Good morning, and welcome to Home Depot's 20 19 Investor and Analyst Conference. This morning, you will be hearing from Craig Meniere, our Chairman, CEO and President and Richard MacPhail, 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 Anne Marie Campbell, Executive Vice President of U. S.
Stores Ted Decker, Executive Vice President, Merchandising Bill Lenny, Executive Vice President, Outside Sales and Service Edmark Holyfield, Executive Vice President, Supply Chain and Product Development. 19. Before I turn it over to Craig, I would like to remind everyone that today's presentation 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 19 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 Viner.
Thank you, Adele. 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 from today's discussion. As you know, we are now in a 2 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 9 to extend our leadership position in the marketplace. There are 5 key messages we hope that you'll leave with today. 19. First, our distinct competitive advantages and execution have and will continue to deliver strong financial results.
19. 2nd, we continue to capitalize on a compelling market opportunity. 3rd, our transformative investments to deliver the One Home Depot experience are largely on track and will further enhance our leadership position. 19. The Home Depot has built a number of competitive advantages that position us as the number one home improvement retailer in the marketplace.
19. 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 19. That provides convenience for our customers that is nearly impossible to replicate. Over the years, 19.
We invested in a market leading dotcom 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. 19. And 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 5 years, we have delivered over $25,000,000,000 in revenue growth and over $5,000,000,000 of net earnings growth. 19. And while we are the number one home improvement retailer across all of our geographies, we represent a relatively small part at a large fragmented addressable market. Home Depot competes in 100 of different categories.
In many of these, the independents, 9. The regionals, the specialty players command the majority of the market share. As a result, the competitive set varies significantly by category. 19. We have captured share over the past several years and we are investing to position ourselves as the low cost provider 19 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 1 Home Depot. What was true in December of 2017 remains crew 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 19. 1 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 back 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 source, ingrates the digital experience, expand our product offerings into new categories, extend our leadership position with a pro It allows customers to receive their goods however they choose.
We've learned a lot on this multiyear journey. 19. Customer feedback has reinforced our beliefs that the investments we are making are the right nineteen. And we'll write 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.
But there is more work to do to unlock the full value 19. We are perhaps a bit ambitious with regards to the speed with which these benefits will be seen in 2019. Transformations are complex 19. 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.
19. First, 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 $1,000,000 price and delivery that is available today at our products into our B2B experience will enable a more seamless interconnected 9th. 2nd, many of you have seen the tools that we've implemented our products They have provided both simplicity and visibility for our associates and translated into a lift in spend with this important customer.
19. The same work is now underway for our DIY customers as we invest in simplified order management in our stores. 19. Historically, our associates have had to navigate dozens of different systems. Now, we have introduced OrderUp, 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. 19. In the near future, we will add a number of different capabilities, including the ability to sell a store based item 19. And an online item on the same ticket. This is part of the interconnected shopping experience that we're building.
19. And finally, another example is increased functionality around personalization, both in marketing and in search results. 19. This is an evolution and we offer personalization today, but there remain opportunities to unlock a more comprehensive view of the customer that will allow us to offer deeper level of personalization going forward. 19.
And while there's more functionality coming, we know that the capabilities that we've built thus far are meaningful to our customers. And as such, we will begin to market with us. So let me show you a new ad that aired this past week. 19. It's a
good time to be a doer. Now your phone not
19
19. And if you can't run to the store, the store can run to you.
19. We have also changed our tagline to strongly signal that 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 1 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.
9. This is the governor, if you will, to the speed with which we will bring new capabilities into the market. 19. 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 our lead associates. We will invest more than 1,000,000 hours per year over the next 5 years in training and development opportunities. Our associates are a competitive advantage and they are key to providing an exceptional customer experience. 19. Approximately 50% of our investment dollars were targeted to leverage the advantages we have with our convenient locations, 19.
Addressing customer pain points and to deliver a great interconnected experience. Our investments here are on track. 19. Approximately 60% of our U. S.
Stores have a new look and feel. We addressed our customers' number one issue, navigation, through our wayfinding investments as well as an enhanced in store mobile navigation experience. We are 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 blockers. 19.
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 19. Our driving higher customer satisfaction scores, which we believe is translating into market share gains. 19. Customers come to The Home Depot for products that allow them to complete their products, excuse me, and it will save them time and money.
So 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 base, reconfiguring them to better showcase our merchandise assortment and in a free up space and new categories for our customers. On average, we have been adding 2 to 3 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 fitting category lists of approximately 150 basis points post reset.
19. By the end of this year, we will execute the Pipe and Aisle reset in 1300 stores and our new Color Solutions Center in over 19 100 source. Our enhanced store and associated experience is complemented by the investments We're making 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 presentation, product content and enhanced fulfillment options.
We have grown our online sales by approximately $1,000,000,000 each over the last 6 years, making us the 5th largest e commerce operation in the United States. And approximately 50% of the time, customers choose to pick up their online orders in our U. S. Stores. This is a testament to an interconnected retail strategy.
19. We know that there is a significant opportunity to better serve our Pro customers who we believe represent about 45% of our sales $1,000,000. The value proposition that we're creating for our pros is a comprehensive ecosystem that encompasses product, 9 exclusive brands, delivery, credit, service, digital capabilities, 2nd. 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. Deliveries and a key component that we're building out through our supply chain investments and the B2B site experience is being designed
19. The pro business is changing faster than ever, and So are we. From tools and services to supply chain and beyond, we know what it takes to power the Pro, including a Pro 19 19. A foundation to build and expand their business, enabling pros to do their job whenever and wherever they 19. We know that all pros are not alike.
General contractors, property managers, Attrition's, plumbers and painters need more than just a toolbox. They need one Home Depot, which means instant access to all the benefits, 19. Managing purchasers and payments. We're making it easier for pros to see all spend from all purchasers online and in store all in one place. 9th.
Now pros can organize different projects and save time with the efficiency and visibility of the Home Depot with a personalized homepage We've even put pros in control of fulfillment, delivery to business, home, job site or pickup in store. Whether it's part of a grand plan or 19. The pro online experience is just one part of our pro ecosystem. Pros invest in us because
19. As you can see, we have a lot of great momentum with the B2B website experience and we are on track to onboard 1,000,000 Pros by the end of this year. Turning to our supply chain and delivery efforts. Given the changing expectations of our 1st. We have committed to a $1,200,000,000 5 year investment to create the fastest, most efficient delivery network and 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 is 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.
19. On the downstream side, we're investing in approximately 150 new facilities to drive speed of delivery for 1st efficient fulfillment, a network tailored to the specific needs of home improvement. 19. 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. 19.
