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Operator
Good day, ladies and gentlemen, and welcome to The Home Depot First Quarter 2018 Earnings Conference Call.
Today's call is being recorded.
(Operator Instructions)
At this time, I'd like to turn the conference over to Isabel Janci, Vice President of Investor Relations.
Please go ahead.
Isabel Janci - VP of IR
Thank you, Katharine, and good morning.
Joining us on our call today are Craig Menear, Chairman, CEO and President; Ted Decker, Executive Vice President of Merchandising; and Carol Tomé, Chief Financial Officer and Executive Vice President, Corporate Services.
Following our prepared remarks, the call will be opened for question.
Questions will be limited to analysts and investors.
(Operator Instructions) If we are unable to get to your question during the call, please call Investor Relations at (770) 384-2387.
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 and 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.
Craig A. Menear - Chairman, CEO & President
Thank you, Isabel, and good morning, everyone.
Sales for the first quarter were $24.9 billion, up 4.4% from last year.
Comp sales were up 4.2% from last year with the U.S. comps of positive 3.9%.
Diluted earnings per share were $2.08 in the first quarter.
We're pleased with our performance in the first quarter, and the fundamentals of our business remain solid.
As Ted will detail, excluding weather-impacted categories, our Pro and core interior project business remained strong in the quarter, and we saw a healthy growth in maintenance and repair categories.
From a geographic perspective, weather impacts can be seen in the variability of performance across Canada, our 3 U.S. divisions and 19 regions.
Our largest division is the Northern division, which posted flat comps due to weakness in our seasonal categories.
The Southern and Western divisions saw relatively better weather trends and comped above the company average.
On the international front, Canada posted a slightly negative comp in local currency, while Mexico posted positive comps in local currency.
You've heard us talk about the bathtub effect based on when spring breaks, where weak seasonal sales in the first quarter are counterbalanced by strength in the second quarter.
We expect that effect to be true this year.
And over the past few weeks, as spring has finally arrived through the U.S. and Canada, we are seeing strong customer demand.
Part of the strength we saw in the business can be attributed to the health of our Pro customer, as Pro sales once again outpaced DIY sales in the quarter.
Investments aimed at deepening our relationship with our Pro customers are yielding increased engagement, which translates to incremental spend.
While still early, the combination of enhanced associate tools in the store and expanded delivery capabilities are gaining traction with the Pros.
In delivery, for example, we augmented our 2-hour and 4-hour delivery window options with same day car and van delivery in select markets.
These efforts help drive double-digit delivered sales growth in the quarter.
Our interconnected retail strategy continues to resonate with our customers.
Online traffic growth was healthy and our first quarter online sales grew approximately 20% from the first quarter of 2017.
During the quarter, we began to launch the customer's ability to attach install services when they buy certain products online in select markets.
For example, in certain markets, if you purchase a faucet online and want to include the installation of the faucet in your purchase, we now enable this experience.
We continue to invest in the interconnected shopping experience and see a positive response from our customers in the form of improved customer satisfaction scores, better conversion and increased sales.
As we continue to make the shopping experience more convenient for our customers, another area of focus and differentiation is our supply chain.
The flexibility of our supply chain is a competitive advantage, particularly when unpredictable weather results in spiky demand patterns.
In-stock levels are at record highs as our shelves are fully stocked with products our customers need to get their projects done.
Let me touch briefly on our long-term strategic priorities.
You will recall at our investor conference in December, we outlined our commitment to accelerate -- accelerated investment plan to create the One Home Depot experience for our customers.
I'm pleased to report that our key initiatives are on track.
We implemented our enhanced wayfinding sign and store refresh package in nearly 250 stores during the quarter and intend to pilot our first new supply chain facility starting this summer.
It is still early days, but we remain very excited about the work and opportunities ahead, as we focus on enhancing the customer experience by investing in our business and in our associates.
Our associates consistent -- consistently execute.
A delay in the spring selling season is not without its challenges, but given the company-wide alignment and coordination of our store teams, merchants, vendor partners and supply chain, coupled with a favorable housing backdrop, we are poised to deliver a strong 2018.
I'd like to close by thanking our associates for their dedication, hard work and commitment to our customers.
And with that, let me turn the call over to Ted.
Edward P. Decker - EVP of Merchandising
Thanks, Craig, and good morning, everyone.
As you heard from Craig, we are pleased with our performance in the quarter.
Excluding our seasonal business, sales exceeded our expectations.
We saw significant strength in our Pro business, interior projects and maintenance and repair categories.
The extreme winter weather in the quarter had a negative impact on our garden categories, which historically represent around 15% to 20% of our first quarter sales.
Our garden departments had negative comps in the quarter, driven by softness in chemicals, fertilizer, mulch and live goods, just to name a few.
Looking at our departments, appliances, electrical and lumber had double-digit comps in the quarter.
Lighting and our garden departments were negative, with lighting comps reflection of LED price deflation.
All other merchandising departments were at or above the company average.
In the first quarter, comp average ticket increased 5.8% and comp transactions decreased 1.5%.
If we exclude our garden business, we saw a positive comp transaction growth.
Commodity price inflation in lumber, building materials and copper positively impacted average ticket growth by approximately 111 basis points.
Foreign exchange rates also positively impacted average ticket growth by approximately 41 basis points.
While cold and wet weather impacted some outdoor-related projects, this didn't prevent our customers from completing a variety of interior projects.
Categories like interior doors, bath fixtures, storage and organization, interior paint, door locks, ceiling fans and window treatments all had comps above the company average.
Core maintenance and repair categories, also performed well during the quarter, with strong results in safety and security, water heaters, plumbing repair, pipe and fitting and air circulation.
As you heard from Craig, in the first quarter, we saw continued traction with our Pro.
Pro heavy categories like lumber, gypsum, insulation, pneumatics, wiring devices and flooring tools all had comps above the company average.
In addition, we are building engagement and enabling our associates to target specific customers, which is driving expansion in -- of categories in services sold.
