家得寶 (HD) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to The Home Depot Q1 2017 Earnings Call.

Today's call is being recorded.

(Operator Instructions) At this time, I'd like to turn the conference over to Ms. Diane Dayhoff, Vice President, Investor Relations.

Please go ahead, ma'am.

Well, thank you, Katharine, and good morning to everyone.

Joining us on our call today are Craig Menear, Chairman, CEO and President; Ted Decker, EVP of Merchandising; and Carol Tomé, 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.

(Operator Instructions) If we are unable to get to your question during the call, please call our Investor Relations department at (770) 384-2387.

Now before I turn the call over to 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, the factors identified in the release and in our filings with the Securities and Exchange Commission.

Today's presentations will also include certain non-GAAP measures.

Reconciliation of these measures is provided on our website.

Now let me turn the call over to Craig.

Thank you, Diane, and good morning, everyone.

Sales for the first quarter were $23.9 billion, up 4.9% from last year.

Comp sales were up 5.5% from last year, and our U.S. stores had a positive comp of 6%.

Diluted earnings per share were $1.67 in the first quarter.

We were pleased with the start of the year as we executed within a more normalized spring environment and navigated a tough weather comparison with weather-driven demand that we saw in the first quarter of last year.

All 3 of our U.S. divisions posted positive comps, led by our Southern division.

On the international front, both Canada and Mexico posted another quarter of positive comps in local currency.

The power of our interconnected retail strategy continues to gain traction in our international businesses as digital sites in both countries were recently updated, driving sales growth and positive response from our customers.

Turning back to the U.S. We saw broad-based growth across our store as both ticket and transactions grew in the quarter and all merchandising departments posted positive comps.

Our commitment to new and innovative products continues to be a contributor of our ticket growth.

Our merchants collaborate with our supplier partners to bring innovative and exclusive items to market that deliver value for our customers by saving them time and money.

As Ted will detail, the extension of lithium-ion battery technology into the outdoor power category is an excellent example of our ongoing focus on innovation, and we continue to see great sales in this category.

Another engine of growth for our business is the Pro customer, as Pro sales once again outpaced DIY sales in the quarter.

We recognize that Pro customers have needs that go beyond our traditional in-store offerings, and we believe that the work we are doing to strengthen our sales support, assortment and fulfillment for this customer base continues to resonate.

For example, our in-store toolroom business helps our Pros more effectively run their business.

In many cases, a partnership with The Home Depot can translate into business for our Pros as we can connect them with our do-it-for-me customers through our Pro referral platform.

We continue to see significant opportunity to help our Pros manage and grow their business while driving higher product pull-through and strengthening our relationship with our do-it-for-me customer.

Another component of our overall Pro strategy centers on Interline in the MRO customer.

Use case 1, the rollout of Interline's catalog of products to Home Depot stores, is now live in over 1,500 U.S. stores.

We continue to roll out use case 2, which enables Interline customers to shop Home Depot stores using a swipe card that is linked to their Interline account.

Interline sales growth outpaced the company average in the quarter, and we remain very excited about the opportunity that Interline provides.

The power of interconnected retail creates growth opportunities for The Home Depot.

As we invest in this area, we are seeing a positive response from our customers in the form of improved customer satisfaction scores and increased sales.

In the first quarter, our online traffic growth was robust, and our online sales grew approximately 23%.

Our supply chain continues to be a source of strength for our business.

The flexibility and nimbleness of our supply chain is a competitive advantage.

This is particularly evident during our busy spring selling season when regional weather conditions vary, resulting in spiky demand patterns.

Operationally, nimbleness and flexibility carries over into our stores.

This spring, MET, our Merchandise and Execution Team, helped us drive productivity by reducing merchandising set times by 25%.

In store, associates efficiently manage rate flow within the store while remaining focused on providing strong customer service in the aisle.

And we hired over 85,000 new associates to ramp up for spring sales with a simplified application process, reducing the time it takes to complete an application by up to 80%.

The success of our first quarter is a result of each and every one of our associates, and I'd like to thank them for their hard work and dedication to our customers.

Looking forward, we plan to continue this momentum.

And with that, I'll turn the call over to Ted.

Thanks, Craig, and good morning, everyone.

We had a great first quarter, driven by continued strength across the store.

Our Pro business was particularly strong and outpaced the company average.

We also saw excellent growth in our online business as online sales grew approximately 23%.

All of our merchandising departments posted positive comps.

Appliances, lumber and flooring had double-digit comps in the quarter.

Tools, electrical, plumbing, decor and kitchen and bath were above the company average.

