家得寶 (HD) 2013 Q1 法說會逐字稿

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  • Operator

  • Good day, everyone and welcome to today's Home Depot first-quarter 2013 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, Mary and good morning to everyone.

  • 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.

  • 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 I would like to start by saying our thoughts and prayers are with those who have been stricken by the violent storms in Oklahoma and throughout the Southwest.

  • Our Company and our associates are part of these communities and we will be working hard to be of help in the days and weeks ahead.

  • Now on our results.

  • Sales for the first quarter were $19.1 billion, up 7.4% from last year.

  • Comp sales were positive 4.3% and our diluted earnings per share were $0.83.

  • Our US stores had a positive comp of 4.8%.

  • All three of our US divisions posted positive comps for the quarter.

  • For our Northern division in particular, this was a significant accomplishment given the dramatic difference between the unusually warm spring of 2012 and the relatively cold spring of 2013.

  • Our Western division was our best performing division driven by double-digit positive comps in most of the major markets in California.

  • Our Florida markets also performed well with comps above the Company average.

  • Internationally, our Canadian business had positive comps for the sixth quarter in a row and our Mexican business had another quarter of positive comps making it 38 quarters in a row of positive comp growth.

  • As Craig will detail, while weather negatively impacted our seasonal and exterior businesses, our core interior project business remained strong throughout the quarter.

  • This was encouraging and consistent with the view that the housing market is starting on the path to recovery.

  • For the first time in the last several years, the growth rate in our Pro Customer segment outpaced the growth rate in the Consumer segment.

  • We have been tracking the relative growth rates of our Pro and Consumer segments as one indicator of the housing recovery.

  • Since 2008, our Pro segment has underperformed our Consumer segment.

  • Last year, the relative growth rates grew closer and in the fourth quarter of 2012, they grew at approximately the same pace.

  • Our expectation was that the Pro business would accelerate during a housing recovery and so this quarter's outperformance from the Pro segment is a positive sign.

  • Some of the outperformance was due to the slower growth in our consumer-oriented garden business, but even adjusting for that, the Pro segment had a higher growth rate.

  • Also, our smaller spend Pro customers contributed more significantly to the overall Pro growth than in the last few years.

  • Our expectation was that we would see improved performance in the smaller spend pros as the housing market recovers, so this is another positive sign.

  • Our services business had double-digit growth in the quarter and we are pleased with the integration of MeasureComp and U.S. Home Systems, our two recent services-related acquisitions.

  • Marvin and his team have been able to improve the customer experience both in the home and in the store by bringing these businesses directly into Home Depot.

  • As part of our interconnected retail strategy, we have completed the rollout of Buy Online Ship To Store.

  • This required an effort across our business from supply chain, to merchandising, to online, to IT and store operations.

  • Our customers now have access to over 300,000 items available for pickup at their convenience in our stores.

  • So far, the growth we have seen from this has been ahead of our expectations and one out of five customers who pick up an order at the store also buys an additional item while there.

  • We also continued our efforts to improve the overall dotcom experience for our customers.

  • We simplified our checkout process for fresh landing pages and integrated e-receipts into the site, among other key activities.

  • We are pleased that the online traffic to our site was up almost 50% and as part of that, not surprisingly, mobile traffic more than doubled.

  • The US macro data on housing continues to improve.

  • Private fixed residential investment as a percent of GDP picked up for the sixth consecutive quarter to 2.7%.

  • Increasing household formation, price appreciation and higher housing turnover are all positives for our market, but credit availability remains tight and constrains the velocity of the recovery.

  • Last year at our investors and analysts conference, we set out a framework for thinking about the recovery of the housing market and the impact the recovery would have on us.

  • In 2010 and 2011, we went through a period when our sales were growing, but the housing market was still down or at best stabilizing.

  • Our sales performance correlated most directly to overall GDP.

  • Last year, we had an additional modest assist from housing as the market started to improve.

  • We saw that carry through in this past quarter somewhat stronger than we anticipated after adjusting for weather impacts.

  • As Carol will discuss in more detail, we are therefore revising upwards both our sales and earnings guidance for the year.

  • We remain focused on taking care of our customers and investing in our business and in our associates.

  • I would like to thank our associates for their hard work and dedication.

  • Based on this quarter's results, roughly 98% of our stores would be in Success Sharing, our profit sharing program for our hourly associates.

  • Last year, we had 100% of our US stores make Success Sharing.

  • Our objective is to accomplish that again this year.

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

  • Craig Menear - EVP, Merchandising

  • Thanks, Frank and good morning, everyone.

  • We are pleased with our performance in the first quarter with strength in our business across the breadth of the store.

  • We had positive comps in all departments except our indoor and outdoor garden departments.

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

  • Paint, millwork and building materials performed positively while comp sales in indoor and outdoor garden were negative.

  • Spring arrived at various times across the country and we were ready when it broke.

  • In the Western division, where weather was more normal, we had positive performance in all departments throughout the quarter.

  • In contrast, in the Northern and Southern divisions where weather was significantly colder than a year ago, spring gardening and outdoor entertaining categories posted negative comps in February and March.

  • But as the weather improved in April, our nimble supply chain and partnership with our store operations and field merchandising teams reacted quickly and maximized demand spikes.

  • By taking advantage of these moments of opportunity, we were able to post positive performance in our garden business across all divisions in April.

  • Inside the home, we continue to gain momentum in simple decor.

  • In flooring, customer response to our SoftSpring carpet, new floor tiles and fusion grout helped drive department comp above the Company average.

  • In bath, our lineup of Moen and Delta foundation faucets, as well as new vanities from Glacier Bay were the drivers of our performance.

  • We continue to see strong results in lighting as customers transition to LED bulbs and light fixtures.

  • In maintenance and repair categories, we continue to see strength with comps above the Company average in wiring devices, safety and security, plumbing repair, pipe and fitting, tools, hand tools, power tool accessories, cleaning and door locks.

  • Total comp transactions grew by 0.1% for the quarter, overcoming significant downward pressure from our seasonal business.

