家得寶 (HD) 2013 Q3 法說會逐字稿

Good day, everyone, and welcome to today's Home Depot third-quarter 2013 earnings conference call.

Today's conference is being recorded.

(Operator Instructions).

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

Thank you 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 analyst questions.

Questions will be limited to analysts and investors, and as a reminder, we would appreciate it if the participants would limit themselves to one question with one follow-up, please.

If we are unable to get 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 also include certain non-GAAP measurements.

Reconciliation of these measurements is included in the release and is Provided on our website.

Now let me turn the call over to Frank Blake.

Thank you, Diane, and good morning, everyone.

Sales for the third quarter were $19.5 billion, up 7.4% from last year.

Comp sales were positive 7.4% and our diluted earnings per share were $0.95.

Our US stores had a positive comp of 8.2%.

From a geographic perspective, sales were strong across the US.

All of our US regions posted positive comps in the quarter, as did 39 of our top 40 markets.

The only exception was New Orleans, which anniversaried the impact of Hurricane Isaac from last year.

Our Midsouth, Southeast, and Pacific North regions had our strongest comp performance with double-digit gains.

During the quarter, we saw strong growth in both transactions and ticket.

We have now had 10 consecutive quarters of transaction and ticket growth, which we view as an encouraging sign of the balance in the growth of our business.

We were also able to achieve operational imProvement across key elements of our business, with imProvement in inventory turns, shrink performance and continued expense leverage.

On merchandising, as Craig will detail, the core categories of the store were solid and we saw strength in larger-ticket categories, such as appliances and countertops.

Project-based categories, such as tile and vanities, performed well, and our services business grew double digits.

The recovery of our Pro business continues.

In the third quarter, our Pro business grew at a slightly faster pace than our Consumer business.

In addition to sales from our Pro customers, we also tracked whether we are drawing an increased number of Pros.

We household our customer data, looking at unique customers and account numbers, and we have seen a steady year-over-year increase in the Pro segment.

During the quarter, we launched our first version of a mobile app for our Pro customers.

The app enables Pros to see multiple stores' inventory at one time, Provides them direct access to our Pro desks, tracks receipts and Provides other functionality that can help Pros better manage their businesses.

We will continue to upgrade and imProve the app and are already ahead of our plan on downloads.

We also continued to enhance our website and Consumer mobile presence.

During the quarter, we added enhanced communication for order delivery, refreshed category pages, simplified the checkout Process and invested across interconnected retail to imProve the customer experience.

Both traffic to the site and our conversion rate grew double digits in the quarter.

Sales from our online channels, including those picked up in our stores, were up over 50% and are now apProximately 3% of our total sales.

Marvin and his team rolled out new first training, focused specifically on the interconnected experience in our stores.

We know that our customers are expecting a simple and easy experience shopping online and in our stores and in the intersection between the two.

That has required new training for our associates, as well as technological imProvements.

For example, during the quarter, we enabled our first phones to be able to Process Buy Online and Pick Up In Store, or BOPUs, and Buy Online Ship to Store, or BOS, orders.

Previously, an associate would have to go to a terminal for this activity, adding time to the customer's visits and complexity to our Process.

Now with the first phone, our associates can post the transaction immediately from wherever they are in the store.

The training and additional technology have led to a significant imProvement in our interconnected customer service.

We separately track customer satisfaction scores on BOPUS and BOS orders.

Those scores have shown a marked imProvement over the quarter and we will continue to refine and imProve this Process.

On the international front, our Mexican business positively comped for the quarter.

That makes 40 quarters in a row, or 10 years of quarter-over-quarter positive comp growth for our Mexican business, a great achievement.

Our Canadian business had positive comps for the eighth quarter in a row.

As Carol will discuss in more detail, we are updating our sales and earnings guidance for the year based on our third-quarter outperformance versus our plan and a somewhat more favorable outlook for the remainder of the year.

We still face several headwinds in the fourth quarter, particularly the storm-related sales from last year.

But the housing market continues to be a positive.

Private fixed residential investment, or PFRI, as a percent of GDP imProved again this past quarter to 3.2%, but it remains well below the 60-year average of apProximately 4.6%.

Let me close by thanking our associates for their hard work and dedication throughout the quarter and for their ongoing efforts to assist those in need as the results of the tornado that hit the Midwest this past weekend.

Based on this quarter's results, almost 100% of our stores will qualify for Success Sharing, our Profit-sharing Program for our hourly associates.

We are Proud of that result and plan on carrying that forward into the fourth quarter.

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

Thanks, Frank, and good morning, everyone.

We are pleased with our performance in the third quarter as sales exceeded our expectations.

Strength in the core of the store, the continued resurgence of our Pro customers and mild temperatures helped us overcome difficult comparisons cycling last year's storm-related sales.

All merchandising departments posted positive comps.

Kitchens, lighting, decor, lumber, electrical, indoor garden, paint and bath were above the Company average.

Millwork, flooring, plumbing, outdoor garden, building materials, hardware and tools performed positively, but were below the Company average.

