Good morning, and welcome to The Home Depot's 2019 Investor and Analyst Conference. This morning, you will be hearing from Craig Menear, our Chairman, CEO, and President, and Richard McPhail, our Executive Vice President and CFO. Following their presentations, Craig and Richard will be joined by other executives for a question- and- answer period. Joining them will be Ann-Marie Campbell, Executive Vice President of U.S. Stores, Ted Decker, Executive Vice President, Merchandising, Bill Lennie, Executive Vice President, Outside Sales and Service, and Mark Holifield, Executive Vice President, Supply Chain and Product Development. Before I turn it over to Craig, I would like to remind everyone that today's presentations made by our executives include forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections.
These risks and uncertainties include, but are not limited to, the factors identified on this slide and in our filings with the Securities and Exchange Commission. It is now my pleasure to introduce our Chairman, CEO, and President, Craig Menear.
Thank you, Isabel. Good morning, everyone, and I'd like to start by thanking you all for taking the time to be here with us today. Before we jump into the program, I'd like to provide an overview of what you can expect from today's discussion. As you know, we are now in a two-year journey into a transformation to create the One Home Depot experience. Today, we'd like to provide an update on the progress of our investment initiatives and share a preliminary outlook for 2020. It is our objective for you to walk away with a better sense of why we have more conviction than ever that we are making the right long-term investments in the business to extend our leadership position in the marketplace. There are five key messages we hope that you'll leave with today.
First, our distinct competitive advantages and execution have and will continue to deliver strong financial results. Second, we continue to capitalize on a compelling market opportunity. Third, our transformative investments to deliver the One Home Depot experience are largely on track and will further enhance our leadership position. Fourth, the macro environment continues to be supportive, and our disciplined approach to capital allocation will continue to create substantial value for all stakeholders. The Home Depot has built a number of competitive advantages that position us as the number one home improvement retailer in the marketplace. Our stores are the hub of our business and will continue to be important in the future of home improvement retail. We have a premier real estate footprint that provides convenience for our customers that is nearly impossible to replicate.
Over the years, we have consistently invested in a market-leading dot-com experience, knowing that our customers increasingly leverage the digital world for their projects. This has been done through an integrated approach in merchandise and marketing. We have created a best-in-class supply chain. Finally, our unique culture and values, as well as our knowledgeable sales associates, has always been a competitive differentiator. These competitive advantages have translated into significant growth in our business over time. Over the past five years, we have delivered over $25 billion in revenue growth and over $5 billion of net earnings growth. While we are the number one home improvement retailer across all of our geographies, we represent a relatively small part of a large, fragmented addressable market. Home Depot competes in hundreds of different categories.
In many of these, the independents, the regionals, the specialty players command the majority of the market share. As a result, the competitive set varies significantly by category. We have captured share over the past several years, and we are investing to position ourselves as the low-cost provider and to grow faster than the market going forward. In order to do this, we know we can't just maintain the status quo. This is why we made the decision to invest in One Home Depot. What was true in December of 2017 remains true today. Retail is changing rapidly, and customer expectations are higher than ever. Customers are consolidating the number of retailers that they visit on a regular basis, so delivering convenience and value through a personalized, interconnected experience is critical.
One Home Depot is the full realization of the interconnected, frictionless shopping experience that we started talking about several years ago. It enables our customers to seamlessly blend the digital and the physical world. Every initiative in our investment strategy was formulated using a customer-backed approach that will drive results, not just over the next several years, but for the long term. We are building interconnected capabilities that leverage the convenience of our stores, integrates the digital experience, expand our product offerings into new categories, extend our leadership position with the pro, and allows customers to receive their goods however they choose.
We've learned a lot on this multiyear journey. Customer feedback has reinforced our beliefs that the investments we are making are the right investments, and they will create value in the marketplace that we believe is unique. Our strategic investments are largely on track, and we are realizing benefits.
There is more work to do to unlock the full value of the One Home Depot experience. We are perhaps a bit ambitious with regards to the speed with which these benefits will be seen in 2019. Transformations are complex, and our technology teams have done a fantastic job supporting the organization as we work to greater enable functionality and capabilities. Let me give you a couple of examples of areas where more opportunity is ahead. Let's talk about our B2B experience that we're creating. There are features and functionalities not yet available that will better serve our large, more complex pros. For example, integrating the functionality around special order, price, and delivery that's available today at our Pro Desk into our B2B experience will enable a more seamless, interconnected experience for our pros.
Second, many of you have seen the tools that we've implemented at our Pro Desk that have provided both simplicity and visibility for our associates and translated into a lift in spend with this important customer. The same work is now underway for our DIY customers as we invest to simplify order management in our stores. Historically, our associates have had to navigate dozens of different systems. Now we have introduced Order Up, which begins to streamline those multiple systems into one that is simpler and much more intuitive. For the functionality that we've enabled to date, the average customer experience is 35% faster and has led to increased customer service scores. In the near future, we will add a number of different capabilities, including the ability to sell a store-based item and an online item on the same ticket.
This is part of the interconnected shopping experience that we're building. Finally, another example is increased functionality around personalization, both in marketing and in search results. This is an evolution, and we offer personalization today, but there remains opportunity to unlock a more comprehensive view of the customer that will allow us to offer deeper level of personalization going forward. While there's more functionality coming, we know that the capabilities that we've built thus far are meaningful to our customers. As such, we will begin to market those. Let me show you a new ad that aired this past week.
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We have also changed our tagline to strongly signal that The Home Depot is evolving as our customers' needs change. Now, let me provide a bit more detail on some of the other major areas of investment. Our investment to deliver the One Home Depot experience is nearly double what we would have spent in a business-as-usual environment. As we transform the business, there is a customer experience standard that aligns to The Home Depot brand that we hold ourselves accountable to deliver. This is the governor, if you will, to the speed with which we will bring new capabilities into the market. Our culture centers around taking care of our associates. We have invested in them in wage, benefits, training, and career development opportunities.
Our commitment to our associates' growth and development can clearly be seen in the store leadership roles, as over 90% of our store leaders began their careers at The Home Depot as hourly associates. We will invest more than 1 million hours per year over the next five years in training and development opportunities. Our associates are a competitive advantage, and they are key to providing an exceptional customer experience. Approximately 50% of our investment dollars were targeted to leverage the advantages we have with our convenient locations, addressing customer pain points, and to deliver a great interconnected experience. Our investments here are on track. Approximately 60% of our U.S. stores have a new look and feel. We addressed our customers' number one issue, navigation, through our Way finding investments, as well as an enhanced in-store mobile navigation experience.
We're improving the checkout experience through investments in the front end of our stores. We are enhancing the pickup experience for online orders by reconfiguring our service desk and implementing pickup lockers. Connecting the digital world's rating reviews for appliances through digital labels has been part of the overall improvements we've made in our appliance shopping journey, which continues to deliver sales growth ahead of the market. Our store investments are driving higher customer satisfaction scores, which we believe is translating into market share gains. Customers come to The Home Depot for products that allow them to complete their projects and to save them time and money. We continue to invest in merchandising resets in our stores to refine assortments, introduce innovative products to improve visual merchandising to drive a better in-store shopping experience.
Two examples are our pipe and fitting aisles, as well as our Color Solution Center in paint. In our pipe and fitting aisles, we are resetting all of our bays, reconfiguring them to better showcase our merchandise assortment and to free up space to add new categories for our customers. On average, we have been adding two to three additional bays per store through this reset, which has given us the space for additional SKUs for our pro customers. As a result, we have seen key pipe and fitting category lifts of approximately 150 basis points post-reset. By the end of this year, we will execute the pipe and aisle reset in 1,300 stores and our new Color Solution Center in over 1,900 stores. Our enhanced store and associate experience is complemented by the investments that we're making in an interconnected and digital customer experience.
We know that customers expect speed, convenience, and a variety of delivery fulfillment options. This is why we continue to invest in our website and mobile applications, improving our search capabilities, site functionality, category presentations, product content, and enhanced fulfillment options. We have grown our online sales by approximately $1 billion each of the last six years, making us the fifth-largest e-commerce operation in the U.S. Approximately 50% of the time, customers choose to pick up their online orders in our U.S. stores. This is a testament to interconnected retail strategy. We know that there is a significant opportunity to better serve our pro customers, who we believe represent about 45% of our sales today. The value proposition that we're creating for our pros is a comprehensive ecosystem that encompasses product, exclusive brands, delivery, credit, service, digital capabilities, tool rental, and more.
