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Operator
Good day and welcome to the Home Depot Q1 2015 earnings call.
Today's conference is being recorded.
(Operator Instructions)
At this time I would like to turn the conference over to Ms. Diane Dayhoff, Vice President, Investor Relations.
Please go ahead.
Diane Dayhoff - VP, IR
Thank you and good morning to everyone.
Joining us on our call today are Craig Menear, Chairman, CEO and President; Ted Dekker, EVP of 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.
Now before I turn the call over to Craig 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 measures.
Reconciliation of these measurements is provided on our website.
Now let me turn the call over to Craig.
Craig Menear - Chairman, CEO & President
Thank you Diane and good morning everyone.
Sales for the first quarter were $20.9 billion, total sales and comp sales were up 6.1% from last year, diluted earnings per share were $1.21 in the first quarter and our US stores had a positive comp of 7.1%.
We were pleased with the start of the year.
We saw a more normal spring across much of the country in the first quarter.
All three of our US divisions posted mid-single digit comps or higher.
Our Western division was our best performing division with strength in key markets including San Francisco, Sacramento, Colorado and Seattle.
All 19 of our US region saw positive comp growth in the quarter.
Both tickets and transactions grew during the quarter with particular strength in transaction growth.
While our seasonal businesses were strong in the quarter, core categories also contributed to our performance.
As Ted will detail we were pleased with the growth in our pro categories and our installation and service business saw sales growth above the Company average in the first quarter with strength in countertops, windows and water heaters.
On the international front both our Mexican and Canadian businesses exceeded our expectations in the quarter.
Ricardo and his team in Mexico posted double-digit comps in local currency making it 46 consecutive quarters of positive comps.
And Bill and the Canadian team posted comps in local currency above the Company average making it 14 consecutive quarters of positive comps.
Operationally, in the quarter we hired over 75,000 associates to ramp up for our spring season.
Flexibility is required to be successful in spring and our associates and store operators were able to do just that.
They efficiently managed the freight flow within the store while maintaining focus on providing strong customer service in the aisle.
And our second-generation First Phone enabled us to expedite the checkout process for customers during peak traffic periods.
We had the highest first-quarter transactions in Company history and at the same time saw our net promoter scores improve during the quarter.
As I mentioned on last quarter's call, we expected a challenging transportation environment in the first quarter due to the West Coast ports.
While this proved to be true and created some pressure on in-stock rates, our supply chain team worked vigorously and creatively to mitigate this condition.
The situation is improving and we will continue to work to recover our in-stock levels.
The retail environment continues to evolve blending the digital and physical worlds together and we at the same time are building out our interconnected capabilities.
For the spring season we work to further connect our in-store and online experiences.
From a marketing approach we leveraged our digital marketing capabilities to more effectively target customers with relevant products and special buys.
We not only offered more spring season product online, but also leveraged digital media channels to highlight local in-store assortments and create footsteps to our stores.
In the store our mobile app helped customer identify product locations with our enhanced product locator.
We are also interconnecting our distribution networks to more effectively meet the customer's demand for fulfillment options.
We have begun to rollout the capability to flow Buy Online, Ship to Store orders through our rapid deployment centers or RDCs creating a more efficient flow to the stores.
For the quarter our online sales grew almost 30% and with our digital properties being our virtual storefront we were pleased with online traffic growing double digits in the quarter as well.
We will continue to invest in mobile, search and creating a frictionless transaction across the different channels.
While it's early in the year our view of the macro environment has not changed much.
The US GDP growth was below consensus estimates for the first quarter but housing data remains positive and supportive of the housing recovery.
And the growth that we see in or business also supports the view of a continued recovery in the US housing market.
As Carol will detail because of our outperformance in the first quarter relative to our plan we are increasing our sales and our earnings per share guidance for the year.
We now expect fiscal 2015 sales growth of approximately 4.2% to 4.8% and project diluted earnings per share of $5.24 to $5.27.
We remain focused on investing in our business and our associates as well as taking care of our customers.
And I'd like to thank our associates for their hard work and dedication.
Based on this quarter's results 93% of our stores will be eligible for Success Sharing, our profit-sharing program for our hourly associates.
And with that let me turn the call over to Ted.
Ted Decker - EVP, Merchandising
Thanks, Craig, and good morning everyone.
We were pleased with our performance in the first quarter as we saw continued strength across the store.
Sales were aided by a more normal spring and great events including our Annual Spring Black Friday.
The departments that outperformed the Company's average comp were tools, indoor garden, outdoor garden, decor, lighting, plumbing and appliances.
Kitchen and bath, lumber, hardware, millwork, building materials, paint, flooring and electrical were all positive but below the Company average.
Pro heavy categories continued to show great strength as we saw double-digit comps in siding, power tools, commercial lighting, fencing and power tool accessories.
In addition pressure-treated decking, compressors, windows, tile setting materials, concrete board insulation and fasteners all had comps above the Company average.
Outdoor project categories were also strong during the quarter as we had double-digit comp sales in lawnmowers, chemicals, outdoor power equipment, planters, lawn accessories, and grills.
The core of the store continued to perform well across the country as we saw strength in maintenance and repair categories.
Water heaters, cleaning, hand tools, air circulation, wiring devices, adhesives and light bulbs all had comps above the Company average.
In decor categories vanities, special order cabinets, ceiling fans, bath fixtures, decorative lighting and tile also had comps above the Company average.
Our Seventh Annual Spring Black Friday delivered strong sales as the stores drove excitement around special buys that were well received by our customers.
