Greetings, and welcome to The Home Depot Third Quarter 2019 Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Isabelle Jansy.
Please go ahead.
Thank you, Christine, and good morning, everyone. Joining us on our call today are Craig Meniere, Chairman, CEO and President Ted Decker, Executive Vice President of Merchandising and Richard McVale, Executive Vice President and Chief Financial Officer. Following our prepared remarks, the call will be open for questions. Questions will be limited to analysts and investors. And as a reminder, Please limit yourself to one question with one follow-up.
If we are unable to get to your question during the call, Please call our Investor Relations department at 770-384-2387. Before I turn the call over to Craig, let me remind you that today's press release and the presentations made by our executives Include forward looking statements as defined 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 in the release and in our filings with the Securities and Exchange Commission. Today's presentations will also include certain non GAAP measures.
Reconciliation of these measures is provided on our website. Now, let me turn the call over to Guy.
Thank you, Isabelle, and good morning, everyone. First, let me start by welcoming Richard to his first earnings call. Sales for the Q3 were $27,200,000,000 And our U. S. Comps were positive 3.8%.
Diluted earnings per share were $2.53 in the 3rd quarter. From a geographic perspective, all of our U. S. Divisions posted positive comps. Internationally, both Canada and Mexico posted positive comps.
Overall, we continue to see a strong and engaged customer. As Ted will detail, both ticket and transactions grew in the quarter. With the exception of lumber and electrical, all of our merchandising departments posted positive comps. While our Q3 results largely demonstrate broad based growth across geographies and merchandising departments, Our sales performance was below our expectations, driven primarily by the timing of certain benefits associated with our strategic initiatives. At the beginning of the
year, we shared with you our
expectation that these initiatives would collectively contribute These investments are significant and long term in nature, and we expect that the momentum we've We'll continue to build. Our rollout is largely on track and we are realizing benefits. It's just taking a little longer than our original assumptions. In a moment, Richard will walk you through the implications this has for our 2019 guidance. But let me first provide more context.
We have foundational IT work streams supporting many of our strategic initiatives that will significantly enhance our ability to serve That has proven to be more complex than originally anticipated. Take the B2B website experience, for example. Our investments in a personalized B2B website experience is a significant component of the unique value proposition we are creating for our pros. As you would expect, the most engaged customer cohort is 135,000 pros that we onboarded at the beginning of the year. We are seeing meaningful lift in spend as these customers become more familiar with the new experience.
The rollout of the B2B site experience itself is on track, but underlying IT work must be completed before turning on Additional elements of personalization and functionality for our larger Pro customers.
Other investments are yielding results
in line with or in some cases above our expectations. For example, homedepot.com continues We are now in a listen only mode. Forms to drive incremental growth from adjacent categories like HD Home, Pool and Workwear and are seeing good traction across all of these We are seeing healthy growth in our online sales and online shoppers continue to see the relevance of our stores As more than 50% of our online U. S. Orders were picked up in our stores, a testament to the power of our interconnected retail strategy.
We continue to roll out automated lockers in our stores to make pickup of an online order easier
and more convenient.
To date, approximately 1300 stores have lockers and we've been very pleased with the customer response. As approximately 95% of customers rating their lockout experience pickup give us a 5 out of 5 stars. We fundamentally believe that when a customer comes to one of our stores, it has to be a great experience. Over 60% of our U. S.
Stores have a new look feel and customer response has been very positive. Customer service scores in the category of neat and clean have increased 120 basis points versus last As we approach the end of the 2nd year of our transformative One Home Depot investments, we have even more conviction today That we are making the right long term investments for the business to extend our competitive advantage in the marketplace. As with any transformation, the work we are doing is complex and I'm proud of the way our team is consistently up for the challenge. Our associates continue to focus on what's most important in our business, our customers. And I want to close by thanking them for their hard work and dedication.
And with that, let me turn the call over to Ted.
Thanks, Craig, and good morning, everyone. During the Q3, we saw strength across most of our departments driven by growth with both our pro and DIY customers. Comps in appliances, indoor garden, Decor and storage, hardware, tools, outdoor garden, paint and plumbing were above the company average. All other departments, with the exception of electrical and lumber, were positive but below the company average. Electrical was essentially flat due to light bulbs and In copper, the lumber reported low single digit negative comp due to continued commodity price deflation, we saw strong unit comp growth.