In the core of the store, maintenance and repair categories saw continued positive comp performance in Products like ladders, light bulbs, air circulation, wiring devices, pipes and fittings, fasteners and builders' hardware.

There was also strength in decor, with comps above the Company average in categories such as lighting, countertops, floor and wall tile, window coverings, faucets, vanities, fixtures and special-order carpet.

At the end of the third quarter, we had apProximately 400 stores with our enhanced appliance showroom, a reset that we began last year.

Using localization tools in these stores that have various footprints, we optimized the space between our kitchen and appliance showrooms and showcased our expanded assortment.

This expanded assortment is also available online, and as a result, we experienced double-digit growth for appliances both in-store and online in the third quarter.

As Frank mentioned, Pro customer sales continue to gain strength, and while Pros shop across the store, we saw double-digit comp growth in categories such as gypsum, concrete, pressure-treated lumber and moldings.

Mild weather throughout much of the quarter and across the country continued to drive sales in our exterior Project categories.

For example, sales in exterior stains and water sealers, pressure washers and exterior paint all posted comps above the Company average.

Our Labor Day and fall cleanup events Provided great values and were well-received by our customers, resulting in solid comps in grills, storage and soils and mulches.

Total transactions grew by 4%, while average ticket increased 3.2% for the quarter.

Our average ticket increase was positively impacted somewhat by commodity price inflation from Products such as lumber and copper.

The total impact to comp growth from commodity inflation was apProximately 45 basis points.

Transactions for tickets under $50, representing apProximately 20% of our US sales, were up 3.1% for the third quarter.

Transactions for tickets over $900, also represented in apProximately 20% of our US sales, were up 10.3% in the third quarter.

The drivers behind the increase in big-ticket purchases were continued strength in our Pro business, appliances, HVAC, countertops and in-stock kitchens.

Now, let me turn our attention to the fourth quarter.

Our strategy of partnering with our suppliers for exclusive launches of new and innovative Products continues to gain traction.

During the fourth quarter, we are excited about the launch of the Nest Protect smoke and carbon monoxide detector.

Its alarm quiets down when you wave your hand at it and sends a message to your phone if the alarm goes off or batteries run low.

Instead of just chirping at you, it speaks with a human voice and give a friendly heads-up before burning toast can turn into an emergency.

We are also introducing new technology in door locks with the Kevo Bluetooth deadbolt from Kwikset.

With Kevo, your smartphone is your key.

You can share keys with visitors, monitor lock activity and delete or disable access, all from the mobile app.

Finally, there is innovation in lighting from Cree with the launch of the Cree TrueWhite bulb.

The TrueWhite LED bulb gives off some of the best natural color when compared to other LED bulbs on the market and is a great complement to the Product launches that we have celebrated this year.

We have an outstanding offering of Products in our gift centers for the holiday season.

This year, we are featuring a Ryobi One Plus cordless drill that includes two lithium-ion batteries, charger and carrying case at a price below the NiCad alternatives in the market today.

For our Pro customers, we have exclusive values on (technical difficulty) combo kits from Makita, Milwaukee and Ridgid.

And we are also introducing the Husky Total Socket.

The Husky Total Socket is an adjustable wrench, one tool that replaces up to 44 sockets.

It also features a lower Profile than standard socket wrenches, allowing you to get into tight spaces.

And we have our best lineup yet in holiday decor.

We continue to bring innovation in the latest offerings to our customers and we are becoming a leading destination for the category, both in-store and through our extended assortment online.

We are committed to simplifying holiday decor for our customers.

About half of our pre-lit artificial tree assortment is designed with Kwikset electrical connections.

Just connect the polls to the base and your tree will illuminate hassle-free.

Making it easy for our customers to enjoy the holidays and Providing great values will allow us to win this holiday season.

Finally, I would be remiss if I didn't mention the outstanding Black Friday special buys that we have planned this year, with extreme values for our traditional DIYers and Professional customers, including some amazing offers on appliances.

Go into our stores or online and I think that you will agree this is one of our most exciting lineups yet.

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

Thank you, Craig, and hello, everyone.

In the third quarter, sales were $19.5 billion, a 7.4% increase from last year.

Comps or same-store sales were a positive 7.4% for the quarter, with positive comps up 8.7% in August, 8.2% in September and 5.6% in October.

Comps for US stores were positive 8.2% for the quarter, with positive comps of 9.6% in August, 9.4% in September and 6.2% in October.

Our total Company gross margin was 34.9% for the quarter, an increase of 35 basis points from last year, of which 32 basis points came from our US business.

Our gross margin expansion in the US is explained by the following factors.

First, we experienced 22 basis points of gross margin expansion in our supply chain due primarily to higher Productivity.

Second, we experienced apProximately 17 basis points of gross margin expansion due to the impact of gross margin accretive businesses that were acquired in 2012.

Third, our shrink reduction efforts continued to gain traction and we realized 2 basis points of margin expansion due to lower shrink.