Comps in gardening tools, soils and mulch, watering, live goods and patio were all above the Company average.
We continued to work to mitigate the effects of the drought in California using our planning and assortment tools.
We're featuring more water saving products and landscape options like moisture control, soils and mulches, drip irrigation systems, and drought resistant plants like succulents.
In addition our stores in California are holding clinics to educate customers on these products and how to reduce water usage.
As a result of the indoor and outdoor garden departments in the Western division posted comps above the Company average.
Total comp transactions grew by 4.4% for the quarter while comp average ticket increased 1.7%.
Our average ticket increase was negatively impacted by commodity price deflation mainly from copper.
Total impacted ticket growth from commodity price deflation was approximately negative 15 basis points.
Tickets for transactions under $50 representing approximately 20% of our US sales were up 3.2% in the first quarter.
Transaction tickets over $900 also representing approximately 20% of our US sales were up 6.8% in the first quarter.
The drivers behind the increase in big-ticket purchases were riding lawnmowers, water heaters, appliances, windows and sheds.
Now let me turn our attention to second quarter.
We continued to be the leader in the marketplace for innovation and value that save our customers both time and money.
Nowhere is this more apparent than in the exciting lineup of new products for our pro customers.
We are pleased to introduce a new lineup of DeWalt and Makita pneumatic nailers both exclusively sold at the Home Depot.
These are strong national brands that our pro customers know and trust.
The new DeWalt nailers are compact, lightweight and feature innovative true sight nose technology that allows for faster and more accurate nail placement saving our pros time on the job site.
Utilizing our field merchants and our planning assortment tools we constantly refine our assortments.
Some product categories are sourced nationally and some are sourced regionally.
Based on customer preference and the output of our tools we've recently refined our assortment in roofing.
We added an assortment of Owens Corning single products in select areas of the United States including California where they are one of the top professional single brands.
Pros are increasingly shifting to cordless platforms that offer the power and runtime of gas.
New from Echo is a 58 volt lithium-ion battery platform featuring a string trimmer, hedge trimmer, blower, chainsaw and lawnmower.
These tools feature a brushless motor for superior power and performance that rival and in some cases surpass corded and gas powered counterparts.
In addition to all the great products we're excited about our upcoming events.
The outdoor season is upon us and we will help our customers enjoy it with an incredible lineup of great values and special buys for our Thrill of the Grill Memorial Day, Father's Day and Fourth of July events.
With that I would like to turn the call to Carol.
Carol Tome - EVP, Corporate Services & CFO
Thank you Ted and hello everyone.
Before we discuss our first-quarter results I want to call out at change in our accounting policy for certain shipping and handling costs related to store deliveries and online sales.
In order to better align our costs across all selling channels, these shipping and handling costs are now included in cost of sales whereas they were previously included in operating expenses.
We changed the policy this year and accordingly have reclassified 2013 and 2014 results.
The impact of the reclassification in the first quarter of 2014 was an increase of $128 million to cost of sales and a corresponding decrease of $128 million to operating expenses.
For fiscal 2014 the impact of the reclassification was an increase of $565 million to cost of sales and a corresponding decrease $565 million to operating expenses.
The reclassification has no effect on operating income or to net earnings.
So with that let's move on to our first-quarter results.
In the first quarter sales were $20.9 billion, a 6.1% increase from last year.
Versus last year a stronger US dollar negatively impacted total sales growth by approximately $234 million, or 1.2%.
Our total Company comp or same-store sales were positive 6.1% for the quarter with positive comps of 4.1% in February, 6.8% in March and 6.8% in April.
Comps for US stores were positive 7.1% for the quarter with positive comps of 5% in February, 7.8% in March and 7.9% in April.
Our total Company gross margin was 34.4% for the quarter, an increase of 4 basis points from last year.
In the first quarter we had 21 basis points of gross margin expansion in our supply chain driven by lower fuel costs and increased productivity.
This expansion was offset by a change in the mix of products sold and slightly higher shrink than one year ago.
For fiscal 2015 we continue to expect our gross margin rate to be about the same as what we reported in fiscal 2014 which after applying the change in our accounting policy was 34.1%.
In the first quarter operating expense as a percent of sales decreased by 83 basis points to 21.9%.
Our expense leverage reflects the impact of positive comps sales growth.
Total expenses were $15 million over our plan in the quarter due to $7 million of net expenses incurred as part of our data breach and higher late-season snow removal costs.
Given our strong sales performance, however, we leveraged expenses to plan.
For the year we are now expecting our expenses to grow at approximately 35% of our sales growth rate.
Our operating margin for the quarter was 12.4%.
Interest and other expense for the first quarter was $193 million, up $102 million from last year reflecting for the most part a pretax gain of $97 million on the sale of HD Supply common stock which was not repeated this year.
In the first quarter our effective tax rate was 34.3% compared to 36.9% for the first quarter of fiscal 2014.
The reduction in our first-quarter 2015 effective tax rate was due primarily to the settlement of a tax audit.
We now expect our income tax revision rate to be approximately 36.4% for the year.
Our diluted earnings per share for the first quarter were $1.21, an increase of 21% from last year.
Our diluted earnings per share for the first quarter included a $0.05 benefit related to the settlement of the tax audit I just mentioned.
Moving on to some additional highlights, during the first quarter we opened one new store in Canada and ended the quarter with a store count of 2,270 and selling square footage of 236 million.
Total sales per square foot for the first quarter were $354, up 5.9% from last year.
