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Operator
Good day, everyone, and welcome to today's Home Depot third-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, ma'am.
Diane Dayhoff - VP, IR
Thank you, Vicki, and good morning to everyone.
Welcome to the Home Depot third-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 expectations 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.
Frank Blake - Chairman & CEO
Thank you, Diane, and good morning, everyone.
Sales for the third quarter were $18.1 billion, up 4.6% from last year.
Comp sales were positive 4.2% and our diluted earnings per share after adjusting for the closure of our stores in China were $0.74.
Our stores in the United States had a positive comp of 4.3%.
We faced a difficult year-over-year comparison in the quarter, particularly in our Northern division, because of the overlap from Hurricane Irene last year.
Despite this, all three of our US divisions had positive comps.
The Southern division was our strongest division for the quarter.
Of note, all of our major markets in Florida showed quarter-over-quarter comp improvement, and in the Western division at our major markets in California had growth rates above the Company average.
Both of these are signs, we believe, of the continuing healing in the housing market.
All 33 of our top 40 markets had positive comps and our markets with negative comps were primarily in the Northeast.
On the international front our Mexican business had another quarter of positive comps for the 36th quarter in a row for nine years of quarter-over-quarter positive comps.
In Canada we had positive comps for the fourth consecutive quarter as Bill Lennie and his team continued to improve our business there.
And during the quarter we announced the closure of our big-box stores in China.
After several years of effort we concluded that we could not make our big-box retail model profitable there.
As you will hear from Craig, in the US we continued to see strength in the core of our store and the Company had solid growth in both transactions and ticket in the quarter, making this our sixth consecutive quarter with transaction and ticket growth.
We also continue to see recovery in our Pro business.
Our Pro sales grew during the quarter, though at a slower rate than our consumer business, due in part to comparisons to the strong sales in roofing from last year.
On a regional basis it is encouraging to see our Pro sales growth matching consumer growth in key areas like Northern California and Phoenix.
During the quarter we also rolled out several enhancements to our Pro website, including a bulk pricing program online that mirrors our in-store bulk pricing program.
Marvin and his team continue to focus on improving the in-store experience for our prose.
We look at customer satisfaction surveys for both our Pro and Consumer segments, and our net promoters score for Pros is now consistently over 70% as is our consumer score.
Our installed services business had another quarter of positive growth with strength across the country and in all key programs.
This is another critical area where we have implemented improvements to our website.
In this case with a functionality called MyInstall that is specifically designed to improve the transparency and communication in install projects and to simplify the customer experience.
We will be adding capabilities to MyInstall throughout 2013.
In the quarter we completed the purchase of U.S. Home Systems, a kitchen and bath refacing business.
This company's business was already effectively 100% Home Depot-based, but the acquisition will allow us to create more effective interconnection between our stores and the U.S. Home Systems in-home selling platform, just as we have done with our roofing, siding, and windows businesses.
We continued to work on improving our supply chain and in the quarter we completed the mechanization of all of our rapid deployment centers, which will further improve the cost effectiveness of this platform.
Disasters such as Hurricane Sandy create enormous demands on supply chain and our team responded.
To date we have shipped approximately 4,000 truckloads of product to assist the communities impacted by the storm.
As Carol will discuss in more detail, we are updating our earnings per share and sales guidance for the year based on our outperformance in the third quarter.
We anticipate that over several quarters' time Hurricane Sandy will have an impact to our sales comparable to that of Hurricane Irene, but the exact timing of that is uncertain.
As a more general comment on our market, we believe the US is still working through the issues associated with the housing crisis.
Credit availability remains a major issue, but we can start to see the housing market as an assist to our growth rather than an anchor.
That is consistent with the national numbers which now show housing as a positive contributor to GDP.
Private fixed residential investment as a percent of GDP has improved for the fourth consecutive quarter to 2.5%, though it is still well below previous historical lows, not to mention its 60-year average.
Based on this quarter's results, 95% of our stores would qualify for Success Sharing, our profit sharing program for our hourly associates.
This is a reflection of the hard work and dedication of our associates.
And I would like to give a special thanks to all of our associates who have worked to help the communities impacted by Hurricane Sandy and Hurricane Isaac.
They have worked tirelessly under difficult circumstances, often in the face of disruption in their own lives caused by the storms.
Helping in a time of need is a core part of the Home Depot culture and we are very proud of their efforts.
With that let me turn the call over to Craig.
Craig Menear - EVP, Merchandising
Thanks, Frank, and good morning, everyone.
We were pleased with our performance in the third quarter as sales exceeded our expectations.
The departments that outperformed the Company average comp were lumber, decor, kitchen, paint, lighting, bath, electrical, outdoor garden, indoor garden, hardware, and flooring.
Plumbing, tools, and millwork performed positively while comp sales in building materials were negative due to a tough year-over-year comparison in roofing.
In the last week of the third quarter we experienced around $70 million lift in sales including batteries, flashlights, generators, and extension cords as customers in the North prepared for the threat of Hurricane Sandy.
Looking ahead it's difficult for us to forecast the magnitude of ongoing cleanup sales in the affected areas.
In the beginning of the third quarter I told you that we would be setting our holiday assortment in half the time previously required by leveraging our supply chain and merchandising execution teams.
And we did just that.
The objective was to extend our fall cleanup selling season and allow time for an additional fall event which exceeded internal expectations.
These efforts, along with great fall weather, drove double-digit positive comps in walk-behind mowers, riding mowers, pressure washers, exterior stain, and chemicals.
Portable outdoor power, exterior paint, lawn accessories, soils and mulches, fertilizers, grills, and planters all performed above the Company average comp.