Perhaps the better way for you all to understand what we are building is to actually see it in action. So we prepared a video for you to provide some context. 19.
Conveyors and scanners to quickly receive and sort inbound freight destined for stores and fulfillment centers. In 20 17, we began making these fast flow centers run even faster. We installed mechanized downlines at the loading doors. 2 years later, 8 of our 18 RDCs have had these lines installed and we are rolling these out to all RDCs over the next 2 years. We are also improving our direct fulfillment center network, which serves our delivery customers.
We are moving from a 2 day ground 19. We have found that every time we speed up our delivery, We improved customer conversion and satisfaction to achieve one day service to 90% of the U. S. Population currently at 50%, 19. We are expanding and enhancing our direct fulfillment center network.
We've retrofitted our existing Hagerstown DFC 9th. With new parcel shipping capability and we've begun development of a new DFC in the Seattle area and we're well on our way towards completing another DFC 19. The Dallas Center will be a part of the most cutting edge campus we've ever built. Right next door to the Dallas DFC, a new flatbed delivery 9th. With the Dallas flatbed delivery center, we're able to deliver heavy and oversized building materials directly to our customers along with all of the smaller related items for customers to complete their projects quickly and efficiently.
But it doesn't stop there. Our plan also calls 9 19. Now Home Depot Pro Business, the first of several market delivery centers became operational in 2019. Located in Chicago, it's a working prototype for the MDC concept. These centers deliver directly to our customers using box trucks.
They handle large 19. Such as water heaters and cabinetry for fast delivery to job sites along with thousands of our smaller best selling items. Finally across the country supply 19. This concept has already earned its 9. Stripes, MDOs now handle over 20% of our appliance deliveries nationwide.
MDOs will allow us to control the customer experience from end to 19. For the most critical deliveries across the threshold into customer homes, including appliance installation. At The Home Depot, our supply
9th.
This improved customer
19. Today, you've heard how our business is in the midst of 19th One Home Depot experience for our customers. We will leverage our convenience store locations. 9. 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. 19 transformation and 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 is worth noting and values that were established in our business by our founders. Our culture centers around values in a leadership construct industry leading results, but it is the underpinning of our strategy to create the 1 Home Depot.
This includes our shareholders, 19 our associates, our customers, our supplier partners and in the communities that we serve. 19. As we invest to unlock the truly interconnected one Home Depot, we are enhancing our already strong foundation 19. Good morning and thank you for being with us today. As you heard from Craig, we are 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 and home improvement to win with the customer and deliver exceptional returns to shareholders. 19. Today, I'd like to take you through our preliminary outlook for 2020. But 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, 19 1.8% fiscal sales growth reflecting comparisons against the 53 week year in 2018 and diluted earnings per share of $10.30 While we define our sales growth in percentage terms, We capture share in dollar terms and through the 2nd year of our One Home Depot Investment Program, 19.
We will have grown sales by over $9,000,000,000 unmatched in our market terms. 19. And through the 2nd year of our One Home Depot investment program, we will have grown sales by over $9,000,000,000 unmatched 19th. We are investing to win over the long term. By the end of next year, nineteen.
We will have invested $5,000,000,000 in our stores, dollars 2,500,000,000 in technology and we'll be on track to invest $1,200,000,000 on our wind supply chain network. 19. It's important to remember that these investments are designed to extend advantages that we already enjoy. 19. Our 2,291 stores across North America are the hubs of our customer experience.
19. 90% of the U. S. Population living within 10 miles of a Home Depot store. They provide us with structural advantage that will likely never be replicated.
As we unlock the power of an interconnected 9th. We continue to drive strong sales productivity and we are now at the highest level of sales per square foot 19. For the last decade, the power of The Home Depot's economic model has been defined by productivity 19 Efficiency. And while we are in an advantaged position today, our investments are designed to extend our position 19. We are making transformational investments in technology to simplify our infrastructure, 19.
Our investments in our supply chain will provide increased speed and reliability of delivery for our customers, 19. They also create cost advantages. We are working to build the lowest cost network in our industry 19. That will also drive simplification in our stores as we migrate deliveries out of our stores and on to an optimized network. 19.
As a whole, productivity and efficiency are at the heart of our investment program. 20. We build our preliminary outlook for the year on the foundation of a supportive environment for growth in 20. The U. S.
Consumer is healthy and the housing environment is stable and provides support for home improvement and demand. 19. 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 Shield forecast for GDP growth is 1.8% for 2020. 19.
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 provides a solid foundation for home improvement demand. 19. While we don't expect to see the same tailwinds as in prior years, we do expect to see a positive influence from housing. 19. And when we think about how home improvement should grow over the long term, we think about 2 supporting data points.
19. First, the age of the housing stock continues to increase with over 50% of homes now over 40 years of age. And as we know, 9.2nd, homeowners have more capacity to spend on their homes than ever before. 19. The value of homeowner equity and housing stock of the United States has more than doubled over the last 8 years and is at an all time high.
19. The combination of these factors supports our view that home improvement spending will grow faster than GDP 19. For fiscal 2020, our preliminary outlook is for the sales growth of between 3.5% 4%, Representing sales of between $114,000,000,000 $114,500,000,000 19 operating margin of approximately 14% and a return on invested capital of approximately 45%. 20 will be a year of transition for us. While we expect to continue to grow faster than the market, 2020 represents peak year of investment in our $11,000,000 program, creating pressure to operating margin during the year as we complete many of our initiatives.
20.20, this level of investment will decrease and the benefits from our investments should increase. 19. Our preliminary sales outlook of 3.5% to 4% growth built off of the 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 it 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. 19. As expected, our operating margin will reflect over $200,000,000 of incremental investment in both cost of goods sold and operating expense as well as incremental depreciation of approximately $70,000,000 19. 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 customers' shopping experience and are now rolling out these solutions more broadly. While we implement these changes, we think it's It's prudent to anticipate continued pressure in 2020.
We will maintain our disciplined approach to capital allocation. 19. Our strong performance allows us to invest more than anyone in our space, while returning more than $35,000,000,000 in the form of dividends and share repurchases over the 3 years ending in 2020. 2020 will be a year of ongoing development for us. And while we're not providing guidance for the years beyond, 19.
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 19. 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 19. 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.
19. 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. 19. The macroeconomic environment is supportive and our capital allocation principles will continue to create value for our stakeholders.
As Richard mentioned, we will now be moving to the question and answer session. We have 2 of my colleagues in the back, Elizabeth and Luke. They 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 questions.
And please limit yourself to one question with one follow-up. Also please state the name your name and the name of your firm before asking your question. So with that, let's get started.