  • Transactions for tickets under $50 representing approximately 20% of our US sales were down 1.6% for the first quarter, principally due to our garden business.

  • In contrast, in the month of April, we were able to drive positive transactions, including tickets under $50.

  • Transactions for tickets over $900 also representing approximately 20% of our US sales were up 9.7% in the first quarter.

  • Average ticket increased 5% in the first quarter.

  • The drivers behind our average ticket growth were the strength in appliances, as well as continued improvement from our Pro business.

  • Our average ticket increase was also impacted somewhat by commodity price inflation, mainly from lumber and copper, which contributed approximately 120 basis points to comp.

  • Now let me turn our attention to the second quarter.

  • We are introducing new technology and paint from Behr with our new line of MARQUEE exterior paint and primer.

  • This new paint creates a tough, nonstick surface that resists dirt and offers advanced paint performance for longer-lasting color all backed by a lifetime guarantee.

  • Our exclusive MARQUEE paint resists rain showers as early as 60 minutes after application and can be applied in lower temperatures, which are great features for our Pro customer.

  • Also in paint for our professional customer, we are introducing new paint sprayers from Graco.

  • We have an incredible lineup of great values and special buys, as well as innovative products for Memorial Day.

  • We are introducing the first battery-powered trimmer that converts to a corded trimmer so that you never run out of power from Ryobi.

  • In store now, we have the Pennington Smart Feed Sprayer System.

  • Without measuring, pouring or mixing, this system delivers even feeding every time and puts out more nutrients than competing products while using less water.

  • For our Father's Day and Fourth of July events, we also have an extensive lineup of great values and special buys.

  • These events, along with our superior execution in the stores, will generate a lot of excitement in the second quarter.

  • And with that, I would like to turn the call over to Carol.

  • Carol Tome - EVP, Corporate Services & CFO

  • Thank you, Craig and hello, everyone.

  • In the first quarter, sales were $19.1 billion, a 7.4% increase from last year.

  • As you will recall, fiscal 2012 had a 53rd week, which shifted our fiscal 2013 calendar.

  • By starting fiscal 2013 one week later than last year, we had an additional week of spring sales.

  • The calendar shift contributed approximately 320 basis points of year-over-year sales growth.

  • On a like-for-like basis, comps or same-store sales were positive 4.3% for the quarter with positive comps of 4.6% in February, negative 3.5% in March and positive 9.9% in April.

  • Comps for US stores were positive 4.8% for the quarter with positive comps of 4.8% in February, negative 3% in March and positive 10.8% in April.

  • The monthly variation in our comps was due primarily to weather, which impacted our garden department, as well as the timing of Easter.

  • As Craig mentioned, every department, with the exception of our garden departments, reported a positive comp in the quarter.

  • Sales related to Hurricane Sandy were approximately $145 million in the second quarter, $30 million higher than the storm sales we realized from Hurricane Irene in the same period last year.

  • As the rebuilding continues, we believe we will see some additional storm-related sales in the second quarter.

  • Our total Company gross margin was 34.9% for the quarter, an increase of 20 basis points from last year.

  • This gross margin expansion came from our US business and can be attributed to the following.

  • First, our shrink efforts are gaining traction as we realized 11 basis points of gross margin expansion due to better shrink performance than one year ago.

  • Second, we experienced approximately 20 basis points of gross margin expansion due to the impact of recently acquired businesses, which are gross margin accretive.

  • And third, we experienced approximately 10 basis points of gross margin contraction due to a change in mix of products sold.

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

  • In the first quarter, operating expense as a percent of sales decreased by 112 basis points to 24%.

  • Total operating expenses grew at a factor of 35% of our sales growth, better than our original guidance due principally to the sales environment.

  • Interest and other expense was $161 million for the first quarter, an increase of $77 million over the same period last year due to the following factors.

  • First, in the first quarter of 2012, we had a $67 million benefit arising from the termination of a third-party loan guarantee that did not repeat in 2013.

  • And second, our net interest expense was $10 million higher than last year due for the most part to interest associated with $2 billion of incremental debt issued in April of 2013.

  • Our income tax provision rate was 36.6% in the first quarter and we expect our income tax provision rate to be approximately 37% for the year.

  • Diluted earnings per share for the first quarter were $0.83, an increase of 22.1% from last year.

  • Moving to our operational metrics, during the first quarter, we opened one new store in Mexico for an ending store count of 2,257.

  • At the end of the first quarter, selling square footage was 235 million and total sales per square foot for the first quarter were $328, up 7.8% from last year.

  • Now turning to the balance sheet, at the end of the quarter, inventory was $11.8 billion, up approximately 2% from a year ago.

  • Inventory turns were 4.4 times, up from 4.3 times last year.

  • We ended the quarter with $44.2 billion in assets, including $4.3 billion in cash.

  • In the first quarter, we repurchased $2.1 billion, or approximately 27.2 million shares of outstanding stock, including 9.1 million shares through open market repurchases and 18.1 million shares through an accelerated share repurchase program.

  • The shares acquired under the accelerated share repurchase program are an initial calculation.

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

  • In April, we issued $2 billion of long-term debt at a record low blended coupon of 3.45%.

  • At the end of the quarter, our adjusted debt to EBITDAR ratio was 1.8 times against a target of 2 times giving us approximately $2 billion in additional borrowing capacity.

  • We have no plans to issue incremental debt in the second quarter, but if conditions warrant, we may look to do so in the back half of 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 17.7%, 230 basis points higher than the first quarter of fiscal 2012.

  • Continued strong performance in the core of the store drove first-quarter sales ahead of our plan.

  • Further, we know that some garden sales that were deferred in the first quarter will be realized in the second quarter.

  • Finally, while the forecast for GDP growth in the US hasn't changed materially, housing continues to recover.

  • Today, we are lifting our 2013 sales and earnings per share growth guidance reflecting our first-quarter outperformance and our forecast for the second quarter where we are projecting sales and earnings to be higher than what we originally planned.

  • Because it is early in the year, we are not changing our forecast for the back half of the year.