At the end of the quarter inventory was $12.3 billion, virtually flat to last year but that is a bit distorted due to a stronger US dollar.
On the currency neutral basis inventory dollars were up approximately $124 million from last year.
Inventory turns were 4.7 times compared to 4.4 times in the first quarter of last year.
Payables were up $331 million from last year reflecting the seasonal nature of our business.
Our Payables were also distorted by the impact of a stronger US dollar.
On a currency neutral basis payables were up $416 million from the prior year.
In the first quarter we repurchased $1.125 billion or approximately 9.9 million shares of outstanding stock.
For the remainder of the fiscal year we intend to repurchase approximately $3.4 billion of outstanding stock using excess cash bringing total 2015 share repurchases to $4.5 billion.
Computed on the average of beginning and ending long-term debt and equity for the trailing four quarters, return on invested capital was 26.1%, 490 basis points higher than the first quarter of fiscal 2014.
When we built our 2015 sales plan it was based on US GDP growth forecast of approximately 3% and about 150 basis points of growth coming from continued recovery in the housing market.
While GDP was weaker than expected in the first quarter housing data, namely home price appreciation and household formation, were a little ahead of assumptions we used to build our plan.
Even in the face of a stronger US dollar our sales in the first quarter were better than our internal sales plan.
Further, our earnings per share were stronger than our internal plant reflecting a lower tax rate and more expense productivity than we anticipated.
As a result we are raising our sales and earnings per share growth guidance.
On a currency neutral basis we now expect our 2015 sales to grow by approximately 4.8% with comps of approximately 4.6%.
If the US dollar remains at current foreign exchange rates we would expect our fiscal 2015 sales growth rate to be 4.2% and comps to be approximately 4%.
For earnings per share remember that we guide off of gap.
On a currency neutral basis, we now expect fiscal 2015 diluted earnings per share to grow by approximately 12% to $5.27.
But if exchange rates remain where they are today our projected fiscal 2015 diluted earnings per share would be approximately $5.24.
So we thank you for your participation in today's call.
And Audra, we are now ready for questions.
Operator
(Operator Instructions) Seth Basham, Wedbush Securities.
Seth Basham - Analyst
Good morning and thank you for taking my question.
My question is around the big ticket purchases by consumers.
Can you talk in more detail the trends you are seeing there, so trends in big ticket purchases not driven by the pro?
Craig Menear - Chairman, CEO & President
I would say we are sailing really strength across many departments water heaters, appliances our tools, riding mowers, walks, all of our outdoor garden categories, grills, etc.
had just a terrific quarter.
And those wouldn't be pro focused items.
Carol Tome - EVP, Corporate Services & CFO
And I might jump and just to give you some demographic information.
As we look at our customer base we're seeing some interesting trends.
Since 2009 spending in high income households has grown faster than low income households driven in part by higher end homes recovering faster than lower end homes.
And when we say higher end homes we are talking of homes of $200,000 and up.
Interestingly as we look at our consumer base over 50% of our customers have homes of $200,000 or more and you compare that to the national average which is more like 40%.
So we think just the nature of our customer base is helping drive this big ticket growth.
Craig Menear - Chairman, CEO & President
So the other factor that I throw in that is our services business was strong again in this quarter outpacing our Company average and the average ticket there is north of $1,500.
Seth Basham - Analyst
That's helpful.
And just as a follow-up does that imply based on the data that you talked about that we're seeing a broadening recovery here with even lower end and mid-income consumers doing more big ticket discretionary projects?
Craig Menear - Chairman, CEO & President
I would say that if you look at the strength both in the small ticket as well as the big ticket we're seeing a broad sales pattern across the store and across the demographics.
Seth Basham - Analyst
Got it.
Thank you very much.
Operator
Chris Horvers, JPMorgan.
Chris Horvers - Analyst
Thanks, good morning everybody.
You mentioned that this was a normal spring.
Do you think there was any pull forward from the second quarter in the spring business?
And can you shed some metrics on the way to think about what the underlying trend in the business and where we are in the cycle, so perhaps what outdoor categories comped overall relative to what the comp in the core and the pro was?
Craig Menear - Chairman, CEO & President
I will let Carol provide, she has some details in terms of the numbers.
But when we look at this business as its playing out this year it appears to be much more towards a 2010 type of scenario which was a more normalized spring overall.
Carol Tome - EVP, Corporate Services & CFO
Here are some numbers.
If we look at our garden department, our garden apartment in the United States made up 19% of our sales and took 6% of our growth.
If you compare that to last year which wasn't a normal spring our garden department made up about 18% of our sales but only 4% of our growth.
This ratio of 19% penetration and 26% of growth is more normal for us.
So we don't believe that we have pulled forward sales nor do we believe we will lose sales or grow sales more than our plan in the second quarter.
Chris Horvers - Analyst
So you are one of the rare retailers that have reported an acceleration in comp in April.
I think a lot of retailers are talking about weakness in April and essentially guiding down the second quarter.
So can you shed some light on how you are thinking about the second quarter and what the business is telling you so far in May?
Thanks.
Carol Tome - EVP, Corporate Services & CFO
Yes, we haven't changed our outlook for the second quarter.
In fact, we haven't changed our outlook for the year and if there is a bias in a forecast we believe the bias is to the up.
We are pleased with our performance in May.
Chris Horvers - Analyst
Thanks very much.
Operator
Simeon Gutman, Morgan Stanley.
Simeon Gutman - Analyst
Thanks, good morning.
It's Simeon.
How are you?