Finally, we experienced 9 basis points of gross margin contraction due to a change in the mix of Products sold, the majority of which was due to a higher penetration of appliance sales than one year ago.

Our total Company gross margin performance also reflects $10 million of inventory liquidation costs associated with our China store closings in 2012 that did not repeat this year.

While we continue to Project modest gross margin expansion for the year, as we look to the fourth quarter of fiscal 2013, we expect our gross margin to decline roughly 15 basis points from what we reported in the fourth quarter of fiscal 2012, due primarily to certain gross margin benefits recognized last year that we do not expect to repeat.

In the third quarter, operating expense as a percent of sales decreased by 187 basis points to 23.1%.

Our expense leverage reflects our strong sales performance and some favorable year-over-year comparisons.

As you will recall, in the third quarter of 2012, we closed our stores in China and incurred $155 million of operating closing costs that did not repeat this year.

Adjusting for the China store closings, we leveraged operating expenses by 101 basis points, better than our plan.

For the year, we expect our expenses to grow at apProximately 34% of our sales growth on a 52-week basis.

Interest and other expense for the third quarter was $188 million, a 25.3% increase from last year, reflecting new interest expense associated with $2 billion of incremental debt issued in April and an additional $3.25 billion of incremental debt issued in September of this year.

Proceeds from the September debt issuance will be used to repay $1.25 billion of outstanding debt that is coming due in December, with the remainder to be used for share repurchases.

I would also like to note that during the quarter, we received an upgrade from Standard & Poor's, taking our long-term debt rating to Single-A.

Our income tax Provision rate was 35.8% in the third quarter, and for the year, we expect our tax Provision to be apProximately 36.5%.

Diluted earnings per share for the third quarter were $0.95, an increase of 50.8% from last year.

Adjusting for the cost of the China store closings, our diluted earnings per share grew 28.4% from the same period in the prior year.

Now moving to our operational metrics, during the third quarter, we opened two new stores in Mexico for an ending total Company store count of 2260.

At the end of the third quarter, selling square foot was 236 million and total sales per square foot were $329, up 7.2% from last year.

At the end of the quarter, inventory was roughly $11.3 billion and inventory turns were 4.7 times, up from 4.6 times last year.

We ended the quarter with $43.8 billion in assets, including $4.9 billion in cash.

Moving to our share repurchase Program, in the third quarter, we received 2.4 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 $2.1 billion, or 24.5 million of our outstanding shares.

This included $600 million, or 8.1 million shares, repurchased in the open market and 16.4 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 an additional $2.1 billion of outstanding shares in the fourth quarter, bringing our total share repurchases to $8.5 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 19.7%, 360 basis points higher than the third quarter of fiscal 2012.

As we look to the fourth quarter, please remember that the fourth quarter of 2012 had an extra week, contributing $1.2 billion of sales and $0.07 of earnings per share that will not repeat in the fourth quarter of fiscal 2013.

Additionally, we are up against some very tough comparisons, as we had apProximately $255 million of storm-related sales in the fourth quarter of 2012 that we don't expect to repeat.

But we had a great third quarter, exceeded our plan in all departments and our business momentum continues.

Housing is a bright spot in our economy.

As such, we are forecasting our fourth-quarter sales and earnings to be stronger than our plan.

So today, we are lifting our 2013 sales and earnings-per-share-growth guidance, reflecting our year-to-date performance and our forecast for the fourth quarter.

We now expect fiscal 2013 sales to increase by apProximately 5.6%, with positive comps on a 52-week like-for-like basis of apProximately 7%.

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

We now Project fiscal 2013's diluted earnings per share to increase apProximately 24% to $3.72.

This earnings-per-share guidance includes the $6.4 billion of share repurchases completed in the first three quarters of 2013 and our intent to repurchase an additional $2.1 billion in shares during the fourth quarter.

We look forward to talking with you at our Investor Conference on December 11 in Boston, where we will update you on our key strategic initiatives and Progress towards reaching our long-term financial goals.

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

(Operator Instructions).

Gary Balter, Credit Suisse.

Thank you.

First of all, congratulations on just another solid, solid, good quarter.

Frank and Carol and everybody, the question is a couple years ago when you had your last analyst meeting, you highlighted that you are more focused on GDP as your driver, as opposed to PFRI or previous housing metrics that you used.

Yet your numbers have clearly been better than GDP.

And Carol, as you just finished, you talked about housing being one of the drivers.

As you look at your results and you look at the opportunities in housing, are you rethinking the metrics that you use from a macro perspective?

Well, Gary, thanks for your question and for your comments.

Thank you very much.

We still think GDP is the basis for sales growth.

But as you know, we have an imperfect but directionally correct model that gives us some insight as to how housing is driving our sales.

Now, it is hard to nail it on a quarter, but for this year, we feel pretty good about what our model is telling us.

So as you know, we have just increased our comps for 2013 to 7%.

And the way we get there is this way.

First, we start with the GDP estimate of around 2%.

Then we add to that what we think housing is contributing to our sales.