  • As a result, we now expect fiscal 2013 sales to increase by approximately 2.8% with positive comps on a 52-week like-for-like basis of approximately 4%.

  • Given our updated sales growth guidance, we now expect expenses to grow at 30% of our sales growth rate on a 52-week basis.

  • For earnings per share, remember that we guide off of GAAP.

  • We now project fiscal 2013 diluted earnings per share to increase approximately 17% to $3.52.

  • This earnings per share guidance includes the $2.1 billion of share repurchases completed in the first quarter and our intent to repurchase an additional $4.4 billion in shares over the course of the year.

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

  • Operator

  • (Operator Instructions).

  • Dennis McGill, Zelman & Associates.

  • Dennis McGill - Analyst

  • Hi, good morning.

  • I guess first question -- Carol, I think it was a couple years ago, you had mentioned an REO turnkey program for banks on the foreclosure side.

  • And I think that business is probably still growing and you have got an emergence of single-family rental companies out there as well that are going to be a little bit more institutionalized than maybe national.

  • Can you just talk big picture what that program looks like today and how you guys are thinking about maybe agreements that could get you into the maintenance side on the single family part of the business on the rental side?

  • Carol Tome - EVP, Corporate Services & CFO

  • Well, I will start and then, Marvin, maybe you want to kick in.

  • We are pleased with this business.

  • On a relative basis, Dennis, it is pretty small for us, but we are seeing nice growth and we will continue to use our services organization to expand this across the country.

  • What we are more excited about actually is what Frank has commented on is the strength in our Pro business and the REO would not be inside of that Pro business necessarily, but we are really excited in that regard.

  • Marvin, any color you want to add?

  • Marvin Ellison - EVP, US Stores

  • Dennis, the only thing I will add is, as you know, the business is shifting from traditional foreclosures with banks to private equity funds going in and purchasing up groups of properties.

  • So we are shifting and adjusting, but I think Carol's point is most important.

  • This is a small business.

  • It is something that we are very interested in.

  • We think that we have unique competencies with our Pro business with the products that we sell and our key is really two things -- leveraging our GC network that we have because we are in the services business and the Pro business, but also leveraging product pull through.

  • We want those customers to come to our stores to buy products and those products to be the fixtures, the faucets, the plumbing supplies, etc.

  • that we put in those homes from a remodel and from a maintenance standpoint.

  • So so far so good, but it is a relatively small business.

  • Dennis McGill - Analyst

  • Roughly how big would that be today?

  • Carol Tome - EVP, Corporate Services & CFO

  • We haven't disclosed that, Dennis.

  • Dennis McGill - Analyst

  • Okay.

  • Second question, as you talked about double-digit comps in California for the quarter, can you maybe go into a little bit of detail as far as categories that you see driving that performance and then maybe, Frank, just big picture how you think about that maybe being a leading indicator to other parts of the country as home price inflation gains momentum as well?

  • Frank Blake - Chairman & CEO

  • Well, let me take the latter first, Dennis.

  • What we have seen over the last several quarters is some of our most hard-hit markets, the markets that were really ground zero of the housing collapse, recover.

  • And that is California, Florida, moving into Arizona, now even Las Vegas in Nevada.

  • So it is really part of how badly those markets suffered previously and now starting to return to more normal performance.

  • I will let Craig and Marvin comment, but I am not aware of any particular differences in terms of what is being sold in those markets.

  • We are really selling across the store there.

  • Craig Menear - EVP, Merchandising

  • It really is broad-based when you look at virtually every department we have.

  • All posted positive growth in the California area.

  • So we are very, very pleased that it is a broad-based sales pattern.

  • Carol Tome - EVP, Corporate Services & CFO

  • There is that saying a rising tide lifts all boats.

  • The entire business is lifting.

  • Craig Menear - EVP, Merchandising

  • Correct.

  • Dennis McGill - Analyst

  • Pretty bullish.

  • Thanks, guys.

  • Operator

  • Gary Balter, Credit Suisse.

  • Gary Balter - Analyst

  • Thank you.

  • Just two questions.

  • One is can you talk about -- you have been doing these different tests with PayPal and other ways of servicing the customer from a payment point of view.

  • Could you discuss where you are going with that and what has been the results of some of the tests and what are you rolling out, etc.?

  • Carol Tome - EVP, Corporate Services & CFO

  • Well, on the PayPal front, we are very pleased with the year-over-year performance.

  • It actually doubled in penetration, but, Gary, it is very, very small.

  • We brought PayPal into our business because our customers wanted to use that as a form of tender and so we are delighted to have the relationship with them.

  • As we look ahead, we have got our eyes wide open as to what may be available to retailers from a mobile wallet perspective.

  • And there are a number of things that are being talked about, as you know.

  • There is a consortium of retailers, we are not part of that consortium, but we are watching what they are doing.

  • That is MCX.

  • We are watching what they are doing.

  • Obviously we are watching what Google is doing.

  • There was an announcement today about Google.

  • So we are eyes wide open.

  • We want to be with where the customer is going.

  • We don't necessarily want to lead the way.

  • Gary Balter - Analyst

  • Okay.

  • And Lowe's being part of that consortium doesn't really impact your decisions, right?

  • Carol Tome - EVP, Corporate Services & CFO

  • Eyes wide open.

  • We want to do the right thing for our customers.

  • Gary Balter - Analyst

  • Okay.

  • And second question, your productivity now [by], assuming this calculation, leases about $326 per square foot.

  • You peaked out at about $100 higher back in the good old days.

  • And just comping in the high singles, you are going to get near there.

  • As you look at your staffing in the stores and the way the store is set, do you feel like you could -- the capacity is fine for getting up to those levels or do you feel that maybe you'll start stretching your stores again and you have to start changing the way you come to market a little bit?

  • Carol Tome - EVP, Corporate Services & CFO

  • Well, it really depends on the nature of the sales growth.

  • As you know, we forecast sales growth 50% coming from transactions, 50% coming from ticket growth.

  • As you saw in the first quarter, our growth came from ticket growth.