Indoor garden was in line with the company average.

Building materials, millwork, hardware, lighting, paint and outdoor garden were positive but below the company average.

In the first quarter, total comp transactions grew by 1.5%, and comp average ticket increased 3.9%.

The increase in average ticket was positively impacted by a number of things, including customers trading up to new innovative products.

Commodity price inflation in lumber, building materials and copper also positively impacted average ticket growth by approximately 75 basis points.

Looking at big-ticket sales in the first quarter.

Transactions over $900, which represent approximately 20% of sales, were up 15.8%.

A few drivers behind the increase in big-ticket purchases were appliances, flooring and roofing.

In the first quarter, sales with our Pro customers outpaced the company average, driven by both our high-spend and low-spend Pros.

We saw strong comps in several lumber categories, wire, commercial and industrial lighting and gypsum.

In addition, decor in the store performed well, and we saw strength in several maintenance and repair categories across the company.

Classes that outperformed the company average included several flooring categories, tool storage, power tools and a number of bath categories.

As Craig mentioned earlier, our customers respond to new and innovative products.

A perfect example is the customer response that we're seeing with our new lithium-ion battery technology in outdoor power.

We've partnered with the best suppliers to put together a lineup of tools that has the long-lasting power and run time to get the job done without the hassle of gas and cords even with a lawnmower.

Our exclusive assortment of EGO and RYOBI cordless mowers can handle a standard-sized yard with just one charge.

In addition, for those customers that prefer gas power, we've got a powerful lineup led by Honda and Toro that includes 13 of the top 15 rated self-propelled gas mowers on the market.

And all of these are retail exclusives to The Home Depot.

Our Spring Black Friday event was a success.

Our associates drove excitement around special buys in our stores and online, and our customers responded.

We saw increased traffic both in-store and online and strong comps in categories like mix and match patio, outdoor power tools, mowers and chemicals.

We strive to balance the art and science of retail.

With our interconnected retail strategy, we are continually improving the customer experience by striving to create frictionless shopping across all channels.

For example, our new simplified and expedited online checkout process reduces a customer's check-out time by an average of 20%.

In addition, we are leveraging our digital assets in big data to better know our customers and in turn, better meet their needs through targeted online offerings and localized online experiences.

For example, our refreshed mobile app personalizes the user's homepage based on location, customer segment and shopping patterns.

We are pleased with the customer engagement in response to these enhancements, and we are seeing increased conversion rates.

Now let me turn our attention to the second quarter.

We continuously introduce innovation and value that save our customers both time and money.

A great example of this is the new PPG TIMELESS exterior stain and sealant.

This is the first PPG-branded product offered at The Home Depot, and it's their most advanced and durable line of wood care on the market.

With enhanced oil technology, improved resins, stronger UV absorbers and better water repellency, this product provides outstanding outdoor protection from the elements.

PPG TIMELESS exterior stain and sealant is exclusive to The Home Depot.

Another exciting new product is the Ring outdoor cam with motion-activated floodlight.

This the first high-definition security camera with building flood lights, 2-way talk, automated recording and a siren alarm.

The best part is that this product is easy to install, connects directly to your mobile device so you can monitor your property anytime, anywhere.

This product launched exclusively at The Home Depot.

In addition, all the new product offerings we are gearing up for our upcoming events in the second quarter.

Be on the lookout for our Thrill of the Grill, Memorial Day, Father's Day and Fourth of July events, where we will be offering more great value and special buys for our customers.

With that, I'd like to turn the call over to Carol

Thank you, Ted, and good morning, everyone.

In the first quarter, sales were $23.9 billion, a 4.9% increase from last year.

Our total company comps or same-store sales were positive 5.5% for the quarter with positive comps of 5.8% in February, 4.3% in March and 6.2% in April.

Comps for U.S. stores were positive 6% for the quarter with positive comps of 6.3% in February, 4.6% in March and 6.8% in April.

The cadence of our monthly comps was impacted a bit by weather and by the timing of Easter this year versus last year.

Adjusting for Easter on a like-for-like basis, our U.S. comps were 2.9% in March and 8% in April.

Two more comments about our first quarter sales growth.

First, for activity purposes, we record comp sales when tender is accepted, and we record sales revenue when the transaction is completed.

The difference is known as deferred sales.

Compared to last year, our deferred sales grew by $116 million.

As a result, our reported sales growth was less than our comp sales growth.

Second, versus last year, fluctuating foreign currency exchange rates negatively impacted total sales growth by approximately $71 million.