We believe what we are building is unique to the marketplace. We are building the capabilities to enable the Pro to be served no matter where and how they might want to interact with us. The store experience is being enhanced. Delivery is a key component that we're building out through our supply chain investments. The B2B site experience is being designed to make it easier for our Pros to engage with The Home Depot from the job site. We'd like to share a video to help bring this experience to life for all of you.
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As you can see, we have a lot of great momentum with the B2B website experience, and we are on track to onboard 1 million pros by the end of this year. Turning to our supply chain and delivery efforts, given the changing expectations of our customers, we have committed to a $1.2 billion, five-year investment to create the fastest, most efficient delivery network in home improvement for both pro and DIY customers. Over the last decade, we have invested heavily in our upstream network and have created a distinct competitive advantage. Yet there's still opportunity to improve going forward. We are investing to automate and mechanize our RDC network to require fewer product touches and faster movement of goods.
On the downstream side, we are investing in approximately 150 new facilities to drive speed of delivery for our customers, efficient fulfillment, and a network tailored to the specific needs of home improvement. We are now live with at least one of each of these types of facilities that we are building, and we're pleased with the results. Perhaps a better way for you all to understand what we are building is to actually see it in action. We prepared a video for you to provide some context.
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Today, you've heard how our business is in the midst of a One Home Depot experience for our customers. We will leverage our convenient store locations. We will create a best-in-class interconnected experience, and we will deliver the fastest, most efficient delivery network in home improvement. All of this to extend our leadership position into the future. With any transformation, the work that we're doing is complex, and I am proud of the way that our associates continue to focus on what's most important in our business, our customers. As we celebrate the 40th anniversary of our store openings, it's worth noting how the company continues to evolve while at the same time staying true to the culture and values that were established in our business by our founders.
Our culture centers around values in a leadership construct. That is the lens through which we make management decisions around important issues like environmental, social, and governance issues that impact our business. We know that this not only drives strong business practices that has enabled us to deliver consistent industry-leading results, but it is the underpinning of our strategy to create the One Home Depot. This includes our shareholders, our associates, our customers, our supplier partners, and the communities that we serve. As we invest to unlock the truly interconnected One Home Depot, we are enhancing our already strong foundation in order to deliver [inaudible] .
Good morning, and thank you for being with us today. As you heard from Craig, we're confident that the investments we're making will extend our leadership position in our market. We believe that ultimately, scale combined with a low-cost position will win in retail, and we intend to deploy and leverage our unmatched scale in home improvement to win with the customer and deliver exceptional returns to shareholders. Today, I'd like to take you through our preliminary outlook for 2020. Let's first quickly cover our expectations for the remainder of 2019. Today, we are reaffirming our previous guidance of 3.5% comparable sales growth, 1.8% fiscal sales growth reflecting comparisons against a 53-week year in 2018, and diluted earnings per share of $10.03. While we define our sales growth in percentage terms, we capture share in dollar terms.
Through the second year of our One Home Depot investment program, we will have grown sales by over $9 billion, unmatched in our market terms. Through the second year of our One Home Depot investment program, we will have grown sales by over $9 billion, unmatched in our market. We are investing to win over the long term. By the end of next year, we will have invested $5 billion in our stores, $2.5 billion in technology, and we'll be on track to invest $1.2 billion on our winning supply chain network. It's important to remember that these investments are designed to extend advantages that we already enjoy. Our 2,291 stores across North America are the hubs of our customer experience.
With 90% of the U.S. population living within 10 mi of a Home Depot store, they provide us with a structural advantage that will likely never be replicated. As we unlock the power of an interconnected experience with our digital assets, we continue to drive strong sales productivity, and we are now at the highest level of sales per square foot in our history. For the last decade, the power of the Home Depot's economic model has been defined by productivity and efficiency. While we are in an advantaged position today, our investments are designed to extend our position as the low-cost provider in our market. We're making transformational investments in technology to simplify our infrastructure, harness the power of data analytics, and to drive complexity and cost out of our processes and systems.
Our investments in our supply chain will provide increased speed and reliability of delivery for our customers, but they also create cost advantages. We're working to build the lowest cost network in our industry that will also drive simplification in our stores as we migrate deliveries out of our stores and onto an optimized network. Taken as a whole, productivity and efficiency are at the heart of our investment program. Let's turn to 2020. We build our preliminary outlook for the year on the foundation of a supportive environment for growth in 2020. The U.S. consumer is healthy, and the housing environment is stable and provides support for home improvement demand. With wage growth now at over 3% and the lowest unemployment rate in 50 years, the consumer remains confident heading into next year.
We're in the 10th year of economic expansion, and the current Blue Chip forecast for GDP growth is 1.8% for 2020. The housing environment is healthy, and we believe that we have entered a period of stability with respect to home price appreciation, housing turnover, and household formation that provide a solid foundation for home improvement demand. While we don't expect to see the same tailwinds as in prior years, we do expect to see a positive influence from housing. When we think about how home improvement should grow over the long term, we think about two supporting data points. First, the age of the housing stock continues to increase with over 50% of homes now over 40 years of age. As we know, spend per home increases as homes grow older. Second, homeowners have more capacity to spend on their homes than ever before.
The value of homeowner equity in the housing stock of the United States has more than doubled over the last eight years and is at an all-time high. The combination of these factors supports our view that home improvement spending will grow faster than GDP over the long term. With that backdrop, let's turn to our preliminary outlook. For fiscal 2020, our preliminary outlook is for sales growth of between 3.5% and 4%, representing sales of between $114 billion and $114.5 billion, operating margin of approximately 14%, and return on invested capital of approximately 45%. 2020 will be a year of transition for us. While we expect to continue to grow faster than the market, 2020 represents the peak year of investment in our $11 billion program, creating pressure to operating margin during the year as we complete many of our initiatives.
After 2020, this level of investment will decrease, and benefits from our investments should increase. Our preliminary sales outlook of 3.5%-4% growth builds off a base of estimated GDP for 2020, which is slightly lower than in prior years, as a stable level of support we expect from housing, and reflects our outlook for continued growth faster than the market, built on the investments we are making and the improvements we continue to make in areas of opportunity in our business. Our preliminary margin outlook for 2020 reflects our peak year of investment. Let's talk about the walk from 2019 to 2020. We expect to continue to deliver leverage in our business as usual expenses. As expected, our operating margin will reflect over $200 million of incremental investment in both cost of goods sold and operating expense, as well as incremental depreciation of approximately $70 million.
Our investments, both in the form of capital and expense, will decrease as we move past 2020. Additionally, we will see an impact from product mix. As lumber price deflation abates and we continue to see outsized growth in categories like appliances, power tools, and outdoor power equipment, we expect to see some pressure from mix in 2020. While these sales are dilutive to margin rate, they are accretive to operating profit dollars and are evidence of share capture in those categories. Finally, the most significant impact to our margin outlook is continued pressure from shrink, primarily driven by product theft. We have tested approaches to mitigate this loss while minimizing the impact on our customer shopping experience and are now rolling out these solutions more broadly. While we implement these changes, we think it's prudent to anticipate continued pressure in 2020. We'll maintain our disciplined approach to capital allocation.
Our strong performance allows us to invest more than anyone in our space while returning more than $35 billion in the form of dividends and share repurchases over the three years ending in 2020. We expect our return on invested capital at the end of 2020 to be approximately 45%. 2020 will be a year of ongoing development for us, and while we're not providing guidance for the years beyond, we know where we're heading. We're creating an interconnected experience for our customer that we believe will be unique to our market. We expect to continue to grow faster than the market and to capture dollar share at an increasing rate. We will extend our position as the lowest cost provider in our market, particularly through the transformation of our supply chain and our technology infrastructure, and we will continue to drive capital efficiency throughout our business.
At The Home Depot, our scale creates a virtuous cycle. As you heard from Craig, our distinct competitive advantages position us to deliver strong financial performance. While we are the leader in our space, our market is large and fragmented, and we have plenty of room to grow faster than the market. We believe the One Home Depot experience we are creating will extend our leadership position. The macroeconomic environment is supportive, and our capital allocation principles will continue to create value for our stakeholders. Thank you for your time, and now I'd like to invite my colleagues to the stage for Q&A.
As Richard mentioned, we will now be moving to the question- and- answer session. We have two of my colleagues in the back, Elizabeth and Luke, that will have microphones. If you have a question, please raise your hand and wait for the microphone to reach you. We want those that are joining us on the web to be able to hear your question. Please limit yourself to one question with one follow-up. Also, please state your name and the name of your firm before asking your question. With that, let's get started.