  • That has an impact on our staffing model because it is an activity-based staffing model, but, Marvin, you've got tons of flexibility to do what you need to do to serve the customer.

  • Marvin Ellison - EVP, US Stores

  • Yes, Gary, we do, in fact.

  • If you go back to the whole 60/40 initiative over the last four years, we've reinvested roughly 500 hours per store per week back to the stores for service.

  • And that is a reallocation, not an incremental add, so that has really allowed us to continue to sustain a service level while making sure that we respond to the needs of business.

  • But I think Carol's point is very keen and that is we have an activity-based system driven by transactions and ticket.

  • So where sales are picking up, our staffing has increased.

  • We think we will be in a perfect position to keep up with the trends.

  • We work hand-in-hand with Craig's team.

  • So as we forecast events, new product introductions, we will adjust our staffing to make sure we have customers served in the most appropriate way.

  • So we feel really good about the future and how we can keep up with the business.

  • Frank Blake - Chairman & CEO

  • Gary, the one other point that I would add to that on the store, we are pleased with the size of our store.

  • We don't see a need to substantially remodel our stores or expand them.

  • The one thing that we are dealing with, between Marvin and our supply chain team, is Buy Online Pick Up In Store and Buy Online Ship To Store and Buy Online Ship To Store particularly that we have had some pretty good customer interest in that and so we are thinking about how do we segment parts of the store to more efficiently serve that customer who is coming in and has bought online and just wants to pick it up in the store.

  • So Marvin and his team are working on, gee, what would we do with the store layout.

  • But that is a slight alteration; it is not a remodel.

  • Carol Tome - EVP, Corporate Services & CFO

  • Here is a really interesting statistic.

  • If you look at the first quarter, 22% of the sales placed online were actually picked up in the store and 10% of those were BOSS-related Buy Online Ship To Store-related.

  • Isn't that interesting?

  • Gary Balter - Analyst

  • Thank you very much.

  • Operator

  • Aram Rubinson, Nomura.

  • Aram Rubinson - Analyst

  • Hi, good morning.

  • A question about traffic and ticket.

  • I see the quarter's entire comp, as you said, came from ticket.

  • There were a number of factors though that might have influenced that such as the extra week shift and the weather and other things.

  • Can you help us disaggregate some of those factors?

  • Trying to get a sense of how the underlying traffic is on a reported basis.

  • Underlying traffic on a comp basis was slightly negative.

  • So was just trying to get a little context around that.

  • Carol Tome - EVP, Corporate Services & CFO

  • Well, I can start and Craig, you can add some color.

  • Our comp transactions, as Craig pointed out, were up 0.1% and that is a good number given how we are so heavily penetrated in garden in the first quarter.

  • Our garden business makes up 18% of our total sales.

  • If you look at our comp average ticket, it was up 4.2% year-on-year and if you look at the drivers, it was across all categories.

  • As Craig pointed out, we had about 120 basis points coming from commodity inflation.

  • We had about 70 basis points of growth coming from appliances.

  • So our appliance business is growing quite nicely and then the rest was across all categories.

  • Craig, do you want to give any more color?

  • Craig Menear - EVP, Merchandising

  • Yes, just to reiterate, when we got into April and actually began to see a more normalized weather pattern, we were able to actually drive the transaction growth in the Company and with the garden businesses kicking in and getting to positive growth in the month of April, it significantly helped that, including the lower ticket categories, which grew as well.

  • Aram Rubinson - Analyst

  • So usually in a cyclical rebound, we see ticket lead the comp.

  • Is that just part of what we are seeing naturally or do you expect the traffic to kind of be balanced with the ticket in the year ahead?

  • Carol Tome - EVP, Corporate Services & CFO

  • Well, we would expect the traffic to come back in the second quarter, of course, because the sales that we didn't get in the first quarter have not been lost.

  • As we look at our garden sales -- recall last year, we had a really warm first quarter.

  • So we pulled forward about $160 million of garden sales into the first quarter last year.

  • This year, we estimate we lost about $188 million of garden sales, but it's not lost forever.

  • Maybe some of it is lost, but we are going to get the majority of that back in the second quarter and with that comes people.

  • Craig Menear - EVP, Merchandising

  • I think the other factor, when you think about the growth in ticket, as we called out over $900, being up 9.7%, the improvement in the Pro business is also a factor there that is helping to drive that higher ticket.

  • While we are not back to historical norms, we are seeing improvement in terms of unit productivity and the number of items in a basket with our Pro customer and so that is encouraging for us as well.

  • Aram Rubinson - Analyst

  • That's great.

  • All right, thanks for that thoughtful reply.

  • Operator

  • Dan Binder, Jefferies.

  • Dan Binder - Analyst

  • Hi, good morning.

  • I was wondering if you could just give us your best thoughts on what the -- when the seasonal shifts will occur with -- I should say the week shift that occurred in Q1, how that plays out across the rest of the year.

  • And then my second question was just regarding competition, both online and on land, how that is looking these days?

  • Carol Tome - EVP, Corporate Services & CFO

  • Sure.

  • So let's talk about the seasonal shift.

  • And I'm going to do it on a comp basis.

  • So for the first quarter, we told you that the seasonal shift was 320 basis points.

  • On a comp basis in terms of dollars, that was $554 million.

  • Looking at the second quarter, we will actually have a lower comp basis and it will be lower by about $300 million.

  • So if you think about what that means, our comps will be higher in the second quarter than our total sales growth.

  • Then looking to the third quarter, there shouldn't be any meaningful difference in the comp basis.

  • And then finally in the fourth quarter, our comp basis should decline by about $100 million.

  • You can call that pretty flat.

  • So hopefully that is helpful.

  • Craig Menear - EVP, Merchandising

  • And as far as the competition, really it is still there.

  • We have plenty out there.

  • Kind of haven't seen anything dramatically different in the last quarter, but clearly we monitor what is happening in the marketplace and then adjust according to what we see happening.

  • Dan Binder - Analyst

  • Great, thanks.

  • Operator

  • David Gober, Morgan Stanley.

