.

So we think there is a ton of beta in the environment.

And when there is a ton of beta in the environment, not the best time to add that debt leverage.

Our point of view, Chris, that interest rates aren't moving anywhere.

If we thought that there was an opportunity to be lost, we would have a different point of view; but we don't think there is an opportunity to be lost.

So for now we are sticking where we are, and we will tell you what we plan to do when we plan to do it.

So this doesn't -- I guess, given the amount of cash that you have, it doesn't necessarily impact how much you could buy back into the balance of the year?

Well, as we look at our cash balance -- and we are very pleased with our cash balance of $2.8 billion -- a couple things to remember.

First, we have only spent about $550 million of capital this year against our plan of $1.325 billion.

So we've got a lot more capital spend in the back half of the year.

Second, we need about $1 billion to operate, just given the size of our business, the seasonality of our sales, etc.

And the third, not all of our cash is available.

We do hold cash outside of the United States in Mexico, Canada, and China.

So, we will always have some cash on the balance sheet.

Okay.

Then as a follow-up, you commented that the weather drove some of the variability on the monthly side in the quarters.

Was the July acceleration at all weather driven?

Can you talk -- can you share with us whether you see much difference in US comps in 3Q versus 4Q?

Thank you.

On the weather side of it, July's acceleration wasn't really driven by weather itself.

We had strength across the store in the month of July.

And I am not sure if your comment was on last year or this year.

Last year in the US, comps in Q3 were 3.8%, of which about 100 basis points was driven by Hurricane Irene.

Comps in the fourth quarter last year were 6.1%, which was driven in large part by that warm weather that we had in December and January.

Now we planned for that as we built our plan for Q3 and Q4 of this year.

So as we look at US comps for Q3 and Q4 this year, they should be more or less in line with what we experienced in the second quarter.

Is that helpful?

Thanks very much.

Alan Rifkin, Barclays.

Thank you very much.

I know that you said that big ticket was up 3.4%, while sales of small purchases actually declined slightly.

But could you maybe shed some color on what you are seeing with respect to discretionary items, regardless of price point?

Yes, Alan, I think we are very pleased with things like kitchens, which is clearly a discretionary spend and also a very large spend.

The team has worked incredibly hard to build a better experience for the customer, whether that be through the product offerings that we have or Marvin's team and the service group on the install side of that experience.

And we saw strong growth there.

We have grown that business now for almost two years.

So we believe that we are taking share in those type of businesses.

It's an effort of continuing to remain focused on the value proposition that we are providing the customer in those bigger-ticket categories.

So whether it is kitchens, flooring, all of those businesses have performed.

And our sales and tickets over $900 have actually been solid performance.

And we believe it is because of the value proposition that we are bringing to the market in those categories and taking share.

Okay.

Thank you.

And one follow-up if I may.

As you continue to grow the dotcom business, obviously at a greater rate than brick-and-mortar -- and obviously I realize it's only about 2% of revenues -- do you believe that you are taking share more so from other competitors?

Or do you think that there is some cannibalization going on?

Can you maybe just shed a little bit of color on how we should be thinking about the inherent profitability of dotcom relative to brick-and-mortar for let's say a given product?

So, as it relates to sales, I think we are taking sales from the marketplace.

We do monitor our in-store business in conjunction with our online business, and I would say at this point in time don't see a lot of cannibalization in the business in total.

So we again are focused on the experience that we are delivering to the customer and want to make sure that we are providing an experience that allows us to grow that business by taking share from the market.

And from a profitability perspective, as you know, we're on a path to reach a 12% operating margin by 2015, and that path includes the impact of dotcom.

Okay.

Thank you all very much.

Matthew Fassler, Goldman Sachs.

Thanks a lot.

Good morning.

One question on the tone of business and then one follow-up on the balance sheet.

Alan touched on this a bit, but you talked about what you are seeing in terms of GDP forecasts; and then obviously you see the cadence of the business day to day and what the rhythm is among categories.

Is there anything that you saw from Q1 to Q2, ex-ing out the weather, that would have suggested or substantiated the notion of a slowdown in consumer spending?

Or are your cautious comments just a function of what the forecasters are saying?

So, I would say, Matt, that the cautious comments are a little bit what the forecasters are saying.