Our total company gross margin was 34.1% for the quarter, a decrease of 9 basis points from last year.

As expected, the modest decline in our gross margin was primarily driven by a change in the mix of products sold.

For fiscal 2017, we continue to expect our gross margin to decline by approximately 15 basis points from what we reported in fiscal 2016.

In the first quarter, operating expense as a percent of sales decreased by 59 basis points to 20.1%.

Our expense leverage reflects the impact of positive comp sales growth, along with continued expense control.

In the quarter, our expenses were roughly $18 million under our plan, albeit some of the variance was due to timing.

While our expenses grew at approximately 39% of our sales growth rate in the first quarter, for fiscal 2017, we now expect our expenses to grow at approximately 43% of our sales growth rate.

Our operating margin for the first quarter was 14%, an increase of 50 basis points from last year.

Interest and other expense for the first quarter was $241 million, up slightly from last year.

In the first quarter, our effective tax rate was 35.2% compared to 36.5% in the first quarter of fiscal 2016.

The year-over-year change in our effective tax rate was driven largely by a new FASB stock compensation accounting standard that we adopted at the beginning of fiscal 2017.

For the year, we expect our effective tax rate to be approximately 36.3%.

Our diluted earnings per share for the first quarter were $1.67, an increase of 16% from last year.

Now moving to some additional highlights.

During the first quarter, we opened 2 new stores in the U.S. and 1 new store in Mexico, bringing our total store count to 2,281 and selling square footage to 238 million square feet.

Total sales per square foot for the first quarter were $394, up 4.6% from last year.

Turning to the balance sheet.

At the end of the quarter, merchandise inventories were $13.6 billion, up $390 million from last year.

And inventory turns were 4.8x, flat to last year.

Accounts payable grew by $427 million year-over-year.

In the first quarter, we repurchased $1.25 billion or approximately 8.5 million shares of outstanding stock.

For the remainder of the fiscal year, we intend to repurchase approximately $3.75 billion of outstanding stock using excess cash, bringing total anticipated 2017 share repurchases to $5 billion.

Computed on the average of beginning and ending long-term debt and equity for the trailing 12 months, return on invested capital was approximately 32.3%, 310 basis points higher than the first quarter of fiscal 2016.

To wrap up the commentary on our first quarter financial results, we were pleased as sales and earnings were better than we planned.

Looking ahead, while U.S. GDP forecasts are mixed, housing continues to be a growing asset class, and our sales thus far in May have been very good.

But relative to our plan, we do anticipate some foreign exchange pressure.

So today, we are reaffirming the sales growth guidance we laid out on our fourth quarter earnings call.

For fiscal 2017, we expect sales to increase by approximately 4.6% with positive comps of approximately 4.6%.

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

Given our first quarter expense performance, we are lifting our earnings per share growth guidance.

For fiscal 2017, we now expect diluted earnings per share to increase by approximately 11% to $7.15.

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

And Katharine, we are now ready for questions.

(Operator Instructions) Our first question comes from Simeon Gutman with Morgan Stanley.

In looking at different markets across the country, can you tell us if you're seeing a broadening across markets?

Meaning, if there are some of the laggards out there, are they speeding up?

And then are you seeing any moderation in some of the faster-improving markets?

We actually look at the variability of our markets.

And in the quarter, our variability narrowed about 40 basis points year-over-year, which was pretty consistent with what we saw in Q4.

And that narrowing, I guess, can you elaborate if that's a function of the fast going -- getting slower or some of the slower improving, getting faster?

No, it's really -- we're not seeing a big change in the regional sales other than where we have some weather impacts.

Okay.

And then my follow-up on flow-through, which has been pretty strong and consistent, and it's a function of both the gross margin and the SG&A.

We know the guidance for the rest of the year.

Thinking really towards the end of this year into next year, anything sort of good guys or bad guys to think about that impacts it going forward?

I mean, I know this year gross margin, a little weaker because of just mix headwinds.

But as you look out a little bit longer term, are there anything positive or negative we should think about?

No, nothing at this point.

And as you know, have an Investor Conference coming up in December, and we'll give you a lot more color about our point of view for fiscal '18, '19 and '20.

We'll continue on to Michael Lasser with UBS.

So deferred revenue was bigger this quarter than it's been in the past, and you’ll recognize that next quarter.

To what degree is that a leading indicator of the business given the nature of the sales that are in that number?

Yes, there were 3 big drivers of the deferred revenue growth year-on-year.

One, you've heard commentary about our dot-com sales growth, up 23% year-on-year.

