Greetings, and welcome to The Home Depot 4th Quarter 2019 Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Isabelle Jansy, please go ahead.
Thank you, and good morning, everyone. Joining us on our call today are Craig Meniere, Chairman, CEO and President Ted Decker, Executive Vice President of Merchandising and Richard McVale, Executive Vice President and Chief Financial Following our prepared remarks, the call will be open for questions. Questions will be limited to analysts and investors. And as a reminder, Please limit yourself to one question and one follow-up. If we are unable to get to your question during the call, please 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 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 presentation also includes certain non GAAP measures. Reconciliation of these measures is provided on our website. Now let me turn the call over to Craig.
Thank you, Isabelle, and good morning, everyone. Fiscal 2019 was another record year for our business Fiscal 2019 sales grew 3.5 percent to $110,200,000,000 Diluted earnings per share were $10.25 As expected, we finished the year with our strongest comp performance in the 4th quarter. Comp sales were up 5.2% from last year and our U. S. Comps were positive 5.3%.
Sales for the Q4 were $25,800,000,000 and diluted earnings per share were $2.28 We saw broad based growth across all geographies and merchandising departments in the quarter. All 19 of our U. S. Regions posted positive comps and internationally, both Canada and Mexico reported positive comps in the 4th quarter. As Ted will detail, both comp ticket and transactions grew in the quarter, and we saw growth with both our pro and DIY customers.
We had a strong holiday season with record setting sales on Black Friday and during Cyber Week. These results reflect solid execution by our stores, our merchants, our supply chain teams, as well as our vendor partners and demonstrate the overall health of the consumer. I'm proud of our results in fiscal 2019 as the team successfully navigated a number of headwinds by maintaining a relentless focus on our customer. 2019 was also a pivotal year in our transformation To create the One Home Depot experience, we are now 2 years into our multiyear investment and are realizing benefits. We have more conviction than ever that these strategic initiatives are creating a value proposition that is unique to the marketplace and will extend our leadership position for years to come.
The majority of our U. S. Stores have a new look and feel, And we address customer pain points around navigation and checkout. Our enhanced signage and store refresh package, Along with investments in the front end of our stores have improved the customer experience and driven associate productivity. These store investments are driving higher customer satisfaction scores, which we believe is translating into market share gains.
As a complement to our store investments, we are investing to strengthen the competitive advantages that we have built Through the blending of our physical and digital platforms into a more seamless interconnected experience. For example, our chain wide rollout of digital appliance labels connecting ratings from the digital world to the physical world, enhancing the in store shopping experience. Additionally, homedepot.com continues to be an engine for growth For our overall business, driving increased traffic online and additional footsteps to our stores. Because of this, we continue to invest in search functionality, category presentations, product content and enhanced fulfillment options To remove friction from the online shopping experience, excluding the extra week last year, online sales grew 20.8 This is the power of the interconnected retail strategy. We have also expanded our digital capabilities by investing in a B2B website experience tailored specifically for the needs of our Pro customers.
We have now onboarded over 1,000,000 Pro customers. Additionally, during the quarter, we completed the integration of a third party best in class CRM system For all of our pro sales and services teams, this enhances our visibility, enabling us to better serve our customers. I'm excited about the opportunities ahead as we continue to build capabilities to engage with the pro, no matter when, where or how they want to interact. Another key component of the best in class interconnected shopping experience centers on the enhanced delivery and fulfillment options. In 2019, we continued our multiyear journey to create the fastest, most efficient delivery network in home improvement.
We are now live with at least one of each type of facility that we are building. Though it is early days, we are pleased with the initial results. For example, we have opened a dozen market delivery operations or MDOs that have enabled us to transition 20% of our clients' number of new facilities coming online in 2021 2022. Turning to 2020, Richard will take you through the details, but we expect another year of growth with both sales and comp growth ranging Approximately 3.5 percent to 4% and diluted earnings per share of approximately $10.45 Today, our Board approved a 10% increase in our quarterly dividend to $1.50 per share, which equates to an annual dividend of $6 per share. We remain committed to maintaining a disciplined approach to capital allocation to create value for our shareholders.
I'm incredibly proud of the progress our team has made as we transform ourselves And through the 2nd year of our OneHome Depot investment program, we have grown sales by over $9,000,000,000 The level of growth unmatched in our market. As we look forward to 2020, I am more excited than ever about the opportunities ahead. We are investing to unlock the power of a truly interconnected customer experience by enhancing our already strong foundation to further extend our leadership position into the marketplace. As with any transformation, the work we are doing is complex, And I'm proud of the way our associates continue to execute at high levels and focus on what's most important in our business, Our customers, I want to close by thanking our associates for their hard work and dedication in the Q4 and throughout the year. For the second half of the year, 100 percent of our stores will receive success sharing, our bonus program for our We look forward to continuing our momentum in 2020.