In Interline Brands alone, we saw sales growth ahead of the company average.
We also saw a healthy customer appetite for big-ticket projects.
Big ticket sales in the first quarter or transactions over $900 were up 10%.
The increase in big ticket sales was driven in part by vinyl plank flooring, appliances and various lumber and building materials categories.
In the first quarter, we hosted our President's Day and Spring Black Friday events.
Our stores did a fantastic job executing these events, and our customers responded.
During the event, we saw great results in several tool categories and cleaning.
One of our core strategies as merchants is to balance the art and science of retail, both in-store and online.
Over the last year, we made several improvements to our interconnected shopping experience, including better product content, a refreshed mobile experience, improved inventory visibility and faster checkout.
These investments have helped drive a more seamless, frictionless customer experience, and conversion rates in the first quarter increased more than 10% year-over-year across all devices.
Now let's turn our attention to the second quarter.
Just in time for the warmer weather, we are excited to introduce a fantastic new innovative product in our outdoor garden category.
We have partnered with Syngenta and Fernlea to bring our new Rio dipladenia plants to market.
These plants are low maintenance, drought tolerant and have reoccurring blooms throughout the growing season.
Rio is available in all of our U.S. stores and is a big-box exclusive to The Home Depot.
In addition, we're very happy to announce the extension of our PPG partnership with the launch of Olympic exterior stains.
With this launch, Olympic brings 80 years of trust and brand recognition into our stores.
This broadens our assortment in our paint department, providing customers choice with a strong lineup of products across the category.
We are also thrilled about new product offerings across all of our categories and our upcoming events.
During the second quarter, we will host our Memorial Day, Father's Day and Fourth of July events, where we will be offering more great values and special buys for our customers.
With that, I'd like to turn the call over to Carol.
Carol B. Tomé - CFO & Executive VP of Corporate Services
Thank you, Ted, and good morning, everyone.
Before we discuss our first quarter results, I want to mention a change in our accounting policy.
During the quarter, we adopted ASU number 2014-09, which pertains to revenue recognition.
This standard changes the way we account for certain items related to our private-label credit card and gift card programs.
While the new standard changes the geography of certain items on our income statement, it has no impact on operating profit.
Looking at our first quarter results, the change in accounting caused a $131 million increase to gross profit and a corresponding $131 million increase to operating expenses.
Note that the $131 million increase in gross profit was driven by a $33 million net increase in sales and a $98 million decrease in cost of goods sold.
While we did not recast our historical financial statements to reflect to this accounting change, included in today's press release is a quarterly pro forma view that shows the impact to the accounting standard as if it had been in place during fiscal 2017.
So with that, let's move on to our first quarter results.
In the first quarter, total sales were $24.9 billion, an increase of 4.4% from last year.
Versus last year, a weaker U.S. dollar positively impacted total sales growth by approximately $104 million or 0.4%.
Our total company comps were positive 4.2% for the quarter with positive comps of 5.6% in February, 5.9% in March and 2.2% in April.
Comps in the U.S. were positive 3.9% for the quarter with positive comps of 5.1% in February, 5.5% in March and 2% in April.
As you may have personally experienced, April was one of the coldest and snowiest months in more than 20 years.
In the first quarter, our gross margin was 34.5%, an increase of 40 basis points from last year.
The increase in our gross margin year-over-year reflects the following factors.
First, we experienced $131 million or 48 basis points of gross margin expansion due to the new accounting standard; second, we experienced 14 basis points of gross margin expansion due to changes in mix and the gross margin benefit of recent acquisitions; finally, we experienced 22 basis points of gross margin contraction due to higher shrink and higher transportation costs in our supply chain than what we experienced last year.
In the first quarter, operating expense, as a percent of sales, increased by 87 basis points to 21%.
Our operating expense reflects the impact of the new accounting standard, the impact of the strategic investment plan we laid out at our December investor conference and ongoing expense control.
Specifically, the new accounting standard resulted in a $131 million increase in our operating expenses and caused 50 basis points of operating expense deleverage.
Expenses related to our strategic investment plan resulted in approximately 56 basis points of operating expense deleverage.
Finally, we drove 19 basis points of expense leverage due to ongoing productivity actions in the core business.
Our operating margin for the first quarter was 13.6%, a decrease of 47 basis points from last year.
For the quarter, interest and other expense decreased by $2 million to $239 million, and our effective tax rate was 23.5% compared to 35.2% in the first quarter of fiscal 2017.
The decrease in our effective tax rate reflects, for the most part, the benefit of tax reform.
For the year, we expect our effective tax rate to be approximately 26%.
Our diluted earnings per share for the first quarter were $2.08, an increase of 24.6% from last year.
Moving on to some additional highlights.
During the quarter, we opened one new store in Stamford, Connecticut, for an ending store count of 2,285.
Selling square footage at the end of the quarter was 238 million square feet.
Total sales per square foot for the first quarter were $412, up 4.5% from last year.
At the end of the quarter, merchandise inventories were $14.4 billion, up 6% from last year.
Inventory turns were 4.9x, up slightly from last year.
While spring was a reluctant bride, she has arrived, and our stores have the inventory necessary to meet demand, which is a good thing, as month to date, for the company, our May comp sales are double-digit positive.
Moving on to capital allocation.
In the first quarter, we repurchased $1 billion or approximately 4.7 million shares of outstanding stock.
As of today, we are targeting $4 billion of share repurchases for fiscal 2018.
Computed on the average of beginning and ending long-term debt and equity for the trailing 12 months, return on invested capital was approximately 36%, 370 basis points higher than the first quarter of fiscal 2017.
As we look to the remainder of the year, we are encouraged by what we are seeing in housing and the broader economic environment.
The U.S. economy is strong and housing fundamentals continue to be supportive of our business.
Unemployment is the lowest it has been since 2000.
Wages are increasing.