Not all of those sales are completed at the time of -- that we take the tender.

Our dot-com sales now make up 6.6% of our total sales.

We also saw growth in our services business.

Our services business grew faster than our company average, and Ted called out flooring as an example.

Those are the 2 biggest drivers of the deferred sales increase.

Is it a leading indicator for the next few quarters given what's going into those numbers?

So we would anticipate continued strong growth in those categories.

Okay.

And then my follow-up question is on the e-comm business.

Obviously, you're doing really well through that channel.

To what extent is it validating that consumers increasingly want to buy the home improvement products through the online channel and subsequently, going to expose you to greater and greater levels of competition?

I mean, I think the interesting thing for us is over 45% of our orders on homedepot.com, the customer's actually choosing to pick up into our stores.

So they're finding it incredibly convenient to blend the channels and utilize all the assets that we have.

Is that percentage changing at all, Craig?

I think you mentioned that it's 50% in the past.

It's been growing over the past 12 months.

Our next question comes from Seth Sigman with Crédit Suisse.

I had a follow-up question on big-ticket comps in the quarter.

It seems to be one of the key bright spots here where it accelerated, up 15.8%, I think you said.

You mentioned a couple categories.

Do you think that reflects an acceleration in market share and maybe some of the benefits from company-specific initiatives and the Pro focus?

Or how do you balance that with also maybe an acceleration in demand trends overall?

I mean, I'll start and let Ted comment on this.

I do think it's an acceleration of the customer's willingness to spend in big-ticket projects.

We're seeing strong remodel business with our Pro, but then it's also categories that we've invested in as well.

Yes.

I'd add to that.

It's really all of the above, the customers responding to the product and the innovation.

Certainly, there's some very big-ticket items like appliances, where we had double-digit comps again.

But across the whole portfolio, as I've mentioned before, we track the purchase patterns from OPP up the line structure, and we continue to see a willingness and response from the consumer when we're showing great value on innovative products at higher price points.

And then services is going quite well.

Those, obviously, are bigger-ticket items.

And our Pro customer, which here, you'd get a much larger items per basket where you're driving a project, and that's been very healthy as well.

Okay, that's helpful.

And then to follow up on gross margin, mix has been the primary driver of the slight decline.

Can you maybe speak to some of the other underlying drivers that you've talked about in the past, whether it's the productivity and supply chain work and then the partial offset from investments in price?

Are you seeing a change in the pace for either of those items?

Well, let's talk about supply chain first.

Supply chain did contribute 1 basis point to the gross margin expansion in the first quarter.

That's after 3 basis points of pressure coming from higher fuel cost.

Again, despite the demand that we had in the first quarter, we were very pleased with our supply chain performance.

In the first quarter, in fact, expenses were under plan.

So that was a good story.

And some of the other drivers, it's all parts of the portfolio that Ted and the merchants run, and it's working just the way we want it.

Yes.

Our next question comes from Keith Hughes with SunTrust.

Question on some of the categories -- the double-digit categories specifically flowing.

Can you just highlight what's -- it appears to be well above the industry.

Could you talk about what's working there and what's allowing you to gain share?

Well, we have a nice mix there.

The hard surface flooring had been much stronger over the past couple years, and we've done a lot of work in our showrooms with hard surface flooring, particularly with tile and laminate.

But recently, vinyl plank has been taking off.

So luxury vinyl plank manufacturers are now putting a solid core in the products, so you can get much greater use cases of that final product.

And it's the efficacy of it and the look is getting better and better, and that's selling very well.

And then soft flooring.

Soft flooring is not dead, and we simplified a go-to-market model...

Model in front of it.

And we're seeing terrific strength with our soft flooring categories.

And you're referring to the whole house installation price.

Is that what you're referring to in soft flooring?

Yes, yes.

Okay.

Second question regarding big-ticket in general.

As referred to, very good in the quarter.

How much did the lumber inflation play in to the big number you reported there?

Lumber was a little more than half of that 75 basis points.

A little more than half, okay.

And that 75 basis points, is that on the full year comp or just on the growth of the -- I guess it would be the same, actually, on the full year comp or the growth of big ticket?

That was only on the average ticket growth for the company.

In terms of the performance of big-ticket category, it was more driven by appliances.

Flooring.

And flooring.

Yes.

It's not so much (inaudible).

Our next question comes from Brian Nagel with Oppenheimer.

So a couple questions here.

First off, not to be nitpicky here, but if you -- just a question on the cadence of comps in the quarter.

So Carol, you called out in the U.S. business, I guess, adjusted for Easter, March was 2.9% and then April was 8%.