Good morning. It's Michael Lasser from UBS. Thank you for hosting the event today. I want to ask you a little bit more about the future state slide that you posted at the end of your presentation. One could argue that over the last decade, Home Depot's been on a fantastic run of steady state margin expansion as there's been a prolonged benefit from the housing recovery, as the consumer's been in a good spot, as you've had a distracted competitor, there's been really sound execution. Over the last two years, we've seen the company's operating margin come down. You're guiding for another year of margin degradation in 2020. From there, should we start to expect to see the Home Depot's operating margin stabilize in light of everything you know to date?
Have you just been past peak margins, and based on the overall environment, based on the cycle, we should really expect margins to come down further? I have a follow-up.
Thank you, Michael. If you take a look at our outlook for 2020 and our margin of 14.0%. If you were to take the current mix of business as it stands today, and you set aside the investments we're going to make in 2021 and 2022, you would see the type of leverage in our business that you've seen from us over the past many years. We're focused on creating the lowest cost platform in home improvement in order to drive incremental share gains and incremental sales. We don't quite know what the product mix might look like of that incremental opportunity. It's preliminary to talk about what margin looks like. Again, if you took the current business and thought about, okay, absent investments, you would see the type of leverage.
Think of it this way. Maybe an example to think about is with the network that Mark is building, there are multiple types of facilities. When you think about the market delivery centers, the MDCs, those are supportive of core business as well as the opportunity to accelerate growth in MRO, which would be accretive overall. At the same time, Mark's building the flatbed distribution facilities, and those are all about really driving share opportunity in lumber and building material type categories, big and bulky things, which are lower rate, but significantly higher ticket and operating profit dollars. The question for us and the learning that we'll go through in 2020 is: how does that mix play out as we bring these facilities up on board?
It makes it a little bit harder to tell you out years right now until we get a few more of these facilities open and begin to understand how that plays out in the market. But as Richard said, we're building the low-cost position to be able to take care of all aspects of our business and take outside share and drive gains and op profit dollars.
That's helpful. My follow-up question is on shrink, because it seems like the expectation that it's going to get worse before it gets better is new information today. Can you give us more detail on the drivers of that shrink? How much is it we're just in a really tight labor market, and that's part of it? How much is it idiosyncratic to The Home Depot? Maybe you had above average shrink experience over the last few years, and now it's just coming back to normal. Thank you.
Let me make a comment. Then I'll turn it over to Ann to talk about a little bit of what we're doing. Look, this is a situation that, quite honestly, continued to become more problematic as 2019 played out despite the work that we were doing. We've got some great work that we've done to begin to turn a corner in 2020. This is largely as a result of theft, as Richard said in his opening comments. It is driven, in large part, by organized retail crime that has expanded rapidly in this country. We have a hypothesis that this ties to the opioid crisis. We're not positive about that. What we can tell you is that working hand in hand with law enforcement, we are seeing significant busts that are happening where we work with law enforcement.
We'll go into a warehouse facility that gets hit, and it is literally millions and millions of dollars of multiple retailers' goods in these facilities. The digital world has become a pretty easy way to move this product. We're working with all parties, including partners in the digital world. Mia, maybe you want to talk just a little bit-
Yeah.
about what's going on in this world.
Yeah. We've initiated several pilots to see how we can really mitigate and reduce shrink across the board. Some of the short-term things we're doing, of course, is really making sure that we can secure our high-value product. When you think about what they tend to take, it's very marketable product that they can put online. If we can secure that product, we can certainly bend the curve on shrink. Not only are we doing that from a short-term perspective, we are also accelerating our plans around some of the technology things we can do to bring shrink down. Think about serialization or POS activation, that you buy a power tool, and the only time that power tool can work is if it goes through a POS.
When you think about the short-term things we're doing and the acceleration around the long-term things we're doing, we expect to see shrink abate, not only in 2020 but beyond. You may ask why you will see a little bit of pressure in 2020. We take inventories in our store once a year. Even though we're seeing short-term benefits from the things that we're enacting, we're not going to recognize that benefit until we actually take our physical inventories. Our predictors on the things that we have implemented have shown really good success, and we expect to continue to roll out those initiatives that continue to see value.
Hi, Brian Nagel from Oppenheimer. Thanks for having us. The question I have first off, I guess, bigger picture, we talk a lot about the investments at The Home Depot, and you outlined those a couple of years ago. We talked about more today. The question I have is, as we look at or consider some of the recent commentary that you have not gotten as quickly as you initially thought the benefit of these investment, has the investment plan for 2020 changed, either in allocation of dollars towards certain initiatives or magnitude of dollars to account for that?
In large part, the investment dollars are the same. There are always tweaks that we make based on learning. One of the things, I'll give you an example of one of the things that we're going to do in 2020 is put more dollars than we originally anticipated into the work that we're doing in our high-volume stores. We've had great learning through some initiatives that were in 2019 that we have seen terrific results in making the operations of our high-volume stores, and as a result, seeing sales lift in those stores significantly better. We're going to shift some more dollars from into 2020 to go after that. It's always a little fluid as we learn.
I'd say the other comment around that is when you think about another thing that's happening in our business right now is we're completely changing, Matt and the team, in terms of how we develop software. We are totally doing it from a customer-back approach versus the historical old way of doing it, which would fill out your requirements and then go build. Then, by the time you implemented it, the world might have changed on you. We are doing it from a customer-back, iterative, agile approach. That by its very nature says we'll shift things as we learn.
As far as my follow-up question, with regard to the pro customer, there was an analysis you referred to for a while just basically articulating how low your penetration with key pros was. Their spend being done at The Home Depot. With all these initiatives, as we start to improve the onboarding to the digital platform or even the delivery, can you point to some key wins with pro customers and how that spend with The Home Depot has really started to improve?
I'd say first of all, we're very pleased in the last quarter, for example, with the acceleration of our pro business. We also like the growth that we're seeing in our DIY business, and we want to maintain a balance in that, by the way. We don't want to wake up one day and go, Hey, we left the DIY customer behind. Bill, you might want to share what we're seeing.
Yeah. No. Brian, I would say that the slide that Craig put up on the pro ecosystem is really a key to the future for the pro. We all talk about there isn't the one thing that resonates with the pro and allows you to gain share of wallet. We know that the key buying factors for pros vary by size of pro, type of pro, and what purchase occasion they're in. That's exactly what we're doing, is we're listening to the pros, taking that feedback, and then building out that ecosystem that provides them with the services that they need that will allow them to spend more with us. We know that we have to earn that, have to create an experience for them that's a lot less friction to it, more seamless, give them the tools that help them become more productive.
As we do that, we see share of wallet gain. This is all about engagement. It's all about finding ways to transact and get frequency up with them. The more that we provide that, the more we see that share of wallet accelerate and the more we expect the business to grow.
Simeon Gutman, Morgan Stanley. Good morning. My question is what percentage of the One Home Depot is in place? It could be 0%, it could be 10%. It doesn't seem like the whole thing is in place. You're early on in the B2B initiative for the pro. Can you share some data points around sales uplift? The question is, if we're looking at a stable housing environment for the next few years, it would seem like 3.5% to 4% should not be the ongoing run rate. It should be better than that from these investments. Anything you can point to the future of that.
Yeah. The first comment I have is what we're building and the investments that we're making is to position us to be able to take outside share growth in any environment whatsoever, period. Whether it's a great environment or an environment that changes down the road. That's what we're trying to accomplish overall. As it relates to where are we, I'd say we're probably still in the third inning. Mark's just getting going in supply chain, which is a key component. We're making really nice progress in the underlying technology that the team is building to be able to transform how we actually do technology in the future with much greater speed and agility. Feel really good about that.
Our physical investments in store are largely on track. I'd say there 2020 will be a big chunk of that complete, not totally complete at that point. Probably still pretty early innings. At the end of the day, obviously, we'd like to see that when this all comes together and we begin to have leverage from all the investment that we're making, that we would grow substantially ahead of the market. Based on where the market is, obviously if it were the same, yeah, we'd like to see accelerating growth. Absolutely.
Yeah. Follow-up is in 2019, we talked a lot about these sales headwinds and that the underlying rate of the business looked like it could've been a little stronger than what you were reporting. We're going to lap some of this deflation next year. Housing, you say, is no worse. You have initiatives coming to the fore. What are the moving pieces to the 3.5%-4%? Why isn't it a little bit stronger than that?
Thanks, Simeon. As has long been our practice, we build our outlook off of GDP, which this year the outlook is around 1.8%. That's a little lower than the outlook for 2019. We add a positive level of support from housing. I would say not at the level that we've seen in prior years, but a very positive, very stable environment for home improvement demand. Then the remainder really reflects our view that we will continue to gain outside share in our market. Those are the building blocks.