Home prices are appreciating, buoyed by a housing shortage in the U.S. And while interest rates are rising, this is indicative of a strong economy.
At these levels, we do not expect interest rates to lead to a slowdown in customer desires or demand.
That's why today, we are reaffirming the sales and earnings per share growth guidance that we laid out at our fourth quarter earnings call, adjusting certain items solely for the change in accounting standard.
Remember that we guide off of GAAP.
The new accounting standard will not affect our earnings per share guidance, but it will impact sales growth and the gross margin and expense growth factor guidance we gave at the beginning of the year.
Recall that fiscal 2018 will include a 53rd week, so the fourth quarter of fiscal 2018 will consist of 14 weeks.
For fiscal 2018, we now expect sales to increase by approximately 6.7% with positive comps as calculated on a 52-week basis of approximately 5%.
Reflecting the new accounting standard, we now expect our 2018 gross margin to increase by approximately 45 basis points.
Also reflecting the new accounting standard, we now expect our 2018 operating expenses to grow at approximately 144% of our sales growth rate.
For earnings per share, we expect fiscal 2018 diluted earnings per share to grow approximately 28% to $9.31.
I also want to take a brief moment to comment on our long-term financial targets.
The new accounting standard does not change our sales growth or operating margin targets for fiscal 2020.
Because the accounting change did affect the geography of certain items on the income statement, we have posted an update to our December investor conference materials on our website to assist you with your modeling.
And with that, I'd like to thank you for your participation in today's call.
And Katharine, we are now ready for questions.
Operator
(Operator Instructions) We'll hear first from Simeon Gutman with Morgan Stanley.
Simeon Ari Gutman - Executive Director
My first question, it's all about weather, and it's kind of couple of parts.
Can you clarify -- you said garden was negative.
Is April the largest month for garden?
And then you also mentioned that Northern is your biggest division.
If we assume it's, let's say, 40%, I think that would imply Southern, Western would be north of like 6%, 6.5%.
Is that fair?
Craig A. Menear - Chairman, CEO & President
So in terms of garden, April is not necessarily the biggest month in garden generally.
That is May.
And we actually don't break out the divisional numbers.
But it's -- Northern division is our largest division.
Simeon Ari Gutman - Executive Director
Okay.
And then maybe just a follow-up.
Were -- the remaining divisions, I guess, Southern and Western, were those trajectories similar?
Or were there -- was there a big discrepancy between them?
And then have their quarter-to-date trends held up?
I'm assuming Northern is the one that's been broke -- that's breaking out, but has Southern and Western stayed the same or strengthened?
Craig A. Menear - Chairman, CEO & President
Actually, all areas are breaking out with this change in the weather.
Carol B. Tomé - CFO & Executive VP of Corporate Services
We're so pleased with the performance across our geographies.
And if you look at the performance in the first quarter, the Southern division had a slightly higher comp than the Western division.
But remember, the Southern division had some hurricane-related sales in it.
So if you normalize for hurricanes, the divisions performed pretty much the way they should have performed.
It was really in the north and it come back, and the whole business is coming back.
Simeon Ari Gutman - Executive Director
Okay.
And my follow-up question.
I think the issue the market is contemplating here is the cycle question versus what the weather is doing.
And so I don't know how you look at it, but if there is something that's slowing -- that's more than weather and it doesn't seem like that's the case.
I guess, how obvious are these signals?
And how much lead time do you think you have to be able to see them?
Craig A. Menear - Chairman, CEO & President
I mean, first of all, this clearly is really a garden story for us.
The miss in terms of garden was significant against what we planned.
Carol B. Tomé - CFO & Executive VP of Corporate Services
And Craig, maybe we could just quantify that for you.
If you backed out the gardens, our comp for the quarter would have been 6.5%.
Craig A. Menear - Chairman, CEO & President
Right.
Operator
And our next question comes from Michael Lasser with UBS.
Michael Lasser - MD and Equity Research Analyst of Consumer Hardlines
So of that 230 basis point impact from the weather, is that a net number?
So that's net of the hurricane benefit?
And what percentage of that -- of those sales do you expect to recoup in the second quarter?
Craig A. Menear - Chairman, CEO & President
The storm-affected sales were roughly 135 basis point impact.
And we actually expect to capture the majority of those sales and is -- we're seeing that happen in May.
Michael Lasser - MD and Equity Research Analyst of Consumer Hardlines
And my second question is on the initiatives that you outlined.
Both the 200 stores that you touched with your new signage package, what comp are you seeing those stores produce above and beyond the corporate average?
And then as part of that, can you also touch on your Pro delivery initiatives?
Is that helping you more with existing customers?
Or customers who you really haven't done business with in the past?
Craig A. Menear - Chairman, CEO & President
So let me -- I'll touch on the store a minute here and then Mark Holifield is here and can speak to the delivery.
250 stores that we implemented new signing and refresh package in, we're obviously just completing those.
We did that investment for our stores over a couple of year period or doing that because of the pilots that we ran previous to that.
So we've built that lift into our guidance, and that, that's something that we're rolling here over the next 2 years across all the stores.
Mark Q. Holifield - Executive VP of Supply Chain & Product Development
And Craig, on the new delivery that's out there, the car and van delivery, that's really driving sales across of the range.
We have a lot of Buy Online, Deliver From Store customers who are trying out the car and van delivery.
And our Pro customers, our existing Pro customers and new customers are using the two- and four-hour windows.
Carol B. Tomé - CFO & Executive VP of Corporate Services
So our math isn't perfect, but our modeling would suggest that the majority of these delivered sales are incremental.
Michael Lasser - MD and Equity Research Analyst of Consumer Hardlines
Incremental for customers that you're already doing business with?
Or more so attracting customers who you -- both?
Carol B. Tomé - CFO & Executive VP of Corporate Services
It's (multiple speakers) both, Michael.
Operator
We'll continue on to Zach Fadem with Wells Fargo.