Carol and Craig you guys have done a nice job framing the outlook in terms of macro and housing with the various phases.
I think buildup and steady growth, I'm not sure if I am naming them right.
Not sure how and if it's incorporated but rising interest rates, inevitable over time, a lot of debate in terms of what we are going to see in terms of magnitude.
But in general it should imply an improving macro but I'm curious how rising rates are factored into your outlook and into that longer term, any considerations there?
Carol Tome - EVP, Corporate Services & CFO
Well let's look at the affordability index.
Because that's a big impact to help people feel about their homes, what kind of homes they can afford, etc.
The analysis would suggest that interest rates and these would be mortgage interest rates could rise 200 basis points and the affordability index would still be north of 100%.
So even in the face of potentially higher rates, and who knows when that might occur, but even in the face of potentially higher rates we don't see any near-term pressure on our business.
And in fact to your point that could suggest a little inflation in the economy and that would be a good thing.
Craig Menear - Chairman, CEO & President
It wouldn't be a bad thing.
Simeon Gutman - Analyst
Okay.
And then my follow-up you mentioned in the script your AP ratio was up I think 300 bps, AP and inventory year over year which is quite solid.
Can you talk about where it's coming from and is anything changing in the way you are approaching the payables or your vendors in that regard?
Carol Tome - EVP, Corporate Services & CFO
No, this is just a function of purchases.
And we're buying up --
Craig Menear - Chairman, CEO & President
Spring.
Carol Tome - EVP, Corporate Services & CFO
It's springtime, so nothing has changed in our payable terms.
Simeon Gutman - Analyst
Okay, thanks.
Operator
Michael Lasser, UBS.
Michael Lasser - Analyst
Good morning, thanks for taking my question.
It's on the nature of the first-quarter sales and how it relates to the rest of the year.
If you look at the idiosyncrasies of the quarter, how is it different?
Because if we look on a multiyear stack basis not just last year but for the last five years the stack comps on a three- and four-year basis had been lower than you've seen for the rest of the year.
And I guess it's important because if we look what your outlook is implying that it's a nice acceleration on that basis, is there something different about the nature of demand as you move out of winter and into spring aside from just the weather?
Craig Menear - Chairman, CEO & President
I think if you look at we always look at the half first of all.
Because the quarters in the first half can play out very differently based on how the weather plays.
And you are right when you look at multiyear stacks the first quarter has had a tendency to be a softer multiyear because for the past several years we've seen slower start to our spring selling season.
Carol Tome - EVP, Corporate Services & CFO
So other than weather the only other anomaly I can think of was Superstorm Sandy and the impact that it had in terms of creating real variation in our stacks comps.
Those are really the drivers.
Michael Lasser - Analyst
Okay.
My second question is on the change to the accounting policy.
Do you expect that to have any impact on your e-commerce sales which continue to grow at a very impressive clip?
For example do you think that the behavior of some of your merchants will change as they are now going to be essentially expend shipping charges?
And so how will that manifest in the business mix?
Craig Menear - Chairman, CEO & President
Well, this is all about driving interconnected retail at Home Depot.
Our core merchants are responsible for the sales and margin dollars of all activity, all channels.
So they are really looking at two different P&Ls to drive an interconnected experience and give them visibility of their comprehensive profitability and performance of their categories merchandise.
And they are very excited about this change to get aligned and have one P&L the whole business.
Carol Tome - EVP, Corporate Services & CFO
And as Craig pointed out our dotcom sales grew nearly 30%.
In fact they contributed 20% of our overall Company growth in the first quarter.
We made the change at the beginning of the year.
Craig Menear - Chairman, CEO & President
Yes, it's just important to be able to give our merchants common visibility.
And we manage our business on a portfolio approach and to be able to actually look at the business is in a common way just gives them better information overall.
Michael Lasser - Analyst
Okay, that's helpful.
Thank you so much.
Operator
Aram Rubinson, Wolfe Research.
Aram Rubinson - Analyst
Hey, good morning.
So you've got a merchant now as a CEO and I'm wondering what differences that makes throughout the organization when it comes to maybe pace of innovation on merchandising, speed to markets and even risk in terms of risk taking on the merchandising front.
Any perceptible differences there that we should expect?
Craig Menear - Chairman, CEO & President
Well, I would say that first of all we been focused for a while now on trying to create excitement for our customers and our associates in the stores through product innovation and that will continue.
It's something that's hugely important not only to obviously our customers but we know it's our job as a team to excite our associates and we firmly believe that when we do excite our associates they drive it in the market place better than anybody out there.
So that is our primary focus.
I think what Ted actually brings to the party is he's taken it to a different level and looking at a much more end-to-end approach from supplier all the way through customer.
And I think that piece will be different than what actually I did when I sat in Ted's chair.
And I can assure you that product will remain a focus for our Company.
Aram Rubinson - Analyst
Let me ask a second question.
I know your execution in the stores continues to be excellent.
I am wondering if you can help us benchmark, you touch the customer in a number of different areas, stores, services, Buy Online, Pick Up In Store, general dotcom.
Is there a way for you to handicap your voice of the customer's feedback and grade each of those so we have a sense as to where your execution falls relative to the other businesses?
Craig Menear - Chairman, CEO & President
We actually do look at that under multiple facets and Marc Powers is here.
I will let Marc speak to that.
Marc Powers - EVP, US Stores
We look at and survey our customers in many different ways through all the channels and we pay very close attention to it whether it be our voice of the customer inside the store.