So as we think about that, I'd assume that 8% reflected picking up some of the business that may have been lost or didn't happen in March because of weather.

So then how should we think about then maybe a run rate -- a more normalized run rate there?

Right.

So Brian, it was a little choppy in terms of the cadence, and we do think that was weather.

If you look at our transactions, our transactions in March were actually under 1% growth year-on-year, and that was all weather-related.

And when the weather improved in April, the sales came back.

So we always talk to you about the bathtub effect of that first half, but we had a bathtub effect in the first quarter.

We did.

And so as we're thinking now about the first half, we would think that the first quarter will be slightly stronger than the second quarter and that the comps for the first half will be about the same as the comps for the back half.

Got it, that's helpful.

And then the second question I had is probably a follow-up to a prior question.

But with regard to online sales, we have seen a nice tick-up here.

Craig, you called -- I think you said 45% of the online sales now are Buy Online, Pick Up In Store.

Right.

The other points -- I guess, the remaining 55%, is there any color you can give on what people are actually buying online?

Has it surprised you in any way?

And maybe then just a comment on the profitability of those sales versus in-store sales.

So let me address the last part.

And then Kevin Hofmann, who's here, who runs our online business, I'll let him comment on the sales patterns.

When it comes to the profitability, it's actually this whole customer engagement is becoming a blended element between online and in-store.

And the customer is choosing, in some cases, to start the shopping experience online, they finish in-store or they might -- vice versa.

Start in the store and actually finish online.

And so with 45% of the orders being picked up, it is truly a blended effort.

And we look at it that way, and our merchants manage it as a total portfolio.

So they see an entire blended mix of sales for the business.

And that's actually how we run the business.

So we don't focus on it individually by itself.

And then, Brian, from just a sales perspective, certainly, we see strength across the store.

Our bath business has been doing very well.

Our flooring business has been doing very well.

Plumbing, power tools, all doing very well.

And not to ignore the core building materials products, we see great visit traction of Pros shopping online looking for inventory levels, looking at pricing.

And that's been working very, very well for us as well.

And Chris Horvers with JPMorgan.

Following up on just how you think about guidance.

So there was a swoon in the late summer last year.

I was curious if you had any retrospect on what drove that.

And as you just think about modeling the business, is the growth in the market, the growth rate and sort of compares don't necessarily matter?

Or do you think maybe as we'd lap through that pause, like it seemed to happen in late summer, where you would expect to pick up some extra this year as we approach that?

No.

I think we've all kind of talked this out a lot, and we think the Pros went on vacation.

And good for them.

They were busy.

They got more work than they know what to do with, and they took some time off.

And then they came back.

It's back hard at work.

And to your point, to ignore the compares, I don't think you should ever ignore a compare.

But clearly, there's demand that's being created by this housing market that is very strong.

Home price is up year-on-year over 5%.

Housing turnover, over 4%.

An aging housing stock, household formation.

We see growth in private fixed residential investment every quarter.

It's still a long way to go to reach back to the mean -- or 4% -- 4.5% of GDP.

So a lot of good momentum in our business.

So I guess then, playing as devil's advocate on it.

I mean, the compares do ease.

You talked about a pretty normal spring.

It doesn't sound like there's any pull forward into 1Q out of 2Q on the spring business.

So why isn't this a 5% to 6% growth business through the balance of the year?

So a few things.

First, as I mentioned, we've got some currency pressure coming our way.

We estimate that currency pressure to be $250 million.

Second, it is the middle of May, and it's a little too early to start thinking about (inaudible) for the full year.

But as I said, sales so far in May have been very good.

I think one other comment would be, Chris, that while we had a great indoor garden business with power equipment, the outdoor garden business in the first quarter really hadn't come alive.

And you saw that in the flatness of our ticket, $50 and under.

There are parts of the country where it was pretty wet for people to be preparing their landscape for planting.

And so I think that was a factor as well.

And then my follow-up is, is there anything to, as you think about different cycles that you've all seen in this business, the traffic number for this quarter, ticket continues to lead, which is very encouraging.

But at the same time, traffic matters.

How are you thinking about that in the context of the cycle?

Yes.

Ted’s got some really great data on traffic.

You might want to share that?

Yes.

So we look at the contributors to our transactions by, obviously, all the different price breaks.

And it is -- as Craig just said, it is an outdoor garden story on the transaction.

So that's why we'd be a little conservative.

You obviously have to get some good weather into Q2 to drive that outdoor business.

Q1 wasn't particularly good or bad.