I'd say one other comment as it relates to, you mentioned the deflationary pressure that we saw. Ted, we'll be pretty stable right now based on year-over-year in the lumber business, we think at this point.
The lumber prices were actually pretty flat. Lumber and panel traded in a pretty tight range throughout 2019, but it was all lapping the spike in prices we saw in 2018. As we look at 2020, we'll stay flat. We won't have pressure in 2020, but we won't have tailwind either in terms of our comp.
We don't plan for any adjustment.
Right.
We set a pace and go.
Hi, good morning. Dennis McGill with Zelman & Associates. Richard, the first question, can you bridge the margin outlook today for 2020 versus the outlook from a couple of years ago? I think the midpoint of the range was 14.7% versus 14%.
Sure. I think, Dennis, the easiest way to think about it is if you look at our 2019 guidance, 4.03%, slightly different than our guidance at the beginning of the year, principally because of the fact that we expect to report 3.5% sales growth in 2019, so that perhaps a little different than what we had outlined many years ago. If you look and you bridge to 2020, which I went through, again, based on the 3.5%-4% sales growth, we are certainly leveraging at the degree to which you would expect with that sales growth. Then you have the investments that are right on track with respect to the long-range plan. Shrink has really been the largest unplanned item, particularly in 2019, and we just think it's prudent while we are going to be taking steps to implement actions that we've tested with success.
That's going to take a little time to work through our P&L. Improvement in shrink actually only works its way through the P&L as we take inventories, and we take inventory throughout the year. That's why 2020, the shrink impact still looks relatively significant.
Okay. Secondly, on the margin mix or the product mix, as you think about the flatbed services in particular, is your point, Craig, when you grow that business over the next couple of years, that that's going to be disproportionately in categories that are more building material commodity oriented and they'll just carry lower margins so you'll have a better return perhaps, but the margin mix from that operation in particular is something that you're unsure of how it will unfold?
Yeah. The flatbed distribution centers are all about driving big and bulky capabilities in home improvement, right? It will allow us to actually extend assortments in that space beyond where we have room today in store. If you talk to our store associates, for example, there's lots of stores we have that don't have the space to carry 20-ft lumber and product like that. These facilities will allow us to do that and get it delivered to the customer in a very expeditious, efficient way. We see opportunity for growth in that space. What's the average ticket mark on a truck going out is significant.
Well over $1,000.
Yeah.
$1,300 is.
Driving big sales and op profit dollars on a very low efficient cost base, it just is lower rate than our average. It could put some pressure on rate, but obviously we're trying to bring up the MDCs at the same time, which are more accretive to the type of stuff we sell. The balance between how those ramp will really determine what kind of rate. At the end of the day, honestly, we don't take rate to the bank. It's all about how do we drive gross profit dollars, and that's what we're really focused on. How do we accelerate the growth in top line and gross profit dollars in the most capital efficient way possible, which is the point of One Supply Chain.
Thank you, guys.
Morning. It's Laura Champine with Loop Capital. Another question about the margin pressure you expect from the mix shifts. I think, Richard, you mentioned an expectation to take outsized share in appliances and OPE. My sense from some of Craig's answers is that that's driven by distribution improvements. If that is so, how do you communicate that and turn those improvements into better conversion relative to more typical sales drivers like promotions and assortment?
Hopefully I'll hit your point here, tell me if I don't. When you think about what we've done in the appliance business, we've invested heavily in appliance business over a number of years as one of our chief competitors was donating lots of share, and we saw an opportunity to go after that, and we grabbed our unfair share of that market opportunity. As a result, we sit here today with about a $10 billion appliance business, which is rate pressure to your question. It's rate pressure. It is a phenomenal return on invested capital and drives great overall sales productivity. The ability, as we shared in the video, in supply chain for Mark and his team to take that customer experience more in-house. Mark, I think we're at 20% today.
20%, yep.
Of appliances delivered in total by The Home Depot controlled environment. We are taking control of that customer experience, and we're seeing great feedback from the customers on that. The interesting part is that not only is it that, but it is the entire process end to end that we're working on. The work that the team has done to enhance the overall beginning of the shopping experience. As I mentioned, bringing the digital label so that you actually have ratings and reviews in the store from the digital world has given the customer confidence and our associates confidence in selling. It's really this interconnected blend that we're bringing together that we see acceleration in businesses when it all comes together. That's candidly why we're making the investments that we're making.
I think appliances are a great example of taking control of the end-to-end supply chain and the customer experience to improve our customer satisfaction and improve our penetration there. Our legacy appliance delivery processes, we've gone through those stem to stern . As well, we continue to improve that whole end-to-end process. On top of that, the One Supply Chain investments of opening up the market delivery operations, which are these appliance hubs. As Craig mentioned, we're at 20% control directly of our appliance delivery now, where before none of it was directly controlled by us. Our goal is to fully control that over time, and we've seen a seven-point improvement in our customer satisfaction scores on appliance delivery, which is very meaningful. It's great we've got that improvement, there's still tons of upside on that. We're not where we want to be on that.
There's a lot of opportunity ahead of us, and that's what we expect to capture with One Supply Chain investments in market delivery operations.
My follow-up is on that same bucket of margin degradation on the shrink side. I think that you're being more vocal than other retailers, at least as far as I'm aware, on the crime issues that are impacting you there. Is there something special about The Home Depot's warehouses or access to inventory? Is there something that makes you more vulnerable that you might be able to crack down on to stop it before it happens?
Let me share an example of a report that I read yesterday, just as one example of many. The report came from our head of asset protection on a bust that we participated in that was a warehouse, and I don't remember what city it was in. It was a major metropolitan market, if I remember correctly.
It was.
$16.5 million of goods from multiple retailers in this one warehouse, of which Home Depot's was estimated at $1.4 million. This is happening everywhere in retail.
Yeah. I think, for us, when you have strong brands like we do and they're very marketable. Of course, we're going to be challenged just like any other retailer that have these strong brands. I think it's important to point out that we're doing things immediately. I talked about some of the things we're doing just to protect the product in bay. When you think about the stuff we're doing with the machine learning behind the scenes, where we are anticipating where these organized retail crime operations are moving, which is why we're getting some of the busts we're getting. When you look at some of the things we're doing with non-receipt returns, where we are identifying things behind the scenes that help us identify where we have gaps in our system.
We're not only reinforcing the asset protection component of our stores because we do have multiple entrances and exits, and we have to protect the safety of our customers and our associates. There's a lot of things we can do with technology that can really help us across the board. When we are our hardest target to take things from, they go somewhere else. We have to continue to be vigilant about it, and that's where we have upped our game across the board to make sure that we're not as vulnerable as we were in the past, just given the environment that's changing.
Hi, yes Matt McClintock, Raymond James. Just a lot of the focus today has been on One Home Depot, and rightfully so. On product and innovation, you talked about 2019. I was wondering if you could give us some insight into how you think about that category in 2020, I have a follow-up.
Product innovation.
Which category?
Product innovation, just the product that you expect to do and launch.
Generally, yes.
We see it happening across the store, and we see our customers trading up and selecting that innovative product. If you think of things that are more discretionary nature, like appliances, just unbelievable technology and innovation in the appliance space. We just came out of a big event for the holiday season, and we continue to see customers trade up to that innovative product, whether it's different ice cube making devices, LED lights, stainless steel. Smart technology is now entering the appliance space, whether it's preheating an oven or refrigerators. You might not think you need this, but cameras inside the refrigeration. If you're at the grocery store, Hey, do I need milk? You can actually look through your phone to see what's in your refrigerator. We've talked a lot about power tools.
That has been transformational and continues to increase the power and the runtime of these tools, the electronics in the tools, the battery power, the brushless motors. That has revolutionized the tool industry. We've invested behind that in how we bring that to life in the store and digitally. That transformation is now moving into outdoor power equipment. Those battery platforms are moving into outdoor power, where now you can actually cut 1/2 acre, 3/4 acre lawn on one battery charge. A pro can have a string trimmer or a leaf blower and do hours of work on a battery pack. If you have a couple battery packs, you can get through most of the day's work. We're investing behind that as well.
As we reset our tool corrals by brand, by battery platform, we are now resetting our outdoor power equipment by brand, by battery platform because these batteries work across the tools, whether it's in outdoor power or in traditional powered portable power tools. It's just not the fun, cool stuff like technology. We see innovation literally every day in every bay. Some things that might not seem so sexy, but fast set times with high PSI ratings in concrete, lightweight drywall, mold-resistant, flame-retardant drywall, soundproofing and flame-retardant insulation. The flooring industry, what's happening with polymers in carpet, what's happening with solid core vinyl plank. I mean, I can go on and on. We have 900-odd bays in the store, and there's literally technology improvements and enhancements in each case.