19. Good morning. It's Michael Lasser from UBS. Thanks for hosting the event today.
I want to talk a little or ask 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 has been on a fantastic run of steady state margin expansion as there's been a prolonged housing as there's been a prolonged benefit from the housing recovery as the consumer has been in good spot, as you've had a distracted competitor and there's been really sound execution. And over the last 2 years, we've seen the company's 19. Operating margin come down. You're guiding for another year of margin degradation in 2020.
19. From there, should we start to expect to see The Home Depot's operating margin stabilize in light of everything you know today? Or 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?
And I have a follow-up. Okay. Thanks, Michael. So if you take a look at 19. Our outlook for 2020 and our margin of 14.0%.
If you were to take the current mix of business 19. As it stands today and you set aside the investments we're going to make in 2021 2022, 19. You would see the type of leverage in our business that you've seen from us over the past many years. 19. We're focused on creating the lowest cost platform in home improvement 19.
In order to drive incremental share gains and incremental sales. And so We don't quite know what the product mix might look like of that incremental opportunity. 19. So it's preliminary to talk about what margin looks like. But again, if you took the current business and thought about, okay, absent investments, you would see the type of 9.
So think of it this way, maybe an example to think about is, with the network that Mark Building. There are multiple types of facilities. And we 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. 19.
And those are all about really driving share opportunity in lumber and building material type categories, big and bulky things, 19. Which are lower rate, but significantly higher ticket and operating profit dollars. Nineteen. And so 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. So it makes it a little bit harder to tell 19.
Out years right now until we get a few more of these facilities open and begin to understand how that plays out 19. In the market. But as Richard said, we're building a low cost position to be able to take care of all aspects of our business and take outside share and drive gains and profit dollars. Nineteen. That's helpful.
And my follow-up question is
on shrink, because it seems like the expectation that's going
to get worse before it
gets better is new information today. So can Can you give 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 19.
You'll see credit to Home Depot, maybe you had above average shrink experience over the last few years and now it's just come
back to normal. Let me make a comment and then I'll turn it over to Anne to talk about a little bit of what we're doing. So look, this is a situation that Honestly, continued to become more problematic as 2019 played out despite the work that we're doing. We've got some great work that We've done to begin to turn the corner in 2020. This is largely as a result of theft, As Richard said in his opening comments, it is driven by in large part by organized retail crime that has We have a hypothesis that this ties to the opioid crisis, But we're not positive about that.
But what we can tell you is that working hand in hand with law enforcement, we are seeing significant nineteen. That are happening where we work with law enforcement. We'll go into a warehouse facility that gets And it is literally 1,000,000 and 1,000,000 of dollars of multiple retailers goods in these facilities. World, but maybe you want to talk to us a little bit about what's going on this quarter.
Yes. So we've initiated several pilots to see how we can really mitigate and reduce straight across the board. And 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, right, it's very marketable product that they can put online. So if we can secure that product, week and certainly bend the curve on shrink.
But 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. So think about serialization or POS activation If you buy a power tool and the only time that power tool can work is if it goes through a pre OS. So 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. Now you may ask why you will see a little bit of pressure in 2020. We take inventories in our store once a year.
So even though we are seeing short term benefits from the things that we are enacting, we're not going to recognize that benefit until we actually take fiscal inventory. But our predictors on the things that we have implemented have shown really good success and we strategy to roll out those initiatives that continue to see value.
19. Hi, Brian Nagel from Oppenheimer. Thanks for having us. So the question I have first on nineteen.
We talk a lot about the investments at Home Depot. You outlined those a couple of years ago.
We talked about it more today.
The question I have is, as you look at 19. Consider some of the recent commentary that you have not gotten as quickly as you initially thought for the benefit of this investment. Has the investment plan for or 2020 change either in allocation of dollars towards certain initiatives
or magnitude of dollars. Do you recall for that? 19. So in large part, the investment dollars are the same. There are always tweaks that we make based on learning.
19. And 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 originally anticipated into the work that we're doing in our high volume stores. We've had great learning through some initiatives that were 19 that we have seen terrific results in making the operations of our high volume stores and as a result in sales lift in those stores Significantly better. And so we're going to show some more dollars from in 2020 to go after that. So it's always a little fluid 19.
As we learn, I'd say the other comment around that is when you think about another thing that is happening in our business right now is We're completely changing, Matt and the team in terms of how we develop software and 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 and then by the time you The world might have changed on you. So we are doing it from a customer back iterative, agile approach. And so that by its very nature says we'll shift things as we learn. And 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 19. Your penetration with KeyPros was, there's spend being done in Home Depot. Now with all these initiatives, as we start to improve the The on boarding to the digital platform,
we're doing the delivery. Can you point
to some key wins with the pro customers and how that spend with Home Depot
is really starting to improve? 19. So, I mean, I'd say, first of all, we're very pleased in the last quarter, for example, with the acceleration of our pro business. 19. We also like the growth that we're seeing in our DIY business and we want
to maintain the balance in that by
the way. We don't want to
wake up one day and
go, hey, we left the DIY 9. So Brian, I would say that, the slide that Craig put up on the co system is really our key to the future in 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 the pros vary by size of the prototype of the pro and what purchase occasion they're in. And so 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, but we know that we have to earn that, have to create an experience with them that's a lot less friction to it, more seamless, Give them the tools that help them become more productive.
And 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 out of them. So the more that we provide that, the more we see that shared wallet accelerate And tomorrow we expect the business to grow.
19 My question is what percentage of the 1 Home Depot is in place? It could be 0, it could 19. It doesn't seem like the whole thing is in place. You're early on in the B2B initiative for the DeBrol. 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 to
5 for the 4 should
not be the ongoing It should be better than that from these investments. So anything you can point to, to take a point look at the future of that?
19. The first comment I have is what we are building and the investments that we're making is to position us to be able to 9th. Outside share growth in any environment whatsoever period,
whether it's a great
environment or an environment that changes down 9. That's what we're trying to accomplish overall. As it relates to kind
of where are we,
I'd say we're probably still in the 19. Mark's just getting going in supply chain, which is a key 19. We're making really, 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. So feel really good about that. Our Physical investments in store are largely on track and I'd say there we're in 2020 will 19.
Be a big chunk of that complete, but not totally complete at that point. So probably still pretty early innings. 19. And at the end of the day, obviously, we'd like to see, that we 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. So based on where the market is, we would obviously, if we were the same, yes, we'd like to see accelerating growth.
Absolutely.
19 follow-up is, in 2019, we talked a lot about these sales headwinds and that the underlying rate of the business looks It could have been a little stronger than what you're reporting. We're going to lap some of this deflation next year. How many days is no worse? You have initiatives coming to the 4. So what are the moving pieces to the 3.5 to the 4?