Zachary Robert Fadem - Senior Analyst
Could you talk a little bit about the competitive environment in the paint category?
Have you started to see any step change there in terms of promotions?
And any thoughts on what you think the key drivers are for you to maintain and win share in the category this year?
Edward P. Decker - EVP of Merchandising
Sure, I would say that the paint promotional environment is certainly for us, it's the exact same year-over-year, we're not seeing any more promotion out of others in the marketplace either.
We are very happy with our paint performance.
Our comp was at the company average and we saw the strongest interior paint comp gallon performance we've seen in a long time.
So we're happy with our brands.
We have the best brand with Behr in the marketplace.
We're thrilled with our expansion of PPG, and Ann and team are doing a fantastic job of selling in the stores.
Zachary Robert Fadem - Senior Analyst
Got it.
And to follow up, as input cost for items like lumber and building materials continue to grind higher.
First of all, what are your expectations there for the year?
And is there any concern in your mind on your ability to pass along the higher prices to customers in this environment?
Edward P. Decker - EVP of Merchandising
Well we're -- the 2 areas we've seen the largest cost requests are in clear commodities, so looking at lumber and copper, for example.
Those generally, the market passes on.
Most of those products are priced weekly, and well-known pricing indexes in the market tends to follow that, so we've had no problem passing that on.
And I will say lumber and panel prices are at historic highs.
We don't see that abating at all.
We're up about 30% year-over-year.
Certainly don't want it to go a whole lot higher.
But for right now, we've been able to pass on and not seeing degradation in units.
The other area is in things like laundry, where you had a very specific tariff.
The entire industry has accepted that cost increase based on the tariff and you're seeing retails in all competitors that have gone up, more or less mirroring the impact from the tariff.
Operator
Our next question comes from Steve Forbes of Guggenheim Securities.
Steven Paul Forbes - Analyst
Craig, you mentioned piloting the first new supply chain facility this summer.
But can you help us or help expand on that?
What type of facility is it?
And maybe just give us your updated plan for this year as far as how many and what type of facilities you plan on opening in 2018?
Mark Q. Holifield - Executive VP of Supply Chain & Product Development
It's Mark Holifield here.
The facilities we're going to be doing first are our market delivery operations, which are the hubs out there.
These are stockless locations that will be delivery hubs for big and bulky product like appliances and vanities and things like that.
Later this year, we'll be testing our flatbed distribution capability and opening our first local direct fulfillment center.
Carol B. Tomé - CFO & Executive VP of Corporate Services
And Steve, I'd like you to remember that this is a 5-year plan.
We've committed $1.2 billion in our supply chain over the next 5 years.
We will spend as much in year 4 and 5 as we do in year 1 through 3. So it's definitely going to ramp-up over time, isn't it Mark?
Mark Q. Holifield - Executive VP of Supply Chain & Product Development
Yes, I mean, perhaps, a way to think about this is if you think back to our RDC rollout years ago.
In the first year 2007, we had exactly 1 RDC.
In 2008, we did 4. 2009, we did 7. 2010, we did 7. So you'll see a ramp somewhat similar to that across the 5 years of the supply chain transformation ahead.
Steven Paul Forbes - Analyst
And then just a quick follow-up.
On retail services.
So I recognize the percentage of revenue here.
But I -- it's a topic I find interesting as you think about the opportunity to build brand awareness and share of wallet, right?
With the DIY consumer here.
So can you touch on how that business performed during the quarter?
Craig A. Menear - Chairman, CEO & President
Yes, our services business, it represents about 4% of our total sales and grew low single digit, really driven by HVAC and window treatment.
Wasn't much exterior business happening.
Operator
We'll continue on to Keith Hughes with SunTrust.
Keith Brian Hughes - MD
I have another product question, specifically on flooring.
You did very well in flooring last several year, particularly carpet, which is kind of a declining industry.
But as you called out luxury vinyl plank, I assume you mean LVT there is growing well.
Could you talk about your hard surface offering, how that's growing and what you see for the future?
Edward P. Decker - EVP of Merchandising
Yes.
Overall, flooring, again, we're very happy.
Our comps in flooring were above the company average, for sure led by the LVT.
That product is just a fantastic product, solid or waterproof vinyl product that looks like tile and/or wood.
The rest of the business is solid.
I mean, lot of sales moving into that LVT product.
But the rest of the business is sort of low single-digit comp.
Operator
Our next question comes from Chris Horvers with JPMorgan.
Victoria Kraus Bertschy - Analyst
This is Tori on for Chris.
For some prior quarters, it would seem that Pro is comping 10%.
Is that fair?
And can you talk about the performance of Pro in the first quarter?
And if you think that impacted the business?
Craig A. Menear - Chairman, CEO & President
Well, we certainly had a strong Pro quarter, and it outpaced the DIY business in total, largely due to the fact that the garden business was obviously down dramatically in the DIY space.
But we're very pleased with our Pro.
And Bill, I don't know if you want to add to that?
William G. Lennie - EVP of Outside Sales & Service
Well, Craig, just kind of a follow-up on engagement.
Craig mentioned the tools that we're providing to our account managers in the stores are [POSes].
And as they get more engaged, we are seeing customers expand the number of categories that they purchase.
We're seeing them start to utilize more services like delivery.
And then as a result, we're seeing accelerated growth in the accounts that are managed by our POSes.
So great strength in Pro and top performing Pro trades, where our renovate and remodeler, our property investors and property managers.
So we're pleased with the progress and the trajectory of the business.
Victoria Kraus Bertschy - Analyst
And as my follow-up, following up on the May commentary, can you talk about what you've seen from the acceleration from Pro versus DIY quarter-to-date?
Craig A. Menear - Chairman, CEO & President
I mean, we're seeing both in May.
The whole store is lifting.
Operator
Our next question comes from Seth Sigman with Credit Suisse.
Seth Ian Sigman - United States Hardline Retail Equity Research Analyst
A couple of follow-up questions here.