It was a more normal spring.

We are not concerned that there was much if anything pulled forward.

So we are expecting that business to come in outdoor garden.

And when you talk about the bigger trends, we've often mentioned the 40 classes that we track from the prior peak in '06.

And we still have 12 of those 40 top classes of goods that have not recovered to the peak.

So those tend to be the much bigger products -- or projects, rather, involving a lot of millwork and building materials.

So while we're seeing a lot of strength in that business and very robust, I called out roofing as a double-digit driver.

But that whole portfolio, you're generally working at adding square footage to get the big project-driven projects, and we're looking forward to that coming.

That sales opportunity, by the way, is $1.3 billion.

We'll continue on to Matt Fassler with Goldman Sachs.

So your online business seemed to reaccelerate from the trend that you saw all of last year.

I'm interested in what you think drove that business, whether it was the tilt towards big ticket or changes that you made.

And also for the past couple of years, online growth has been strongest in the first quarter.

It seems almost like the seasonality is changing.

And if you could talk about if there's any rhyme or reason to that, it'd be helpful to understand that.

I mean, Matt, as you know, this is an area that we've been investing in.

And so I think the investments that we're making is improving the customer experience.

And I'll let Kevin talk about the specifics.

Yes, Matt.

We've been very focused on improving the experience across the whole shopping funnel, and we made the really large site redesign last fall.

We upgraded our mobile app substantially.

And those have paid nice dividends for us.

From a seasonality perspective, I just think you're seeing core categories that we tend to be strong in online penetrate well in the first quarter, and that's what's driving the growth.

And just a couple numbers.

Matt, if I could add a couple of numbers.

The visits were up 15% year-on-year.

Our conversion rate increased 13 basis points year-on-year.

So if your visits are up and your conversion is up, your sales are going to grow.

And a lot of that is because of the site experience improvements that Kevin and his team have made.

That's terrific.

If we think about that, I'm sure you have data on customer age.

And you can probably tell from the kind of products that they're purchasing and the kind of products they're engaging in.

If you think about online transaction, is there a sign that the millennial customer is disproportionately patronizing the enterprise online?

Or is it more evenly distributed across age groups?

We actually see it more evenly distributed.

Got it.

And then just one piece of cleanup, if I could.

You gave the comp growth for the biggest-ticket basket.

Can you give us the comp growth for the small ticket basket, the $50 and under, please?

It was flat.

We'll now hear from Kate McShane with Citi Research.

My question is centered around any potential bankruptcies in the place and if -- in the space, excuse me.

And if a bankruptcy were to happen, how does it play out for your business?

And how would it change what you're already experiencing in appliances, if anything?

I mean, we clearly have invested to disproportionately take share in categories that we overlap with key competitors, who have been having their challenges.

And we're going to continue to focus on trying to capture as much business as we can.

It's in categories like appliances, it's tools, hand tools, storage.

There's multiple categories that we overlap in businesses where we think we can continue to grow share.

There is an appliance retailer that recently announced store closing, basically going out of business.

And we're seeing sales coming our way.

In an environment where they're liquidating the stores, it's very...

That's really interesting.

Yes, it's very interesting.

And then if I could just follow up.

It's a bit granular.

But I know you've highlighted that millwork is an opportunity, but it's still trending below the company comp average.

What is holding that category back?

And do you have any expectations on when that comp could accelerate and what could drive it?

As I mentioned, these are much larger projects.

You can replace an exterior door to refresh your look or wear and tear.

But if you're going to be getting into a number of interior doors, add windows, et cetera, to your house, you're generally doing a much larger remodel and one that would likely add square footage to the house.

And we're confident, while that business hasn't come roaring back just yet, it's healthy.

But with the price appreciation Carol mentioned in housing, this is where people are going to be much more confident to invest in their home with the confidence that, that investment will be rewarded with a higher home value.

So we remain very bullish on the state of housing and the likelihood of these much larger projects getting under way.

Yes.

This isn't really nothing but statistic to me, in a way.

There are 76 million owned households in the United States.

And of those, there are only 3.2 million that have negative equity in their home.

And you go back to 2011, 11 million of those households had negative equity in their home.

So the amount shows that since 2011, homeowners have enjoyed a 113% increase in wealth, if you will, coming from home price appreciation.

So on average, $50,000 per household.

So you can imagine, at some point, to Ted's point, they'll take that down out and do a bigger millwork or a total remodel job.

And I think the other part is we're -- there's 3.8 months of supply of inventory and housing on the market compared to historical norm of 6. I think that actually leans into people thinking about a remodel versus move as well.