Why isn't it a little bit stronger than that?
Thanks, Emyin. So As has long been our practice, we build our outlook off of the GDP, which this year the outlook is around 1.8%. So that's a little lower 19. We added a positive level of support from housing. I would say not at the level that we've seen in prior years, but at a very positive, very stable environment for 9.
And then the remainder really reflects our view that we will continue to gain outside share in our market. So that's 9. And then 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 and lumber business we think.
Yes, the lumber prices were actually Pretty flat lumber and panel traded in a pretty tight range throughout 2019, but it was all lapping the The spike in prices we saw in 2018. So as we look at 2020, we'll stay flat. We won't have pressure in 2020, We won't have tailwind either in terms of our comp.
And we don't plan for any adjustment, right?
We set a pace ago.
19. Hi,
good morning. Dennis McGill with Alman and Associates. Richard, for the first question, can you bridge the margin outlook day 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 sort of look at our 2019 19 guidance for 3, 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. And then 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 in which you would expect With that sales growth. And 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 19. Taking steps to implement actions that we've tested with the success. That's going to take a little time to work through our P and L. Improvement in shrink actually only works its way through the P and L as we take inventories and we take inventory throughout the year.
So that's why 2020, the shrink impact still looks relatively significant.
Okay. And secondly, on the margin mix of the product mix, As you think about the flatbed services in particular, to your point Craig, when we grow that business over the next couple of years, that's going to be Fortunately in categories that are more material commodity oriented and those just carry lower margins and so you have better return perhaps, but the margin mix from that operation in particular is something that you're unsure of how it will unfold?
Yes, the flatbed distribution centers are all running big and bulky 9. Capabilities in home improvement, right? And it will allow us to actually extend assortments in that space beyond where we have room today 19 store. So if you talk to our store associates, for example, there's lots of stores we have that have don't have the space to carry 20 foot 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.
So we see opportunity for growth in that space. It is, let's say, the average take up
Well over $1,000 $1300 is.
So, driving It just is lower rate than our average. So it could have put some pressure on rate. But obviously, we're trying to bring up the MDZs at the same 9 which are more accretive to the type of stuff we sell. So the balance between how those ramp will really determine what kind of rates. 9.
At the end of the day, honestly, I mean, 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 19.
Thank you, guys.
Good morning. This is Laura Champine with Loop Capital. Another question about the margin pressure you set from the mid shift. I think Richard you mentioned an expectation to take outsized share in appliances and OPE. And my sense from some of the Greg's answers is that that's driven by distribution improvements.
19. If that is so, how do you communicate that and turn those improvements into the better conversion relative to more typical sales drivers like promotions and assortment.
So, let me if I hope I understood your point or tell me if I don't. So, when you think about, what we've done in the appliance business, we've invested heavily in the appliance business 19. Over a number of years as one of our chief competitors was donating last year and we saw an opportunity to go after that and we grabbed our unfair share 19. And as a result, we sit here today with about $10,000,000,000 points, 19, which is rate pressure to your question, but it is a phenomenal return on investment capital and 19. The ability 19.
And as we shared in the video and supply chain, we'll mark and his team to take that customer experience more in house. 19. Mark, I think we're at 20% of appliances delivered in total by Home Depot controlled environment. 19. We are taking control of that customer experience and we're seeing great feedback from the customers on that.
19. The interesting part is not only is it that, but it is the entire process and that we're working on. 19. Research for that product begins online even was purchased in store for the large part. So the work that the team has done to enhance 19.
The overall beginning of the shopping experience. Bringing as I mentioned, bringing the digital labels so that you actually have ratings reviews in the store 19. So it's really this 19. That we're bringing together that we see acceleration 19.
I think appliances are a great example of Taking control of the Indian 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 and to discern. There has been a number as well and we continue to That whole win in process. And then on top of that, the one supply chain investments of opening up the market delivery operations, which 19 appliance hubs. As Craig mentioned, we're at 20% of control directly of our appliance delivery now, where before none of it was
Our goal is to fully control
that over time and we've seen a 7 point improvement in our customer satisfaction scores on appliance delivery, which is very meaningful. It's great we've got that improvement, but there's still tons of upside on We're not where we want to be yet on that. So there's a lot of opportunity ahead of us and that's what we expect to capture with more supply chain investments in market delivery operations.
19. 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 On the crime issues that are impacting you there, is there something special about Home Depot's
19. Let me share an example of a report that I read yesterday just as one example of many. 19. And record came from our Head of Asset Protection on a bus that we participated in that was warehouse in 19. It was a major metropolitan market if I remember correctly.
$16,500,000
of goods From multiple retailers in this one warehouse of which Home Depot's was estimated at 1,400,000.
This is happening everywhere in the retail.
19. And I think for us when you have strong brands like we do and they're very marketable, of course, we are going to be challenged just 19. But I think it's important to point out that we are doing things immediately. When you think about I talked about some of the things we're doing just to protect the product in May. But When you think about the setup we remember the machine learning behind the scenes where we are anticipating where these organized retail clients operations are moving, which is why we're getting some of the boxes we're getting.
When you look at some of the things we're doing with non receding returns, where we are identifying things behind the scenes that help us 19 It really helps us across the board and when we are in our hardest part to take things from, they know somewhere else. And so we have to continue to be vigilant about it. And that's where we are up to a game across the board to make sure that we're not as vulnerable as we were in the past, given the environment that's changing.
So just
19. And then I have a follow-up.
Which category?
Product innovation, just Product that you started to launch it generally, yes. We see it happening across the store and we see our customers trading up in selecting that innovative product. So if you think of things that are more 19. The discretionary nature of like appliances, this is unbelievable technology and innovation in the appliance space, 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, so 9. There's preheating an oven or refrigerators.
You might not think you need this, but campers inside the refrigeration. So if you're at the grocery store, 19. 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 19. The power in the run time of these tools, the electronics in the tools, the battery power, The brushless motors has revolutionized the tool industry. We've invested behind that and how we bring that to life in the store and digitally. That transformation is now moving into outdoor power equipment. So those battery platforms are Moving into outboard power where now you can actually cut a half acre, 3 quarter acre lawn on one battery charge.
A Pro can have a spring trimmer or a leaf blower and do hours of work on a battery pack. And if you have a couple of battery packs, you can get through most of the day's work. We're investing behind that as well. So as we reset our tool corrals by brand, by battery platform, we are now resetting our 9th. By brand, by battery platform because these batteries work across the tools, whether it's an
19. But it's just not
the fun cool stuff like 9th. We see innovation literally every day and every day, some things that might not seem so sexy, but 19. 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 9 Polymers and carpet that's happening in solid quarter vinyl plank. I mean, I can go on and on. We have 900 odd bays in the store and there's literally 9th.