Patio furniture and live goods had a positive performance in the quarter as well.
In the third quarter we began resetting some of our appliance showrooms to include Electrolux, Whirlpool, and Frigidaire brands.
We will complete the rollout of our 120-store pilot during the fourth quarter.
These appliances are available online through HomeDepot.com and can be ordered in all of our stores.
We are pleased with the results we have seen so far.
For the balance of the business we continue to see momentum in maintenance and repair and simple decor.
On the maintenance and repairs side, departments such as hardware and electrical as well as categories such as cleaning and plumbing repair continue to perform positively.
Bath, lighting, flooring, and interior paint performed well within simple decor.
As part of our interconnected retail strategy, we are inspiring and educating our customers through our style guide available on the web and for the iPad.
The style guide is rated 4.5 stars out of 5 and is consistently a top 100 app in the app store.
This week we will launch the holiday version of the style guide.
Total transactions grew by 1.7% while average ticket increased 2.9% for the quarter.
Our average ticket increase was impacted somewhat by commodity price inflation from lumber.
The total impact to the ticket growth from commodity inflation and lumber was approximately 70 basis points.
Transactions for tickets under $50, representing approximately 20% of our US sales, were flat for the third quarter.
Transactions per ticket over $900, also represented approximately 20% of our US sales, were up 4.3% in the third quarter.
The drivers behind the increase in the big-ticket purchases were strength in appliances, flooring, and in-stock kitchens.
Now let me turn our attention to the fourth quarter.
Innovation remains a key part of our leadership strategy and one of the products we are excited by is our second-generation Ryobi lithium batteries with fade-free power.
Our lithium plus batteries offer better performance for existing tools, fuel gauges, and extreme weather performance.
We bring to market the looks customers want with the features they need.
In the fourth quarter we will be exclusively launching a new wood plank look porcelain tile from MARAZZI.
This new product will give customers the ease, maintenance, and durability of a porcelain tile with the wood finish they desire.
Additionally, we introduce the MOEN Haysfield motion-sensing faucet exclusive to the Home Depot.
This faucet delivers consistent hands-free activation, even when the handle is in the off position, with two sensors that provide flexibility and convenience in many kitchen tasks.
We are also the exclusive home improvement launch partner for Kidde's worry-free smoke alarms.
These alarms utilize lithium technology eliminating battery changes for 10 years, saving our customers on average $40 in battery replacement while enhancing safety.
Finally, we have an outstanding offering of products in our gift centers for the holiday season and our best lineup yet in holiday decor.
The offerings in our gift centers will feature an extensive assortment of hardware and holiday items for gift giving and decorating.
For Black Friday we have outstanding special buys with extreme values for our traditional DIYers and professional customers.
With that I would like to turn the call over to Carol.
Carol Tome - EVP, Corporate Services & CFO
Thank you, Craig, and hello, everyone.
Before I begin my remarks I want to remind you that in the third quarter we closed seven big-box stores in China, and as a result of the store closings, recorded an after-tax charge of $165 million, or $0.11 per diluted share.
The charge included the impairment of goodwill and other assets, lease terminations, severance, and other charges associated with the store closing.
In our press release we provided a supplementary schedule that sets forth the impact of these charges.
And for the purpose of today's call I am going to talk about our financial performance on an adjusted basis, adjusting out the financial impact of the China store closings.
So with that sales for the third quarter were $18.1 billion, a 4.6% increase from last year.
Comps, or same-store sales, were positive 4.2% for the quarter with positive comps of 2.6% in August, 5.1% in September, and 4.8% in October.
Comps for US stores were positive 4.3% for the quarter with positive comps of 3% in August, 5.2% in September, and 4.6% in October.
On an adjusted basis, our total company gross margin was 34.6% for the quarter, an increase of 22 basis points from last year.
Our US business drove 13 basis points of gross margin expansion in the quarter while our international business, principally Canada, contributed 9 basis points of gross margin expansion.
In the US, our gross margin expansion is explained by the following factors.
First, our shrink reduction efforts are gaining traction and we realized 10 basis points of margin expansion due to lower shrink.
Second, we experience 7 basis points of margin expansion due to lower costs in our supply chain.
Third, we experienced 4 basis points of gross margin contraction due to a change in the price and mix of products sold.
On an adjusted basis operating expenses as a percent of sales decreased by 93 basis points to 24.2%.
Our expense leverage reflects our strong sales performance and some favorable year-over-year comparisons.
Year-over-year we had $21 million of natural disaster expense that didn't repeat this year.
Additionally, our credit card expense in the third quarter of fiscal 2012 was $37 million lower than last year, due primarily to benefits arising from our private-label credit card program.
Interest and other expense for the third quarter was $150 million, a slight decrease from last year.
On an adjusted basis, our income tax provision rate was 36.4% in the third quarter.
Let me note that on a reported basis, our tax rate was 40.2% in the third quarter because we didn't realize any tax benefit from the charges associated with the China store closings.
On an adjusted basis, diluted earnings per share for the third quarter were $0.74, an increase of 23.3% from last year.
On a reported basis, diluted earnings per share were $0.63, reflecting the $0.11 per diluted share impact of the charges associated with our China store closings.
A few other items of note.
During the third quarter we opened two new stores in Mexico and closed seven stores in China for an ending store count of 2250.
At the end of the third quarter, selling square footage was 235 million, and total sales per square foot where $307, up 4.6% from last year.
At the end of the quarter, inventory was roughly $11 billion, up $243 million from a year ago.
And inventory turns were 4.6 times, up from 4.3 times last year.
We ended the quarter with $41.7 billion in assets, including $2.6 billion in cash.