So first, just on the delivery from the store.
It's continued to grow at this double-digit rate pretty much since you guys have rolled it out.
Can you help us understand how meaningful that is today in terms of the overall contribution?
And also, the influence that it may be having in drier -- driving higher transaction size?
Because but it does seem to be a big differentiator for you.
Craig A. Menear - Chairman, CEO & President
I mean, we're pleased overall with what's happening on the delivery side of the business.
We're -- we don't break out those numbers specifically.
But we are seeing very nice growth, and as Mark said earlier, that is attracting both incremental business with current customers and new customers into the business.
Seth Ian Sigman - United States Hardline Retail Equity Research Analyst
Okay.
And then when you look at the online growth this quarter, up 20%, obviously, very strong again.
Is it fair to assume there was really little weather impact there?
And I -- you discussed a couple of things that may be helping.
Any more insight into where the growth is coming from?
The types of categories?
And also, from a profitability perspective, just the progress that you're making there in improving the margins in that business?
Craig A. Menear - Chairman, CEO & President
So let me, I'll answer the second part of that and I'll turn it over to Kevin Hofmann.
From a profitability standpoint, we run this on a portfolio basis, and it's an interconnected experience.
So in many, many cases, the experience starts in the digital world, it may finish in the physical world.
Over 45% of our orders, the customer chooses to pick up in one of our stores.
So we manage the portfolio, if you will, on a profit basis across the channels.
Kevin Hofmann - CMO & President of Online
And then, just from the health of the online business.
So we were really pleased with the traffic growth we saw.
Ted mentioned we had a double-digit improvement in our conversion rates because of the experiential improvements we've been putting in place.
But just super excited.
Some of our fastest-growing sales are in, what we call those interconnected sales, where the customer is buying online, picking up in store; buying online, shipping to store, and that was some of our fastest growth.
And really across the store, flooring did great, plumbing did great, electrical did great.
We were very pleased.
Craig A. Menear - Chairman, CEO & President
So there actually is an impact from a seasonal standpoint in the online business.
When it's snowing on the ground in April, people aren't really looking online for patio furniture, for example.
So it's kind of funny, but there actually is an impact.
Operator
We'll continue on to Brian Nagel with Oppenheimer.
Brian William Nagel - MD & Senior Analyst
So my first question, just on the ticket growth.
Clearly, a lot of discussion here around weather.
But if you look at that -- the ticket growth, it tracked higher in the quarter and I think one of the highest rates in a while.
What's behind that?
And how should we view the sustainability of that metric?
And then I have a follow-up.
Craig A. Menear - Chairman, CEO & President
I'm assuming you're referring to the $900 and above.
Carol B. Tomé - CFO & Executive VP of Corporate Services
Or the average ticket of 5.8%?
Craig A. Menear - Chairman, CEO & President
Or the average ticket of 5.8%?
Brian William Nagel - MD & Senior Analyst
Yes, I was just talking more about the number in the press release, the average ticket of 5.8%.
Carol B. Tomé - CFO & Executive VP of Corporate Services
Okay.
Craig A. Menear - Chairman, CEO & President
So if you look at the average ticket of 5.8%, think about the commodity impact plus the FX impact, and that gets you back to kind of where we've been running all of 2017 quarter-by-quarter.
Brian William Nagel - MD & Senior Analyst
Okay.
So it's -- there [hasn't way] as much changes besides that?
Craig A. Menear - Chairman, CEO & President
No, not at all.
Carol B. Tomé - CFO & Executive VP of Corporate Services
No.
Brian William Nagel - MD & Senior Analyst
Okay.
That's helpful.
And then the second question I have, and I guess, from a bigger picture perspective.
We talk a lot about -- just you mention a lot just the ongoing strength of the macro environment.
Clearly, looking at my screen right now, we do have rates rising, albeit off a lower -- historically low levels.
The question I have is, what do you watch?
I mean, as you -- why you guys do a very good job of watching a lot of factors out there.
What are you watching for maybe some potential, early indications of an impact of higher rates upon your business?
Carol B. Tomé - CFO & Executive VP of Corporate Services
Yes.
So there are a number of things that we look at, obviously.
During the recovery, we were always looking for green shoots and now we're looking for red flags, luckily we are not seeing any of those.
But here's what we're looking.
As you see, rates are going up, 30 year mortgage, I don't know what your screen is showing.
The last time I looked, it was about 4.6%, and it's on its way up projected to be at least 5% by 2020.
Historical mortgages over the past, gosh, 50-some-odd years, it's 5.8%.
So we are considerably under those historical mortgage rates.
But we are super focused on the Affordability Index and what that means in terms of performance by market.
So if you look at the Affordability Index for the country at large, it's 152%, which is still very good.
The average over, again, decades is about 127%.
So if the Affordability Index were to reach 127% or under, that would certainly be a red flag.
And then we look at rising home prices coupled with rising mortgage rates, you see in markets where you might argue there's an overheated housing market or at least certainly one that's on fire, is there anything happening to our business?
So I would call out 2 markets: Denver, Colorado, and Seattle, Washington.
Both that have seen extraordinary expansion of home price appreciation.
The business there is very good, and the reason is because the economy is very good.
So you can't just look at housing prices and interest rates and say, "Uh-oh." You got to then look at what's happening to the economy.
So it's getting a bit more complicated than it has in the past because there are all these influences of business.
But certainly, if I stop talking and just tell you what we look at every day, we look at ticket and transactions, ticket and transactions.
Because if you go back to the last recession, ignoring the housing downturn recession, but the last recession the United States had 2001, our ticket was flat.
So we're looking at that.
And then, of course, transaction.
Because transactions can be an indicator of a few things, right?
It could be an indicator of a slowdown in demand or an indicator that a competitor is taking your customer away.
So I hope -- hopefully, that's helpful, Brian.
Operator
Our next question comes from Elizabeth Suzuki with Bank of America Merrill Lynch.