And with that, let me turn the call over to Ted.
Thanks, Craig, and good morning, everyone. We had a strong finish to the year with 4th quarter sales exceeding our expectations. We saw growth across the store, both our pro and DIY customers. All of our merchandising departments posted positive comps, led by our appliance which posted double digit comps in the quarter. Comps in Decor and Storage and Tools were also above the company average.
All other merchandising departments were positive, but below the company comp of 5.2%. In the Q4, comp average ticket increased 4.4% and comp transactions increased 0.8%. The strength in our comp was partially driven by a shift in our timing, which Richard will talk through in a moment. In addition, we had an excellent response to our Black Friday and holiday events, And our customers continue to trade up to new and innovative items. After experiencing significant deflation in lumber and copper during 1st three quarters of 2019, commodity prices had a more neutral impact in the 4th quarter.
During the Q4, big ticket conference actions or those over $1,000 which represent approximately 20% of U. S. Sales We're up double digits. The strength in our big ticket sales was driven in part by the shift in our event timing as well as strong performance in a number of other big ticket During the Q4, big ticket categories like appliances, vinyl plank flooring and our installation services business all posted comps Consumer demand is strong and this was evident during our annual Black Friday gift center and decorative holiday events. The partnership and collaboration between our merchants and supplier partners, helping a fantastic lineup of great deals and special buys In categories like smart home, power tools, hand tools and decorative holiday, our unique assortment together with excellent customer service execution led to incredible results.
Black Friday was a record sales day for our company and our gift center event grew double digits versus last We also saw our customers tackle a variety of projects around the house. During the Q4, we saw comps above the company average in several kitchen Bath categories, special window coverings, cleaning and exterior paint. We also saw significant growth in our online only home decor categories, which we call HD Home, as we build awareness around these high quality style forward assortments. Sales to our pro customers were healthy, driven by strength in categories like pneumatics, concrete, hand tools and COGS, All of which grew faster than the company average. Looking back at 2019, our team continued their unwavering commitment to serve our With great everyday values and innovative product and we did this while investing in a customer backed store and interconnected experience To ensure that we continue to be the product authority in home improvement for years to come.
At our Investors Conference back in December, We talked about investments we are making across our business. We also shared our new ad campaign and tagline, how doers get more done We launched to highlight our investments into these new experiences and capabilities. We believe it is important to signal to our customers The Home Depot is evolving as their needs change. While it is still early in our campaign, we see customers responding to our enhanced capabilities, Giving us credit for saving them time and helping them complete their projects. In response to our campaign, we saw one of our largest single days of downloads Our award winning mobile app and double digit growth in usage of mobile tools like product locator and image search.
As we look forward to 2020, we will continue our investments to better meet our customers' needs and drive a great shopping experience. One of the investments you will see in the first half of the year is a reset to our outdoor power equipment phase. We know the marketplace for outdoor power tools is Transitioning to cordless technology. And we learned in our tools department that once a customer adopts a battery platform, They see tremendous value in sticking with that platform. Similar to what we have done in our tools department, we are in the process Resetting our outdoor power equipment phase to showcase our assortment by brand, highlighting EGO, Toro, Milwaukee, Ryobi, DeWalt, Clearly see and easily shop the value proposition that these cordless platforms bring, including being more environmentally friendly, Safer and easier to use, all with the power and run time to get the job done.
These powerful brands Now have the lion's share of batteries in the marketplace with 100 of millions of batteries in customers' homes and job sites today. We currently offer over 1,000 cordless power tools and that number will continue to grow as our supplier partners are introducing innovative product all the Our comprehensive and unique assortment of outdoor power equipment resulted in double digit comps in fiscal 2019. The spring right around the corner, we are gearing up for another busy season. Our stores are stocked with new and innovative products, And we just recently announced that we are hiring 80,000 new associates to help us serve our customers during our spring selling season. With that, I'd like to turn the call over to Richard.
Thank you, Ted, and good morning, everyone. Before we begin, let me take a quick moment To remind everyone that fiscal 2019 consisted of 52 weeks, while fiscal 2018 consisted of 53 weeks. This extra week added approximately $1,700,000,000 in sales to the Q4 of fiscal 2018. When we report our comparable sales or comps, we report them on a 52 week to 52 week basis By comparing weeks 1 through 52 of fiscal 2019 with weeks 2 through 53 of fiscal 2018. In the Q4 of 2019, total sales were $25,800,000,000 a 2.7% decrease from last year, reflecting the compare against the extra week in 2018.