Moving to our share repurchase program, in the third quarter we received 5.6 million shares related to the true-up of an accelerated share repurchase or ASR program we initiated in the second quarter.
Additionally, in the third quarter we repurchased $700 million or $10.2 million of our outstanding shares.
This included 900,000 shares repurchased in the open market and 9.3 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 completion of the ASR program in the fourth quarter.
Further, we plan to repurchase $700 million of outstanding shares in the fourth quarter, bringing our total share repurchases to $4 billion for the year.
Computed on the average of beginning and ending long-term debt and equity for the trailing four quarters return on invested capital was 16.1%, 200 basis points higher than the third quarter of fiscal 2011.
As we head into the fourth quarter we are faced with unknowns surrounding the magnitude of the damage caused by Hurricane Sandy that is home improvement related and the speed with which impacted areas will recover.
In addition, we are heading into the winter months where weather could hamper the rebuilding efforts.
Our hearts go out to those who are impacted by this horrific storm and we will do our best to be there when our customers need us, but forecasting the impact of damage-related sales prospectively would simply be a guess.
So our guidance for the year is going to reflect our performance for the first nine months of fiscal 2012 coupled with our planned for the fourth quarter, and given our third-quarter performance we are lifting our guidance.
We now expect fiscal 2012 sales will increase by approximately 5.2% on a 53-week basis.
From an earnings per share perspective, remember that we guide off of GAAP so our guidance includes the $0.11 per diluted share impact related to the China store closings in the third quarter.
We are projecting fiscal 2012 diluted earnings per share to increase approximately 18% to $2.92 on a 53-week basis.
So we thank you for your participation in today's call and, Vicki, we are now ready for questions.
Operator
(Operator Instructions) Colin McGranahan, Bernstein.
Colin McGranahan - Analyst
Good morning, thank you.
First question is just on Sandy, and understand the difficulty in projecting anything at this point given the amount of damage and the speed with which recovery is done.
But, Craig, it sounded like, firstly, you said that being you thought the overall benefit or overall impact to be similar to Irene and I guess wondering why it wouldn't be larger given a larger magnitude of damage.
And, Carol, did you just imply that your guidance for Q4 does not include any impact from Sandy?
And how do you reconcile those two?
Carol Tome - EVP, Corporate Services & CFO
Let's just start with the impact from Irene.
Last year we had $230 million of sales from Irene in the third quarter, $130 million of sales from Irene in the fourth quarter for a total of $360 million of sales.
And, of course, this is a rough estimate but this is our best guess of the sales coming up from the hurricane.
So we would envision going forward we would have at least $360 million coming off of Sandy.
The property damage, as we understand it, related to Irene was about $16 billion.
The property damage for Sandy is about $20 billion, so it would suggest possibly higher sales.
But it is impossible for us to know right now.
As we look at our guidance for the fourth quarter, you are correct, we are including no benefit from Sandy in our guidance because, again, determining what it will be prospectively is very difficult.
I will say, however, that our sales for November are quite good.
But, interestingly enough, the strength is coming out the West and the South and not so much out of the North because, as you all know, our customers are still very much in turmoil.
You may have personally experienced some of this yourself.
So this is going to be a different type of recovery than what we have seen in the past.
Would you agree, Craig?
Craig Menear - EVP, Merchandising
Yes, I think it is.
I think the other comment I made, Colin, is it is a different storm than Irene.
This was much more impacted in terms of water flow.
Irene was stronger wind impact, so there is a little different needs that exist in this storm versus Irene.
Colin McGranahan - Analyst
Okay, that is helpful.
Then my follow-up is on expenses.
If I look at the expenses last year and back out the Irene impact of $21 million and then I back out the $37 million of credit benefit this year, it looks like kind of trying to normalize that SG&A or operating expenses were up to about 2.2% year over year.
Is that kind of a normal growth rate you are thinking about now as you work through some of the benefits?
And while we are on expenses, depreciation was up year on year for the first time since 3Q 2008.
Is that now -- have we reached the bottom in declining depreciation with more system spending going forward?
Carol Tome - EVP, Corporate Services & CFO
Well, let me answer the last part of that question first.
Yes, because the investment in IT -- and we write our IT investments off over a shorter timeframe, typically no longer than six years -- we anticipate that you will start to see year-over-year increases in depreciation.
And that is an okay thing because the IT investments that we are making are giving us a positive ROI.
From a normalized SG&A perspective, as we have told you back in June we would expect long term that our expenses would grow around 38%, 40% of our sales growth.
This year it is going to be a little bit different than that.
On a 52-week basis, if you back out the impact of China, our expense growth will be basically flat, but on a normalized basis going forward we would expect more in the 38%, 40% area.
Colin McGranahan - Analyst
Thank you very much.
Operator
Peter Benedict, Robert W. Baird.
Peter Benedict - Analyst
Thanks.
Just diving into the categories a little bit more.
Craig, maybe can you talk to us about the trend you are seeing in the window business?
How has that been going the last few quarters and what is your outlook there?
Craig Menear - EVP, Merchandising
So we actually had positive comps overall in our millwork business, and our window business has come back from previous years which were hit pretty hard during the downturn, so we have actually seen positive growth.
Hopefully that answers your question.
Peter Benedict - Analyst
Yes, that is helpful.
Maybe just between your larger Pros and your larger Pros -- I know you guys have spoken in recent calls about the larger Pro doing better.
Any indication that the smaller Pro is starting to see some of that as well?
Frank Blake - Chairman & CEO
The larger Pro is still doing better, Peter.
Peter Benedict - Analyst
Okay, great.