The pros find it for ease of use, and the consumers find it for convenience and satisfaction and well-being for a more fulfilling life. It's super exciting. It continues, and it has for 40 years, right, Craig. This isn't new in Home Depot. The supplier community appreciates that no one launches this type of product better than Home Depot, which is why we get the disproportionate share of exclusive product. Even if it is an exclusive product or an exclusive brand, we'll often have exclusive lines, like in the case of DEWALT, the ATOMIC, which is their new compact platform, is exclusive to Home Depot. Even if it isn't an exclusive brand or an exclusive line, we'll often get launch exclusives. For six months, for nine months, for a year, we'll have the product before anyone else in the market.
Because the supplier community knows no one, our digital platforms, our marketing platforms, and in the stores brings a product to life and launches it like The Home Depot.
Thanks for that. My follow-up is, you talked about in terms of lessons learned over the last two years, one of them was transformations are complex and take time. Can you talk about how you've incorporated that lesson into the planning process for 2020 and beyond?
Yeah. I think, if you think about as we build these capabilities.
More capabilities come into play. What we've really learned is how we're trying to approach this, the interconnected interdependency that exists going forward is really important and really powerful. It makes it harder for us to understand exactly what each little component is delivering. We know that when it comes together, it's really powerful. I go back to maybe the category Ted was just talking about. When you think about power tools, for example. This is a category that we've had a leadership position in with a pretty large share for a very long time. Yet we are growing at an accelerated rate right now because all of the capabilities that we're bringing together in this. Ted, I don't know if you want to talk on. We actually had this conversation, by the way, as we were preparing for this meeting, going, All right.
How do we explain this to you guys? Because it's pretty interesting.
Yeah. I think from a customer back, the operative words and experience we're trying to develop is a seamless, interconnected, convenient shopping experience. All of these pieces start to come together. When you think about power tools, we know most all shopping journeys start online. Is it the fact that we reach people appropriately with marketing or with SEM or SEO efficacy to get them to come to our site? Did they resonate with the experience and the category experience we build on power tools? Did they resonate because we have these great brands at generally every day low prices and in all cases, great values? Do they resonate because when they come into the store, in part of that $5 billion that we spend in the stores, we spend about $100 million on our tool corrals to do that setting by brand.
It's very expensive, as you can appreciate, to move product around and steel around in our stores. Is it the great customer service that Ann and her team give when the customer's in our stores? Is there great relationships with our supplier partners? In many cases, they have some augmented expertise in our store. Is it if someone chooses to have it shipped to the job site or to the home, the supply chain that Mark is building, that they can reach 90% of the country in two-day or less parcel. Is it our seamless and easy-
One day.
One day.
One day.
Headed to one day.
Sorry.
Return policy, where we'll take back with limited friction. All of that comes together and what we've learned is to try and parse that, we're going to get X basis points from returns. We're going to get Y basis points from an online experience. We're going to get Z basis points from two-day shipping or one-day shipping. That's very hard because all of it comes together in a seamless, interconnected, convenient shopping experience.
It gives us real confidence that what we're investing in, quite candidly, when we can continue to take outsize share in a category that we have significant share already, we feel pretty good about the investments we're making.
Thank you.
Eric Bosshard, Cleveland Research. Two years ago, when you talked about this program, the sales guidance was, I think, increased, and you spoke maybe to 4.5% to 6% . Understand moving pieces at 2019. And I guess some of the moving pieces in 2020, but if you could talk about the thoughts on the 4.5% to 6% , and the thoughts on the incremental revenue growth as a payback from these investments. If you could bridge that would be helpful.
Well, we are focused on delivering the remainder of 2019. We have built an outlook in 2020 that expresses our confidence that we're going to continue to take outsize share. As we've said, we're building the most capital-efficient, low-cost platform to go after incremental market share opportunities. We don't quite know what that business looks like, but we're confident. As we learn more through 2020, we'll come back with our views at the appropriate time.
I guess a quick follow-up. What's different your confidence in the payback, I think your execution of the investment of the new capabilities, all those things seem to be delivering it? I appreciate the economy can be perhaps different, but what is different that makes it add up to less? It's also conceivable the original guidance was not optimal. Perhaps just put that in context.
Look, I think that we've shared with you that some of our investment has been pushed. Some of the things that we're doing are harder than what we anticipated. If you think about the underlying changes that we're making to be able to drive this experience, we've shared that one of the complications that underlies a lot of the work that we're doing is if today you have an item that exists in store and in online and by the way, in our MRO business, that carries three SKUs in our world today. We can't present a consolidated view to the customer until we solve that underlying problem. The team's working really hard. When we solve that underlying problem, then we can drive significantly greater leverage through the supply chain, and we can drive more value for the customer.
I'd say, Eric, we probably, maybe were just a little bit too ambitious in our thinking as to how fast we could get some of this done and how fast the benefits would come. We love the early reads that we're getting on the work that we've done, for example, on the B2B website. We onboarded early this year, 135,000 pros. Later, towards the end, we added another, what, 650,000, Bill?
Correct.
It takes time to get them to engage with the experience, understand the functionality we've built, and then we have more work to do to be able to get to more complex pros, where we have more functionality that they need. I'd say we were probably a little ambitious.
Craig, just a follow-up comment on the B2B website as an example. If you think about a pro going into our store and they're trying to buy three types of products, you want to buy an in-stock product, you want to order something that's online, have you deliver it to the store for pickup, or ship to your job site, and want to place a special order. If you go up to our pro desk, we can orchestrate that and make that happen real quick and seamlessly. If you try to do that online, you're operating in three different POS systems, so it's very complex. Our goal is to take all of that and make that customer-facing through a digital experience. We're confident we're going to get there, but it's going to take us a little bit longer to deliver that.
I'll make one comment on why I think that's so important. 70% of our pros that are in our stores never go to a Pro Desk. This is all about our find and grow strategy, identifying those pros that are in the aisle, getting them signed up for Pro Xtra, starting to engage them. When we do that, we see their purchases double. When you start to take those experiences and make them customer-facing, we think that there's tremendous upside. We're seeing momentum in the customers that have been migrated. We're really excited and encouraged about what lies ahead, but it's just going to take us a while to get those capabilities customer-facing.
I think it's important to know this isn't the company's first time entering and pursuing a new market opportunity. That it was unclear to understand what the true upside was, but that eventually came to the fore. Ted, maybe you might talk about appliances.
Yeah. If you take appliances and questions about growth opportunity, share opportunity, and impact on rate, when we started the appliance business in a modest way 15-odd years ago, we didn't even have showrooms. We put some very basic appliances inside our racking. You couldn't even call it a display, really. 15 years later, we're pushing a $10 billion appliance business. Unfortunately, the gross margins are not 34% in appliances. We've managed that in the portfolio. Disproportionate growth in a lower-earning business, but tremendous gross margin dollars in appliance, if not rate.
Tremendous return on capital employed.
Tremendous return on capital employed, given our direct model. When you think what we've built out now in, what I would argue is a best-in-class digital experience. With videos on how to receive your order, picking your delivery date, everything that Mark's doing in the supply chain. The breadth of the brands that we have, the ability to get all those brands delivered generally inside of five days. Just tremendous evolution of that business to what we have today. As Craig said, will MRO grow faster than more big and bulky coming out of the two platforms of MDC and FDC? The aim is to grow them all equally because, as we said, at 15% share in a $650 billion market, there are share opportunities in all these categories.
As the assets come online, as the interconnected, largely powered by systems and IT comes online, our merchants are working very closely with Bill and the Pro team and our outside sales forces to start unlocking these market opportunities and turning it into share gain through satisfying increased customer purchase occasions.
Steve Forbes, Guggenheim. Craig, you mentioned the 150 new supply chain facilities as part of the $1.2 billion investment right over the five-year period. Can you or, I guess, Mark, provide some color on how many facilities are slated to open in 2020? Discuss whether the incremental operating costs of those facilities, whether or not they're part of the $200 million-plus of incremental investment spend that you noted for next year.