We look at housing turnover, home price appreciation and new household formation.

And when we look at those drivers, we think housing is contributing about 250 basis points of our growth.

To that, we add the benefits that we have enjoyed this year from commodity price inflation; that is maybe around 80 basis points for the year.

The benefits that we are enjoying from our new expanded appliance assortment; that is another 80 basis points.

And then there is about 90 basis points left that is just coming from other growth, be it new innovation that we are bringing into the store, great execution by our store associates.

So that is how we get to the 7%.

Thank you, that's very helpful.

Christopher Horvers, JPMorgan.

Following up on the housing topic, there has been -- some of the metrics recently have slowed down or at least perhaps plateauing, and you have had a lot of rate volatility.

So I was curious what your thoughts are around that, if you are seeing anything in your business.

And playing devil's advocate, is what you are seeing today simply a lag effect that would suggest that later on, as we start to comp the comp and see the lag from slower housing metrics, that things are going to be slower in the future?

So Chris, one of the things that I think and Carol might want to elaborate on this is for us, new home construction is less important as a driver of our business than what is happening with existing homes, both turnover and, most importantly, price appreciation.

We have long thought that one of the key determinants of our business is do people feel good about investing in their house, because they are going to see pricing appreciation in their home.

And that continues to move forward at a pretty good pace.

But Carol, you may want to maybe want to get into more detail.

Sure.

Well, we have regressed ourselves both against 10-year treasuries and 30-year mortgages to see if there is any sort of correlation, and we can't see it.

But all that being said, we do pay particular attention, as Frank mentioned, to both housing turnover and home prices.

And if we were to see housing turnover decline because of the rising rate environment, we would then look to see what is happening to home prices.

And if home prices were to decline, then we might have a different point of view on the housing recovery.

But we are not seeing that.

And for us anyway, we think home price appreciation has been the biggest contributor of our sales growth this year.

And if you look at the Case-Shiller data, it shows that home prices are up 10% year on year; and if you look at the composite index, maybe up closer to 13%, but still 25% lower than their peak.

So we think that there is a lot of room for recovery and it is not going to stall out in the short-term.

And how much of that do you think is that -- perhaps is the underinvestment?

That the homes durable Product -- filled with durable Products and there is this recapture effect as people had underspent for a number of years?

That is a tough one to answer, Chris.

I would say many years ago, somebody's comment, an economist's comment to us was, look for when Consumers start to think of a granite countertop as an expense rather than an investment.

And our hypothesis is there are a lot of things that people want to do with their home, whether it is just imProving the livability or actually fixing things up, that is determined by that investment versus expense factor.

And CoreLogic has done some interesting work that shows people who have positive equity in their home -- and that comes as a result of rising home prices -- people who have positive equity in their home spend three times as much as those who have negative equity in their home.

Thanks very much.

Brian Nagel, Oppenheimer.

Hi, good morning.

A question on the Pro customer.

The comments you made today in your prepared remarks suggest that the Pro business for you continues to imProve.

And if I look back over the prior few quarters, it seems like we are seeing a strengthening trend there.

The question I have is how should we think about the potential for Pro going forward with the backdrop in imProving housing environment?

So Brian, I would say first off, it has been really for the last several years one of our key indicators on recovery.

Because the Pro customer was hit harder for us during the housing crash and now is recovering.

Going forward -- and you see it a bit this past quarter -- we would expect Pro to be growing at or maybe slightly better than the rate of our Consumer.

But really the catch-up has happened and now they should both be growing Probably at about the same rate.

And it will Probably bounce a bit back and forth depending the quarter.

Second quarter, Consumer grew slightly more than Pro; third quarter, Pro grew slightly more than Consumer.

But the good news is both are experiencing growth.

Got it.

And then as a quick follow-up, if I could for Carol, as you look at the expense leverage -- and I guess more of a modeling question -- if you look at the expense leverage here in the third quarter versus what we saw in the second quarter, it was much better.

In the second quarter you called out the step-up in incentive compensation.

I know there is a lot moving on.

But was that basically the difference, Q2 to Q3?

Well, there are a number of things that drove the differences between the quarters.

In the second quarter of 2012, we had some good guys that didn't repeat, including positive expense resulting from our casualty reserve analysis.

As we look to the third quarter and the fourth quarter of 2013, we are going to have higher expenses related to compensation, and we are really thrilled.

And if I could just put our expenses into perspective for you, if you go back to the beginning of the year and the guidance that we gave and fast-forward now to the end of the third quarter, we have increased our sales growth guidance by $2.9 billion.

We have increased our expense guidance by $180 million.

And of the $180 million -- and this is all implied in the guidance that I have given you -- of the $180 million, a third of that is variable compensation, Success Sharing and bonus.

Very helpful.

Thanks.

Dan Binder, Jefferies.

Hi, good morning.

Congratulations on a good quarter.

My question was regarding the appliance resets.

I was wondering if you can give us any more color around how the stores with the full reset are performing in that category versus the stores that have not received the reset, specifically in the appliance business?