Thanks, guys.
Operator
Dan Binder, Jefferies.
Dan Binder - Analyst
Good morning.
My question was regarding your comments about credit expense being lower year over year.
I was wondering if you could elaborate a little bit more on that.
Then, secondly, on the inflation front what you are expecting with building material inflation in the coming quarter or in the fourth quarter I should say.
Carol Tome - EVP, Corporate Services & CFO
Sure.
As it relates to our credit expense, as I think you will recall, we have capped our cost of credit at 1.3% but we do share in the profitability of the portfolio.
And the portfolio this year is more profitable than it has been for a couple of reasons.
One, higher sales, that is a good thing, but also the net losses in the portfolio are down.
In fact, we are projecting that the loss rate will be below 6% by year-end.
Contrast that to 2010 where the loss rate was 14%.
So as the portfolio becomes more profitable we share in that profitability.
On the inflation side --?
Craig Menear - EVP, Merchandising
As it relates to inflation, obviously lumber prices are remaining at this stage of the game higher than previous year.
We have seen some drop in copper as it relates to year over year in the past few weeks, so our anticipation at this point is that we would probably see a similar type of movement.
And lumber, don't see anything really taking that down short term.
Dan Binder - Analyst
So about another 70 basis point benefit, you think, to Q4 comps from that sort of thing?
Craig Menear - EVP, Merchandising
No, the penetrations change quarter to quarter so --.
Dan Binder - Analyst
Okay, thanks.
Operator
Michael Lasser, UBS.
Michael Lasser - Analyst
Good morning.
Thanks a lot for taking my question.
Coming back to the topic of Hurricane Sandy, can you give us the number of stores that you think will be impacted by this event versus Hurricane Irene to give us some indication of the order of magnitude?
Frank Blake - Chairman & CEO
So, Michael, I would say there will be fewer stores.
The breadth of Irene, it impacted more stores than any storm in our history of certainly when we have looked at that.
So it declined some with Sandy, but as Carol and Craig were discussing, the nature of the damage also was more severe.
So there will be fewer stores impacted but the impacts might be more significant within those localities.
Michael Lasser - Analyst
And what would be a significant amount -- will the delta between the number of stores be significant?
Frank Blake - Chairman & CEO
I mean I would say -- it depends what you would say is significant.
But if you say a third fewer stores, just kind of ballpark, but take that only directionally, yes, so it is significantly fewer number of stores.
It is less, but again the magnitude of the damage faced in those areas is higher.
Carol Tome - EVP, Corporate Services & CFO
Let me just say, we are going to have fun planning the store sales trying to determine which stores gets the impact from the hurricanes, but we will do our best in that regard.
Michael Lasser - Analyst
Okay, that is very helpful.
Then a question on the strength you are seeing in the Southern markets and the Western markets.
Is the consumer behaving any differently with respect to the selection of good, better, and best products?
So as the cycle manifests might you have to assort a little differently to meet customers changing tastes, and could that impact your margin?
Thanks a lot.
Frank Blake - Chairman & CEO
So, Michael, really not seeing that much geographically that is different, so it is not as though the California consumer is coming back but is more on the opening price point or mid-price point.
Really we are not seeing that much of a difference regionally.
Michael Lasser - Analyst
So you're really just seeing more folks participate in the market?
Frank Blake - Chairman & CEO
Yes, correct.
Michael Lasser - Analyst
Thank you very much.
Operator
Bud Bugatch, Raymond James.
TJ McConville - Analyst
Good morning, everyone.
This is actually TJ McConville filling in for Bud.
Congratulations on the quarter, thanks for taking my questions.
Frank, in your commentary and in the release comments related to housing -- I mean I think you noted we are still in the work-through phase but it certainly sounds like you are incrementally a little bit more positive.
Can you talk about maybe what you are seeing in the progression of the recovery and how that affects some of your long-term targets maybe that you talked about at the analyst day in June?
Frank Blake - Chairman & CEO
First, I would say the comments are very much in line with what we said in June that we see housing having to go through a workout period.
And we would say we are in that workout period now.
That is a positive though because we are working through issues and now housing is a little bit of an assist rather than a negative.
It was interesting just when we look at the number of times used the word consecutive as we have gone through just this earnings call.
We have had a number of quarters of consecutive performance.
It starts to give you some confidence that the market is healing.
There it is still lots of issues out there.
There is a lot of credit issues in particular that we are concerned about and obviously broader policy issues.
But if you look at our performance this year and take a two-year quarter over quarter and our business continues to progress.
Carol Tome - EVP, Corporate Services & CFO
We might add a little more color perhaps on the housing, Frank, if that would be helpful.
We have got a high level, and I will call it, imperfect model but we have looked at drivers of housing that could impact our business focusing principally on turnover.
If you look at how housing turnover is performing this year on an annualized basis, about 4.5 million units, we know from a study back in 2008 that the average spend is about $3,500.
If you then calculate our market share against that and look at our anticipated comps to be versus GDP growth, we would estimate that housing turnover is impacting our comps by about 50 basis points this year.
So as Frank pointed out we are on the path of recovery.
TJ McConville - Analyst
Thank you, that is very helpful, Frank and Carol.
Appreciate that.
Then moving along to some of those policy issues that you may have noted there, Frank.
Can you talk about maybe what some of the outlook is or what the planning is from a resource allocation and capital allocation perspective on what the potential impacts of, let's say, what a fiscal cliff might look like specifically?
Maybe your dividend versus repurchase decisions or something like that.
Frank Blake - Chairman & CEO
No, I think we will wait until we let the policymakers resolve those issues before giving you hypothetical responses to them.