Our total company comp sales in the 4th quarter increased 5.2% And comps in the U. S. Increased 5.3%. Because of last year's 53rd week and the resulting calendar shift, Our monthly costs are distorted due to the timing of our annual Black Friday and Cyber Monday events this year versus last year. Our reported monthly comps for the total company were positive 1.2% in November, 9.9% in December and 5.7% in January.
Our monthly costs in the U. S. Were positive 1.1% in November, 10.4% in December and 5.8% in January. Given the distortion in our monthly comps Caused by the calendar shift, we believe it is more appropriate to look at November December on a combined basis. For the combined 2 months of November December, our total company comp was 5%, followed by 5.7% in January.
For the year, our sales totaled a record $110,200,000,000 If we exclude the sales from the 53rd week in fiscal 2018, We grew sales by approximately $3,700,000,000 in fiscal 2019, a level of growth unmatched in our market. For the year, total company comp sales increased 3.5% and U. S. Comp sales increased 3.8%. In the Q4, our gross margin was 33.9%, a decrease of 20 basis points from last year.
Similar to last quarter, the change in our gross margin was primarily driven by higher shrink and a mix of products sold compared to last year. For the year, our gross margin was 34.1%, slightly higher than our guidance at the beginning of the year. In the Q4, operating expense as a percent of sales decreased by 64 basis points To 20.7%, slightly better than our plan. During the quarter, We saw approximately 77 basis points of leverage as we lapped the fiscal 2018 impairment of certain trade names And the 53rd week last year. This leverage was partially offset by expenses related to our strategic investment plan Of approximately $280,000,000 which increased approximately $25,000,000 from last year and caused 12 basis points of deleverage.
Fiscal 2019 operating expense as a percent of sales was 19.7%, A decrease of 28 basis points from last year. Our fiscal 2019 expense performance was better than our initial expectations, Driven by productivity initiatives in our core business. During the year, we spent approximately $1,000,000,000 of investment expenses related to our strategic initiatives in line with our plan. Our operating margin for the Q4 was approximately 13 point 2% and for the year was approximately 14.4%. Interest and other expense for the 4th quarter Grew by $27,000,000 to $292,000,000 due primarily to higher long term debt levels than 1 year ago.
In the Q4, our effective tax rate was 20.3% and from fiscal 2019 was 23.6%. The lower than expected effective tax rate in the 4th quarter and for fiscal 2019 was driven primarily by several discrete tax items. Our diluted earnings per share for the 4th quarter were 2 point From last year. For fiscal 2019, diluted earnings per share were $10.25 An increase of 5.3% compared to fiscal 2018. Moving on to some additional highlights.
We ended the year with a store count of 2,291, while retail selling square footage Was approximately 238,000,000 Square Feet. For the fiscal year, total sales per retail square foot Or $4.55 the highest in our company's history. At the end of the quarter, Merchandise inventories grew $606,000,000 to $14,500,000,000 and inventory turns were 4.9 times, Down slightly versus last year. The growth in our inventory versus last year reflects We are making to accelerate merchandising resets and higher in stock levels than we had 1 year ago. Moving on to capital allocation.
In fiscal 2019, we generated approximately $13,700,000,000 of cash from operations And use that cash as well as the proceeds from $2,400,000,000 of net debt issuances to invest in our business, Pay dividends to our shareholders and repurchase our shares. During the year, we invested approximately $2,700,000,000 back into the business through capital expenditures. Further, we paid $6,000,000,000 in dividends to our shareholders. Finally, during the year, we repurchased approximately $7,000,000,000 or about 32,800,000 of our outstanding shares, including roughly $3,250,000,000 or 14,500,000 shares in the 4th quarter. Computed on the average of beginning and ending long term debt and equity for the trailing 12 months, return on invested capital was approximately 45.4%, 60 basis points higher than the end of fiscal 2018.
Today's press release includes our guidance for fiscal 2020, and I want to take a few moments to comment on the highlights. Remember that we died off of GAAP. So fiscal 2020 guidance will launch from our reported results for fiscal 2019. At our investor conference in December of 2019, we shared with you some preliminary thoughts for 2020, And we are reiterating that guidance today. The economy is strong and the U.
S. Consumer is healthy. The foundation of our sales plan starts with GDP and our 2020 sales guidance assumes U. S. GDP growth of slightly less than 2% in 2020.