Technology improvements and enhancements in each case, the pros find it for ease of use and the consumers find it for convenience and 19. Satisfaction and well-being for a more fulfilling life. So it's super exciting. It continues and it has for 4 years, right, Craig. This isn't new in Home Depot.
The supplier community appreciates that no one launches this type product better than Home Depot, Which is why we get the disproportionate share of exclusive product. And even if it is an exclusive product and or an exclusive brand, 19. 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. And even if it isn't an exclusive brand or an exclusive line, we'll often get launch exclusives. So 19.
No one our digital platforms, our marketing platforms and hand in the stores brings product to life and launches it like The Home Depot. 19.
Thanks for that. And then 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? Yes. So I think 19.
If you think about as we build these capabilities and more capabilities come into play, 19. What we've really learned is how we're trying to approach this. The interconnected interdependency 19. That exists going forward is really important and really powerful. 19.
And it makes it harder for us to understand exactly what each little component is delivering, but we know that when it comes 9 together, it's really powerful. And 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 and to Alan, you want to talk on we actually had this conversation by the way as we were preparing for this meeting. All right, how do we explain this to you guys?
It's premier. Yes, I think from a customer back,
the operative words and We're trying to develop is a seamless, interconnected, convenient shopping experience. And all of these pieces start to 9 come together. So when you think about power tools, we know most all shopping journeys start online. So 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. 19.
Did they resonate with the experience and the category of experience we build on power tools? Did they resonate because we have these great brands 9. Generally everyday low prices and in all cases great values. Do they resonate because when they come into the store Part of that $5,000,000,000 that we spent in stores is about $100,000,000 on our tool for us to do that 9th setting by brand. It's very expensive as you can appreciate to move product around and steal around in our stores.
It is a great customer service that Anne and 19. When the customers in our stores, they are 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 the home 19. Supply chain that market is building that have reached 90% of the country in 2 days or less parcel.
19. We'll take back with limited friction. So all of that comes together. And what we've learned is to try and parse that, we're going to get tax basis points from returns, we're going to get a lot of basis points 19. And online experience, we're going to get 3 basis points from 2 day shipping or one day shipping.
That's very hard because all of it comes together in seamless
19. So this is real confidence that what we're investing in quite candidly, when we can continue to
19. Eric Bostard, Cleveland Research.
2 years ago when you talked about this program, the sales guidance was, I think, increased I understand
the movie pieces at 2019. And I guess some
of the movie pieces at 2020, but if you
could talk about 19. The thoughts on
the 4.5% to 6%, the thoughts on the incremental revenue growth is the payback for these investments. If you could bridge
that, that would be helpful.
Well, we are focused on delivering the remainder of 2019. 19. We have built an outlook in 2020 that expresses our confidence that we're going to continue to take outside of share. 19. And as we said, we're building the most capital efficient low cost platform to go after incremental market share opportunities.
20. We don't quite know what that business looks like, but we're confident. And so as we learn more through 2020, 19. We'll come back with our views at the appropriate time. Yes.
I have a quick follow-up. What's different, 19. Your confidence in the payback, I think your execution of the investment of
the new capabilities, all those things seem to be
And I appreciate the economy can be perhaps different, but what is different that makes it that optimal? It's also going to be what the original guidance 19. Look, I think that 19. We've shared with you that some of our investment has been pushed. And so some of the things that we're doing are harder than what we anticipated.
19. If you think about the underlying changes that we're making to be able to drive this experience, 19. 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 online and by the way in our MRO business. That carries the SKUs in 19. And so we can't present a consolidated view to the customer 19.
Until we solve that underlying problem and the team is working really hard and when we solve that 19. Then we can drive significantly greater leverage through the supply chain and we can drive more value for the customer. And I'd say, Eric, we probably maybe we're 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 had another, what, 650,000 bill.
19. It takes time to get them to engage with the experience, understand the functionality we've built and we have more work to do to be able to get to more 19. Complex Pros where we have more functionality that they need. So I'd say we were probably a little ambitious. 19.
Just a follow-up comment on non DB website as an example. If you think about a pro going into our store and trying to buy 19. Types of products you want to buy an inside product, you want to order something that's online, get them to the store for pickup or ship to your job site, you want 9 If you try to do that online, you're operating in 3 different POS systems. And so it's very complex. Our goal is to take all of that and make that customer facing through a digital experience.
And we're confident we're going It's going to take a little bit longer to deliver that. Now, I'm going to make one comment why I think that's so important. 9 70% of our pros that are in our stores never go to a pro desk. But this is all about our final growth strategy, Identifying those trolls 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.
9. But when you start to take those experiences and make them customer facing, we think that there is tremendous upside. So 19. We're seeing momentum and the customers that have been migrated. We're really, really excited and encouraged about what lies ahead, but it's just going to take us a while to get those capabilities customer base.
I think it's important to know this isn't the company's first time entering and 19. Pursuing a new market opportunity that it was unclear to understand what the true upside was, but that eventually Kane, to the floor, Ted, maybe you might talk about appliances.
Yes. If you take appliances and questions about 19. When we started the appliance business In a modest way, 15 odd years ago, we didn't even have showrooms, right? We just we put some very basic appliances inside our rack. 19.
You couldn't even call it a display really. And 15 years 19. Later, we're pushing a $10,000,000,000 appliance business. Unfortunately, the gross margins are not 34% 19 19. Tremendous gross margin dollars in appliance, if not a rate.
19. And we've got a tremendous return on capital employed given our direct model. And when you think what we've built out now 19. What I would argue is the best in class digital experience, with videos on how to receive your order, 19. Picking your delivery date, everything in the market doing in the supply chain, The breadth of the brands that we have, the ability to get all those brands delivered generally inside of 5 days, Tremendous evolution of that business to what we have today.
So as Craig said, will MRO grow faster 19. Then more big and bulky coming out of the 2 platforms of MDC and FTC. 19. The aim is to grow them all equally because as we said at a 15 share and $650,000,000,000 market, 9. There's share opportunities in all these categories.
And as the assets come online, is the interconnected largely powered by 9. Our merchants are working very closely with Bill and the Pro team and 19. Our outside sales forces to start unlocking these market opportunities and turning it into share gain
Greg, you mentioned the 150 new supply chain facilities as part of the $1,200,000,000 investment right over the 5 year period.