TJ McConville - Analyst
Fair enough.
Thanks for taking my questions.
Best of luck on the rest of the year.
Operator
Laura Champine, Canaccord.
Laura Champine - Analyst
Good morning, guys.
Along those lines what, Carol, is your estimate for the impact of the changes in healthcare regulation in 2013?
Carol Tome - EVP, Corporate Services & CFO
Laura, we are still working through this.
It is highly complicated for all of corporate America, but with a company like the Home Depot with over 300,000 associates we have got to study this very carefully.
And we are waiting for the rules to get formalized.
So once we know we will tell you.
Laura Champine - Analyst
Okay.
Then on the appliance store pilot, how are you judging success from a quantitative basis?
And if you are successful in whatever the metrics are you are looking to achieve, how large could that rollout be across your chain?
Craig Menear - EVP, Merchandising
So as we do with every pilot and every reset in our stores, we obviously go through a financial assessment of what we are looking to achieve and we lay out targets for that.
It is very early at this stage in the pilot.
We haven't completed our 120-store rollout yet.
We still have that to finish in the fourth quarter.
And we do like the early results that we see.
Based on how the rollout continues and how the sales perform, we would then determine what the next steps might be and how many stores that would actually roll to.
Laura Champine - Analyst
Are you looking for incremental sales per square foot or what are the metrics that you are looking to see improve?
Craig Menear - EVP, Merchandising
That would be one of the metrics that we look at is exactly that -- how do we actually continue to drive incremental sales, yes.
Carol Tome - EVP, Corporate Services & CFO
The really interesting thing about our approach here is that it is not just a store story it is also a dot-com story.
So we really like the penetration that the new brands are selling on our website.
Craig, you might want to talk about that?
Craig Menear - EVP, Merchandising
All of our brands are obviously available on HomeDepot.com for our customers to shop around the clock, when they choose to shop.
And, likewise, we leverage HomeDepot.com and our delivery system to make those brands available in all stores today.
Laura Champine - Analyst
Thank you.
Operator
Eric Bosshard, Cleveland Research.
Eric Bosshard - Analyst
Good morning.
Wondering if you could talk a little bit -- you highlighted the big-ticket process progress in the quarter.
Wonder if you could talk a little bit about what you are doing promotionally within big ticket and across the business.
Then also if you could link that a little bit to how you think the gross margin progression works from here.
Craig Menear - EVP, Merchandising
I will address the big ticket aspects.
When you look at our growth in big ticket it's a culmination of a lot of things -- hard work by our associates in the stores.
We have worked hard on the assortments over the past few years.
Kitchens, for example, continue to be a positive growth story as they have been for the past couple of years now.
We feel like we are taking share in those areas.
We have improved our flooring business overall.
As a matter of fact, Eric, what I would say is that if you looked at our decor businesses in total they actually outgrew the Company average.
So I think customers are beginning to be willing to step in and do the decor projects like flooring, like kitchens.
We have had a nice quarter in appliances as well.
So I think it is a combination of a number of things including assortment, our effort by our associates in our stores to drive this business.
Carol Tome - EVP, Corporate Services & CFO
On the gross margin front we would expect the fourth-quarter gross margin to be flattish relative to last year, principally because of what we are anniversarying.
You will recall in the fourth quarter of 2001 we had 53 basis points of margin expansion coming off of our supply chain.
We are not expecting that in the fourth quarter of this year.
Eric Bosshard - Analyst
Then if I could just follow up.
Craig, in terms of the promotions in decor, you talked about gaining share.
Would you say that year-over-year promotions across those categories are similar to a year ago, more promotional, less promotional?
How would you characterize that?
Craig Menear - EVP, Merchandising
Pretty comparable to where we were a year ago.
Eric Bosshard - Analyst
Very good, thank you.
Operator
Gary Balter, Credit Suisse.
Gary Balter - Analyst
Thank you.
First, a comment that doesn't count as a question.
Could you get more generators in your store in Vauxhall, New Jersey?
Frank Blake - Chairman & CEO
We are working hard on more generators.
Gary Balter - Analyst
Okay.
Frank, you sounded more positive overall on signals of a housing recovery.
You walked us through the numbers and we heard consumer spending is just as strong as the commercial spending.
What are the signals?
Could you go a little deeper into what you are seeing that builds that confidence up?
Frank Blake - Chairman & CEO
Sure.
Part of it is, Gary, if you think back to 2011 where we had some strong quarters, second, third, fourth quarters very strong, each one of those quarters had its unique weather story.
So it was difficult to pull the strands out of what is more weather-related, what does the housing recovery look like.
It felt like that was sort of the start of housing starting to heal but a little cautious about it.
We have had -- this third quarter is an interesting quarter because it was a very tough compare for us, given the sales related to Irene as Carol detailed.
So the positive comp in this quarter, which again not really Sandy related; Craig called out $70 million at the very end of the quarter.
So the positive results in the quarter combined with, as I said, every quarter this year on a two-year stacked basis doing better.
And, again going to Craig's comments, strength in the core of the business.
You go we are starting to see -- I mean this isn't -- we are not lighting rockets over this and we don't want to get out over our skis, but we are starting to see the recovery of the housing market.
I mean there are lots of data points that we look at this on obviously.
Geographically, the harder hit areas that were really the epicenter of the housing crisis appear to be on the mend.
It has been consecutive, it has been consistent, so that is why we think it is healing.
Gary Balter - Analyst
Thank you.
Operator
Scot Ciccarelli, RBC Capital Markets.