Dan, obviously, the customer has responded well to the expanded brands that we have.

And where we are able to show that footprint, we are seeing very nice lift in those stores.

But also remember that all those brands became available to all stores through HomeDepot.com, and as a result, we have seen nice lift really in all stores, and seen category growth in every subset of appliance business.

So we are very pleased with how that is going so far.

I guess I was wondering, because as you look at the two different sets, the reset obviously is pretty impressive.

I am just curious how many stores ultimately put that in and why you wouldn't put it in certain stores versus others.

Because it seems like it is a material imProvement over what you had.

We certainly intend to continue to look at the opportunity.

We don't see this as a fit for all stores.

But clearly, there is opportunity for us to continue to imProve in additional stores, and we will evaluate that as we continue to watch the performance.

We will talk more about this at our Investor Conference because we are going to layout our goals for 2014 and we will talk to you about our capital and where it's going.

Okay, great, thanks.

Matthew Fassler, Goldman Sachs.

[Congrats] and good morning.

A couple of questions.

First of all, can you talk to us how to think about the cadence of the business, given the trend you saw in October and the compares that you faced during Q4.

Maybe any initial comments on the tone of business in November.

As presumably you are facing kind of the teeth of the Sandy compares, it would be very helpful.

Well, sure.

As you know, we did a lot better than we thought we would do in the third quarter.

And the cadence of the business is really a reflection of year-over-year comparisons.

So we had strong comps in all three months, but obviously October was our lowest comping month.

When you think about that, is when we were up against the Sandy sales from last year, and we had $122 million of Sandy sales in October.

Also, if you think about one of our largest (technical difficulty) the Gulf region, the Gulf region had a terrific month in October.

It slowed down year on year because the prior year, they had double-digit comps coming off of other storm sale.

So we were pleased with the cadence of the business, and now as we have entered into the fourth quarter -- and obviously it is very early in the fourth quarter -- our toughest comparison is ahead.

Our hardest comp month is the month of December.

But Matt, we lifted guidance today, because we think we are going to do better than we originally thought in the fourth quarter, and we wouldn't have done that today if we hadn't started off ahead of our expectations.

Great.

And then a second question.

As we look at the expectation for EBIT for this year on a full-year basis, you are sort of creeping up to that 12% number Probably a little faster than you thought you would when you first issued that guidance I guess about a year and a half ago.

How does that lead you to think about the long-term target, which Probably becomes quite germane as you look towards next year, where expectations Probably are going to start to get to that number?

So Matt, the good news is we have our conference coming up in just a few weeks, and so we will be able to lay that out for you and everyone then.

Fair enough.

Thank you, guys.

Aram Rubinson, Wolfe Research.

Thanks, everybody, great work.

A question on the balance of ticket and traffic.

I think the last time we saw ticket and traffic so well-balanced, actually, I think you have to go back to before the year 2000.

And I was just wondering if you can talk about whether or not you find that as significant and what it says about the business and if you would expect the shape of that to change as the cycle Progresses.

Thank you.

Yes, the first comment, Aram, is, as I said in my opening comments, we do see that as a real positive for the balance of the growth of our business.

And obviously, it is something we would like to sustain.

It is definitely something we work on consistently, to drive both traffic and ticket.

And we do think it is important.

Certainly it is a measure of how well the assortments are performing within the store.

Clearly, we have seen nice growth in big-ticket categories for several quarters in a row now, and again, our Pro contributes to that.

Things like kitchens and HVAC, all of that has been positive contributors.

But likewise, we have been really focused on making sure that we capture the opportunity for the Consumer with the smaller tickets as well.

And some of the key driving factors behind the lower ticket categories are things like bulbs and power tool accessories and fasteners that are being driven with larger Projects, more Pro business, as well as great innovation in Products like spray paint and hand tools that have allowed us to drive the smaller ticket.

So it is something that we really focus on to try to bring a balanced apProach to the business.

Thanks.

And it's not easy to stay in stock on all that other stuff -- smaller ticket items when you are comping as hard as you are.

So you must be doing a great job on the supply chain.

The supply chain is definitely helping with awesome in-stock position while leveraging inventory investment.

Thanks, guys.

Budd Bugatch, Raymond James.

Good morning, and let me add my congratulations on the very solid quarter.

I guess my first question really has to do with the leverage factor, Carol.

You've talked about 34% for the year.

I wonder if you could maybe give us some more color on the fourth quarter.

And how should we think about that for 2014 and beyond now?

Yes.

So as you look to the fourth quarter, our expense growth factor will be higher than it was in the third quarter for a couple of reasons.

It will be higher because of incentive comp.

We just raised our guidance, which means we are going blow through the plan that we put together, which is great news for our store associates and for everyone who is bonus or Success Sharing eligible.

So that will drive year-over-year outperformance and higher expense growth, if you will.

We also pushed some of our -- we have got a year-over-year comparison -- pardon me -- related to China.

Last year, we had a good guy in China, it was a $20 million good guy, and that will not repeat.