Yeah. I'll just go through the platforms. A couple of years ago, when we unveiled the One Supply Chain strategy, we really identified what we were going to do across five different platforms. Part of one of the key tenets of the story is really to leverage our upstream supply chain, where we built a tremendous competitive advantage with a low-cost, fast flow supply chain, and to further mechanize the RDCs. You saw on the slide there where we went from three touches to one. We're halfway through that. We actually accelerated that program because we're having such good results from that. It's been great results in terms of financials. A bonus from that has been it's improved the safety in our facilities as well, doing that further mechanization. Well on track in terms of the RDC platform in the upstream.
Another platform that we talked about was the flatbed delivery centers. We talked about that a bit. We've got our first one up and running in Dallas. We'll be opening more in 2020. Really excited about what we're seeing in Dallas. One of the things that changed a bit in the last couple of years is we really found that we had an opportunity to go further upstream in our flatbed and bulk distribution. In other words, where we're doing these flatbed DCs, most of them will be combined with our bulk distribution centers that serve our stores with goods for that side of the store, the lumber and building materials. What we're doing now more than ever, is taking control of that upstream supply chain.
We figured over the years, we left it to the vendors much like we did the rest of our supply chain that we transformed with the RDCs, and we left the bulk DCs kind of alone. We've discovered that, hey, as the largest purchaser of lumber in the U.S., we have tremendous leverage in managing the rail inbound and the truck inbound to these distribution centers, have a flatbed delivery center co-located there, and take control of that entire supply chain from the lumber mill all the way to the customer. A huge advantage there. We have the one up and running, as I said, we'll be opening more in 2020. Our market delivery centers, these are the centers that will consolidate the legacy Interline Brands and Home Depot Pro centers, 25 of those in local markets. We have one open in Chicago. We'll be opening more in 2020.
We're on track there. I think maybe a little bit behind on that one, as Craig mentioned, getting the integration of our order management systems, our inventory systems, and our transportation systems to really be able to take an order, understand where the inventory is, understand the transportation options to get the product there. That's proven to be a little more challenging than we thought. Maybe a bit behind on that one. Well, not finally, our direct fulfillment centers. We had three of those that have got us to two-day parcel freight on the ground for 90% of the U.S. population. We're now adding facilities in Dallas and in Seattle, as noted in the video. They're underway now in terms of construction. That will get us further on to our goal of 90% one-day parcel freight to the U.S. population.
Pleased with the progress there. Finally, the MDOs. We mentioned the appliance deliveries that are enabled by the MDOs. They're not just for appliance, but that's really where the biggest bulk of their business is. 20% of our appliance delivery is now under The Home Depot control through those market delivery operations. We'll more than double that in 2020 as we build more market delivery operations. We've opened 13 of the 150 facilities. We've got 26 that are in some state between real estate committee approval and getting ready to open. 26 are in the development phase, and we have more in the pipeline that will be taken to the real estate committee for approval going forward. Feel well on the way and largely on track with what we outlined a couple of years ago.
As we shared in the past, obviously, as we invest in opening these up, that's pressuring.
It is in the $200 million of investment.
As a follow-up on that, Richard, if you can, the $200 million, given sort of the weight on the supply chain side, can you just provide some color, sort of split between COGS pressure and SG&A pressure with that incremental spend?
Supply chain is largely expressed in COGS, but the vast majority of that $200 million is in operating expense.
Thank you.
Good morning, guys. Scot Ciccarelli, RBC. I guess I was looking for some clarification. Craig, you've mentioned a couple times maybe you guys were a bit ambitious in terms of how quickly some of the changes and investments could manifest in terms of accelerated sales growth, market share gains. I guess the question is there a couple that you can kind of point out that have taken longer, or is it just the combination/integration of all of them together has just been a longer and executive process?
I think it's a combination of everything coming together has been a little bit longer. On some of the investments, particularly, for example, on the Pro side, as I mentioned, it takes a while. Pros are creatures of habit. It takes a while to get them to begin to utilize and understand the new capabilities. When they do, we see great results. That's part of now what we're doing as planned to go market and actually communicate and begin to more aggressively onboard as well.
Once you have all those physical capabilities on the digital side, supply chain, et cetera, and given your comments right there, how long do you think it'll take the stores and the DC workers, et cetera, to actually get used to it, where you could actually start to see, again, more of a what's called a net financial benefit flowing through to P&L?
I think to tell you that I could give you a month, a timetable exactly, would probably be unrealistic. What we're seeing is we're seeing a ramp, and this will continue to ramp over time as we pull these capabilities together and begin to create the holistic experience that we're building. Obviously, a key component of that is the supply chain, and that takes time. As Mark just shared, we have a number of buildings coming up. That will continue. We're taking the same approach that we did with the RDC network. If you remember, we went pretty slow in the beginning with the RDCs, then as we proved that model out, we began to ramp that and started seeing more and more benefit as time goes by. I think you'll see this same type of pattern as we go forward.
Thank you.
Some of you might have heard me say this before. When we built the RDC network in 2007, we had one. In 2008, we had four. In 2009 and 2010 each, we opened seven each. One, four, seven, seven was the cadence there. Our supply chain build-out will look something like that as we look forward.
Understood. Thank you.
I think even for the stores, talking a little bit about adoption of flatbed delivery centers, just think about picking orders in 2,000 stores, delivery orders, right? Being able to become much more efficient through a flatbed delivery center. Mark mentioned the one that's in Dallas, or it's one of our biggest kind of big and bulky market. Literally, the adoption will be as soon as it opens.
You take that top right.
That one will be pretty fast.
That's important. When you think about how we go to market and usage of our labor, and we think about activity-based labor modeling, and we look at where we use labor that can be most efficient somewhere else, this is where the flatbed delivery center is just a tremendous win. It's not going to be an adoption issue with the stores because clearly it's going to be more efficient, more effective, and we can think about where should we reallocate that labor if necessary, or whether or not we need to use that labor within the store. There's a lot of things that have to come online simultaneously, but once it come online, certainly the stores will leverage those capabilities very quickly.
Shifting that to the fulfillment to the FDC will also improve the customer service experience in the store.
In the store. You will walk into some of our stores today that we are pulling orders for customers, right? This is like, to Craig's point, 14-ft lumber, and it's blocking an aisle of the store because that's where we can store the product. There are just so much value beyond the efficiency we can gain by doing it out of a central facility. It just gives us a lot of capabilities and a lot of efficiency in the stores that we want to unlock as well because there's a tremendous amount of value beyond just the picking and the packing.
Yeah, it's a huge component of our high-volume store strategy, really. If you go over to New Jersey, I think some of those high-volume stores we have there, go there at 6:00 A.M. some day, you might see delivery orders blocking the lumber aisle. If you think about Dallas, that flatbed delivery center is going to serve 61 stores' needs in terms of lumber and building materials flatbed delivery. Think of the efficiency of that. That facility is co-located with our bulk distribution center that serves those stores. In the old days, the product would come through that bulk distribution center and go to the store, and then we'd pull it back out of the store, load it on a truck, and deliver it to the customer.
Yeah.
That flow doesn't happen anymore for delivery, right? We'll bring that product to the bulk distribution center. We'll move it across the floor to the flatbed delivery center, load it on a truck, and deliver it to the customer. Much more efficient than all of the store labor to receive that product, put it away, let it down, and then go pick it for a customer and take it back out the back door. Much more efficient to launch that from a central flatbed delivery center. We're really excited about the possibilities of that one. Our store team is super excited about that in Dallas. Can't convey enough our excitement about that one, I think.
Hi, good morning. I have two questions on the e-commerce business. The first one, what you mentioned there in the last five or six years, you've been growing over $1 billion of e-comm business. Can you give me the split in terms of how much of that business came from Amazon, from Lowe's, from other retailers, from Home Depot, people not going to the store but going e-com? I'm not looking for exact numbers, but just rough indication. My second question on e-commerce is why have you seen CapEx declining post 2020 when e-com is supposed to continue growing and then maybe eventually go from next-day shipping to same-day shipping kind of thing, or to more services to customers? Thank you.
Yeah, go ahead.
No. E-comm, as Craig said, the e-comm business itself, the pick, pack, and ship business continues to grow. We believe we're number five in e-commerce in terms of product flow. That all continues to grow at rates over 20% on a bigger and bigger base. We're thrilled that we're keeping that growth rate. It's harder to get market share. When we look at overall market share, the base numbers are the federal census numbers. We know we're taking share in the overall space.
As we go through categories, it gets more challenging. When you get into online, it gets more challenging. We look at what our growth numbers are, publicly reported numbers from digitally native competitors, talking to our supplier base on where they're seeing growth. We're quite confident that we're taking share in e-com in virtually all categories. This past quarter, we had double-digit growth in virtually all categories. While 22% overall, we had double digit in virtually every category online. We feel pretty good that we are indeed taking share in virtually every category online. Others are also taking share, but we're pleased that we're taking share. On the delivery, yes, expectation of time to delivery is increasingly important.