Elizabeth Lane Suzuki - VP
I think you had expected before to experience a similar net sales impact from Harvey and Irma in 2018 as in 2017.
Is that still the expectation?
And will the benefit be limited to the first half?
Or could there be some residual benefit in the second half as well?
Carol B. Tomé - CFO & Executive VP of Corporate Services
Our expectation is that the sales will be the same year-on-year.
The majority of the benefit will occur in the first half.
There may be some trail on benefit in the back half because the issues in Puerto Rico are so dramatic, but it won't be material to the company.
Elizabeth Lane Suzuki - VP
Okay.
And then sort of shifting over to online.
I mean, what are the product categories that are doing well online?
And which are more traditionally sold in-store and don't do very well online?
And then how frequently are you able to adjust your online pricing to stay competitive?
Craig A. Menear - Chairman, CEO & President
So first of all, what I'd say is, largely our business online is incremental sales.
We're growing the categories in store at the same time that we're growing online.
And I'll let Kevin speak to the categories.
Kevin Hofmann - CMO & President of Online
Yes, as I mentioned, so still strength in our core tools department, our plumbing department, our electrical department.
Really, the core of the store has been performing very nicely.
We've got a great bath business online as well.
In your question around pricing, it's just like how we think about it in the store of being priced competitively every day and making sure that we differentiate, not just on price, but on the full service offering to the customer, the experience and all the things that we bring to the table.
So very actively monitoring and managing the price situation online just like we do in the store.
Craig A. Menear - Chairman, CEO & President
We can move prices obviously online instantaneously.
We purposely -- because of how it impacts the store environment -- move prices in the store at a different rate than we do online.
Edward P. Decker - EVP of Merchandising
And I don't want to forget that the interconnected aspect of our online business as well because things like the lumber department pages or building material pages are some of our most active pages because the Pros are looking at price and the inventory availability.
So while they're not transacting as much online in those departments, we have great traffic on those pages.
Operator
We'll continue on to Seth Basham with Wedbush Securities.
Seth Mckain Basham - SVP of Equity Research
Could you guys give us some color on the comp?
Or the growth in comp transactions by ticket size?
Carol B. Tomé - CFO & Executive VP of Corporate Services
Yes, we talked about big ticket already.
I suspect you're wanting to know what happened with the smaller ticket?
Seth Mckain Basham - SVP of Equity Research
Correct.
Carol B. Tomé - CFO & Executive VP of Corporate Services
Yes.
So as you would anticipate, for transactions of -- with tickets of $50 or less, they were down year-on-year.
That was because of our garden business.
And I can make this really real for you if you just think about penetration of tender and you may say why?
Well, if you look at penetration of tender in the quarter, our private-label credit card penetration increased by 50 basis points; while at the same time, our cash tender decreased by 50 basis points.
And that was all related to our garden business, which is a smaller ticket activity.
Seth Mckain Basham - SVP of Equity Research
Fair enough.
If you think about the transaction growth overall, ex-garden, how positive was it?
And how does that compare to recent quarterly trends?
Carol B. Tomé - CFO & Executive VP of Corporate Services
It was a positive 1.1% for the quarter and continues to be positive.
As we said, May comps for the company are double-digit positive.
Operator
We'll now hear from Dennis McGill with Zelman & Associates.
Dennis Patrick McGill - Director of Research and Principal
First question just had to do with the pilot program on the delivery from car and van.
Can you maybe elaborate a little bit there what you're seeing from that uptake?
And particularly at the category or customer level, are you seeing Pro versus DIY being more heavy with that uptake?
Mark Q. Holifield - Executive VP of Supply Chain & Product Development
It's still early days, and customers are choosing to purchase all sorts of things.
It could be a Pro on a job site needing something.
But there's a lot also on the Buy Online, Deliver From Store front.
So it's interesting to see where it goes.
It's not taking a real pattern at this point.
Dennis Patrick McGill - Director of Research and Principal
Okay, great.
And then, Carol, can you elaborate, on the transportation costs increase that you experienced in the quarter, the deleverage there.
Is that fuel alone?
Are you seeing any issue with availability?
And where do you see that trending for the year within guidance?
Carol B. Tomé - CFO & Executive VP of Corporate Services
No, it wasn't fuel alone.
We had 8 basis points of gross margin contraction in transportation, of which 3 basis points was fuel and 5 basis points was the pressure in transportation.
We're not alone.
All companies are facing a higher transportation costs.
And as you know, as our practice, we will figure out a way to work through this, but we certainly got some challenges ahead.
Operator
Our next question will come from Dan Binder with Jefferies.
Daniel Thomas Binder - MD and Senior Equity Research Analyst
It's Dan Binder.
Carol, you mentioned a margin mix impact on gross margin.
Was that primarily from the seasonal mix?
And how should we think about that for Q2?
And then my second question was around credit.
And just curious if I can get your thoughts on demand for credit, use of the credit lines that are out there, average spending on credit, and delinquencies.
Carol B. Tomé - CFO & Executive VP of Corporate Services
Yes.
So on the margin expansion that came from mix and acquisitions, that was 14 basis points in total, of which 6 basis points was mix and 8 basis points came from our recent acquisitions, those acquisitions being The Company Store and Compact Power.
As we look to the second quarter, obviously with an increasing penetration of the garden business, which is a lower-margin category, that's going to impact the gross margin, but we're going to have benefit in other areas, too.
So nothing comes to our attention that says we can't deliver the gross margin guidance that we've just provided and updated with you today.
On our private-label credit card, really pleased with the performance.
As I mentioned, we saw a 50 basis point improvement in penetration year-on-year.
What we're seeing is a very healthy portfolio.
The average net receivable, which obviously isn't written -- underwritten by us, it's underwritten by a third party, but it's over $12 billion.
We had 1 million new accounts open year-on-year and we're seeing pretty good utilization on those accounts.
For the consumer, the utilization is around 29%.
For the Pro, the utilization is around 23%.