Yes.

We'll now hear from Seth Basham with Wedbush Securities.

My question is around the Pro business.

If maybe you could provide some color on the degree of outperformance relative to DIY this quarter relative to recent quarters, that would be helpful.

Should I jump in?

I'll be happy to jump in.

So our Pro business grew twice as fast as our DIY customers in the first quarter.

It was pretty balanced between our big-ticket Pro and our small-spend Pro as well.

That's helpful.

And as it relates to Interline specifically, you talked about some improvements with the use cases and those starting to roll out and get some traction.

As you anticipate the balance of the year from those use cases and the others you're working on, would you expect a further acceleration in Interline growth?

We are very pleased with the growth that we're seeing in Interline.

And use case 1, for example, I mentioned that we're at 1,500-plus U.S. stores now and actually seeing sales ahead of what we anticipated with that.

So yes, we're excited about the opportunity with Interline as we go forward.

Yes.

The sales growth rate was higher than the company average in the first quarter.

It's less than 2% of our sales, so you can't see that in the top line yet, but we will see it as these use cases gain traction.

We'll now hear from Matt McClintock with Barclays.

I was wondering if we could talk about the power of innovation at driving both ticket and total sales.

What product categories would you say overindex on innovation or what you would call the benefit of innovation to those product categories?

Well, there's actually a ton.

I'll call out the -- maybe the -- some of the most exciting and technologically savvy.

But when you look across the entire store, we get a distributable monthly report of all the great new innovative product.

And it's fascinating to go through it.

It's -- this is a 200-, 300-page report of product every month.

It's calling out, it could be, lightweight drywall.

It could be something as simple as cutting plywood into 4x4 panels to have that precut item for a project.

But certainly, on the more techie innovative side, the lithium-ion battery technology has to be one of the largest.

We have a full riding tractor, RYOBI tractor, available for sale that, I've ridden it, you can cut your lawn on a battery-powered tractor.

Craig mentioned the outdoor power.

We have the power and the run time of gas on blowers and trimmers and hedge trimmers.

We've seen it in portable power in -- for many years now, and it's now accelerating in outdoor power.

And then the second one is LED lighting technology in not just the individual A-line bulbs.

But you're now seeing integrated LED in your ceiling fans, in your light fixtures.

And that's really what's driving our commercial and industrial lighting that I called out as having such strong comps.

Because now you're getting that integrated fixture and getting all sorts of really attractive design elements powered by that incredibly thin lighting form factor.

But it goes on.

Our LifeProof carpet and our PetProof carpet, where technology enables us to offer lifetime stain guarantees on the products.

So really across the whole storage.

It's super exciting, great, innovative product that customers are responding to.

And Carol, if I could just ask one follow-up.

Just inventory turns for the quarter were flattish year-over-year.

How should we think about inventory as we progress through the remainder of the year?

Yes.

Well, on an unrounded basis, inventory turns were slightly better than last year.

And for the full year, we're expecting inventory turns to be up year-on-year, a few 10.

We'll now hear from Mike Baker with Deutsche Bank.

Just one more e-commerce question.

If you guys are -- I'm sure you have -- it's probably been asked.

Just to go over it again.

What percent -- what categories in your storage do you think lend themselves best to online?

And in particular, I'm curious about how the appliance business does online.

Is that something that you think can work through that channel?

So yes, I think we shared a number of years back that we looked at all of our categories and had segments of the business that we felt would lean more towards the digital world.

Those things would be products that were smaller cube, more dense, higher value, would lend themselves to that type of business.

And so things like faucets and power tools, for example.

What's interesting is that we've been in a position to be able to not only grow that business online.

We've also been able to grow those categories in-store at the same time.

And so that's something that we see as a real advantage in our business.

And then other categories that maybe the customer actually starts online, but they may finish in the physical world, would be things like flooring and kitchens.

And so the research is done there.

But many times, a customer still wants to come in and talk to one of our associates and maybe go through some product and questions that they may have about a process.

So it's really something that we've been watching carefully.

But we've been incredibly fortunate that we've been able to grow both channels really across categories that we think lend themselves to the online business.

So customers look a lot online before they actually come into the store and shop.

So just a follow-up there.

Are you seeing -- do people actually transact for appliances online?

And then the second follow-up is, have you ever quantified like x percent of your products are in that first bucket of lend themselves well to online?

No.

I mean, customers do go online.

And some customers buy online, just like some customers buy patio online.

They are comfortable doing that without sitting in it.