Nineteen. Can you or
I guess Mark provide some color on how many facilities are slated to open in 2020 and discuss whether the incremental sort of operating 19. The cost of those facilities are a
part of whether or not they're part of
the $200,000,000 plus of incremental
19. Yes. So, I'll just kind of go through the platforms. A couple of years ago, when we unveiled the 1 splicing strategy, we really identified what we were going to do across 5 different platforms. 19.
The first platform part of one of the key tenants of the story is really to leverage our upstream supply chain where we build a tremendous competitive 9th Advantage with a low cost fast flow supply chain and to further mechanize the RDCs. And you saw on the slide there where we went from 19. 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, it has also been a bonus from that has been improved the safety in our facilities as well, doing that further mechanization.
So Well on track in terms of the REC platform in the upstream. Another platform that we talked about was the flatbed delivery centers. We talked about that a bit. We got our first one up and running in Dallas. We'll be opening more in 2020.
19. 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 found out 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 RPCs and we left the ball PCs kind 19. 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 And take control
of that entire supply chain from the lumber mill all the way to the customers. So a huge advantage there. We have the 1 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 airline brands and Home Depot Pro Centers, 25 of those in local markets.
We 19. 1 open in Chicago. We'll be opening more in 2020, and 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 9. Our transportation systems are really be able to take an order, understand where the inventory is, understand the transportation options to get it for the product there.
That's proven to be a little more challenging than we thought, so maybe a bit of time on that one. And then finally, our direct 19. We have 3 of those that got us to a 2 day parcel freight on the ground for 90% of the U. S. Population.
19. 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. So Pleased with the progress there. And then finally, MBOs, we mentioned the appliance deliveries that are enabled by the MBOs. They're not Just for appliance, but that's really where the biggest fall for their business is. 20% of our 19.
Delivery is now under Home Depot's control through those market delivery operations. We'll more than double that in 2020 19. As we build more market delivery operations. We have opened 13 of the 150 facilities. We've got 26 that are in some state between real estate committee approval 9 and getting ready to open.
So 26 are in the development phase and we have more in the pipeline that we'll be taking to the real estate committee
And as we shared in the past, obviously, as we invest in opening these up, that's pressure and that is in the It is in the $100,000,000 As a follow-up on that, Richard, you can, the $200,000,000 given sort of the weight on the supply chain side, 19. The supply chain is largely expressed 19. Thank you.
19. I guess I was looking for some clarification. Craig, you mentioned a couple of times.
19. I guess the question is, is there a couple
of ways you can point out that take longer or is it just a combinationintegration of all of them together
I think the combination of everything coming together 19. It has been a little bit longer. And then on some of the investments, particularly, for example, on the pro side, as I mentioned, 19. It takes a while, grows our creatures and habits. It takes a while to get them to begin to utilize and understand the new capabilities.
And actually communicate and begin to more aggressively onboard as well.
So once you have all those digital capabilities on digital side, supply chain, etcetera. And given your comments right there, like how long do you think it will take the stores and the DC workers, etcetera, actually get used to it where you could actually start to see, again, more of a net financial benefit flowing through the P and L.
I mean, I think to tell you that
I could
give you a month of timetable exactly 19. Would probably be unrealistic, but 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. And as Mark just shared, We have number of buildings coming up. That will continue.
We're kind of taking the same approach that we did with the RDC network. If you remember, we went Pretty slow in the beginning with the RBCs and then as we prove that model out, we will begin to ramp that and start seeing more and more benefit as time goes by. So I think you'll see the same type of pattern as we go forward.
Some of you might have heard me say this before, but when we built the RDC network. In 2007, we had 1. In 2008, we had 4. And then in 2000 and 9 and 10 each, we opened 7 each. So 1477 was kind of the cadence there.
Our supply chain build out will look something 19 Like
that as we look forward. Understood. Thank you.
I think even before the store, we talked a little bit about adoption of flatbed delivery centers. Just think about picking orders 19,000 stores delivery orders, right? And 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 multi market. Literally, the adoption 19. And when you think about activity based label modeling and when you look at where we use labor that can be moved efficiently somewhere else, This is where the fact that as a limited percentage is such a tremendous win.
And 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 label if necessary or whether or not we need to use that label within the store. So There's a lot of things that have to come online simultaneously, but want it to come online, there is certainly the stores will leverage all capabilities very quickly.
19. Shifting that to the development of the SEC will also improve the customer service experience in
the store.
In the store, because you will walk into some of our stores today that we were pulling orders for the customers, right? And this is like to the 19.14 foot lumber and it's blocking the model of the store because that's where we can store the product. So there are just strategic decision in the stores that we won on off as well because it is a very limited amount of value beyond just the opinion component.
Yes, it's a huge component of our high volume store strategy really. I mean, if you go over to New Jersey, I think some of those high volume stores we have
there, go there at 6 in
the 19. You might see lumber blocking the lumber aisle. 19. If you think about Dallas, that flatbed delivery center is going to serve 61 stores' needs in terms of 9th. Long room building materials flatbed delivery.
And think of the efficiency of that. That facility is co located with our vault 9th distribution center that serves those stores. So in the old days, the product would come through that bulk delivery center bulk distribution center And go to the store and then we pull it back out of the store, load it on
a truck and deliver it to the customer.
That flow doesn't happen anymore for delivery, right? We'll bring that product to the bulk delivery bulk distribution center. We'll move it across the floor to the flatbed delivery center loaded on a truck and deliver to the customer. Much more efficient than all of the store waivers that we see that product, put it away, let it down and go pick it 19.
For a
customer to 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 possibility of that. Our store team is super excited about that in Dallas. Can't convey an offer or excitement on that
19. Yes, good morning. I have two questions on the e commerce business. The first one, Well, you mentioned that in the last 5 or 6 years, you've been growing over $1,000,000,000 of e com business. Can you give me the sense of how much of that business came from 19.
Amazon, some Lowe's, some other retailers, some Home Depot, people are not going to the store, like Going ecom, just I'm not looking for exact numbers, but just rough indication. And my second question on e commerce is While we're seeing CapEx declining post 2020 when e comm is supposed to continue growing Then maybe eventually go from next day shipping to same day shipping kind of thing or to more services to customers. 19. So, ecom,
As Craig said, the e com business itself, the pack and ship business continues to grow. We believe we're number 5 9th. In e commerce in terms of product flow, that all continues to grow at rates over 20% on a bigger and bigger base. So we're thrilled that we're keeping that growth rate. It's harder to get market share.
So when we look at overall market share, The base numbers are the federal census numbers. So we know we're taking share in the overall space. As we go through categories, it gets Challenging when you get into online, it gets more challenging. But we look at what our growth numbers are publicly reported numbers from 19. Digitally native competitors talking to our supplier base on where they're seeing growth.