Scot Ciccarelli - Analyst
Just curious, given where we are in the housing cycle and what appears to be a market still concentrated, if I'm listening to you right, Frank, in the basic repair and remodel portions of the home improvement market, are you surprised at all that transactions under $50 aren't a bit stronger than flat?
Frank Blake - Chairman & CEO
So, Craig, you want to address the --?
Craig Menear - EVP, Merchandising
So I will talk to that a little bit.
So when we look at transactions under $50 there is an awful lot of those transactions that fall into a few categories.
Very pleased with how we did in outside garden.
As you can imagine that is a big transaction driver in that business.
But then when you look at kind of what has happened in some of the categories, the average unit retail growth -- so, for example, LED versus incandescent bulbs has had an impact on that business.
When you look at the expansion of what has happened in the retail side of the business in paint you see transactions that maybe have fallen from what were under $20 to now over $20.
Then there is some actions that we have taken as well in terms of how we are driving some off-shelf special buys, value packs that have led to part of that shift in transactions under $20.
Scot Ciccarelli - Analyst
Got it, understood.
Then you had also -- Craig mentioned something about fourth-quarter aggressive holiday deals, etc.
Is that something you saw in the third quarter?
Is that just an expectation that pricing will become more aggressive in the fourth quarter, or is that just the normal holiday aggression and promotions?
Thanks.
Craig Menear - EVP, Merchandising
As it relates to the fourth quarter, I mean we are excited about the plans we have put in place to aggressively go after the market.
We have -- our merchants have worked hard to really create some outstanding values for our customers.
We have got awesome values in our gift center.
We got a great holiday decor lineup.
We do have outstanding values that we will bring to the market around Black Friday, which is obviously a very aggressive time in retail.
So we are excited about the offerings that we have forthcoming in the fourth quarter.
Carol Tome - EVP, Corporate Services & CFO
And don't forget, in the month of December last year we had a positive comp in the United States of 7.1%, so we better have a good holiday to comp that.
Scot Ciccarelli - Analyst
Understood.
All right, thanks, guys.
Operator
Mike Baker, Deutsche Bank.
Mike Baker - Analyst
So first I wanted to follow up on the healthcare question, understanding that it is very complicated and you are not sure what is going to happen.
But maybe just help if you could remind us how your healthcare works now, who is covered in terms of your part-time and full-time employees.
You stopped telling us your percent of part-time employees in your 10-K, but has that changed very much since the last time you reported that, which I think was 55% or 59% in the 2010 10-K?
Frank Blake - Chairman & CEO
Yes, first off on what we provide -- and now this is speaking US obviously -- we provide health insurance to our full-time associates.
For our part-time associates there is a company -- in effect we make available to them what might be called a mini med program.
In terms of the ratio of full-time and part-time, I am not sure.
When was the last --?
I don't think there has been a major difference --
Carol Tome - EVP, Corporate Services & CFO
There is not a major difference, no.
Craig Menear - EVP, Merchandising
-- from the last time we disclosed.
Mike Baker - Analyst
But your in-store employees, full-time employees who aren't necessarily store managers they are currently -- what percent of those are currently covered?
Frank Blake - Chairman & CEO
So we make it available to all of our associates and, Mike, one of the questions for us -- and we are not going to get into our specific percentage on this.
But one of the questions is, for us, in thinking about this program and understanding it and understanding the cost implications is for those associates who do not now take advantage of the healthcare that we provide, why don't they take advantage of it?
Are they covered by their spouse?
Are they not taking the healthcare because for whatever reason they don't choose to spend their money in that direction?
Then as you shift into the healthcare legislation, what will the impact of the healthcare legislation be on those associates?
All of those, in addition to the regulatory issues that Carol referenced that still need to be resolved, there is sort of a base understanding that we need to develop on what behavioral changes this will create within our full-time associate ranks.
And that has a significant impact on how we estimate the cost.
So as Carol said, as soon as we feel comfortable and confident of what the impacts will be we will be sharing that with everyone.
Mike Baker - Analyst
Fair enough.
One more real quick one.
The full-year guidance that excludes the $0.11 impact from China, does it include the $0.03 benefit roughly that you had in the first quarter?
Carol Tome - EVP, Corporate Services & CFO
It does.
Mike Baker - Analyst
Thank you.
Carol Tome - EVP, Corporate Services & CFO
You're welcome.
Operator
(Operator Instructions) Matthew Fassler, Goldman Sachs.
Matt Fassler - Analyst
Thanks a lot and good morning.
My first question, you have addressed sort of the magnitude of the impact you expect from Sandy on the top line.
Can you talk about its impact up and down the P&L?
For example, you spoke about some storm-related expenses from last year that you cycled and were not repeated in Q3.
Might we see those in Q4?
How you think about storm-related sales perhaps impacting the gross margin rate as they drive sales over the next several quarters as well?
Carol Tome - EVP, Corporate Services & CFO
Of course.
Because Sandy was so coastal in its nature and we don't have stores built along the coasts, we were very fortunate and we had little to no damage in our stores.
So do not expect any storm-related expense in the fourth quarter.
We do have a Homer Fund, which is a 501(c)(3) that we have established, which will take care of our associates in need but that won't impact our P&L.
From a margin perspective, it really is going to depend on the products that are sold.
Craig Menear - EVP, Merchandising
Short term we are still selling things that have lower gross margins.
We are still selling generators, that type of product.
Lumber to get basic repair done right now.
It really depends on how the sales progress from here as to what the ultimate mix of sale will be, which will determine where the margin falls.
Carol Tome - EVP, Corporate Services & CFO
Again, rather than trying to guide to that prospectively, we would rather explain to you what we experience.
Matt Fassler - Analyst
Got it.