So as I look at our expense growth factor in the fourth quarter, it will be more like 50% of our sales growth.

For the year, it is 34%.

And as Frank pointed out, we have got an Investor Conference coming up on December 11 and we will give you longer-term point of view on expenses at that time.

I thought that would be the answer for 2014.

And my follow-up question, just you talk about you did better than you expected.

Can you give us -- can you quantify how much better than expected you did in both sales and maybe earnings?

Sure.

I mean, I am happy to do it from an earnings perspective.

Well, I will give it you for both.

Why not?

So we beat our sales plan by about $700 million and we beat our earnings plan from an earnings per share perspective by about $0.10 a share.

Very impressive.

Thank you very much.

Look forward to seeing you in a couple of weeks.

Congratulations.

Thank you.

Dennis McGill, Zelman & Associates.

Good morning and thank you.

First question would just be as it relates to mix within categories, and thinking about Consumers' willingness to trade up, can you maybe just elaborate on what you are seeing there and maybe any examples whether you, I guess, A, are seeing mix benefits, and B, if you are, where that might be.

Dennis, we are seeing customers willing to spend, particularly where you are bringing innovative Product that helps them complete a job faster, saves them money.

So things like LED, which is a significant premium in the market compared to incandescent or halogen for that matter or CFL bulbs, we are seeing terrific growth in that, as customers understand the value Proposition.

Likewise, when you think about tools, lithium continues to grow.

It carries a premium price in the market, particularly in the Pro tools, because the performance enhancements have been there, and we are on about our fourth generation of lithium battery technology over the past five years.

So we have seen customers step up there.

And likewise, we have seen customers willing to step up in things that -- we tested, for example, a 100-gallon Japanese Maple tree for $3000 this spring.

And we were actually quite surprised at how well that sold.

So there are customers willing to step up.

And likewise at the same time, we need to be conscious that there are more runners in the market today, less space.

So we are also looking at the opening price point or the smaller items within our categories as well.

For example, we added in Products in our cleaning, where we took it out of club packs, if you will, and brought in singles, and we have seen nice response with that as well.

Dennis, this is Marvin.

Also, double-digit growth in the services installed business is a reflection of customers' willingness to trade up and take on bigger ticket purchases.

So I guess it sounds like innovation is a big part of it.

If I said it a different way, is the better and best portion of the price spectrum gaining share at the expense of good, if you looked across the store?

No, I wouldn't necessarily say that.

I think the opportunity that we have seen is we have customers willing to step up, but not necessarily seeing a decline in the opening price point.

Okay.

And then second question.

The fourth-quarter comp, which you highlighted, seems to be a recurring theme that we have seen now for the last few years, and you have continued to best that comp I think above expectations after the quarter has wrapped up.

Or I guess said another way, the fourth quarter seems to be coming a bigger portion of the store as you get into more decor and holiday items.

How should we think about that growing piece of the pie in relation to how you are apProaching merchandising in the categories that are in the box?

Certainly one of the things that we are trying to do is in many ways create our own seasons, if you will.

And so we have seen tremendous growth over the past several years with our holiday decor Program as a driver of both traffic to the stores, new customers coming into the Home Depot.

So that has been nice.

We have likewise focused on the opportunity that we have around the gift-giving holiday season with Black Friday.

We've put a bigger effort around that as well.

But even with those things said, we have a lot of customers doing Projects every single day in our stores, and we are continuing to focus on the core of the store as well, which is a key factor.

Things like paint remain one of the top categories.

Customers need cleaning Products, they need bulbs and so on throughout the year.

And that has really been our focus, is to drive Productivity through our assortment and our base

Great.

Best of luck, guys.

Keith Hughes, SunTrust.

Thank you.

My question is on gross margin, you had discussed in the prepared text 15 basis points sequential decline.

Can you give any more detail on what is happening as we move from the third to the fourth on that metric?

Happy to.

In the fourth quarter of 2012, we had 15 basis points of gross margin expansion coming from imProved shrink.

As you know, Keith, we have been really working on, through a cross-(inaudible) effort, to manage our shrink down.

We have done a great job, but we don't expect that 15 basis points to repeat in the fourth quarter.

The other thing that is happening from a year-over-year perspective is if you look at the nature of the Products sold in January, the margin coming off of that tends to be higher than the nature of the Products sold both in December and November.

In the fourth quarter of last year, we had an extra week.

That extra week was in the month of January that had a higher margin rate.

So it is just the year-over-year comparison is causing that 15 basis points decline.

The 15 basis points is year over year, correct?

It is.

Okay, year-over-year.

And then second question on -- I believe it was Marvin mentioned earlier about the installed Product being strong in the quarter.

Is there any specific Product that was stronger than other in the last quarter or two?

I mean, across the board, I mean, when you think about installed businesses (inaudible), you'd think about carpet, you'd think about kitchens, countertops.

We had strength really in the flooring side of the business.

We also had strength across the board from a kitchen standpoint.

We're pleased with that business.