During the Q3, we saw balanced growth with both transactions and ticket. Comp transactions increased 1.8% during the Q3, An acceleration from what we saw in the first half of twenty nineteen. The strength in our comp transactions was driven in part by the strategic store investments geared at improving the customer experience and extended outdoor season and traffic growth in a number of core categories. We also saw solid performance in big ticket transactions. During the Q3, big ticket comp transactions For those over $1,000 which represent approximately 20% of U.
S. Sales were up 4.8%. Excluding hurricane related markets, big ticket comp transactions were up 5.5%. In the Q3, comp average ticket also increased 1.8%. We remain pleased with the performance of our ticket growth despite significant lumber price deflation.
The increase in our comp average ticket continues to be positively impacted By our customers trading up to new and innovative items. During the Q3, commodity deflation And lumber and copper negatively impacted our average ticket growth by approximately 80 basis points. Let me take a moment to comment on tariffs. As expected, during the Q3, we saw increased costs arising from tariffs. Our merchants, finance and data analytics teams are doing an incredible job mitigating cost impacts and helping us evaluate our elasticities.
While still early days, we continue to believe we can effectively manage tariffs. However, we remain cautious on how Sales to our Pro customers, which we estimate represent approximately 45% of our overall sales, continue to outpace DIY in the U. S. We are investing in resets, services and a suite of tools to drive a better customer experience Save our pros time and money. In the Q3, we saw strong growth in pro heavy categories like fasteners, pneumatics, Concrete and Installation.
Turning to our DIY customer. As summer started to wind down, we saw customers take advantage of The extended outdoor season. During the Q3, categories like patio furniture, exterior stains and paint, Soils and LiveGoods all had comps well above the company average. Our digital investments in We continue to see growth in online traffic, conversion and average ticket. In fact, during the Q3, we saw double digit online growth in nearly all of our departments.
And given the project nature of our business, more than 50% of these online U. S. Orders Recently, we've rolled out a new online category presentation in Patio that allows our customers to easily see the entire collection, different colors and styles as well as various fulfillment options, all on one page. These new enhancements help drive our strongest patio We talked about the incredible response we are seeing from our customers to our industry leading lineup of exclusive cordless outdoor power equipment From Ryobi, Milwaukee to Walt and Ego, we are excited to add Makita's new line of 18 volt outdoor tools to our Makita's 18 volt platform has over 2 25 tools and over 30,000,000 batteries in During the Q4, we will add a powerful trimmer, blower, hedge trimmer and chainsaw to that assortment, All compatible with Makita's award winning portable power platform. We are proud to be Makita's exclusive big box partner.
In addition, we are thrilled about the upcoming holiday season. Our merchants have worked hard to establish The Home Depot as the holiday shopping destination. We have worked Tirelessly with our supplier partners to put together a broad assortment of product offerings at the best value for the holidays. As in previous years, we will have a number of special buys for Black Friday along with an in store gift center showcasing great offers from our exclusive brands. With that, I'd like to turn the call over to Richard.
Thank you, Ted, and good morning, everyone. In the Q3, total sales were $27,200,000,000 an increase of 3.5 percent $921,000,000 versus the Q3 of fiscal 2018. Our total company comps and 3.1% in October. Comps in the U. S.
Were positive 3.8% for the quarter, With positive comps of 4.4 percent in August, 3.9% in September and 3.3% in October. Versus last year, a stronger U. S. Dollar negatively impacted comp sales growth by approximately $41,000,000 or 0.2%. As you will recall, fiscal 2018 had a 53rd week, which shifted our fiscal 2019 calendar.
As a result of this shift, our comp in October Was negatively impacted due to the timing of our Black Friday event last year versus this year. This shift in timing And event timing negatively impacted our U. S. October comp by approximately 100 basis points. U.
S. Comps for the quarter were negatively impacted by approximately 35 basis points. As you just heard from Ted, During the Q3, lumber prices remained depressed. Versus last year, this lumber price deflation Negatively impacted our comp sales growth by approximately $175,000,000 or over 65 basis points. In the Q3, our gross margin was 34.5%, a decrease of 31 basis points from last year.
The change in our gross margin was primarily driven by higher shrink and the mix of products sold compared to last year.
In the
Q3, operating expense as a percent of sales decreased by 10 basis points versus last year to 20%. Our operating expense performance reflects strong expense control and continued productivity in the business as well as continued investments in our strategic initiatives. Specifically, expenses related to our strategic investment plan of $277,000,000 Increased by approximately $44,000,000 from last year and resulted in approximately 13 basis points of operating expense deleverage. This deleverage was offset by productivity in BAU or business as usual expenses, which drove 23 basis points of operating expense leverage. Our operating margin for the 3rd quarter 14.5%, a decrease of 21 basis points from last year.