And our approval rates are north of 70% for both the consumer and the Pro.
Part of the change in accounting for us is moving the -- all of the aspects of our private-label credit card up to the revenue line.
And included in the benefit that we removed out of our selling expenses and moved up to the revenue line was gain share.
Gain share is our profit-sharing program with Citi who underwrites this card for us.
The way the portfolio has gains is there's an EBIT threshold it must earn and then anything over that EBIT threshold, we share in it.
And that percentage of sharing changes over time.
Embedded in that EBIT threshold, of course, is that you've got to make sure that the portfolio doesn't have high losses because that could impact your gain share.
And our losses, this is long-winded answer to your question, but our losses are running at or below historical averages.
So the portfolio is very healthy.
Operator
Our next question comes from Chuck Grom with Gordon Haskett.
Charles P. Grom - MD & Senior Analyst of Retail
Just on the gross margin line.
Just a follow-up on the transportation cost.
Just wondering if you could characterize how they came in relative to your original expectations.
And then I have a follow-up.
Carol B. Tomé - CFO & Executive VP of Corporate Services
We didn't anticipate deleveraging the supply chain in the first quarter to the extent that we did.
The team did an awesome job, though, of managing spiky demand, pressure coming from all kinds of areas.
So managed through it.
Charles P. Grom - MD & Senior Analyst of Retail
Okay.
So you would expect that headwind to continue over the balance of the year?
Carol B. Tomé - CFO & Executive VP of Corporate Services
No, there's definitely pressure coming at us for the balance of the year.
But we'll manage through it.
Charles P. Grom - MD & Senior Analyst of Retail
Okay.
And then just on the weather here.
Obviously, you guys have a lot of experience dealing with it.
When you think about it, does the business get simply delayed here?
Or -- and you recover most of it?
Or do you lose some of it because the window just simply closes?
Craig A. Menear - Chairman, CEO & President
No, you -- we'll actually recover most of the business.
There may be a piece here and there that you miss, like part of pre-emergents.
But even in that, we feel like we're getting most of that business right now particularly in the north.
So the majority of this business will be recovered.
Operator
We'll continue on to Matt McClintock with Barclays.
Matthew J. McClintock - Senior Analyst
McClintock.
Carol, I was wondering (inaudible) we take it, the housing question for more of a generational perspective.
It seems like a lot of the long-term optimism for the housing market to stay strong is driven by the millennial generation forming households.
But can you talk about maybe trend changes that you're seeing in the other generations?
And I only ask because it seems like a lot of the story of baby boomers maybe moving, downsizing their household seems to be kind of minimizing.
Carol B. Tomé - CFO & Executive VP of Corporate Services
Yes.
Well, as we look at mobility rates, we see mobility rates declining by all age cohorts, particularly baby boomers like me.
And there's been some great research that came out of the Harvard Joint Center for Housing Studies that suggest the desire is to age out in your home.
Think about what that means for home improvement.
But there's nothing but opportunity.
So that's just one trend.
Matthew J. McClintock - Senior Analyst
Can you maybe dig in to sum up how the opportunities do change for you?
And how you position yourself for some of those changes?
Just a little bit more.
Craig A. Menear - Chairman, CEO & President
Well, yes, I mean, if you think about flooring, for example.
That's something that people look at as they age in their home, how do you make sure you eliminate trip hazards.
You think about bath remodels and the ability to put in walk-in showers, for example, so that you don't have to step into a bathtub where you have the potential to slip.
You think about lighting around the home becomes an important factor, both inside and outside the home.
You think about security.
So there's lots of factors that go into how somebody thinks about changing their home if they're aging out in their home.
Operator
Our next question comes from Peter Benedict with Baird.
Peter Sloan Benedict - Senior Research Analyst
I appreciate the Stamford, Connecticut, store.
The..
Carol B. Tomé - CFO & Executive VP of Corporate Services
Sure.
It's a great store, it did $1 million the first week, it's an awesome store.
Peter Sloan Benedict - Senior Research Analyst
There you go.
Well done.
Given the traction online with categories like tools, electrical, bath, just can you remind us how you're rethinking the space allocation within the stores to take advantage of the opportunities across different categories?
That's my first question.
Craig A. Menear - Chairman, CEO & President
Sure.
I think, as I mentioned earlier, our online business for all practical purposes is incremental.
So we actually haven't seen the need to make a lot of shifts in space.
It's something that we look at on a continual basis, but we really haven't had to do that at all.
Edward P. Decker - EVP of Merchandising
No, I'd say, Craig, the space that we're doing speaks more to the interconnected nature of our online business, where we're putting lockers in the front of our stores.
We'll do about 1,000 lockers this year.
And we're also adding some bigger holding area for bulkier items near the front of the store.
So space allocation is more for online pickup than any merchandising changes in the bay.
Carol B. Tomé - CFO & Executive VP of Corporate Services
46% of our online orders were picked up in the store in the first quarter.
Peter Sloan Benedict - Senior Research Analyst
Okay, that's terrific.
Yes, it makes sense.
And then Carol, back to kind of the red flags that you're keeping an eye on out there.
How about -- what are you watching when you think about the leverage guardrail the business?
Interest rates are going up here.
But I mean, is there a level or a point at which the 2.0 becomes something that you're not comfortable with?
Or how should we think about that?
Carol B. Tomé - CFO & Executive VP of Corporate Services
Well, I'm really pleased with how we've managed our capital structure over the past several years.
If you look at our -- the amount of debt that we have outstanding, long-term debt, excluding current maturities, $24 billion, the average maturity of that debt is 13.6 years.
The coupon is 3.7%.
The latter maturities go out 40 years.
So it's -- we really worked hard to not put any financial risk into the company.
And with an adjusted debt-to-EBITDA target of 2x, that implies we can get the debt paid off in a very short period of time.
So comfortable with that leverage, always going to be mindful of not putting the company into financial distress, but real comfortable with where we are today.