To GDP, we add the impact that we think we will see from the housing environment, including demand driven by home price appreciation, housing turnover, household formation and the age of the housing stock. As we look at these metrics, we see an environment that is healthy and stable. Our 2020 sales guidance Also assumes that we will continue to gain share in the marketplace. For fiscal 2020, We expect both sales growth and total company comp sales growth of approximately 3.5%
to 4%.
Fiscal 2020 represents the peak year of our investment program. And as a result, We expect our fiscal 2020 operating expenses to grow at 1.2 times the rate of our expected sales growth. For the year, we expect to grow operating profit dollars to $16,000,000,000 giving us an operating margin of approximately 14%. For fiscal 2020, We assume our effective tax rate will be approximately 24%. We expect fiscal 2020 diluted earnings per share To grow approximately 2% to 10.45 Only $13,500,000,000 We plan to invest $2,800,000,000 of this cash back into the business in the form of capital expenditures.
We also plan to use this cash to pay $6,400,000,000 of dividends And repurchase at least $5,000,000,000 of outstanding shares. Before I close, I would like to update on how we're thinking about one of our capital allocation principles. With regards to our dividend, in lieu of using a 55% payout ratio, We will look to grow our dividend every year as we grow earnings as we have for the last 11 years. This morning, we announced that our Board increased our quarterly dividend by 10%, which equates to an annual dividend of $6 per share. With that, I want to thank you for your participation in today's call.
And Christine, we are now ready for questions.
Thank you. We will now be conducting a question and answer session. Thank you. Our first question comes from the line of Michael Lasser with UBS. Please proceed with your question.
Good morning. Thanks a lot for taking my question. It's on any potential supply disruption Coming out of Asia, what have you factored in? What's the current status of your supply chain? Have you seen any issues with getting product from Asia at this point?
And if this extends for a meaningful period of time, what how do you size the potential impact
So Michael, let me I'll start off and then I'll hand it over to Mark, Holly, Phil. First of all, The guidance that we've provided obviously does not include any guidance update for the situation. It's a very fluid situation that we're monitoring closely. And all of our goods for Q1 are essentially Onshore or on their way. So we feel pretty good about that situation.
And Mark, you want to provide an update on Sure, Craig. Yes, as
you mentioned, it does change every day. Our Q1 merchandise is already here or on the way. And Q2, the picture is still developing there. For our direct import, our sourcing offices in Asia are in touch with our top factories as they're returning to operations. For our domestic vendors, we're working with them to understand and mitigate any potential impacts in their supply chains.
Our team is working with all of our suppliers, both domestic and import and our logistics service providers on a PO by PO, container by container basis to understand what the impacts to our product flow are and they're taking appropriate action. We are encouraged that we're seeing factories come back to work, Province is coming back to work in China, but it is a fluid situation and it's highly variable in terms of what's the current state.
And just to clarify, based on what you know today, do you think that there will be an earnings hit Over the next couple of quarters based on any supply disruptions, if this even if Things get back to normal in the very near future. So or do you have time to adjust based on what you know at this point?
Michael, based on what we know today, we couldn't say that there would be a hit. Again, the teams are working this Day to day, as Mark said, PO to PO, container to container, we're also putting plans in place To mitigate any risk going forward.
That's helpful. And then 70%
of what we do is domestic.
Okay. Thanks. My follow-up question is, you just wrapped up your 2nd year in a row with about 1% growth comp growth in traffic after Many years of higher traffic than that. Is 1% growth in traffic the new norm? And how do you think the implementation of your strategic investment plan is going to impact traffic in the next few years.
I mean, look, the objective of what we're doing on the investment plan is to position ourselves to be able to continue to grow faster than the market. I think some of the growth that we saw Endure's past was a result of an accelerated recovery from a very difficult spot. What we've always focused on It's how do we balance ticket and transactions. And that's really where our focus is. And the market will determine what level that's at.
Okay. Thank you very much and good luck.
Thank you.
Our next question comes from the line of Scot Ciccarelli with RBC. Please proceed
I actually had a follow-up on Michael's question first. Like, I guess the question is, given the delta that we've seen in transactions and average ticket, What would you guys point to regarding kind of what's driving that divergence? I mean, and you just referenced you had a recovery phase, but I would think that recovery phase actually would help both sides of that ledger, not just one.