We also work with 4C to see how we're doing on our execution on our Buy Online, Pick Up In Store or a Buy Online, Ship to Store.
We also have a VOC for our pro how they are experiencing the Home Depot experience with our Pro Xtra program.
So anywhere we are contacting and engaging our customer we are asking them to provide us feedback on their experience and we pay very close attention to it.
Aram Rubinson - Analyst
And on a scale of 1 to 10 how do we rank in the store versus online versus Buy Online, Pick Up In Store versus services?
Marc Powers - EVP, US Stores
I would say in all of those they are trending up, continue to trend up.
And we are very pleased with the progress we are making in all channels with our customer experience.
Aram Rubinson - Analyst
Very vague but thank you for that anyway.
Operator
Mike Baker, Deutsche Bank
Mike Baker - Analyst
Thanks.
A couple of questions on the pro.
Last quarter you talked about a private label credit card, sorry extending terms for the pro customer I meant to say.
Can you discuss how that's going?
And then I think you had seen better items per basket for the pro customer which you saw as a positive sign, can you discuss trends there?
Carol Tome - EVP, Corporate Services & CFO
Yes, on the private label pilot that we have been conducting it's in about 260 stores.
This is where we are offering terms as well as fuel reward points and we're very pleased with the results thus far and we anticipate making a go/no go decision soon.
Everything got pushed back a bit because of the data breach but we hope to make a decision soon.
And on the pro I can give just one data point.
And that is just looking at what we know we look at managed accounts as well as sales on our commercial private label card.
Both managed accounts and sales on our commercial private label card make up over 20% of our total sales and in the first quarter we saw growth outperforming the average Company growth.
So we were very pleased with the pro in total.
Mike Baker - Analyst
Helpful, great.
If I could ask another follow-up, I think last quarter you said you expect the first-quarter comp to be the best of the year, I think because of the easy comparisons.
Is that still the case in your outlook?
Carol Tome - EVP, Corporate Services & CFO
Yes, we still expect the first quarter to be the best quarter and that the halfs to be similar.
Mike Baker - Analyst
Okay.
I'm going to sneak in one more if I could.
Sorry everyone.
I know that in your garden business you actually do have some winter product in there, like I think the ice pellets the ice melting pellets and the like.
So how much of that really strong growth in garden was due to winter product and how much is due to what I would refer to as true spring product?
Craig Menear - Chairman, CEO & President
It's largely true spring.
We had a particularly tough start in the Northeast in February with cold and ice and certainly we sold some ice met.
But really the warming trends in a much more normal spring across the whole country it really was a true garden story.
Mike Baker - Analyst
Okay, very helpful.
Thank you.
Operator
Seth Sigman, Credit Suisse.
Seth Sigman - Analyst
Great, thanks very much.
A question on the expense productivity.
So, Carol, I think you said SG&A now expected to grow at 35% of sales growth, a little bit less than you had talked about previously despite what seemed like a couple of incremental costs in the first quarter.
Can you talk about were some of the savings are coming from?
And then related I think you said that the expense growth factor would be higher in the first half.
What's the right way to be thinking about that as we move through this year?
Carol Tome - EVP, Corporate Services & CFO
Nothing has really changed on the expense front and as we call that we had higher expenses in the first quarter than our plan.
Why the expense growth factor is declining from our original guidance is all as a factor of sales.
We had a considerable beat to our plan in the first quarter and we are rolling that forward for the full-year.
And this Company defines operating leverage, so the more sales you get the more leverage that you get.
So it is a function of our new sales outlook.
And in terms of the expense growth factor broken down by half we would expect the expense growth factor to be higher in the first half of the year than the second half of the year.
Seth Sigman - Analyst
And then just a specific category question.
Related to the flooring business obviously there has been a lot of noise in that category.
What are you guys hearing from consumers?
And are you making any changes to your assortment?
And I guess just in general I know you have a number of different tests going on, maybe you could just speak about the performance and what you are seeing that would be helpful?
Craig Menear - Chairman, CEO & President
I would start with just a comment that we're really not hearing much from consumers at all.
And I can let Ted explain kind of growth in categories.
Ted Decker - EVP, Merchandising
Yes, so certainly a lot of noise, nothing that we've been able to quantify in an impact in our business.
Flooring did comp below the Company average but we're seeing a nice trends there.
In tile it is really the story for us.
Tile continues to perform very well.
We did 600-odd stores where we put in the expanded hard set showroom which is really about getting a lot more tile displayed and available for sale in bulk and that continues to perform very well.
It is all of the space optimization play to move into flooring categories where trends are seeing more in hard surface than carpet.
We will continue to look for those opportunities.
We have been pleased with the results of those 600-dd stores.
Seth Sigman - Analyst
Got it.
Thanks very much.
Operator
Brian Nagel, Oppenheimer.
Brian Nagel - Analyst
Good morning.
Congrats on another nice quarter.
A couple of questions.
First off with respect to buybacks it looks with the stock you bought back here in Q1 and then the guidance it seems like you're basically tracking along with your plan.
But as we think about the balance of the there is there any reason to believe or any shift in thinking with regard to taking on extra debt to buy back additional shares?
Carol Tome - EVP, Corporate Services & CFO
Our adjusted debt to EBITDAR ratio stands a little under 1.8 times and you know our target is not to exceed 2 times.
So we have the capacity right now to borrow about $3 billion to take us back up to target.
It is not our intention to let our adjusted debt to EBITDAR ratio decline as it will with more earning.
It is not our intention to let it decline.