Then the second question I have relates to buyback.
So you have had one of the most successful and effective capital allocation programs in retail.
Virtually every share you have ever bought back, given the stock today, is in the money so that has worked out extremely well.
You have shared with us in the past your intrinsic value calculation that you used to think about the buyback.
What is your thought process on the buyback?
You said $700 million for the fourth quarter.
In the short run and the long run with the stock having done so very nicely and the kind of approach you would expect to see, any change in that from where we have been in the past year or two?
Carol Tome - EVP, Corporate Services & CFO
First, Matt, thank you for your acknowledgment of our program.
We have bought back about $37 billion worth of our shares at an average price of about $37.
So the program has worked, and we do have a point of view on the value of our stock and we are not there.
We also look at it, what is the point where you should retire debt versus buyback shares.
So we have got a mathematical calculation that supports our activity.
We feel very committed to our share repurchase program where we are based on that point of view and the fact that sitting on cash on the balance sheet is not very value creating for our shareholders.
Just to that point, you will note that at the end of the quarter we had $2.6 billion of cash, so you may say aren't you a little heavy?
About $1 billion of that cash is outside the United States.
We could get our hands on it; we could repatriate it but then we pay a nice tax on that so we elect not to.
So when I think about the cash that we have available for use, it is about $1.6 billion and we need about $1-billion-ish to operate.
So that is what is giving support to the $700 million that we will buy in the fourth quarter.
One last comment on the share repurchase.
As you know, we introduced new financial targets back in June, our 12/24 target.
That is 12% operating margin and a 24% return on invested capital by 2015.
Inherent in that 24% return on invested capital is that we will use excess cash to buy back shares.
Matt Fassler - Analyst
Got it, thanks.
Operator
Dennis McGill, Zelman & Associates.
Dennis McGill - Analyst
Good morning.
Just a couple quick ones.
Carol, just to make sure, the numbers you put out there for Irene and Sandy net-net for the quarter storm demand would be a net negative, correct, year over year?
Carol Tome - EVP, Corporate Services & CFO
Yes, sir.
Dennis McGill - Analyst
Okay.
Then as you think about the housing recovery and some of the things you have talked about from a bottom up, can you maybe put a little more color behind either at a market level or a state level sort of which would be at the top of that list, either the 33 markets or across the states where you're seeing the strongest year-over-year growth today?
Frank Blake - Chairman & CEO
So if you just look at the third quarter, Dennis, we saw strength, as I referenced, in Florida.
We saw strength in California that was above the Company average, which, as I said, was to us a sign of healing in the market.
And elsewhere we were more -- as Carol had commented before on these calls, the range of difference among our top 40 markets is actually compressed over time.
We were sort of passed the period where we would have major markets that were significantly double-digit comping in comparison -- double-digit negative comping in comparison to other markets.
Dennis McGill - Analyst
So if you looked at Florida and California as an example, would the growth rates for those states put them in the top five across your network?
Frank Blake - Chairman & CEO
So I was looking at it from the market perspective.
If you looked at the top performing markets in Florida would be at the top for the Company.
Carol Tome - EVP, Corporate Services & CFO
In California, the growth rates are between 50 and 180 basis points better than the Company average, just to give you a point of perspective.
Dennis McGill - Analyst
Great.
Thanks, guys.
Operator
David Gober, Morgan Stanley.
David Gober - Analyst
Good morning.
Thanks for taking the question.
Just wanted to dig back a little bit into kind of what we are seeing in terms of the recovery.
Frank, I know you talked a little bit about how you expect the Pro to lead in a recovery and some of the characteristics you expect to see there.
Just curious why you think that is maybe more of a coincident indicator at this point.
We are starting to see ticket pickup but that Pro is still, more or less, in line with the overall company average.
What do you think is different than you would have expected and maybe than what you have seen in prior recoveries?
Frank Blake - Chairman & CEO
So first off, David, I don't know that we can speak to prior recoveries because we really didn't have the data to analyze the differences.
I would say the basis for our expectation, if you remember or would go back to 2008/2009 and particularly post-Lehman, our Pro business dropped off at a significantly steeper rate than our Consumer business.
Both were going down, but our Pro business was going down quite a bit more.
So we had a theory, which today it looks so far so good, that as the market recovered the Pro would start to pick up and would be a key part of that recovery for us.
Where I would say we are now, where the numbers say we are now, and as we called out in June sort of a workout phase, the Pro is recovering but it is not yet at a point where it is surpassing the recovery of the consumer.
Again, as we have referenced, the larger Pro is coming back a little faster.
Carol Tome - EVP, Corporate Services & CFO
Just to put that into perspective, the larger Pro makes up 13% of our Pro sales, so the majority of our Pro sales are the smaller Pro.
Dennis McGill - Analyst
Got you, that is helpful.
Just a little bit more on the geographic mix.
I mean I think what we have seen over the last couple of years is a greater level of growth in urban and maybe closed suburban areas.
Are you seeing any signs that the geographic mix within markets is changing?
I mean obviously you addressed the Florida and California issues.
But given that we started to see signs that household formation is picking up, are you seeing the mix within markets change at all?
Frank Blake - Chairman & CEO
And shifting more to our more urbanly focused stores?
No.
Dennis McGill - Analyst
No, sorry, I mean the other way around.
Maybe more towards suburban and ex-urban areas than where it has been in the last couple of years.
Frank Blake - Chairman & CEO
I will be honest, David, no, haven't seen that.
Dennis McGill - Analyst
Okay, thank you.
Operator
Chris Horvers, JPMorgan.
Chris Horvers - Analyst
Thanks and good morning.