Yes. So I'd say we had
some opportunity areas that we've
We've been we put significant investment in appliances that has paid back in a perfect way in terms So the accelerated growth we've seen in that business. Same thing would hold true for what Ted referenced as it relates To the lithium technology and the average ticket growth we've seen in power tools and now in outdoor power equipment. So I think there's some innovation and investment factors that have helped drive ticket, maybe even above and beyond As we took share in those categories, but we've been pretty pleased with the consistency of Our traffic growth over time, and like I said, we'll work to balance traffic and ticket. We always want to make sure there's a reasonable balance there.
So when
you think about
I'm sorry, go ahead.
I was just going to add, Scott, I'd add to that. Q4, Very much event driven, our gift center, decorative holiday, and as Craig said, appliances, and those all performed incredibly well. So that contributed to the ticket and as we see consumers continue to trade up to the new innovative product that we're offering. And while we're happy with transactions, they were a little bit depressed With the lack of cold weather, so you think during winter, you get a lot of people stopping in for ice smelts For that smaller pickup, even car washer fluid, etcetera, and with the more mild winter, A lot of the biggest suppression there of transactions were those quick cold weather pickup items.
Okay. That's And I guess when you think about all the investments you guys have been making in the business and supply chain and technology, should we continue to expect kind of the pattern that we've seen here Can you or does it have a more balanced impact as we go forward? Thanks.
I think again, we look for Kind of balance in that, will it be perfect one way or another? No, but we would look for balance.
Okay. Thank you.
Our next question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question.
Thanks. Good morning. Long term question first. So thinking again about the payback from investments, It sounds like we'll see some costs moderate next year, so that'll be good to margin. But in terms of the top line lift, and I realize you're probably not going to quantify much, But can you tell us where the places will start to see better comps?
Is it the pro wallet share? Is it MRO categories, DIY?
So what are the some
of the KPIs that won't be as apparent as comps that you're seeing that tells you that some of these investments are beginning to pay off?
First of
all, our investments are targeted for all the above that you just rolled out. When you think pro, you think MRO, you think consumer, our intent is to position The Home Depot to grow faster than the market growth on a consistent basis no matter what that environment is. That's really what we're trying to get done.
And does that require waiting for the Supply chain investments to finish rolling out or no that should stagger as all these other investments are taking place?
The supply chain is a part of the overall component. As we've shared with you, we have investments that span across our business, Whether that's investments in the store, whether that's investments in the digital world, in our marketing elements,
As we put more and more
of these capabilities in place, as the supply chain continues to expand As we open more facilities in 2021 2022, the bulk of those, we'll see that continue to grow As we put more capabilities against the market.
Okay. And then my follow-up is in the Q4, It looks like the business performed a little better than planned. Can you parse out underlying housing signs that It may be improving versus some of the seasonal. It sounds like December was a big month. I don't know if that's more holiday, but at the same time, you didn't have as much weather impact.
So you can just talk about underlying housing versus other drivers.
Sure. Simeon, this is Richard. So from a housing perspective, All housing indicators wound up really sort of where we expected them. And so we don't think that that had any material impact On our business, you mentioned December, there is a little bit of a timing shift there in the calendar from November to December. But overall, it was really just strong execution across the quarter.
And Ted, maybe you want to go a little bit more into the strength of the quarter.
Yes. I think, As I said in my comments, we like the balance of ticket and transaction, and we certainly like the balance of consumer and pro. And our pro was Strong in Q4, but we really saw an engaged consumer in, whether more discretionary categories In a terrific artificial Christmas tree business, our gift center record sales and growth in our gift center And appliances, as I said, double digit comps in appliances, it's not always just a refrigerator that's broken and being replaced. It's increasingly discretionary purchases, so we just saw a very strong consumer.
Great. Thank you.
Our next question comes from the line of Chuck Grom with Gordon Haskett. Please proceed with your question.
Thanks. Nice quarter. Normalizing for the event shift, sales are pretty consistent across the quarter. I'm just wondering how we should think about The cadence of comps by quarter in 2020. And I'm wondering if you could offer some thoughts on how February started out.
Well, thank you, Chuck. So we don't provide quarterly guidance, but we would say that 2020 will see a relatively even spread across the two halves of the year with respect to comp sales. And with respect to what we've seen so far in 2020, our guidance is based on the best information we have At the moment. And so our results to date are consistent with that guidance.
Okay, great. And then just bigger picture, I was wondering if you guys could just amplify on the opportunity That you have with the Pro as you onboard more of them onto the B2B website, particularly now that there's going to be the CRM aspect included? Thanks.