We're quite confident that we're taking share in ecom in virtually all categories. This past quarter, we had double digit growth in virtually all categories. So while 22%. Overall, we had double digit in virtually every category online. So we feel pretty good that we are indeed taking share 19.
In virtually every category online, others are also taking share, but we're pleased that we're taking share. On the delivery, 19. Yes, expectation of time to delivery is increasingly important. And when we open up a new capability 9th. When Mark opens up a new direct shipping facility or we improve supply chain routes so that we can lower our days delivery on website.
If you post the number of days of delivery, we see an immediate increase in sales when we decrease the number of days. So that's why we made the decision that we're 90% out of the country today, 2 days or less 19. 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 percent of our stores for store assorted product, 19.
So we think we're in a
great facility. 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.
19. I'll take one learning too
that I'd chime in on. So 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 crowd sourced 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 and this has been the speed is important, 19. But for our project oriented pro customers, reliability is the most important thing.
And reliability being there when we say we're going to be there 9 is really we're discovering is what's most important to our pro customers. Speed is important, but being there when you say you are is more important.
19. 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 19. We see categories growing in store at the same time we're growing double digit online. Yes. So 19 Fair enough.
To go back to my second, how do you see all that happening yet CapEx is going to be Started to decline post 2020. That's why I won't understand. Right. I understand your question. So first of all, CapEx in total is going to decline post 2020.
So if you think about programs in our investment program, particularly the store investments, what we've done in store environment, for dollars 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 It will sort of lead us to a more frictionless experience online, but they don't last forever. We will continue to invest 19. 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
Chris, over to Jay, good morning. So a bit of a follow-up on a couple of questions. So first on the expense side, you talked about 19. Incremental dollars of investment peak next year into 2020. Store investments are Slowing technology, slowing a little bit, then Mark's got a lot of work to do.
As you get beyond 2020, if We're still in a sort of 3% to 4% comp environment. Do you get back down to the BAU 50% SG G and
A versus sales growth rate
or is that more lagging out as market completes?
So First of all, we really like to 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.
19. $200,000,000 in 2020 and will be lower.
It won't increase it's increasing by $200,000,000 this year in 2020. After 2020, that will be a decrease rather than an increase.
Understood. That's great. And then in terms of sort of a 2 part question, nineteen. Sounds like you've had some technology discoveries where it's like, oh, this is going to take longer than what we originally appreciated. Is there something structural in terms of the systems, the legacy systems that make them harder to change than you previously thought and how is that 19.
Follow-up on someone else's question, like, how do you thought about that as you take make more changes? And then related to the market share of the self help factor on the guide. You had not expecting about 50 basis points this year. Does that 50 basis points accelerate next year or is it more, hey, let's be as prudent here, things are taking longer than we thought and thus, we'll just Assume that 50 bps is a similar level in 2020.
Yes, let me take the first part of that. 9 which is exactly what we're doing in the overall environment. And so, yes, 19. There were things that we had learned that were harder than we thought 19. And if I go back to my SKU example, it took us 19.
In the neighborhood of 4 or 5 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 4 or
5 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. And so, yes, I mean, it's we're learning as we go. But we're super 19. 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 and
open the buildings that he's expecting
to open and begin to build that.
And it's not just This process as well, right? I mean, how do you onboard a SKU? How do you enrich all the content to be able to flow that SKU properly? Nineteen. The process is often fraught with the same kinds of issues as the system.
So 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.
19. 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 while we have that. Chris, the second part of your question, 19. I will 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 9 level of support from housing, albeit perhaps a lower degree than in prior years and an expectation for continued share gains. I 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 19. But I think when you add the factors up, you can see that our expectations for healthy share gains in 2020. 19.
And again, we know that when it all comes together in categories, we've been able to do that in a category like power 19. Same complexity
as some of our big
and bulky, we're seeing the share gains as a result of that,
19. Absolutely, same as your guys. So we're super excited about what we're building going forward. When you think about building that really across all product In the project business that we're in, you go, wow, that is super exciting. It really is.
19. When you think about
the road is littered with retailers that couldn't or wouldn't change with their customers' needs as they change.
19. If you just look back over history, that is not an option for The Home Depot. It is candidly not an option. 19. 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.
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 comp, do you see Maybe to have slightly easier comparison to the first half of the year because some of the weather and the lumber deflation, but also it sounds like investment maybe picks up into the well, all year, but
how should we think about the case
of comp first half versus second half?
Thanks, Kate. Today, we're providing a preliminary outlook. We'll provide further So the detail when we provide guidance for 2020 on our Q4 earnings call.
Okay. And then 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 year labor.
Yes. I think automation is 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 9.
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 We're an associate of Saks and into the Schraver. So two touches to get products from the Inbound side of the building and out to the outbound side. So highly automated. It's great. It works Really well for products that are engaged, right, that fit onto the conveyor and can be conveyed like that.
9. I was walking in an RDC the other day and I'm walking around the dock and I'm always intrigued by the types the products that we handle here at The Home Depot, you look over there and you've got a big hunking spool of wire, Right. Sitting on a pallet. Over here, you've got bags of mulch. Over here, I've got stack of boxes with for goodness sake, those are live goods, they're rose bushes.
Then I've got over here tomato cages People use their guard. That stuff doesn't get to go on the conveyor unfortunately. And right now, the way to handle that is there's a human involved in handling a lot So it probably will be for some time because there just isn't a feasible equipment yet. You saw in the video our appliance 19. I'm very, very interested in the autonomous 2 wheeler.
19. If anyone had a lead on that, please let me know. And we're constantly looking at applying technology to our business. 19. But in keeping with our hallmark of disciplined capital allocation, we always make sure that there's a payback from those When we make them.
We've got a pretty exciting task coming up where we're actually testing autonomous robots in the distribution center to 9th. Help us select orders and bringing them to the outbound dock. So we're there with that. I would say that home improvement is being bulky, lots of different variety of products has to be considered as we make those 19. So 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.
19. I'd also say that part of the investment as it relates to technology and automation, this is in 19 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.
9. Greg now with over for ISI. 19. I guess I had 2 questions, one to Richard and one to Craig and team, however you want to do it. Richard, I just want to make sure We're on the same page to understand the capital allocation philosophy a little bit.
I think it's 55% prior year to dividend. 9 The two times that EBITDA are still with a number. And how do you think about those as what you talked about 2021 evolving where CapEx will be coming 9. Spending on the P and L also probably peaking. How do you think about those sort of numbers going forward?