But again, the majority of our business in those kind of categories are in-store.

And we haven't spent a lot of time trying to quantify.

We'll go to Alan Rifkin with BTIG.

You said that your average ticket growth of 3.9% was boosted in part by new product introduction.

Curious, Craig, given product, what is the duration of like the -- that, that can help contribute to average ticket?

And what does the pipeline look like for new products in the future?

And I do have a follow-up.

I mean, it really varies by category on what the cycle is in terms of product innovation.

Historically, you could think about a product in a 36-month kind of time frame.

Today, there's categories that, that cycle is way shorter than that.

So it varies quite a bit.

Okay.

And then, certainly, you got very solid expense growth in the first quarter, which led you to take the full year ratio from 49% down to 43% after getting 39% expense growth in Q1, which is your -- one of your lower revenue quarters.

If you take that together with the fact that comps ease going forward, it would appear that the expense leverage in the following 3 quarters could even be better than what we saw in Q1, which would maybe lead to a number that's even below 43%.

Is that a correct line of thinking on my part?

Alan, as you know, we've put out guidance based on our point of view on the business, and we always try to do better.

If I look at the next 3 quarters, I would say the expense growth factors will be slightly higher in the second quarter and then lower in the third and fourth quarter principally because of year-over-year comparison.

But we do like to put out numbers that we can beat.

We'll go to Greg Melich with Evercore ISI.

I had a couple of questions, kind of follow-ups.

Carol, you mentioned that May was very, very good, right?

Yes.

And I know last May, there were some, I guess, Memorial Day shift that meant you were doing sort of 3 or 4 depending on how you look at it.

When you say very good, is that a 2-year or a 3-year stack?

How should we think about that in terms of very good and exit rate?

I just look at our numbers versus our plan.

Always versus the plan.

Always versus plan.

Correct.

And then the second question, maybe sort of a follow-up, broader speaking.

There is a lot going on in the industry, a lot of change.

And Craig, I think you answered being positioned to help the customer and take that share.

Could you talk a bit maybe about the position in terms of how you work with vendors?

It seems like you're getting a lot of innovation in product maybe from some of those vendors that might be thinking differently about their other ways of getting product to market.

Could you help us understand that side of the equation, maybe Ted as well, especially given online growth, et cetera?

Just to how the vendors are working with you.

I mean, I'll start with a comment and turn it over to Ted.

I mean, this is an area that we have focused hard on for the past 8 to 9 years.

During the downturn, one of the things that we clearly saw was that if the customer was going to spend money in '08, '09, '10, it was going to be largely around new and innovative product.

And if that product could help them save time or money, they would definitely step in even in those tough economic times.

So this has been a focus that Ted and the merchants have had in a big way.

And we have a huge focus on collaboration with our supplier partners, and we appreciate that we have to win together.

And 2 things we always want our partners to know is that when they're looking for volume, there's no better place than The Home Depot.

No one is going to drive their volume and their productivity at their production facilities like The Home Depot.

And the second thing -- and you notice all the exclusives I called out in my prepared remarks.

No one can launch a product like The Home Depot.

And we want to continue working and collaborating with our partners, driving their volume and introducing their innovation.

Great.

And then, Carol, I have one follow-up, bit of housekeeping.

What was private-label credit penetration in the quarter?

And you've talked a lot about strength of the consumer from housing.

I'm just curious how the credit dynamics are looking to you, guys.

Yes.

We were very pleased with our performance in our private-label credit card.

The penetration grew year-over-year by 20 basis points.

Now it stands at 22.6%.

And we see that the sales on our private-label card for our Pro, the growth rate was faster than the company average.

We'll go to John Baugh with Stifel.

Most of my questions are answered.

But I was curious on the Southern division comment being the strongest.

Is that due to a weather compare or demographics or both?

Well, the Southern division did have the benefit of the $70 million in storm sales year-over-year in Louisiana.

There's still some recovery benefit going on there, so that was part of the driver of the Southern division's outperformance.

And any weather -- or excuse me, calendar issues to be aware of, Carol, for the coming quarter or the year?

No, no.

Not that I can think of.

The timing of Memorial Day may be off year-on-year.

We may have -- it may fall into a different fiscal month.

I can't think it, that it does.

But we'll clarify that at the end of the second quarter.

No quarter to quarter.

But no quarter to quarter differences, no.

Well, thank you, everyone, for joining us today, and we look forward to speaking with you on our second quarter earnings conference call in August.

Thank you, ladies and gentlemen.

Again, that does conclude today's conference.

Thank you all again for your participation.