That encompasses product and brands and delivery and credit services and our digital capabilities with B2B, Tool rental and a whole lot more. Obviously, all of that coming together allows us to be able to Service our Pro customers in a more holistic way, and it allows us to continue to grow with larger, more complex customers. And so when we look at the Pro business, we think we're in the 15% to 17% range. And we'd love to see that be much more in line with the consumer penetration of share that we have as we go forward, which is why we're making these investments.
Our next question comes from the line of Christopher Horvers with JPMorgan.
Thanks. Good morning, everybody. So one, 2, a couple of follow ups. So first on the seasonal business and The impact of the weather overall, how would you assess the weather impact last year? December is really wet.
I think you called out 85 basis points Of headwind a year ago, you also had warm weather in January against polar vortex at the end there last year, but At the same time, you didn't get the snow melt and the snowblower. So how would you assess your overall impact of weather?
Chris, this is Ted. I'd say neutral. It's just as you said, extended season in some markets, The ground is not freezing, etcetera, that pros could stay at work. But then on the other hand, you didn't get all your cold weather categories. So our merchants in the chore and snow and In ice melt business aren't as happy as some of our other merchants.
But I would say on balance, Little impact, neutral.
Got it. And then on the gross margin, so Sequentially, the performance was better relative to the Q3. You mentioned shrink and mix were still headwinds in that. Obviously, you talked about the Analyst Day, they persisted into 2020, but it did get a little bit better. What was the what shifted in the sands there And help offset that or did one of those factors mitigate and does it change your view as you think about 2020?
Shrink was Consistent with what we had observed through the year, and we are taking steps to address that in 2020 as we discussed. We had some great benefit as we've had all year from some of the supply chain investments we're making in productivity and supply chain, but shrink was consistent.
And so the delta versus last quarter, anything to call out there?
It's really it's a consistent trend. And as I said, we're looking to address it during 2020.
Got it. Thanks so much. Have a great spring.
Thanks. Thanks, Chris.
Our next question comes from the line of Michael Baker with Nomura. Please proceed with your question.
Hi, thanks. A couple here. So one, the comp outlook for next year, 3.5% to 4%. This year, you comped at 3.5%, but you were hurt by at least 50 basis So just curious the disconnect there, is it just sort of setting up for some potential upside?
I mean, like I our methodology that we use hasn't changed and it's not a perfect model. But Richard, do you want to just walk through the details?
Yes, sure. We stay consistent with our methodology providing sales guidance. And if you look at the elements of that methodology from GDP assumptions to what we're thinking with respect to support from housing to the expectation that we will continue to take share, None of the assumptions behind those elements have changed significantly since December. And so that's why we're reconfirming that outlook.
One comment, I guess, people have always tried to think about our business as it relates interest rates. Just so you know, we have never been able to correlate sales to interest rates. So that doesn't come into our thinking as a result.
But I guess to follow-up on that, you would think that your business correlates to housing, right, which I guess in turn correlates interest rates. Is that a fair statement?
It's a fair statement. We and certainly, we've seen some of the indicators In very recent in the very recent time period, tick up a bit, but we're not going to adjust Guidance based on short term fluctuations or observations in housing. We think housing is healthy and stable. It's going to continue to provide positive support for our business.
Okay. That makes sense. If I could follow-up, as I recall, The Q3 was hurt a little bit by the timing of Black Friday. So presumably that helped the Q4. I get the shift in the month within Quarter, but Q3 versus Q4, did that help Q4 at all?
And if so, by how much?
Yes, it was roughly a 35 basis point shift both ways. So it hurt Q3 by 35, it shifted that to Q4 by 35.
Okay. Thank you. If I could slide in one more, you said you don't change your methodology and how you do comps, but you are changing methodology on the dividend, just wondering why you're changing that. Is it just a new CFO and a different way to think about it? Or is there something Some other reason we should think about?
So look, we are maintaining our policy of wanting to increase our dividend every year as we grow earnings. We're not going to tie it to a specific payout ratio, but I think that this year's increase of 10% is a great example of our intention to continue to increase the dividend and also a reflection of our confidence in the business.
Okay, makes sense. Appreciate the time.
Our next question comes from the line of Karen Short with Barclays. Please proceed with your question.
Hi, thanks. Actually just a follow-up on that comment on the dividend. So is there a specific relationship we should think about as it relates to EPS growth versus dividend growth? Because obviously, as you said, a percent increase is very impressive. Given that in 2020, you're kind of only looking for, call it, a 2% increase in earnings and presumably earnings growth will accelerate in 'twenty one.