If you just look at our business and you look at the core of the store, and you adjust for the pull-forward you would actually say the core of the store was strong in the second quarter.

Yes.

Got it.

Then, Carol, obviously you had two quarters in a row of ASRs, which I think for those of us trying to reconcile shares, that is a bit of a nightmare, so --

I'm sorry.

I'm sure it is good for the Company.

If you could just give us a sense as to how this trues up as we go through the third quarter and the fourth quarter, what kind of share count we could look for.

Because presumably you will have a bunch of stock coming out with less of an expenditure in the second half.

Well, first let me tell you why we do ASRs.

They are a pretty efficient way to buy in big blocks of stock, and they are derivatives as you can appreciate.

We can set the strike price wherever we want to set it; but the higher we set the strike price, the larger the discount to VWAP.

So when we did the ASR for $1.4 billion in the second quarter we set the strike at $65, which meant we immediately brought in 21.5 million shares.

Now, obviously our stock is nowhere near $65.

So as the ASR is completed, we are buying the shares in at the price every day, so it will average down considerably.

The economic benefit in doing this is almost $0.80 off the VWAP every day.

So there is real value to be created by doing it this way.

So you pick what the average stock price might be.

The ASR expires on August 24.

It could close out anytime between now and August 24.

But I am thinking we'll get another 7 million shares in or something like that, so hopefully that will be helpful.

So that comes in, in addition --

To what we have already gotten.

And then you've got -- then on top of that, you've got the incremental buyback that you guided to, which we should think about at market prices?

Exactly.

So, 7 million comes in with no incremental expenditure; that is the true-up?

That's right, more or less.

Got it.

Cool, thank you.

Greg Melich, ISI Group.

Thanks.

I had a couple questions.

First, Craig, on the ticket decelerated from 2.2% to 1.8% in the second quarter from the first.

Could you describe how weather or perhaps disinflation may have impacted that?

Especially given that vendors' gross margins have started to improve as raws come down.

So, the ticket improvement really was driven through a number of categories around bigger ticket spends -- the HVAC, the appliances, the kitchen, the flooring.

A little bit of drag on the bigger ticket was things like tractors, which were impacted both from a pull-forward where if you were going to by a tractor you bought it in the first quarter; you are done.

And as we called out, we estimated that the pull-forward in the first quarter from the second would be roughly $125 million to $150 million.

That is about what the number was, and it impacted categories like tractors.

And, Craig, if I could just jump in for a second.

There is a currency impact in the ticket in the second quarter.

If you look at the ticket growth in the US in Q2, it was up 2.5%.

Got it.

Then secondly, and this is maybe a little bigger picture looking forward for whoever wants.

We now have the Affordable Care Act is going to go forward.

I am curious what you guys have done to start preparing for that, whether it is looking at your full-time versus part-time labor, potentially outsourcing some certain things.

Marvin, you mentioned the retasking, maybe putting some business (technical difficulty) back on vendors.

Just think about this bigger picture as to how you guys are preparing for that.

So, Greg, we are obviously spending a lot of time thinking through the implications of the Affordable Care Act and how we will respond.

But I would tell you we run our business the right way to run our business.

We are not going to change full-timers to part-timers because of the healthcare legislation, nor would we outsource work for that reason.

And --

The overriding -- the customer experience and what our associates provide to the customer experience, that is our business.

Is there something that you are waiting for to be able to make some more decisions about how to do that best in the new environment?

My gosh, there are so many -- there are a lot of -- there's a lot of regulatory uncertainty still.

There are many -- when you get into -- this is obviously a very complex area and we spend a lot of time internally going through the -- here are the different variables that we've got to take into account.

And there is a lot that still has to be determined.

All right.

Thanks a lot.

David Schick, Stifel Nicolaus.

Hi, good morning.

Two questions.

First, how are private-label sales doing online?

Would be interesting.

And secondly, Frank, you talked about strength of kitchen install; and Craig, you talk about the value proposition that is helping to drive that.

But any more detail on labor efforts, staffing, marketing around the incremental share you're grabbing there, as you said, would be helpful.

Thank you.

So, I will start on the second one, which is the kitchen sales and in particular just going back to a comment I made on the improvement on our kitchen install side; and Marvin may want to add a comment here.

I would say that one of the important things is the confidence of our associates in selling a kitchen install.