When we open up a new capability, when Mark opens up a new direct shipping facility, or we improve supply chain routes so that we can lower our days delivery on the website. When you post the number of days till delivery, we see an immediate increase in sales when we decrease the number of days. That's why we made the decision that we're 90% odd of the country today, two days or less parcel. We'll be same day or next day, 90% of the country when we're done building out the supply chain. We have same day capability today in 70- odd% of our stores for store assorted product, utilizing third parties like Roadie. We actually don't talk enough about it, but we have greater same-day delivery capability of our product categories than anyone else in the country.
I think one learning, too, that I'd chime in on. We're incredibly pleased that we've been able to take those days out of delivery, stand up new offerings like the same-day capabilities with crowdsourced cars and vans out of our stores. 50% of the country is now served by same day with car delivery and 70% via van delivery at reasonable prices. What we find most interesting, I think one learning over the past couple of years for me in this has been the speed is important, but for our project-oriented pro customers, reliability is the most important thing. Reliability, being there when we say we're going to be there is really, we're discovering is what's most important to our pro customers. Speed's important, but being there when you say you are is more important.
The only other comment that I'd make is that our digital growth in our digital business has, for all practical purposes, been incremental growth in The Home Depot. We see categories growing in store at the same time we're growing double-digit online.
Yeah. Fair enough. To go back to my second-
Yeah, go ahead.
How do you see all that happening, yet CapEx is going to be start to decline post 2020? That's why I don't understand.
Right. I understand your question. First of all, CapEx in total is going to decline post 2020. If you think about programs in our investment program, particularly the store investments, what we've done in store environment, for instance, where those improvements are essentially coming to an end, that's going to deflect the capital number down. There are also investments we're making in technology infrastructure that benefit the entire company. They also benefit, and really sort of lead us to a more frictionless experience online, but they don't last forever. We will continue to invest in our online experience. It's just when you put it all together with our other programs, that's why you see the CapEx profile of the total company decline after 2020.
Thanks. Chris Horvers, JP Morgan. A bit of a follow-up on a couple questions. First on the expense side, you talked about incremental dollars of investment peak next year into 2020. Store investment sort of slowing, technology slowing a little bit, Mark's got a lot of work to do. As you get beyond 2020, if we're still in a sort of three to four comp environment, do you get back down to the BAU 50% SG&A versus sales growth rate? Is that more lagging out as Mark completes?
First of all, we're concentrating on 2020, right? There will be investments that are specific to these programs that will continue beyond 2020. The investment, the nominal dollar amount will be lower post 2020.
Nominal dollars will be $200 million 2020, and it'll be lower.
It's increasing by $200 million in 2020. After 2020, that will be a decrease rather than an increase.
Understood. That's great. In terms of a two-part question, sounds like you've had some technology discoveries where it's like, ooh, this is going to take longer than what we had originally appreciated. Is there something structural in terms of the systems, the legacy systems, that make them harder to change than you previously thought? How is that, follow-up on someone else's question, how have you thought about that as you make more changes? Related to the market share or the self-help factor on the guide, you're now expecting about 50 basis points this year. Does that 50 basis points accelerate next year? Or is it more, hey, let's be prudent here. Things have taken longer than we thought, and thus, we'll just assume that 50 basis points is a similar level in 2020.
Yeah. Let me take the first part of that.
There are complex opportunities as we redesign and build our systems for the future and for efficiency and speed, which is exactly what we're doing in the overall environment. Yeah, there were things that we had learned that were harder than we thought to unwind. If I go back to my SKU example, it took us in the neighborhood of four or five months to actually get to an approach to unwind that problem, to truly understand how we were going to unwind that problem and build it for the future going forward. I don't think we anticipated that it would take us four or five months to figure that out. We knew it was not going to be an easy problem, but it was a little bit harder than what we thought to figure out. Yeah, we're learning as we go.
We're super pleased with the support that we're getting from the team. They're doing a great job. They've got an approach on that particular problem now that we're working hard to implement, and that will allow Mark to continue to move forward in opening the buildings as he's expecting to open them and begin to build that experience.
It's not just systems, it's process as well, right? How do you onboard a SKU? How do you enrich all the content to be able to flow that SKU properly? The process is often fraught with the same kinds of issues as the systems. It's not just a system issue, it's really how do we want to do it the right way going forward. Getting it right is way more important than doing it fast.
Really using that customer experience as the governor for, we're going to do this when we actually have everything right for the customer, more so than anything else. We want that experience to be great when we implement.
Chris, the second part of your question, I would go back to how we built our preliminary outlook for 2020 to answer that, which would be to say, again, guiding off of a preliminary outlook for GDP at 1.8% . A positive level of support from housing, albeit at perhaps a lower degree than in prior years, and an expectation for continued share gains. I think as Craig and Ted pointed out today, we don't want to give you a false sense of precision. We've always had a directional and imperfect model. I think when you add the factors up, you can see that our expectation is for healthy share gains in 2020.
Again, we know that when it all comes together in categories, and we've been able to do that in a category like power tools because it doesn't have the same complexity as some of our big and bulky, we're seeing the share gains as a result of that. Absolutely seeing the share gains. We're super excited about what we're building going forward. When you think about building that really across all product types in the project business that we're in, you go, Wow, that is super exciting. It really is. When you think about the road is littered with retailers that couldn't or wouldn't change with their customers' needs as they changed. If you just look back over history, that is not an option for The Home Depot. It is candidly not an option.
We intend to be there, we intend to deliver a great customer experience, and we intend to be the low-cost provider that takes outsize share in the marketplace. That's why we're making the investments that we're making. Yep.
Okay. I'm sorry. I saw Greg. Kate McShane, Goldman Sachs. Just in terms of the 2020 guidance, to the extent that you can comment on the cadence of the year, I'm just curious with regards to comps, do you seem maybe to have slightly easier comparison in the first half of the year just because some of the weather and the lumber deflation, but also it sounds like investment may be picked up into the, well, all year, but how should we think about the cadence of comp first half versus second half?
Thanks, Kate. Today, we're providing a preliminary outlook. We'll provide further detail when we provide guidance for 2020 on our fourth quarter earnings call.
Okay. My follow-up question is just about automation. I wondered if in the supply chain, you can talk to us with regards to all these different platforms, how much automation plays a role versus your labor.
Yeah. I think automation's a real key to our supply chain. You saw in the video quite a mix, though. I think obviously there's conveyors going straight into the truck. The RDC platform, we've got a person in a trailer putting a carton onto a truck, onto a conveyor. It goes through the sorter and it comes out on the other side inside the trailer where an associate stacks it into the trailer. Two touches to get product from the inbound side of the building and out to the outbound side. Highly automated. It's great. It works really well for products that are in gauge, that fit onto the conveyor and can be conveyed like that. I was walking in an RDC the other day, and I'm walking around the dock, and I'm always intrigued by the types of products that we handle Home Depot.
You look over there and you've got a big honking spool of wire sitting on a pallet. Over here, you've got bags of mulch. Over here, I've got stacks of boxes with, for goodness sake, those are live goods. They're rose bushes. I've got over here, tomato cages that people use in their gardens. That stuff doesn't get to go on the conveyor, unfortunately. Right now, the way to handle that is there's a human involved in handling a lot of that. Probably will be for some time because there just isn't a feasible equipment yet. You saw in the video our appliance market delivery operations involves the two-wheelers. I'm very interested in the autonomous two-wheeler. If anyone has a lead on that, please let me know. We're constantly looking at applying technology to our business.
In keeping with our hallmark of disciplined capital allocation, we always make sure that there's a payback from those investments when we make them. We've got a pretty exciting test coming up where we're actually testing autonomous robots in a distribution center to help us select orders and bring them to the outbound dock. So we're there with that. I would say that home improvement, big and bulky, lots of different variety of products has to be considered as we make those investments. But where we can get a return, we're going to make those investments, and we're staying in touch with where the technology is on this.
I'd also say that part of the investment as it relates to technology and automation, this is in supply chain. If you think about what Ted and team are doing in the digital experience and leveraging the ability to personalize, that doesn't happen manually. That all has to happen through real-time automation and machine learning that we build in. It's spreading throughout The Home Depot.
Greg Melich with Evercore ISI. I guess I had two questions, one to Richard and one to Craig and team. However you want to do it. Richard, just want to make sure we're on the same page or understand the capital allocation philosophy a little bit. I think it's 55% prior earnings dividends. The 2 x debt to EBITDA are still the number. How do you think about those as what you talked about 2021 involving where CapEx could be coming down and spending out of the P&L also probably peaking.