19. Thank you for the question. We will maintain our philosophy around capital allocation, which is 9 19th year. So we would look to pay dividends of at least 55% 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 2 times adjusted debt to EBITDAR ratio is the appropriate balance for us 9.
And so we Like the Target, but we certainly maintain flexibility, to do what is right for the business.
That's the answer to that. And Craig, 19. As you build this platform that basically is the largest e com platform, you're 19. Without any 3P business, any I would say, extended your market TAM to the 650,000,000,000 19. Largest digital player in the country in the category that isn't really online.
How else can you leverage that
19. Sure. That's, it's a great question. And if you think about, one of the Things that we shared with you that we're building is an extension of our core business that we call HD Home, 19. And 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.
19. And so 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, 19. 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 that are kind of finishing the home space, if you will, 19. Around the kitchen and the bath and in the bedroom.
I don't own exactly
these numbers. I believe in total, it's about a $200,000,000,000 market, which little north of $25,000,000,000 today is done in the digital space. And so you open up a $25 plus 1,000,000,000 marketplace that auto leverage all of the capabilities that 19. Through our digital platform, through our supply chain network that will have incredibly efficient delivery, low cost model. We are able to serve our customers, make it a more convenient kind of one stop Shop for their home needs and it leveraged all of the spend that we're putting into the business.
And if you think about kind of 2 areas in our business Well, we've done this before. Okay. One is we've talked about a lot here today is the appliance business. We were 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 19. We also live trees, Christmas trees and then our decorative idea was a steak light with green and red balls in our locker. And today, we are a destination for that business and it's a substantial business for us.
And so we think there's opportunity like that. And that's part of the expansion. Of course, the market is expanding, but also when you look at the opportunities, MRO, 19. Hi, thanks. Mike Baker from Insat, Nomura.
I wanted to follow the margins for next year, 19. Down 30 basis points. Are you breaking out that gross margin or SG and A? I think there's some gross margin pressure in shrink and mix. 19.
Should we expect SG and A to deleverage or leverage, I mean, if you go through the math of the 50% business as usual and add on 2 $70,000,000 in incremental expenses. I think you get expense growth out on the last of the sales. Does that make
is that right
at all? Well, 19. When you add the depreciation, so when you take that full bar, including depreciation, 19. 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 the mix and more gross margin in their orientation. We'll provide more detail when 19. Okay. And if I could ask One more follow-up, which is really a follow-up because it's a completely different question. But in your outlook for next year, so maybe it's similar in that sense.
But You talk about having less of a benefit from housing, yet most housing metrics are getting better, really starting to get better mid year and that should flow into next year. Is it a home sales, home price appreciation both accelerating? So why wouldn't housing be more helpful or are you just being conservative in the outlook? 19. 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 7 past. Okay. I mean, if you think about the beginning of the year, everybody thought it was going to be an absolute disaster. And we said, hey, look, 19. Now everybody is thinking that it's going to be a little bit stronger.
Our position hasn't changed. We think it's stable. 19. Nothing specific that you're seeing in terms of competitive situation from one of your competitors investing in a lot of that. It just sounds like seeing a little conservative locker position as I said before.
Okay. Thank you.
And we have time for one more question.
I guess, for the short term, everyone has asked basically all the long term questions. But just your latest view on price elasticity from home to the consumer side of the pros or DIY 9th consumer in relation to maybe price increases you're taking around tariffs or anything else. And then secondly, just how are consumers responding to this sure 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. 19. So on tariffs, our position hasn't changed. We
view this to be manageable, in our merchants and our 19. Finance teams and our supply chain teams have done a great job to identify the pressures literally down to the SKU With every all the tariffs that are in place through 4A for Home Depot is about a $2,000,000,000 potential 19. We've mitigated well over half of that. And on the residual, we have taken some price increases, but we do that 19. The portfolio approach is not necessarily tariffs skewed to retail increase, we look at the entire line structure or even cross categories.
And we're watching the elasticities very carefully. You get the finance partners and merchant teams sort of did a great job 19. To measure those, as you can imagine, we have different elasticities geographically and in product categories, whether it's a pro oriented or 19. We have covered all the top line. So we wouldn't point any top line impact from We've taken on tariffs.
There you generally don't get unit increases when you have retails go up. So we've watched 19 units very carefully. Our whole model is about volume and driving units for our business as well as our supplier partners. So our suppliers are deeply connected with us to keep that unit productivity at the center of all of our actions. So again, we've been able to manage it.
If we get a December surprise Sunday, 19. That's in our outlook. And again, we'll take the same approach for the tariffs on other categories 19. I was chatting before the session started. We actually saw 19.
More net cost pressure in 2018 with the commodities spike than we have with our post mitigation tariff 19 impact. So again, we think this is a bit of manageable. On the short term, again, 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 is could it be better, but we've been seeing this Before for us to have sort of every 7 years and all our plans are on track and getting great results in the decorative holiday,
19. The customer is certainly in Home Depot's. 9. We see that in the business. We are investing for the long term position 19.
And we are investing to make sure that we are in a position to be the low cost provider. 19. We're investing to
make sure that we are
in a position to be able to take share in any environment. We're investing 19. We're in a position to leverage the competitive advantages that we have in the marketplace. 19. And 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 into the business and deliver the kind of returns that we've 9th. Thanks. And then just one quick follow-up, I guess, for Richard, maybe we're thinking about the SOAR based investment, we should start to that. I think $1,700,000,000 CapEx plan next year is on the stores. Is there a way you can see that maybe what's the maintenance CapEx for the store base versus what's kind of the incremental Back to the store base versus what's kind of the incremental investments that are kind of being next year.
Just trying to understand how that breaks down as we think beyond 2020, 9th quarter. Without giving a lot of specific breakouts, The investment we made in the environment of our stores, the investment we made in 19 pickup lockers, the investment we've made in merchandising resets, they all come together to form that number. So 2019 2020. So Richard, I'd like to add one thing that
I'm particularly super excited about. We have seen great results 19. With customer intercept on our whole environmental investments in the store and wayfinding. So to think of the new sign package, 19. Our number of bays, shining floors, updating all restrooms and break rooms for associates.
We are accelerating that with the goal to complete all of our stores in wayfinding and environmental 20. And I would say I've been at Home Depot for 20 years. 19. So it's probably closer to 30 years that this will be the first time every store will have the same brand standard in look
19.
We had made a call to
all the top 40 markets first 19. And then due to the balance of support of 100 odd stores going into 2021, 2022, we said no, we want 1 Home And that means people in Maine, Atlanta, Dallas, LA are all going to have the same
presentation. So 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 Home Depot. And thank you to all of those that H.
J. P. H. Pasco, including our executive, the IR team, our corporate communications and corporate events team.