  • David Gober - Analyst

  • Good morning, guys.

  • Craig, I was just wondering if you could touch a little bit on some of the merchandising initiatives, particularly on the localization front, as you ramp into the busy part of the year.

  • And any kind of update on what you're seeing there and how you are expecting that to impact the business, whether that would be contributing to ticket or traffic.

  • Craig Menear - EVP, Merchandising

  • Yes, David, as you know, we have put tools in place to assist our merchants in assorting.

  • We are working on actually delivering enhancements to those capabilities right now.

  • We have been developing clusters, so working to do a better job of assorting locally.

  • Probably an example of that would be adjustments in floor tile mix.

  • And we had pretty nice performance, so we believe that, by working with our field merchandising team in conjunction with the merchants here in Atlanta, that those kind of adjustments are paying off for us and seeing it in the performance.

  • David Gober - Analyst

  • And maybe just a follow-up on the appliance business, I know Carol mentioned that that continues to be strong.

  • It seemed like, in the fourth quarter, that was a big call-out as you guys expanded a couple of relationships with vendors.

  • Are you still seeing momentum there and as you continue to roll that out, are you seeing the impact across the stores more localized to the appliance section?

  • Craig Menear - EVP, Merchandising

  • First of all, let me start, we are pleased with the performance we are seeing in the appliance business.

  • As Carol called out, it contributed about 70 basis points of comp in the quarter.

  • Our customers are responding to the expanded offering.

  • We completed the initial rollout of our expanded store base, which was 120 stores at the end of last year and we are moving forward, as we called out last quarter, with an additional 120 stores.

  • The appliance business is an interesting business.

  • It is highly repair-oriented.

  • A lot of appliances break every day in the country, so we do see that as a big repair business.

  • It also does complete the kitchen.

  • So there is an opportunity on both sides.

  • David Gober - Analyst

  • Got you.

  • Thanks.

  • Operator

  • Christopher Horvers, JPMorgan.

  • Christopher Horvers - Analyst

  • Thanks and good morning.

  • Carol, I believe you mentioned 18% of sales is historically -- you said garden in the first quarter.

  • What was that this year, how does that compare to 2Q and perhaps can you expand that bucket?

  • How much would you say is seasonal and outdoor broadly historically in the first and second quarter, including things like grills and patio furniture and outdoor paint and all the outdoor activities?

  • Carol Tome - EVP, Corporate Services & CFO

  • The 18% number that I shared with you was the penetration this year.

  • And as we pointed out, our comps were negative, so obviously the penetration was higher last year, slightly higher.

  • And Craig, you might want to talk about how we've categorized --.

  • Craig Menear - EVP, Merchandising

  • Yes, in terms of outdoor kind of categories in total as we look at it, generally, in Q1, that represents about 30% of our business and it grows to about 35% of our business in Q2.

  • Christopher Horvers - Analyst

  • Okay.

  • And so I assume last year that that was a lot higher in the first quarter.

  • Is it 200, 300 basis points higher, the flip year-to-year, or is it something smaller?

  • Carol Tome - EVP, Corporate Services & CFO

  • Well, if you just want to give us a second, we can tell you.

  • So the penetration has changed about 200 basis points year-on-year.

  • Christopher Horvers - Analyst

  • 200 bps year-to-year.

  • Okay.

  • So you're raising the guidance for the -- you are just raising -- assuming that the seasonal business shifts into the second quarter from the first, I think the $180 million that you mentioned that you missed this year, that is about 90 basis points.

  • Should we look at the 2Q outlook on a stack basis or are we just going to assume that the 4.8 domestically, and I get the 90 bps back of that garden business shifting or another 200 basis points from the seasonal shift, total outdoor seasonal shift?

  • Carol Tome - EVP, Corporate Services & CFO

  • Well, let me share with you how we are thinking about it.

  • The guidance that we have given today, the lift from 2 to 2.8 or on a comp basis 3 to 4 equates to about $800 million more in sales than we originally planned.

  • Of that $800 million, about $340 million was recognized in the first quarter.

  • So the balance, we believe, will come in the second quarter.

  • And we get there the following way.

  • First is recovery of garden and we won't recover everything we lost, but we will recover the majority.

  • We also believe that we will have additional sales from Sandy and these will all be incremental sales.

  • We are projecting $80 million from Sandy and I will tell you that is a projection; don't really know.

  • And then the rest will come from strength across the core of the business.

  • It is May 21.

  • Our sales thus far in the month are great, so we feel very comfortable with the guidance that we have given.

  • Christopher Horvers - Analyst

  • Thanks very much.

  • Operator

  • Michael Lasser, UBS.

  • Michael Lasser - Analyst

  • Good morning.

  • Thanks a lot for taking my question.

  • I actually have two.

  • First, it's on the flow of credit to consumers.

  • How are you viewing that dynamic within the broader macro environment as influencing your sales?

  • Is that starting to happen, which is a driver or do you expect that that is still on the horizon that that will happen down the road?

  • And then I have a follow-up.

  • Carol Tome - EVP, Corporate Services & CFO

  • So Michael, the question is on consumer credit?

  • Michael Lasser - Analyst

  • Yes.

  • Is it starting to flow.

  • We saw in the fourth quarter home equity lines were still down year-over-year.

  • What do you think is fostering all this good growth that you are seeing?

  • Carol Tome - EVP, Corporate Services & CFO

  • Well, interestingly, we did see improved penetration on our private-label cards in the quarter.

  • The penetration increased 119 basis points to 22.9% and if we look by category where we saw that growth, it was driven by our kitchen department, our millwork department and our plumbing department, some of our strongest year-over-year growth departments.

  • So that is good news.

  • I will tell you our approval rates continue to decline principally because people are coming off the sidelines with lower FICO scores and they are not being qualified.

  • So our approval rates are about 65% down from last year slightly.

  • The average FICO score being approved is 710 with an average credit line of $5,800.

  • The other interesting statistic is that for our existing customers, there are only about 27% utilized on their credit.