Interest and other expense for the Q3 grew by $56,000,000 to $280,000,000 due primarily to higher long term debt levels than 1 year ago. In the 3rd quarter, our effective tax rate was 24.5% compared to 21.4% in the Q3 of fiscal 2018. For the year, we now expect our effective tax rate will be slightly lower than 25%. Our diluted earnings per share for the Q3 were $2.53 an increase of 0.8% from last year. In October, a devastating round of storms and tornadoes impacted the Dallas area.
During these storms, a tornado destroyed one of our stores in Dallas and our thoughts continue to be with that community and our impacted associates. At the end of the Q3, we had an ending store count of 2,290 And total sales per square foot were $4.49 up 3.5% from last year. At the end of the quarter, inventory turns were 5 times, down from 5.2 times last year, reflecting a load in of inventory in support of our strategic initiatives. Moving on to capital allocation. In the 3rd quarter, We repurchased $1,250,000,000 or approximately 5,200,000 shares of outstanding stock.
This included repurchases of approximately 2,000,000 shares on the open market and approximately 3,200,000 shares through an accelerated share repurchase or ASR program. Note that for the shares repurchased under the ASR, It is an initial calculation. The final number of shares repurchased in the 3rd quarter will be determined in the 4th quarter when the ASR terminates. Computed on the average of beginning and ending long term debt and equity for the trailing 12 months, Return on invested capital was approximately 45.1%, 2.90 basis points higher in the Q3 of fiscal 2018. Turning to our outlook for the remainder of the year.
As we approach the end of the 2nd year of investment geared at achieving our One Home Depot vision, That we are making the right investments for the business to extend our competitive advantage over the long term. As Craig said, These initiatives are gaining momentum and are contributing to our sales growth. But some of the benefits anticipated for fiscal 2019 will take longer realized in our initial assumptions. As a result, today we are updating our fiscal 2019 sales guidance. Remember that we guide off of GAAP.
So fiscal 2019 guidance will launch from our reported results for fiscal 2018, which includes sales and earnings associated with the 53rd week. For fiscal 2019, We now expect comp sales as calculated on a 52 week basis to increase by approximately 3.5%. And we now expect sales reflecting the compare of 53 weeks last year to increase by We are also reaffirming our earnings per share guidance for fiscal 2019. We expect fiscal 2019 diluted earnings per share to grow approximately 3.1% to $10.03 We look forward to talking with you at our Investor Conference on December 11 in New York, where we'll give you an update on our key strategic initiatives as well as some initial thoughts around fiscal 2020. Thank you for your participation in today's call.
And Christine, we are now ready for questions.
Thank you. We will now be conducting a question and answer session. Our first question comes from the line of Samim Gutman with Morgan Stanley. Please proceed with your question.
Thanks. Good morning. My first question is what gives you confidence in these initiatives Hitting. And then what gives you proof that it's the initiatives that are taking longer to realize and not something slowing in the macro? And then I have one follow-up.
Let me start with the initiatives. First of all, we are seeing benefits from the initiatives. It's just not at the rate of our original plan. And when we look at the investment that we're making in this business, as we shared with you back in December of 2017. We're doing this for the long term health of the business and to position ourselves to win competitively in the long term.
This is such a big opportunity that we're going to do this right and continue to make sure that we're delivering an experience that of the investment benefit in 2019 and as we continue to add additional Features and benefits as we unwind some of the complexities of our legacy systems, we'll see that continue to grow. And as it relates to how do we know it's not something else, we continue to see broad based growth in our business. As Ted called out, we had great strength in ticket transactions. We had strength in big ticket. We saw our Pro business We don't see anything there that concerns us at this point.
Okay. And my follow-up is, if you look at the construct Of the existing 3 year plan and you start from today where 2019 margins are going to land, looks like around 14.4, It would call for flattish margins next year to up as much as 60%, if you take the original plan. If the macro is not any different than you plan, which it sounds like it's not, what would cause that to change, this range of flat to up 60?
Hi there, Simeon. So what I would say is, First of all, we're focused on delivering on the guidance for the year and we look forward to talking about 2020 at our Investor December Conference. Clearly, there's been pressure to our margin from shrink, which was The highest contributor to the decrease year over year, within that 31 basis points. And so that is an unplanned pressure, and we're taking steps and have many initiatives in place to address that.
Okay. Thanks, Todd. Thought I took a swipe at it. Appreciate it. Yes.
Our next question comes from the line Michael Lasser with UBS, please proceed with your question.