Right.
How do you think about those sort of numbers going forward?
Thanks for the question. We will maintain our philosophy around capital allocation, which is simply to return excess cash to shareholders in the form of dividends and repurchases after investing in our business. We would look to pay a dividend of at least 55% of prior year earnings per share and return excess cash above and beyond that point to shareholders in the form of share repurchases. We do believe that the two times adjusted debt to EBITDA ratio is the appropriate balance for us between cost of capital, access to capital, and flexibility. We like the target, but we certainly maintain flexibility to do what is right for the business.
Okay. That seemed to be the answers then to Craig. As you built this platform that basically is the largest e-comm platform, you're doing it without any 3P business, any I would say, extended your market TAM to $650 billion. How do you think about other ways you could extend that TAM or deepen the share even more, just given, like fifth largest digital player in the country in a category that isn't really online?
Yep.
How else can you leverage that? M&A?
Sure. It's a great question. If you think about one of the things that we've shared with you that we're building is an extension of our core business that we call HD Home. Right? That is all about how do you leverage the capabilities that we're building to be able to grab a larger share of our customers' spend in related categories around the home. We went down the path, that was the acquisition of The Company Store. Our customers told us that they would be willing to purchase more categories around the home from us, that they trust The Home Depot to bring value to the marketplace. The consumers are shopping fewer retailers on a regular basis, so it naturally applies.
If you think about those categories of kind of finishing the home space, if you will, around the kitchen and the bath and the bedroom, don't hold me exactly to these numbers. I believe in total, it's about a $200 billion market, of which a little north of $25 billion today is done in the digital space. You open up a $25-plus billion marketplace that ought to leverage all of the capabilities that we're building through our digital platform, through our supply chain network that will have incredibly efficient delivery, low cost model. We ought to be able to serve our customers, make it a more convenient, kind of one-stop shop for their home needs and leverage all of the spend that we're putting into the business.
If you think about two areas in our business where we've done this before, okay? One is, we've talked about a lot here today, is the appliance business. We weren't in that business. Our customers told us, We want to buy this from you. The other one, quite candidly, is holiday decor. We weren't in that business either. Our idea of holiday decor was, we always sold live trees, Christmas trees, and then, our decorative idea was a stake light with green and red bulbs in our electrical department. Today, we are a destination for that business, and it's a substantial business for us. We think there's opportunity like that, and that's part of the expansion. Of course, the market's expanding, but also when you look at the opportunities, MRO, this home opportunity, we think we can leverage the capabilities that we're building.
No, it would not grow our inventory by any means. Not at all.
Hi. Thanks. Mike Baker from Instinet / Nomura. I wanted to ask about the margins for next year, down 30 basis points. Are you breaking out, is that gross margin or SG&A? I think there's some gross margin pressure in shrink and mix. Should we expect SG&A to deleverage or leverage? If you go through the math of the 50% business as usual, and then add on $270 million in incremental expenses, I think you get expense growth that'll be less than sales. Is that right at all?
Well, when you add the depreciation, when you take that full bar, including depreciation, the incremental expense is greater than the operating leverage sort of equivalent. I think you have it reasonably right. Some of the factors that we called out, including shrink and mix and more gross margin in their orientation. We'll provide more detail when we provide 2020 guidance, I think round what you used for capturing it.
Okay. If I could ask one more follow-up, which isn't really a follow-up because it's a completely different question. In your outlook for next year, maybe it's similar in that sense. You talk about having less of a benefit from housing, yet most housing metrics are getting better and really just starting to get better mid-year, and that should flow into next year. Existing home sales, home price appreciation, both accelerating. Why wouldn't housing be more helpful, or are you just being conservative in the outlook?
The housing environment is absolutely stable and positive, and it will be a positive influence on home improvement. We just don't want to count on the same level of tailwind that we have in the past.
Okay.
If you think about the beginning of the year, everybody thought it was going to be an absolute disaster, we said, Hey, look, things are stable. Everybody's thinking that it's going to be a little bit stronger. Our position hasn't changed. We think it's stable.
Nothing specific that you're seeing in terms of competitive situation from one of your competitors investing a lot or anything like that? It just sounds like being a little conservative, lack of position, as you said before. Okay. Thank you.
We have time for one more question.
Pressure's on. Peter Benedict, Baird. I guess I'll go short term. Everyone's asked basically all the long-term questions, but just your latest view on price elasticity among the consumers, either the pros or DIY consumer in relation to maybe price increases you're taking around tariffs or anything else. Secondly, just how are consumers responding to this shorter holiday window? You're now past Black Friday, Cyber Monday. Again, short term stuff, but just curious what you would speak to on that. Thank you.
On tariffs, our position hasn't changed. We view this to be manageable. Our merchants and our finance teams and our supply chain teams have done just a great job to identify the pressures literally down to the SKU. With all the tariffs that are in place through 4A, for The Home Depot, it's about a $2 billion potential exposure. We've mitigated well over half of that. On the residual, we have taken some price increases, we do that with a portfolio approach. It's not necessarily tariff SKU to retail increase. We look at the entire line structure or even across categories. We're watching the elasticities very carefully. Again, the finance partners and the merchant teams have done a great job to measure those. As you can imagine, we have different elasticities geographically and in product categories, and whether it's a pro-oriented or consumer-oriented SKU.
We have covered all the top lines. We wouldn't point to any top-line impact from actions we've taken on tariffs. You generally don't get unit increases when you have retails go up. We've watched units very carefully. Our whole model is about volume and driving units for our business as well as our supplier partners. Our suppliers are deeply connected with us to keep that unit productivity at the center of all of our actions. Again, we've been able to manage it. If we get a December surprise Sunday, that's in our outlook. Again, we'll take the same approach for the tariffs on other categories and think it's manageable. I was chatting before the session started. We actually saw more net cost pressure in 2018 with the commodity spike than we have with our post-mitigation tariff impact. Again, we think this has been manageable.
On the short term, Richard updated our guidance for 2019. I can say we had our best week and our highest sales day this Black Friday. We do have a shortened week. Weather could be better, we've seen this before. For us, it happens every seven years. All our plans are on track and seeing great results in the decorative holiday, our appliances, and our gift center. Everything's going at our plan rate. We're very happy.
Yeah, the customer is certainly in a healthy place. We see that in the business. We are investing for the long-term position in this company. We are investing to make sure that we are in a position to be the low-cost provider. We're investing to make sure that we are in a position to be able to take share in any environment. We're investing to make sure that we're in a position to leverage the competitive advantages that we have in the marketplace. We're excited about the opportunities that we have ahead of us. We are pleased with the progress that we're making, and we look forward to being able to continue to drive the kind of growth that we've had in the business and deliver the kind of returns that we've had over time.
Thank you. Just one quick follow-up, I guess, for Richard. Maybe when you think about the store-based investment, you showed the chart that, I think, $1.7 billion of that CapEx plan next year is on the stores. Is there a way you can tease out maybe what's the maintenance CapEx for the store base versus what's these incremental investments that are peaking next year? Just trying to understand how maybe that breaks down as we then think beyond 2020 where store investment could settle in. Thank you.
Without getting a lot of specific breakouts, the investment we've made in the environment of our stores, the investment we've made in pickup lockers, the investment we've made in merchandising resets, they all come together to form that number. I would say that all those programs are significant. I wouldn't isolate any, but we're finishing a lot in 2020.
Richard, if I could add one thing that I'm particularly super excited about, we have seen great results with customer intercept on our whole environmental investments in the store and our way finding. Think of the new sign package, our new way finding, our numbered bays, shining the floors, updating all restrooms and break rooms for our associates. We are accelerating that with the goal to complete all of our stores in way finding and environmental in 2020. I would say, I've been at Home Depot, it'll be 20 years. It's probably closer to 30 years. This will be the first time every store will have the same brand standard and look and feel for probably close to 30 years. I'm super excited about that.
We had made a call to do all the top 40 markets first and then do the balance of 400 odd stores going into 2021, 2022. We said, No, we want One Home Depot, and that means people in Maine, Atlanta, Dallas, L.A., are all going to have the same Home Depot experience. That's all part of our confidence in launching the new advertising campaign is One Home Depot, so super excited about that.
That concludes our Investor and Analyst Conference. Please reach out to the IR team with any additional questions, and thank you for joining us today and for your interest in The Home Depot. Almost done. Thank you to all of those that made today possible, including our executives, the IR team, our corporate communications, and corporate events team. Thank you.