  • So consumers continue to be pretty cautious with credit.

  • The same thing holds true for Pro.

  • Our Pro approval rates are about 70%, a bit of a higher line there, $6,800, but only 20% utilized.

  • Now, on the Consumer side, as you know, the ability to pay or the CARD Act really negatively impacted approvals.

  • The Consumer Financial Protection Bureau came out with some changes recently, which we think will help approval rates.

  • We think it will help grow our approval rates by 100 basis points more or less, so that is good news.

  • This is my long answer to your question that, much like the housing market beginning to recover, the consumer and credit availability is beginning to recover but it has not recovered.

  • Michael Lasser - Analyst

  • And it sounds like you are doing your part to contribute to the freer flow of credit to the consumer.

  • Carol Tome - EVP, Corporate Services & CFO

  • Yes, we are.

  • Michael Lasser - Analyst

  • And my second question is, as the housing recovery continues, the profitability of the supply chain should improve -- of the entire home improvement supply chain should improve as capacity utilization rates rise.

  • Are you starting to see evidence that you are benefiting from that in whatever capacity you think you might?

  • Carol Tome - EVP, Corporate Services & CFO

  • Well, as you know, we have given guidance through 2015, which suggests we will get about 20 basis points of benefit from our supply chain by 2015.

  • We didn't see that in the first quarter, but that is just because of the nature of the seasonal business, the spikey sales and our supply chain did a great job in the first quarter.

  • But longer term, we should enjoy more benefits.

  • Michael Lasser - Analyst

  • So I wasn't necessarily talking about your supply chain, sorry for the confusion.

  • I was talking about your vendors becoming more profitable such that you would start to participate in their improved profitability.

  • Craig Menear - EVP, Merchandising

  • Certainly, when you can put throughput through the factories, that improves overall profitability and we do have agreements in place with our suppliers where, as we drive productivity for them, we share in that productivity and obviously can deliver greater value for our customers as well.

  • Michael Lasser - Analyst

  • Okay, thank you very much.

  • Operator

  • Matt Fassler, Goldman Sachs.

  • Matt Fassler - Analyst

  • Thanks a lot and good morning.

  • You spoke about the strength in your commercial business and you attributed that in part to macro dynamics, which clearly are working in your favor.

  • When we have been talking to pros over the past month about the power center channel supplied to them, Home Depot often stands out as taking more aggressive action and making incremental -- having incremental impact.

  • So is it possible to try to disaggregate you think the contributions of your own changes and you might talk about any ones that are new or different are making a big difference versus that of the market in driving that Pro business above the Consumer business here in the first quarter?

  • Frank Blake - Chairman & CEO

  • So first off, I will ask Marvin to address some of the actions we have taken in the store to better serve our pros, but I would just say, generally, it is tough for us to measure share, period.

  • It is really hard for us to measure share with the pro because the Pro shops across so many different channels.

  • There are so many different kinds of pros in our stores, so we really don't have a good read through into what extent do our Pro numbers reflect some possible share gain versus the market.

  • Since we have started for several years now, we have had a notional theory of what we would see in the housing recovery and since we are seeing that play out with our Pro numbers, we are more inclined to think of that as a more general market recovery.

  • But we have done, and thank you for noting, we have done some things that are very focused on this customer segment in the store.

  • Maybe, Marvin, you want to comment on some of those.

  • Marvin Ellison - EVP, US Stores

  • Sure.

  • Matt, we really took advantage of the downturn.

  • We had processes and our focus was really not that good, to be quite candid and so when the market was depressed, we decided to invest in a couple of things.

  • Number one, we had a very distinct focus on what we do in the store and what we do outside of the store.

  • In the store was primarily for our smaller pros, outside of the store was for pros that typically would not venture into a Home Depot because of the nature of their business and in the store, we focus on speed and convenience.

  • We put in dedicated cashiers for the pros.

  • We put in dedicated loading.

  • We created Pro power hours where we eliminated tasking and we wanted service focus for specific times of the day and we really made a really consistent focus on speed.

  • We leveraged the mobile point-of-sale to help pros accelerate their transactions.

  • Then we shifted outside of the store.

  • We put in a salesforce designed specifically to go to the pros, the larger pros and to make sales calls talking about the features and benefits of working and buying from The Home Depot.

  • We work with Craig's team to improve the bid room process.

  • It would take in the past, days to get a bid back.

  • We turned it into minutes.

  • We continue to listen to pros and just made the necessary changes.

  • And what we hoped is that when the market started to improve that the investments in training and service that we put in place would benefit us.

  • It is still very early; we still have a lot of work to do.

  • And to Frank's point, it is difficult to measure marketshare, but we have to believe that all of the dedicated focus over the last two years may be giving us a disproportionate benefit as the market improves.

  • Matt Fassler - Analyst

  • Thank you.

  • Operator

  • Brian Nagel, Oppenheimer.

  • Brian Nagel - Analyst

  • Hi, good morning.

  • First question, I just wanted to follow on Matt's question on the Pro a bit, but you called out the strength you have seen in the Pro business here and clearly as you said but a big focus for Home Depot.

  • But you are connecting better with those customers now.

  • You're following the data better.

  • As you look at the buying patterns now and with all that is going on in the macro environment, it is not surprising Pro is picking up, but are you seeing something in your data to suggest that we really do have a sustainable trend here now for Home Depot in this Pro business more than we have seen in the past?

  • Frank Blake - Chairman & CEO

  • So I would say this is -- interestingly, this is the first quarter that the Pro segment sales have outpaced our Consumer segment sales.

  • So we are, I think, appropriately cautious about drawing broader generalizations.

  • As Carol said, we raised our guidance thinking through what is going to -- what we think is going to play out in the second quarter and we are just -- I would say it is a bit early from this quarter to say, boy, this is sustaining.

  • We do like the trend over the last -- definitely the trend has been a positive trend.

  • Carol Tome - EVP, Corporate Services & CFO

  • It might be helpful to share with you the top 10 Pro classes to the question of what are they buying.