We worked really hard to simplify the entire offering and the Process; as you can imagine, big-ticket and also big complexity.

So we are working really hard on the (technical difficulty) experience and we are going to talk at the Investor Conference about our vision of how you take our flooring model and how we really transition into three easy steps for the customer, and we are can a try to transition more of our installed businesses to a similar format.

But overall, we are pleased with that entire business platform.

Okay, thank you.

Kate McShane, Citi Research.

Thank you, good morning.

I wondered if we could hear a little bit more about ongoing imProvements in supply chain.

It seemed like you benefited more this quarter with the 22 basis points of gross margin expansion from the supply chain.

Can you walk us through if there were any meaningful changes during the quarter?

Well, I can start and then maybe Mark Holifield will jump in.

As I look at it from at least the lens of the CFO, we had higher units per hour, we had better outbound and inbound cube utilization, which drove Productivity throughout the supply chain.

But it didn't just stop us there.

We also had about a basis point of benefit coming from lower fuel costs.

And then we had about 7 basis points coming -- this is all within the 22 basis points -- 7 basis points coming from lower costs within our international distribution channels.

Mark, do you want to give any more color?

Yes, Carol has run down the key points there in terms of the key contributors to Productivity.

I would just add that that occurred across the board, all of our distribution platforms.

Our direct-to-store expenses for transportation and our international logistics were all leveraged during the quarter.

Okay, that's great.

Thank you.

And my second question is kind of a longer-term question.

Carol, you have always given your opinion on what you thought could be the next leg or growth in the housing market, aside from the turnover and higher prices, and that was the easing of the availability of mortgages.

I just wondered if you could maybe update us on what your opinion is on timing or anything you are hearing with regards to that.

Yes, Kate, that is still an opportunity, isn't it?

If you think about it, the underwriting standards are very tight.

There was a recent survey of banks -- 79% of the respondents said that they have not loosened up on their underwriting standards.

And you can appreciate that from some perspective, because they are all faced with higher capital requirements.

They are trying to make a buck in a low interest rate environment, so taking on more risk is difficult for these financial institutions.

But boy, we sure need some movement there, because that, I think, would just be a big boost to the steepness of the recovery.

We also continue to believe there needs to be reform with the GSEs, and there is a lot of dialogue there, but nothing really happening.

But if we were to get some movement in this space, I think we would see a sharper recovery than what we are experiencing.

Thank you.

Michael Lasser, UBS.

Good morning, thanks a lot for taking my question.

I am curious about the week-to-week volatility within traffic that you are seeing in the stores.

How does it compare to what you saw a year or two ago, when the cycle just started to build?

And then how does that compare to the depth of the declines?

Are you just seeing more consistent traffic build on a week-to-week basis at this point?

You know, Michael, you are getting us -- I don't think we have a good answer for you in terms of whether -- if I understand your question, is whether the delta on traffic week to week, whether that differential is narrower with recovering market or steeper.

And it is an interesting question and don't have an answer for you.

Yes, Michael, we will get back to you.

Is it more consistent now, so you --?

I understand the question, and to be honest, we just haven't analyzed that.

We will have to figure out how to normalize for weather, because that certainly impacts traffic.

But we will take a look at that.

It's a good question.

Okay.

The other question I had is if you look within the basket of the Pro customers, is there anything to suggest that you are starting to take share within categories where you have historically underindexed relative to that customer base?

I think Probably the Prototypical Product is paint, but presumably there is others as well.

I would say that when we look at our unit Productivity across many Pro-dominated categories, we are very, very pleased.

Whether that be things like dimensional lumber, plywood, concrete, we are extremely pleased with the performance and actually the growth in terms of quarter-over-quarter growth as well.

And it's a little bit hard to tell you around share with the Pro, because it is a very fragmented market against a lot of competitors' -- lumber building material, supply houses, electrical distributors -- and that data is a little bit harder to get at.

But given the unit Productivity we have, we feel pretty solid that we think we are taking some share.

Mike, this is Marvin.

The only thing I will add to that, the expanded appliance offerings gave us the ability with Property investors to have a better, more economical offering for appliances.

And so we have seen strength in that category.

Craig noted that appliances was really strong across the board; the Pro segment contributed to that.

Other than that, I think Craig answered the question pretty well.

Okay, that's very hopeful.

Thank you very much.

Greg Melich, ISI Group.

Hi, thanks.

I had a couple questions.

One is on gross margin, just to understand the fourth quarter a bit more.

Historically, your fourth-quarter gross margin usually gets better sequentially, and I would've thought supply chain and other things wouldn't go away.

So I understand last year's comparison.

But if you just look at sequentially, why would gross margins be down a little bit, if I take your guidance right?

Sequentially they won't be.

I'm just talking year-over-year.

Okay, you are -- got it.

And then on online, so if I got the number right, it was up 50%.

Was that in the prepared comments?

Yes.

Was there acquisitions or anything else driving that, or what changed?

And then how does that impact traffic and ticket and all the other metrics we talk about?

Because that is a point of revenue.