So you really have to look at it as a multiyear effort for Marvin and his team of building up our associates' confidence that when we sell a kitchen installation it is going to go well.

And we do very extensive voice of the customer surveys on this.

And Marvin, you might want to add a comment.

Yes.

Look, the key is the confidence of the associate.

I can take you back to the days when I was a division president and you could directly correlate poor-performing stores and markets in kitchen sales to their perception of the quality of the service providers.

So to Frank's point, over the last couple years we have taken some very specific steps in putting all of our service providers through our version of customer-first training.

We rolled it out to the store, we rolled it out to the executive team.

And we figured -- you know what?

Let's roll it out to the service providers, because when you step foot in the home you represent The Home Depot.

And you should have the same brand standard for customer service.

That was a big deal because we had never really done that before.

In addition to that, we put some very rigorous standards in place on the voice of customer surveys.

We changed the way the surveys are conducted.

Now we have a third party that will physically contact the customer after an install and will go through a very brief survey.

And we hold our providers accountable for the results.

If they perform well, we give them positive incentives.

If they don't, they can lose business and in some cases suffer exiting their relationship.

All that being said, we are very pleased.

Frank mentioned early on that our service scores are north of a 9 on a scale of 1 to 10.

We have never had that before, and we have sustained that.

Our goal is to improve it.

We still have concerns about getting better because we have high standards; but the service quality, the training has really played a big role to help Craig's team take great value, create confidence, and to install it in a way that we think is very consistent with the brand standard of our service proposition to the customers.

And as it relates to private-label sales online, where we have categories in-store, online, with same kind of makeup of private-label versus national brand in product, the sales are roughly in the same penetration ranges as they are in-store.

Great, thanks very much.

Michael Lasser, UBS.

Good morning.

Thanks a lot for taking my question.

From a product perspective, if you look at the categories that are most below peak volume levels, how did those perform during the quarter?

And where do you expect them to go over the course of the improvement in the housing recovery?

So, the categories that are kind of past peak would be those seasonal businesses that were coming out of Q2.

And candidly, the pull-forward in Q1 had an impact on them.

So business -- and as well as some of the areas in the North had impact from drought.

So things like live goods and fertilizer had some weather impacts from the drought in the North.

Things like patio and grills and riding mowers that are past their peak, we saw some pull-forward from (technical difficulty) one in those businesses.

Michael, do you mean within the year or over time?

Over time.

I meant looking back to the peak of the housing bubble.

You are doing 60% of your volume in kitchen remodels that you were back then, and those were some of the best performing during the quarter.

You got it exactly right.

So kitchen -- if you look over time, the categories that have been hit the hardest are kitchen remodels; and you have heard we are improving there.

Jobsite tools is always an interesting category, because they correlate to job sites; and I would say stabilizing.

Right.

It's stabilizing.

Lumber has a penetration (multiple speakers) --

Lumber has a penetration (multiple speakers) of the total --

Has a ways to go.

Still has a ways to come back.

Absolutely.

So, you would characterize those categories as some of the better performing during the quarter?

And then I am also curious about July into this quarter, because again the historic relationship between the housing market and home improvement would suggest that you're going to start to see some of that activity really take shape in the second half of the year.

What I would say, Michael, is that what those categories that were hardest hit would say would be the market is stabilizing.

As Carol said, we are kind of in a workout mode; but it's not like this is taking off.

It's stable, it's improving, and that is a positive in a workout sense.

But they're not -- I mean, it's modest.

Okay, more of a slow grind higher than a sharp upturn?

Right.

Okay.

Thank you very much.

Alicia, we have time for one more question.

Scot Ciccarelli, RBC Capital Markets.

Good morning, guys.

I guess I was going to ask a question fairly similar to Michael.

When you look at California and Florida, two areas that you basically had highlighted, do you see much of a difference in terms of mix from what you are seeing through the rest of the country?

Just given the fact that they are coming off such a trough level.

No, it is not a dramatic change in mix of sale.

Not at all?

Not really, no.

Okay.

That's all I had.

(multiple speakers) market is improving, but the mix is about the same.

Okay.

Thanks a lot.

Appreciate it.

Well, thank you for joining us on today's call and we look forward to talking to you at next quarter in November.

That does conclude today's conference.

We thank you for your participation.