And as you've seen us act in the prior couple of years we've taken advantage of market opportunities to bring in some incremental debt and use that for share repurchases.
So nothing to announce today but it certainly is not our intention to let the ratio decline.
Craig Menear - Chairman, CEO & President
And our Board has authorized an $18 billion buyback program through 2017.
Brian Nagel - Analyst
Got it.
That's very helpful.
My follow-up question I guess I will bounce this one, looking to your market model, and I think you guys do a very good job of kind of framing how Home Depot's business is tracking along the lines of the macro economy but what we've seen lately is I think improving housing turn even with some of the data we got this morning.
As you look at your business and the drivers behind that business are you starting to see a benefit of maybe a modestly more robust sales environment for homes helping Home Depot?
Craig Menear - Chairman, CEO & President
Certainly the housing trends that we see in the market are positive and as Carol called out in some cases above our assumptions overall.
It's certainly when home values go up it gives customer confidence to drive into the project business and when we see home turnover that generally drives activity as well.
Carol Tome - EVP, Corporate Services & CFO
So home price appreciation is a big driver.
Home prices were up 5% year on year, that's higher than our plan.
The other driver is household formation.
And it looks like there will be 1 million households formed this year which would be awesome.
In fact I'm always fascinated by this statistic.
If you look at people between the ages 18 and 34 nearly a third of them are at home with their parents.
And if they were all to leave their home nest like my nephew just did, thank goodness, that's 4 million households that would be created.
So I'm just really excited about what the future may be for our business.
Brian Nagel - Analyst
Thank you very much.
Operator
Jaime Katz, Morningstar.
Jaime Katz - Analyst
Good morning.
Last quarter you guys commented on using merchandise planning tools to improve a number of different categories across the store.
I'm curious if there were any incremental lessons learned about how to improve the operating margin line across the board?
Ted Decker - EVP, Merchandising
I think one of the principal lessons we're learning is that you are never done on the journey of continuing to optimize your assortment tenure space.
We used to have resets in PLRs and line reviews as an event and it would be every one year, every two years, every three years and then you wouldn't pay particularly as much attention to that category.
What we're doing now is building the tools that you can have a much more fluid review process and constantly be optimizing your assortments.
And that notion of never really being done and building tools that are flexible enough and easy enough to use, have a continuous productivity and improvement loop is one of the key things I'm discovering.
Craig Menear - Chairman, CEO & President
And the most important piece of that is that starts with sales.
It's all about driving the productivity in sales which then delivers the gross margin dollars.
Jaime Katz - Analyst
And then do you have any additional commentary on the tightness in credit availability?
I think last quarter you commented that it was still very tight.
It has there been any movement in the data that you guys have seen?
Carol Tome - EVP, Corporate Services & CFO
There's slight movement.
It seems to be thawing slowly like a glacier melt, but slowly.
Interestingly the number of mortgages that are being underwritten by FHA, these are insured mortgages, is up year on year.
That is actually pretty encouraging because it means first-time home owners are finding a way to get into a home but this is slow.
Jaime Katz - Analyst
Thank you.
Operator
Dan Binder, Jefferies.
Dan Binder - Analyst
Hi, good morning.
I had a few questions.
I know you've commented on your gross margin outlook for the year.
Just longer term before the reclassification you had a 35% longer-term gross margin outlook.
Has that changed as a result we're looking now at something closer to this 34.1% or 34.2% with the reclassification?
Carol Tome - EVP, Corporate Services & CFO
Dan, we would say 34% is the new 35%.
Now we do have an Investor Conference coming up at the end of this year and we will give you a longer-term outlook on all of our margins.
Dan Binder - Analyst
Okay.
My second question was on the pro.
You just in prior conversations you've talked about different initiatives there.
I'm just curious where we are on the scheduling systems I think you wanted to put in place to improve on the delivery windows.
Craig Menear - Chairman, CEO & President
On the delivery we are still in pilot on that delivery program.
And it is about being able to more consistently drive delivery and narrow our windows as well as better utilization of our assets.
Mark Holifield is here, I don't know if you want to make additional comment.
Mark Holifield - EVP, Supply Chain & Product Development
Yes, we've got the program in pilot in a couple of markets and we're learning how this works and working through the detail so that we can provide the customer a flawless experience.
We're offering two-hour windows, four-hour windows and then next day that are just all-day delivery windows.
The pilot is going well, we're taking the learnings and continuing to improve the process.
Dan Binder - Analyst
And then just lastly on the deflation you mentioned a little bit here in Q1, is there an expectation that will increase in Q2 in terms of the pressure on the comp?
Ted Decker - EVP, Merchandising
Well we're not forecasting an improvement against commodities, copper prices and lumber prices are down meaningfully on next year and we're anticipating staying as is.
Operator
Matthew Fassler, Goldman Sachs.
Matthew Fassler - Analyst
Thanks a lot.
Good morning.
My first question actually relates to the accounting change.
If you think about the SG&A that you had previously or the expenses you had previously allocated to SG&A those numbers were growing with your online sales which were growing at a pretty rapid pace and if you look at the numbers in 2014 versus 2013 for example it seemed to be a decent piece of your SG&A growth.
So is the accounting change influencing the ratio of expense dollar growth to sales dollar growth that you're thinking about either for this year are on a go-forward basis?
Carol Tome - EVP, Corporate Services & CFO
Matt, it is not.
When we put forward guidance at the beginning of the year I looked at it both pre- what we call the COGS alignment and post-COGS alignment just to make sure I wasn't going to give you some distortion on the guidance.