  • It includes plywood, gypsum, dimensional lumber, pipe and fittings, floor and wall tile, tile set moldings, interior paint, studs and lightbulbs.

  • That is pretty core for the Pro customer.

  • Marvin Ellison - EVP, US Stores

  • The only thing I will add is when you talk about the large pro, which we defined as over $10,000 in annual spend and a smaller pro, the smaller pro is improving and that is a good sign, as Frank noted earlier and what we are hearing from the pros is a very simple definition as to why.

  • A lot of the smaller pros basically shut their businesses down and started to work for the larger pros and so now as the business and the market improves, there are more jobs available and a lot of smaller pros are venturing out again to open up their shops and they are back in business.

  • But it is very early, but the trend is positive.

  • We just hope that it sustains.

  • Brian Nagel - Analyst

  • That is very helpful.

  • And then maybe just a shorter question on -- a lot of us are focused here on seasonal sales because it's key this time of year and there has been a lot of shifts with the weather and such, but is there a way that you could look at your business and say, okay, despite all these weather shifts we have had in 2013 versus 2012, seasonal sales are actually better this year or are they the same as last year?

  • Is there some way to look at it like that?

  • Frank Blake - Chairman & CEO

  • Sort of a weather-adjusted seasonal sale metric, we really don't have that.

  • I mean that would be a difficult one to come up with.

  • Craig Menear - EVP, Merchandising

  • I think what we do do is we look at this really on a half basis and we try to take into account both quarters combined to eliminate the shifting noise, if you will, from year to year and we look at multiyear penetrations by category, by week and this is why, as Carol said, we feel like we have got an opportunity to gain most of those sales in Q2.

  • You may have some categories like pre-emergent that we may not get it all back.

  • But we feel pretty confident that we will get the majority of it.

  • Brian Nagel - Analyst

  • Thank you.

  • Operator

  • Peter Benedict, Robert Baird.

  • Peter Benedict - Analyst

  • Hey, guys, thanks.

  • What do you guys make of the recent decline in lumber prices?

  • What do you think is driving that and just getting to your outlook for inflation over the balance of the year?

  • What are you guys thinking on that front?

  • Craig Menear - EVP, Merchandising

  • The lumber pricing has been interesting for the year.

  • I think output in Q1 from the industry was up double digit in the US, as well as up high single digit from Canada.

  • So I am sure that has a factor on driving the overall pricing in the market.

  • It is still up significantly year-over-year, but I think that is probably a factor to the recent declines.

  • Carol Tome - EVP, Corporate Services & CFO

  • And we plan on a commodity-neutral basis, so, as you know, we haven't lifted the back half of the year for anything that might happen with prices up or down.

  • Peter Benedict - Analyst

  • Okay, thanks.

  • And then diving a little bit more into that Pro -- some of the Pro questions here.

  • Any indication in some of the categories, things like jobsite tools, windows, things like that, are they starting to show any kind of an uptick or is that still on the come?

  • Craig Menear - EVP, Merchandising

  • I mean when we look at Pro categories -- Carol called out the top 10 -- we are seeing growth in those businesses and we saw growth in the first quarter obviously versus the fourth quarter, which you would expect to see some based on just seasonal.

  • So we are encouraged by the growth across those categories.

  • Peter Benedict - Analyst

  • Thanks.

  • And then just one last one.

  • When spring arrives as it did this year, I mean when does it typically peak?

  • I mean are we seeing the peak now?

  • Does the peak occur as you kind of get into June?

  • Just trying to understand how long the spring season goes, when it arrives at a similar time as it did this year?

  • Thanks.

  • Craig Menear - EVP, Merchandising

  • That really varies by area of the country and as you can imagine, the South peaked several weeks in advance of the North.

  • But even in that, the peak in any given area can shift up to roughly two weeks give or take.

  • So it really does vary by area of the country.

  • In some areas, it can be as early as week 10; in other areas, it can be as late as 17 or 18.

  • Carol Tome - EVP, Corporate Services & CFO

  • Yes, based on our month-to-date sales, I would say it hasn't peaked.

  • Peter Benedict - Analyst

  • Has not.

  • Thank you very much.

  • Operator

  • Greg Melich, ISI Group.

  • Greg Melich - Analyst

  • Hi, thanks.

  • I had one follow-up question from before and then a longer-term one.

  • Carol, you mentioned that May is running great.

  • Would you describe April as great as well?

  • Carol Tome - EVP, Corporate Services & CFO

  • Well, April was an outstanding month, but I also want to bring your attention to the timing of Easter.

  • Because of where Easter fell this year versus last year, March was -- the negative comp was overstated by about 230 basis points, which means the positive comp in April is overstated by about 230 basis points.

  • Greg Melich - Analyst

  • Got it.

  • So April was great, not outstanding, if you adjust for Easter?

  • I will leave it at that.

  • So a more serious question, your free cash flow guidance you didn't update as part of the change in your EPS guidance.

  • I think it was around $7 billion.

  • Has that changed particularly given that it seems that inventory was only up 2% to get the sort of top-line growth.

  • Should we expect more free cash flow leverage or is it still the same number there?

  • Carol Tome - EVP, Corporate Services & CFO

  • No, we have updated our forecast.

  • I didn't call it out because I don't think it is material on the $7 billion number, but it is up maybe $200 million or $300 million.

  • Greg Melich - Analyst

  • Okay, that's great.

  • Thanks.

  • Operator

  • Michael Baker, Deutsche Bank.

  • Michael Baker - Analyst

  • Hi, thanks.

  • So one shorter-term, one longer-term question.

  • Shorter term, just this quarter, can you tell us the EPS impact of that calendar shift of the $540 odd million?

  • Carol Tome - EVP, Corporate Services & CFO

  • Sure.

  • The EPS impact was $0.03.

  • Michael Baker - Analyst

  • Okay, thank you.

  • And then the longer term, so at least in my model, the last time you were at an equivalent sales per foot number, your operating margins were 250 points lower than they are now.