Operator
Our next question comes from John Baugh, Stifel.
John Allen Baugh - MD
Just quickly, you said you're hyper-focused on the transactions, and thanks for the 1.1% number in April, ex-garden.
I know you don't guide to that figure, but it sounds like May is well up.
You've been running the 2-plus percent, I believe, fairly consistently.
Is there any thought around that number for the year in light of the start to the first quarter?
Craig A. Menear - Chairman, CEO & President
So the 1.1% was for the quarter, ex- our garden business.
It wasn't for April.
So that was for the total quarter.
And we think about the balance between ticket and transactions as being relatively even over time, and that's how we plan the year.
Operator
Matt Fassler with Goldman Sachs has our next question.
Matthew Jeremy Fassler - MD
My first question is for Carol.
You spelled out a 56 basis point impact on the expense ratio from your investment plan.
Can you spell out here at the outset of that program where some of that money went?
And whether that's the kind of impact you'd expect to see through the year?
Or whether with a better top line that impact should dissipate a bit?
Carol B. Tomé - CFO & Executive VP of Corporate Services
Sure.
So I talked about expense deleverage and leverage as a percent of sales.
I didn't really talk about the expense growth factor.
But let's use that nomenclature because that's how we've guided for the year.
So the expense growth factor in the first quarter was 202% and the drivers of that were rev rec, which was 57%; investments in the business, 70%; and then what we call BAU, business as usual, 75%; and in that business as usual, there's about 12% of acquisition-related expenses, companies that we've acquired.
So we focus -- then on the guidance that we gave for the year, clearly, it's going to get better.
And it's going to get better for a couple of reasons: first, we have $167 million of hurricane-related expenses in the back half that will not repeat.
So you should model a higher-expense growth factor in the first half than in the back half; secondly, and you've heard Ann-Marie talk about this, we have a new labor model, which more effectively allocates our hours to our activity.
That starts to kick in into June.
So we should be driving more labor productivity than we saw in the first quarter.
Then if I focus simply on the investments in the first quarter, the dollar amount of investments, and I'm not going to call this out every quarter, but because we're just getting into this, I'll give you this color.
The dollar amount of the investments were $144 million in the quarter.
And those dollars were used for increased wages for our people, for increased advertising as we move to a more marketing technology platform, increases in display cost.
You heard Craig talk -- call out what we're doing inside the stores.
And then increased in headcount.
We've got to have some people on board to help us do all of this investing.
In fact, I believe we've hired 350 people alone in our IT organization.
So these are investments that we're making to reach those sales and operating margin targets that we laid out for 2020.
Matthew Jeremy Fassler - MD
That is great detail.
If I could follow up on a couple of disclosures you made on the monthly trends.
Was there any weather impact on the first 2 months of the quarter on February and March?
And then, when you think about the bathtub effect, if April was really the only month that was impacted, do you tend to recapture most of those lost sales in the month of May?
Or does the bathtub effect push till June or July?
Craig A. Menear - Chairman, CEO & President
Yes, the -- so there definitely was impact still in the other months as well.
And the recovery of that, you'll get a significant piece in May, but it will actually flow into June and July as well.
Operator
Our next question comes from Scot Ciccarelli with RBC.
Scot Ciccarelli - Analyst
So are you seeing a greater appetite for jobsite delivery from your Pro customers?
Craig A. Menear - Chairman, CEO & President
Certainly.
Scot Ciccarelli - Analyst
Okay.
So obviously, that is the case.
Now over time, do you think that happens to change your historical real estate advantage that you've had against some of your major competitors?
Or maybe even open the door to higher levels of e-commerce competition?
Because then the physical location or physical structure of The Home Depot store maybe gets partly marginalized over time?
Craig A. Menear - Chairman, CEO & President
Actually, when you think about our location and footprint, we'll actually leverage that as an advantage overall to our business, where we are well-positioned across markets, including urban markets and sit within 10 miles of 90% of the U.S. population.
So no, we actually see this as an advantage.
And Mark I...
Mark Q. Holifield - Executive VP of Supply Chain & Product Development
Yes, I mean, you'll recall from the investor conference, we outlined 40 flatbed distribution centers, and we expect to open those to take some pressure off of the stores.
But our stores are going to be in the delivery business in smaller markets for a good, long time.
They're still ideally located and a great place to originate those deliveries from.
In urban markets, those flatbed distribution centers will take a lot of pressure off of those high volume stores.
Craig A. Menear - Chairman, CEO & President
I think the other thing you have to think about is actually, not just the downstream portion of our supply chain network, but the advantage that we actually have as a result of the upstream portion of our supply chain moving goods from our suppliers to our stores and our distribution centers.
It's those things working in combination that will create the fastest, most efficient delivery in home improvement.
Operator
And our final question this morning is from Alvaro Lacayo with Gabelli & Company.
Alvaro Lacayo - Research Analyst
It's Alvaro Lacayo here.
Just one question on update on the capital allocation, Carol.
Last call, you said you were going to provide us with an update later on given that cash flow from operations was going to be a little bit higher than where sort of what was guided on dividends and repurchases; and just some commentary around if there's any updated thoughts there.
Carol B. Tomé - CFO & Executive VP of Corporate Services
Yes.
So we've been working on how to best use the cash that's coming off the business through lower taxes.
We aren't announcing anything today.
We have a board meeting this week.
So we will keep you apprised, expect a more thorough update at the end of the second quarter.
But with that, let me just say that our principles aren't changing.
The first use of cash is to go back in support of the business and our strategic imperatives.
The second is to pay our dividend and anything that's left over goes to share repurchases.
Operator
And I'll turn the floor back over to our speakers for any additional or closing remarks.
Isabel Janci - VP of IR
Thank you for joining us today.
We look forward to speaking with you on the second quarter earnings call in August.
Operator
Thank you.
Ladies and gentlemen, again, that does conclude today's conference.
Thank you all again for your participation, you may now disconnect.