I wanted to follow up on the capital allocation question.
I think that your view has recently been you didn't need the cash and rates are going up anytime soon, so there was no rush to add debt to fund the buyback.
However, the other side of this is the stock price.
So while it is below where you think it is worth, the market maybe is ahead of where you thought it would take it.
Now you have an incremental positive view on housing.
November is off to what sounds like a strong start.
You have this potential bridge from Sandy over the next two quarters of tough weather compares.
So I guess, devil's advocate, why isn't now a good time to go add that to the balance sheet and buy the stock below where you think it is worth?
Carol Tome - EVP, Corporate Services & CFO
Well, all good questions.
Here is our point of view on incremental debt.
If you look at our adjusted debt-to-EBITDA ratio we are standing at 1.7 times against a maximum target of 2 times, which would suggest by the end of the year about $3 billion of debt capacity more or less.
As we looked into 2013 a couple of things, there is the fiscal cliff issue and we would like to get through that.
Because as we have talked about in the past, raising debt in an environment of high beta doesn't make a lot of sense, and there is no higher beta, in my opinion, than the fiscal cliff.
Now we will know soon where that ends up.
We have got $1 billion and $250 million coming due in December of next year.
We are going to refinance that; give us an opportunity to add some incremental debt once we get through the fiscal cliff if we so desire.
And when we make that decision we will you know.
Chris Horvers - Analyst
Fair enough.
Then just as a follow-up on the shrink side, which is perhaps the only other question that hasn't been asked yet.
It sounds like you said you are in early on in a process and really the first question that you have talked about it.
So what are you doing there that you haven't done before?
Do you expect this gross margin tailwind to sustain itself?
Thank you.
Marvin Ellison - EVP, U.S. Stores
Chris, this is Marvin Ellison.
Shrink really for us has in the past been a really good news story.
Earlier part of this year we had underperformance and it is really a refocus -- a refocus on operational process, a refocus on merchandising, packaging standards, just a refocus on execution.
We have a new leader in the role.
We have a really strong commitment involvement from all of our associates.
We are pleased with the performance in the second half of the year and we are optimistic that the performance will continue for the balance of the year.
And we will take that into 2013.
Carol Tome - EVP, Corporate Services & CFO
You may recall when we set forth our 12/24 targets, 12% operating margin, we showed a walk on the gross margin line and there was an element of the walk that we called Operational Excellence.
That is code for better shrink performance.
So to Marvin's point, between now and 2015 we continue to expect better performance there.
Marvin Ellison - EVP, U.S. Stores
I think, Chris, it is probably worth noting that we have gone through quite a few process changes over the past three years.
What process change really creates uncertainty and a different view of transparency on how you impact shrink.
So we had to make adjustments to the stores to really alter our processes to meet the needs and the understanding of our new process.
So we feel real good about where we are headed and, again, we hope to keep the performance going into next year.
Chris Horvers - Analyst
Thank you.
Carol Tome - EVP, Corporate Services & CFO
Vicki, we have time for one more question.
Operator
Alan Rifkin, Barclays.
Alan Rifkin - Analyst
One last question, Carol, on Sandy.
Realizing that obviously it is difficult to forecast revenues coming from the storm, if you believe that in the quarter during the storm and following the storm the benefits from Sandy will be equal to that of Irene that would imply about $290 million realized in Q4, which would equate to about 180 basis point benefit on the comp line.
Is that something that would be reasonable for us to expect?
Carol Tome - EVP, Corporate Services & CFO
You need to build the models the way you build your models.
We have given the guidance that we have given based on our plan because we just don't know how to forecast prospectively.
Frank Blake - Chairman & CEO
Alan, one thing just to keep in mind and why we are a little cautious on this and the comparisons to Irene may not be direct, is you have got very different weather circumstances.
So the last year following Irene, if you will remember, fourth quarter was one of the warmest winters ever in the Northern division and that helped in the Irene recovery.
Don't know, obviously, sitting here today what is the weather going to be like in New Jersey and New York as we head into the end of November and December.
And that will have an impact on the recovery efforts.
So that is -- we have spent a lot of time thinking what is the right way to approach this issue for the fourth quarter and, frankly, the first quarter of next year.
And that is why, as Carol said, what we think is better is to tell you, look, here is roughly what we think Irene did.
We think this is, give or take, comparable to the impact of Irene but the timing of it for us is just very uncertain.
Carol Tome - EVP, Corporate Services & CFO
I'll just pile on; we went back and studied every hurricane.
The average time to recovery is T plus six months, with the exception of Katrina.
This storm in many ways is like Katrina; New Orleans is still rebuilding.
So I hope that you can understand why we are cautious in our outlook regarding the storm-related sales.
Alan Rifkin - Analyst
Sure.
No, okay, I appreciate that, Carol.
One last question, if I may.
Carol, you said that in the fourth quarter you are expecting gross margins to be flat despite the anniversarying of more than 50 basis point benefit from the supply chain rolling off.
In terms of the incremental again to the gross margin, do you see that -- and obviously you have spoken about shrink at length.
Do you see any changes in the mix benefiting your gross margins in Q4?
Carol Tome - EVP, Corporate Services & CFO
As Craig pointed out, we are a seasonal business.
If you look at lumber, we would expect a lower penetration of lumber in the fourth quarter which would help our gross margin, as an example.
Alan Rifkin - Analyst
Okay, thank you very much.
Diane Dayhoff - VP, IR
Thank you, everyone, for joining us today.
We look forward to have you join us when we report our full-year quarterly and fourth-quarter earnings at the end of February.
Operator
That does conclude today's teleconference.
Thank you all for joining.