  • So as I start to think out longer term and if you can get back to where sales per foot were pre-recession, is there any reason to believe that the operating margin shouldn't be that much higher, 200, 300, 400 basis points higher than they were last time they peaked?

  • Carol Tome - EVP, Corporate Services & CFO

  • Well, as you point out, we have a ton of operating leverage in our business and by the great work of the team in terms of cost out and just driving productivity, it is more productive than it has ever been.

  • We have guided to a 12% operating margin by 2015.

  • Let us get there and then we will talk about how much more opportunity.

  • Michael Baker - Analyst

  • Looks like you're going to get pretty close by the end of this year, maybe within 50 basis points?

  • We will wait for that update.

  • Carol Tome - EVP, Corporate Services & CFO

  • Very good.

  • Thank you.

  • Operator

  • Alan Rifkin, Barclays.

  • Alan Rifkin - Analyst

  • Thank you very much.

  • With respect to the average ticket, $900 plus, is the composition between large pro, small pro and the DIY similar within that category as the rest of the corporate average?

  • Carol Tome - EVP, Corporate Services & CFO

  • Well, it's interesting.

  • When you look at that average ticket performance, some of the top drivers of the year-over-year growth were in the appliance category and that is mostly Consumer.

  • Craig Menear - EVP, Merchandising

  • That is mostly Consumer.

  • Alan Rifkin - Analyst

  • Okay.

  • So collectively, I mean compared to three and six months ago, what is your take on the proclivity for both the pro customer large and small, as well as the DIY customer to take on some of these larger projects?

  • Are you seeing clear evidence of that?

  • Craig Menear - EVP, Merchandising

  • I think we have seen expansion of the project business.

  • As I called out, we are seeing nice growth in the simple decor, so whether that is a customer taking on flooring projects or now taking on storage projects where in the past they might have deferred that, we have begun to see those categories have nice growth in the business.

  • So we are encouraged by that.

  • Other drivers to kind of expansion of ticket is also innovation, so things like LED, which drives ticket expansion inside of a category, things like lithium technology, which drive expansion in tools now across almost five departments in the store.

  • All of those have positive influences on the growth of average ticket as well.

  • Carol Tome - EVP, Corporate Services & CFO

  • And just one thing we are looking at very carefully and this data comes from CoreLogic and that is where homeowners are on a loan-to-value basis because once homeowners believe their home is more of an investment than an expense, we believe the nature of their spending will change.

  • And so this data came out in the fourth quarter and it suggests those that have negative equity spend maybe $1000 a year, but those that have 100% positive equity or maybe a loan-to-value as much as 49%, they will spend close to $3000 a year.

  • So we are watching with home price appreciation how households will move into different spending buckets and then trying to determine what the impact on our business will be.

  • It is a little early, Alan, obviously, because this data is just coming out, but we are really trying to understand what it could mean for our business and the project nature of our business going forward.

  • Alan Rifkin - Analyst

  • Okay, thank you, Carol.

  • One follow-up if I may for you.

  • Obviously, California, Florida, Nevada, Arizona, outsized gains.

  • Where are we today in absolute terms with where your stores in those markets are relative to where we were six years ago when the crisis really began?

  • Are we above those levels in absolute terms at the store level?

  • Carol Tome - EVP, Corporate Services & CFO

  • Not yet, not yet, no.

  • Alan Rifkin - Analyst

  • Any quantification of still how far below you are on an average store revenue basis in those markets?

  • Carol Tome - EVP, Corporate Services & CFO

  • Just think about it, as of the end of 2012, we still had close to $3 billion of sales to recover from what we lost during the recession.

  • Alan Rifkin - Analyst

  • Very interesting.

  • Thank you.

  • Good luck.

  • Carol Tome - EVP, Corporate Services & CFO

  • Thank you.

  • Diane Dayhoff - VP, IR

  • We have time for one more question.

  • Operator

  • Scot Ciccarelli, RBC Capital Markets.

  • Scot Ciccarelli - Analyst

  • Good morning, guys.

  • Obviously, there were some weather challenges that you guys kind of called out already and generally I think what we have continued to see over the last several quarters is relatively modest improvements in the smaller ticket sales, but pretty big improvements in bigger ticket sales.

  • I guess my question is how much of that is due to changing mix on the assortment side and if this trend continues, is that something you continue to adjust in terms of the mix and assortment of stores in addition to the labor enhancements Marvin has already called out?

  • Craig Menear - EVP, Merchandising

  • It is -- certainly a portion of this is driven by the growth in categories like appliances, which carry a big ticket.

  • But certainly in the first quarter, the smaller ticket was clearly negatively impacted by the lack of garden sales, which is a massive driver to transactions on smaller ticket.

  • As you can imagine, lots of customers coming in buying some bags of dirt and buying live goods and so on, which carry a much smaller ticket.

  • But as we look at the larger ticket, improvement in penetration in lumber with our Pro customer is one of the top classes.

  • Both plywood, dimensional lumber fall into that, gypsum, those are businesses where customers on the Pro side are buying multiples helping to drive the larger ticket, as well as we say the appliance business.

  • We have seen over multiple quarters the hard work that we have put into things like our kitchen business overall, as well as the improvement of our services businesses, which drive ticket, pay off and help drive the growth in the larger ticket over the past several quarters.

  • We still feel that it is balanced, that we will be driving both on an annualized basis both transactions, as well as ticket in our business.

  • Scot Ciccarelli - Analyst

  • But is there anything that you have seen in the business to make you think the trends that we have seen recently won't continue?

  • I mean it seems like you have been calling out appliances for a while.

  • Lumber has obviously been gaining steam for the last couple quarters.

  • These tend to be kind of long cycle trends, don't they?

  • Craig Menear - EVP, Merchandising

  • Yes, I think they will continue to help us grow the larger ticket categories for sure.

  • Scot Ciccarelli - Analyst

  • Okay, got it.

  • Thanks a lot, guys.

  • Diane Dayhoff - VP, IR

  • Thank you very much for joining us today.

  • We look forward to speaking with you next quarter.

  • Operator

  • That does conclude today's conference.

  • Thank you for your participation.