It has no impact at all.
Matthew Fassler - Analyst
Got it.
Thank you.
And then you mentioned the port situation and clearly you put up very good numbers despite some pressure from it.
Can you talk about the categories where you think you saw impact and if it's feasible or material to quantify what it might have done to your inventory numbers, your introductory sales, etc.?
Any quantification would be very helpful.
Craig Menear - Chairman, CEO & President
Sure.
Mark do you want to?
Mark Holifield - EVP, Supply Chain & Product Development
Sure, that as we mentioned last quarter the West Coast ports have been a very challenging situation for us.
The team here has done a great job in terms of working together to mitigate the issues there.
Having said that we have had negative impact on our in-stock particularly for our direct import items but we've also seen some hits to our fill rates from vendors and that has led to lower in-stock than we would like to see.
So our inventory probably is a little lower than we would like it to be given where it's at but that inventory is coming and it's recovering as the port has gotten a lot better.
Carol Tome - EVP, Corporate Services & CFO
Do you want me to quantify this for you?
The impact to in-stocks was about 20 basis points.
Matthew Fassler - Analyst
That's it.
Got it.
Carol Tome - EVP, Corporate Services & CFO
And it's very hard to measure sales impact because what our store associates do and they do a beautiful job of this, if you come into the store and you can't find what you're looking for our store associate is going to take you something out there.
Craig Menear - Chairman, CEO & President
Our best thinking is 60 million-ish.
Matthew Fassler - Analyst
Great, thank you so much, guys.
I appreciate it.
Operator
Scot Ciccarelli, RBC Capital Markets
Scot Ciccarelli - Analyst
Good morning, guys.
So the first quarter continues a trend that we've seen in terms of a lot of sales breadth across categories and geographies.
I guess what I'm wondering is of the 7% of the stores that did not qualify for Success Sharing or profit sharing is there any common denominator there whether it's geography or pro or DIY mix or something you can put your finger on?
Craig Menear - Chairman, CEO & President
It's weather.
Plain and simple.
You know if you look at the areas in New England very, very late start to the spring selling season.
Scot Ciccarelli - Analyst
Got you.
Okay.
And then the second question related to the geography is we have started to hear some sporadic data points from various retailers in terms of some weakness where they are operating in energy impacted markets.
Have you seen that play through whether it's in some of the Texas markets or the Midwestern markets where obviously there's been a big oil patch retraction?
Craig Menear - Chairman, CEO & President
We have 178 stores in the state of Texas.
We've seen no visible impact whatsoever in that state at this point.
Matter of fact all our major markets in that state posted mid-single-digit comps.
It's something that we're keeping our eyes on very closely and we'll adjust accordingly if need be but have not seen it at this point.
Scot Ciccarelli - Analyst
Excellent.
Thanks a lot, guys.
Operator
Dennis McGill, Zelman and associates.
Dennis McGill - Analyst
Good morning, thanks.
Carol just a quick one on the guidance.
Can you just tell us what you're assuming for the domestic side on same-store sales for the year?
Carol Tome - EVP, Corporate Services & CFO
We don't break out comp guidance by US versus total, so no.
Dennis McGill - Analyst
Okay.
Separately on the inventory side it seems when you adjust for FX the turns are very strong quarter over quarter.
Can you maybe just talk to where you are in the process of taking inventory out of channel and where you expect the cash flow and the inventory management to be this year?
Carol Tome - EVP, Corporate Services & CFO
We want to do this the right way.
We don't want to do it by going out of stock.
This year in fact our targeted turns are 4.8 times.
You will recall a few years ago we thought we would get to 5 times by the end of this year.
We're not going to get there because we want to do with the right way.
The good news is that we've got a number of initiatives underway that once they are fully employed I think the 5 times turn will be something considerably higher.
Now that won't be in 2015 but there's more to come on the inventory story at the Home Depot.
Dennis McGill - Analyst
And can you put any context around where you are seeing the best management today as far as categories go?
Carol Tome - EVP, Corporate Services & CFO
On inventory?
Dennis McGill - Analyst
Yes.
Craig Menear - Chairman, CEO & President
You mean on the inventory turns within categories?
Dennis McGill - Analyst
Yes, just on the management side, are there certain categories where you are seeing more opportunity than others?
Craig Menear - Chairman, CEO & President
Yes I think when we actually go through our product line review process this is something that we incorporate into those review.
So the merchants are looking at not only how they can drive more top-line sales and productivity out of the product categories as well but they are looking at how they optimize inventory productivity and first and foremost in-stock within that.
So we've seen improvement in categories that we've actually run through our model.
Dennis McGill - Analyst
Thank you.
Operator
Greg Melich, Evercore ISI.
Greg Melich - Analyst
Thanks.
Actually I have a couple of questions.
The ticket decelerated it seems to 1.7% growth.
Was that a US or a global figure?
And help us understand the deceleration, especially given the success of the March ticket.
Carol Tome - EVP, Corporate Services & CFO
The ticket we called out was a total Company ticket.
FX impacted ticket by $0.58 year on year so that's a pretty big drag.
Greg Melich - Analyst
So the US ticket would have been 2%, 3%?
Carol Tome - EVP, Corporate Services & CFO
Yes.
Greg Melich - Analyst
And then even in that US there seemed to be a deceleration.
Was there something working behind that mix of products?
Craig Menear - Chairman, CEO & President
It's the impact of our garden business being more normal than what it was a year ago.
Greg Melich - Analyst
Okay, that make sense.