Yes, we were very pleased with our online performance.

We have been talking to you a lot about all the investments that we are making from an interconnected experience, and it is starting to play out in terms of sales.

So as Frank pointed out, about 3% of our total sales are now online, up 50% year-on-year.

I can give you a little color as it relates to traffic.

Traffic for our Company was up $13 million year on year; $1 million of that was driven by our online Property.

But remember, Greg, we look at this totally interconnected.

It is how do we increase strong close in our stores, how our stores do the same thing for our online presence, and it seems to be getting good traction.

And there was no acquisition.

No, there was no acquisition.

Nothing else turned that around.

And then lastly, Carol, could you update us on credit?

You talked about how generally speaking banks have not shifted their underwriting standards.

How have you guys been able to maybe help your Consumer out to offset that?

Well, our private label grew -- from a penetration perspective, it grew 68 basis points in the quarter.

We are now standing at 23.4%.

If you look at the Consumer apProval rates, they were up 150 basis points year on year, so now 69%.

The through the door FICO score is 715, so it still pretty doggone high.

But -- like I'm glad to see that that the apProval rates are up.

Those lines for Consumers are about $5700, and they are about 26% utilized.

On the Pro, where credit, I think, is actually more important, we also saw apProval rates at 69%, and much higher rate -- the average line is around $8400.

And what we are doing for the Pro is a couple of things.

It is very targeted, it is very focused.

But for our large-spend Pros, we will work with them to extend lines.

So we work with the underwriter of the Program, and we will go back and extend the lines if we think that makes good sense.

We also have a card called the PROX card, which is a payment term card, usually 30 days.

For certain select Pro customers, we will extend the payment days to 45 days or 60, whatever it is on a case-by-case basis.

So we are working very closely with the underwriter to give credit to this very important customer.

That's great.

Thanks.

Scot Ciccarelli, RBC Capital Markets.

Hey, guys, Scot Ciccarelli.

The slowdown that we saw in the month of October, was that more on the transaction side or ticket side?

Because obviously if it was more ticket, that might just be a mix issue.

And I know you guys have touched a little bit upon big-ticket sales during this call.

But is there any reason to believe that the momentum we have seen in that kind of category or bucket should slow anytime soon?

Thanks.

So on the sales slowdown, basically, you're up against $122 million of storm from a year ago.

And so that is spread across things like generators and cleaning and those type of categories, where we have -- batteries, flashlights.

So that is really the pressure that you saw in October and the year over year.

So more ticket than transactions.

Because those generators are big-ticket items.

They're big-ticket, right.

And then as it relates to big-ticket in general, as I mentioned earlier, we have had several quarters in a row now of strong growth in big-ticket, and don't really see why that would change going forward.

We have continued opportunities to grow big-ticket categories, things like appliances, things like kitchens, flooring, all those have been key focuses for us to continue to enhance our offerings, our assortments.

And we saw strong growth in those categories again.

And Craig, if I may, we saw an increase in items per basket in the third quarter.

That is the second quarter in a row where we have seen that.

And that is a contributor, isn't it, to the big-ticket growth?

It is.

And as Marvin mentioned earlier, likewise, our install businesses have seen nice growth as well, and we see that continuing going forward.

Excellent.

Thanks a lot, guys.

Jake, we have time for one more question.

Eric Bosshard, Cleveland Research Company.

Good morning.

The imProved sales in the second half, both 3Q in 4Q, relative to your expectation, any specific categories or areas of the store that you would look at and say, we thought this wouldn't be as good as it is turning out to be?

So we did about 400 basis points better from a growth rate perspective in the third quarter than our expectations.

And we had thought that we would see a drag from appliances.

We thought that we would see commodity deflation.

And we didn't expect to have good weather in the third quarter.

And when you add that all up, that contributed about 230 basis points of that outperformance, because we didn't get commodity inflation, appliances grew and weather was a help.

And then the remaining 170 basis points was across the store.

It lifted -- as Craig pointed out, every department was positive.

And as we look to the fourth quarter, we are expecting more of the same.

Within that, I guess, the appliance drag, is this the category you expected to be slower or the payback from your expansion initiatives and market share efforts you expected to be slower?

What -- if we drilled into that specifically?

If you remember right, Eric, we had begun to roll out expanded showrooms at the end of the third quarter last year, actually beginning of the third quarter into the fourth quarter.

And we thought that we would see tougher comps as we came over those rollouts from a year ago, but that wasn't the case.

And then secondly, on the impact of Sandy in October, from a basis point perspective, what was roughly the impact?

It looks like it is 150 or 200 basis points was the impact of that (multiple speakers).

Well, I will give you the dollars and you can calculate it.

Last year, we had $122 million of Sandy sales.

This year, we had $10 million of Sandy sales.

So the net deduct is $112 million.

Okay.

Great.

Thank you.

Thank you all for joining us today, and we look forward to meeting with you at our conference in Boston on December 11.

Ladies and gentlemen, this will conclude your conference for today.

We do thank you for your participation.