Look, our general philosophy around capital allocation hasn't changed at all in terms 1st and foremost, we're going to invest what we need to into the business to continue to position this business to win for the long term. Then based on excess cash, we look at whatever opportunities might exist out there, and We are committed to increasing our dividend on an annualized basis as we grow earnings. And then We'll continue to look for ways to return dollars to the shareholders beyond any other opportunity through share repurchase. So those are the fundamental basics that we hold true in this business. We just want to we didn't want to control ourselves To a percentage basis.
Okay. Thanks. That's helpful. And then on the 14% operating margin guidance, obviously, you came in a little bit higher this year at 14.4%. Is there anything to call out there in terms of the 40 basis point decline versus the prior 30?
No. It's really just a reflection of outperformance in Q4 and sort of rounding up to a 14.4 rather than our expectations around 2020, which have not changed. But what great execution across the business from sales to gross margin to operating expense, it was a team effort and we're proud of the results we delivered.
Okay. And then just last one for me. Is there any update you could provide on additional personalization and functionality on the B2B? And maybe any color you could provide on behavior with the PROs and or conversion with respect to the ones you've onboarded?
Look, we continue to drive engagement with the PROs that we've onboarded to the B2B website. We like what we see as those PROs accelerate their engagement. But again, it's We are also, as I mentioned before, we're building a complete ecosystem around the Pro. The B2B website is one portion That experience, but encompasses all the things that I laid out before.
Okay, great. Thanks.
Our next question comes from the line of Brian Nagel with Oppenheimer. Please proceed with your question.
Hi, good morning. Good morning. Thank you for taking my question. Nice quarter.
So I
wanted to just take a step back a bit. So at the meeting in December, We spent a lot of time talking about the investment initiatives. And then you had highlighted the benefits of some of these were Coming as quickly as you initially thought, but they were still coming. I guess
I want an update there.
I mean, as we look at the business now, you had a very nice quarter. You seem excited about the initiatives. Have you seen more progress on that front than was articulated in December?
Well, I think as we shared in December that we would continue to see the investments Have a payback as we move forward, and that is what we're seeing. I think the quarter, In particular, as Ted called out, was a combination of the strength that we see In terms of the events that we put in place, the product offering that we brought to the market, The continued development of our initiatives, it's all those things coming together that actually delivered on this quarter. So yes, we're pleased with the continued growth that we see in the initiatives, But at the same time, really proud of the team. The execution by our stores was outstanding. The supply chain team did a great job.
Our suppliers gave us outstanding products and values. And the ability to start that shopping experience in the digital world and research product and or purchase product there, All of that is leading to the kind of performance that we saw in the 4th quarter.
Got it. And then my follow-up, Craig, I guess, it's similar to my question is on shrink, another topic we spent A lot of times discussion in the December Analyst Meeting. How much of a swing factor could shrink be here in 2020 To the extent that you are able to improve the performance versus what we saw in 2019?
I think as we shared in December, we are In the process of implementing our initiatives to mitigate the impact from shrink, it will take Time for us to actually realize the benefit as that flows through the P and L because we basically do the inventory in the stores once again.
And it's a phased rollout. Right. We've piloted approaches. We feel very confident about those results, but we still learn as we go. We feel confident.
And as Craig said, not only do you have the rollout, but you also have the The actual recognition in the P and L, which is on a lag basis as we take inventories.
All right. Well, thank you and good luck for the spring.
Thank you. Thank you.
Our next question comes from the line of Elizabeth Suzuki with Bank of America Merrill Lynch. Please proceed with your question.
Great. Thank you. Regarding the margin guidance for 2020, can you talk about what assumptions you're making for product margin and the mix impact On gross margin?
For competitive reasons, we can at least tell that comparison.
No, we wouldn't do that. Yes.
Okay. So on but there's no expectation that mix could be a negative given that Client sales have been so strong, for example, or is there anything built into your gross margin assumption in terms of mix?
Well, there is. And as we had outlined in December, if you think about the walk to the 14.0 percent guidance, you start with the fact that we're going to generate Operating expense leverage on a business as usual basis sort of underlying everything, but then recall this is the peak year of investment of our 3 year investment program. So that will put pressure on margin. And then we see the impact from shrink, Which as we said, we're taking steps to address and also from mix. But the mix pressure It's a good pressure.
This is
the pressure that reflects the fact that
we are taking share in categories Like appliances, like power tools, like outdoor power. And so while we do think that there's mix pressure there, Our objective is to grow incremental market share, incremental sales and incremental operating profit dollars, And we do that through attacking our market opportunities in front of us.
Got it. Okay. And has there been products that have been excluded from tariffs Retroactively where you're now getting refunds and are those refunds a positive offset
to your cost of goods sold?