And then my follow-up was I guess a little bit bigger picture.
I think in the prepared comments you guys mentioned that you had the most transactions ever in the first quarter.
And I guess if you think about that longer term do you think you need to add capacity in any way, maybe not footage but more fulfillment centers?
How do you think about that, Craig, longer term in terms of allocating capital and being able to serve all of the customers?
Craig Menear - Chairman, CEO & President
We're not in most cases we're still operating a single shift if you will through our distribution network.
So we have the ability to add a lot of capacity through the asset base we own.
Mark Holifield - EVP, Supply Chain & Product Development
Yes, it's Mark Holifield here.
We don't have any development plans right now on further distribution centers for the core side of the business.
We have been of course improving our direct fulfillment capabilities and we will be bringing on the new direct fulfillment center in Troy, Ohio in the second part of this year.
Greg Melich - Analyst
Thanks.
Operator
Jessica Mace, Nomura Securities.
Jessica Mace - Analyst
Hi, good morning.
I had a follow-up question on the market model, and just on the above plan sales with below consensus GDP.
I was wondering if there's anything you can point to outside of the better housing metric and the weather that accounted for the bridge to that performance perhaps in the competitive environment or marketshare shift?
Carol Tome - EVP, Corporate Services & CFO
Well it's very difficult for us to get a good measure on marketshare.
But if you look at the census data which is a good proxy for us the census data showed us growing our marketshare somewhere around 10 basis points to over 27%.
Jessica Mace - Analyst
Okay, great.
And then also with the strong sales result I think last quarter you mentioned that there was 16 of your 40 categories which were still below peak and just wondering if this strong top-line momentum has taken any of those 16 categories out of the below peak status.
Craig Menear - Chairman, CEO & President
Not yet.
Carol Tome - EVP, Corporate Services & CFO
Not yet.
Craig Menear - Chairman, CEO & President
Working on it.
Jessica Mace - Analyst
Thank you so much for taking the questions.
Operator
Peter Keith, Piper Jaffray.
Peter Keith - Analyst
Thank you very much.
Good quarter.
Kind of a follow-up to Jessica's questions, I'm just wondering about the overall retail wallet share shift that seems to be occurring.
Obviously home price appreciation helped but you guys are comping high single-digit $900 lower than water heaters.
I guess I am wondering if you have a view on why the consumer is deallocating so much money to your industry relative to other parts of retail right now?
Craig Menear - Chairman, CEO & President
I would say that's a tough one to call out.
There is the theory of the case that in some cases there was a delayed spend.
Clearly during the economic downturn and people focused strictly on maintenance of their homes.
If you recall or maintenance category were strong throughout the economic downturn.
And when a home moves to a positive growth in terms of value what was once an expense now becomes potentially an investment.
Carol Tome - EVP, Corporate Services & CFO
It's pretty easy, if you look at your own personal balance sheet it's easy to put a value on your home.
It's easy to put a value on your stock investments or your bond investments or even just the cash that you have in the bank account.
Hard to put value on softgoods, harder to put value on other consumables.
So that could be one reason if you think about wealth creation putting money into where you want to create wealth.
Peter Keith - Analyst
Okay, that's helpful.
And I guess lastly or maybe on a related note I'm curious on the use of HELOCs if you guys are seeing any evidence that there's more borrowing with HELOCs (technical difficulty) your stores?
Carol Tome - EVP, Corporate Services & CFO
We are not current on the HELOCs activity.
Can't help you there.
Peter Keith - Analyst
Okay good enough.
Thank you very much.
Diane Dayhoff - VP, IR
Audra, we have time for one more question.
Operator
Eric Bosshard, Cleveland Research.
Eric Bosshard - Analyst
Good morning.
I was curious for Ted or Craig as you think about mix and promotion and brand, what trends you are seeing and what you are doing either proactively or reactively in those areas in merchandising?
Craig Menear - Chairman, CEO & President
Eric, I'm sorry, I didn't catch the first comment.
Eric Bosshard - Analyst
Sure.
Within product mix and with promotional activity and with brand.
Ted Decker - EVP, Merchandising
Well I don't think the general promotional activity in the marketplace in the first quarter I would say was similar.
We didn't really change our cadence, what we did and the events we did with things like the spring Black Friday.
On mix we have seen the consumers we've talked about this before where we track all sales by various price points and we saw yet another quarter of where the consumer is buying up the continuum.
And we are seeing higher comps in each price gradient as you go up the mix from OPP to good or best premium products.
On brands the consumer always is looking for value.
The right product at retail and I think we have a great mix of the right brands and our own private label product to satisfy that customers.
Craig Menear - Chairman, CEO & President
I would say one other comment as it relates to the mix is with much of the country seeing a much more normal kind of spring obviously just outdoor projects in general were stronger in the first quarter than they were a year ago.
Eric Bosshard - Analyst
Okay.
And then within brands and the strategy on private label I know historically you've been -- sell the customer what they want.
But is there anything that you're mixing different within the from the consumer or anything that you are intentionally focused on in regards to the private label or direct import penetration relative to national brands?
Ted Decker - EVP, Merchandising
No, we haven't we still don't have a specific target on a private label penetration.
We're over 15%.
And again we're letting the consumer choose the value proposition they want.
Eric Bosshard - Analyst
Great, thank you.
Diane Dayhoff - VP, IR
Well thank you everyone for joining us today.
We look forward to speaking with you at our next quarterly earnings call.
Operator
That does conclude today's conference.
Again thank you for your participation.