Yes. I would say, first off, A huge thank you for our combined merchandising, finance, supply chain, global sourcing team as they work through this tariff issue all year. I mean, we've put a lot of effort on it, and the teams did an exceptional job. That follows into the exclusions because that's a whole body work that, excuse me, you need to follow What's being submitted and requested to be excluded and literally get it down to the SKU identifier And then file all the requisite paperwork to get the approvals. There's a massive body of work that the team is currently undertaking.
And one big category, huge growth category for us that has been excluded now is luxury vinyl plank in The flooring business, that's probably the single biggest one, and we're actively working to get that refund Back from tariffs previously paid.
Okay. So those and have those refunds impacted Your Q4 at all or are they more going forward you're likely to see some of that impact in the first half of the year?
There was some of that. There was some benefit, but ins and outs to the quarter, we feel great about the overall performance of the business.
Okay. Thank you. Our next question comes from the line of Zach Fadem with Wells Fargo. Please proceed with your question.
Hey, good morning. Curious if you could speak specifically to the outlook for your e commerce business in fiscal 2020. And Given all the initiatives around fulfillment and pro, curious whether you expect that 20% growth handle to continue, Whether you're still adding any categories and what you think the 2020 drivers could be?
Look, We're excited about our e commerce business as part of a whole interconnected retail strategy. We believe that the front door of our store is not on the customer's pocket. It's on the job site, that most of our Customer shopping experience actually starts in the digital world even if it finishes in the physical world. As Ted has talked about, we have expanded our assortments into more categories Online around the home, we think that is a continued opportunity as customers have shared with us That they believe that we can bring great value in these home categories and they trust us to bring that value. So we think that our digital business continues to be an engine for growth, both in the digital world and in the physical world.
And it's not a separate business. It is managed by our merchandising team, our 1 merchandising team, right? And so Rather than think about it as a separate business, you have to think about it as a capability.
Got it. And on the appliance category, Curious if you could talk a little more about the impact of taking home delivery in house. And considering your share gains In the category over the past several years, could you comment on how much you think share wise is still up for grabs and where you think it's coming from?
Yes. We're really pleased excuse me, it's Mark. We're really pleased with the Work we've done in our market delivery operations, our MDOs, those are staffed with Orange Apron Home Depot Associates To ensure that there's a great customer experience there, working with the delivery teams. So really pleased with the progress there. We as Craig mentioned comments, we've got a dozen of those up.
We have another dozen or so leases signed, and we're going to continue to roll those out through 2020. And as we do, we continue to see an improvement to our on time performance, our reschedule rate And our customer satisfaction.
And I'd say an opportunity to keep growing. There's still lots of participants, Regional, super regionals, even mom and pop furniture stores that have Appliance offering, so we think there's still lots of share out there. I mean, clearly, Sears I've been a donor over the years and very markedly diminished store base, But we still see just a huge market that we've had a disruptive attitude in this space for a long time, And that's continuing to pay dividends as we take share.
Got it. Appreciate the time.
Christine, we have time for one more question.
Thank you. Our final question comes from the line of Seth Sigman with Credit Suisse. Please proceed with your question.
Great. Hey, guys. Thanks for squeezing me in.
A couple of follow ups here.
G and A, and I guess just the cadence of investments, should we be thinking about more pressure on the operating margin in the first half relative to the second half?
First, we think about it in halves and we don't provide specific half guidance. We're looking at a relatively Balanced year across the house.
Got it. Okay. And then just a follow-up on the exit rate, January being a better month here. Should we thinking about any sort of pull forward because of weather or do you think it's some combination of your initiatives and just solid demand overall? And then just some related piece here around the macro.
It sounds like you're maintaining a relatively conservative view. My question is really, are you seeing any sort of improvement or divergence And maybe markets that were slowing last year and are starting to get a little bit better. Any change in performance there that would maybe lead you to believe that the housing backdrop is
Seth, I'd say, first of all, on regional variability, this past Quarter was one of the narrowest we've seen in recent times, and we don't see any widespread variability. It's really early to determine how the business plays out for the first half. We've always talked about this In terms of halves because anything can happen from a weather standpoint that could either accelerate or delay a spring and then You generally work to capture that in the first half. That's really our approach. We're not seeing anything that would have us thinking any differently than that whatsoever.
Okay, understood. Thanks a lot.
Thank you. We have reached the end of our allotted time for questions. Ms. Jansy, I would now like This concludes today's teleconference. You may disconnect your lines at this time.
Thank you for your participation and have a wonderful day.