Good morning. Thanks a lot for taking my question. You mentioned that you're getting about 50 basis points Of lift from their turn on investments rather than anticipated 100 basis points that you previously expected, is there any reason why we Just take that delta, the incremental fifty basis points and just tack it on to what we're modeling for next year. That speaks to both the nature of the return and the timing associated with the return.
Michael, I think as we look at the investments that we're making, we expect that through the balance of 2019 as we move into 2020, we will continue to see the momentum build off the investments that we're making. I don't know that we see it as a straight line, but it certainly will continue to ramp. As we shared in my opening comments, for example, On the B2B website experience, the first 135,000 customers that we put on early in the year, we're seeing very nice results. As we onboard more and we onboarded a number recently at the end of the quarter, as we continue to see them engage,
And it's also, if you think, Michael, about the investments we've made in our store environment, and Ted and Ann, you may want to comment a little bit about We know that the changes we're making are resonating with our customer and we're seeing positive lift from that.
Yes. No, thank you, Richard. A couple of things that Craig called out. First of all, when you think about our sales growth and our online sales growth And what we've seen in the stores, the 50% that's picked up in the stores, as we continue to make that easy for our customers, we're seeing just incredible Repeat as we think about transactions. So we're going to continue to lean into things that really simplify the experience from our customers.
We're also continuing to add Delivery capabilities outside of the stores as well with our car and van delivery, which really benefits our Pro And we see that accelerating through the quarter. And when you think about our VOC scores, Craig called it out As we think about our lockers, but we're also seeing increased VOC scores on our checkout process on the front end as well. So you think about the investments we're making and we think about the Q4 coming up, we're going to see increased traffic for our customers, Another time of introducing all these investments to our customers, which we believe is just going to drive tremendous loyalty.
That's helpful. And my follow-up question is, you're guiding to a 5% comp that's implied for the 4th quarter And that would be higher than what you've done throughout the course of this year. So what's driving your more optimistic expectation? Is it that you're going to see this accelerating return from the investments? Or are there other factors that you can outline that can help bridge to that 5% you're guiding to for
Michael, thanks for the question. We're very comfortable with our guide based on the momentum Ted called out. And while our guidance does imply acceleration, net acceleration is mostly caused by the absence or reversal of pressures we saw in Q3 as we walked Q4, from lumber deflation, from FX and from an event timing shift, that we saw in Q3. So you can look at it a couple of ways to normalize Q3. If you take the quarterly comp of 3.6% And you add back 60 basis points from a much lower level of pressure from lumber we'll see in Q4 versus Q3, and you add back 35 basis points from the impact of event timing to Q3 where basically our Q3 3 comped over the 1st week of Black Friday from last year's Q4, due to the calendar shift.
And then you add back 30 basis points from favorable FX compares. You'll see Q4 is actually right in line with the normalized Q3. You could look at it You could take our October comp of 3.1% as an exit rate. You'd add back 100 basis points From that event timing impact, lumber of 60 and FX of 30. And again, you'll see why we have
Our next question comes from the line of Scot Ciccarelli with RBC. Please proceed with your question.
Good morning, guys. Two follow ups. First, so when we think about the impact of both the Black Friday event and lumber pricing, when we were thinking about a net impact kind of negative 25 basis points, is that right, Richard?
From lower, yes.
Okay, got it. And then also a follow-up Sorry,
I missed most of your question.
Can you repeat the question, Scott? Repeat the question.
Yes, just the net impact, You had some of the Black Friday event kind of fall into Q4 this year versus 3Q last year, plus you had the lumber pricing. I guess I'm trying to figure out what's the net impact? The comments you've made suggests it's about 25 basis points on a net basis.
No, they actually both go the same way. So 35 basis points of negative pressure to Q3 and 60 basis points of negative pressure Sorry, 35 basis points from event timing and 60 basis points from lumber pressure. So they add to about 95 basis points, really Sort of alleviation of those pressures as we walk from Q3 to Q4. And then if you're looking at total company comp, Where there was a 20 basis point differential between total company and U. S.
In the 3rd quarter, then you bring FX And we'll have about a 30 basis point favorable compare in the Q4. Does that make sense?
I think so. And then a follow-up question on your shrink comment. Has the pressure from shrink continued to increase And related to that, do you have any feel for if it's being driven more by internal, let's call it, theft or issues or if it's more external? Thanks.
Yes. Scott, it is continuing to increase. We've seen the pressure, but we have a number of initiatives underway.
Yes. Yes. I'll add. Certainly, in the departments that we've seen increased pressure, they are more what we consider kind of malicious. We have had initiatives underway and have implemented high risk stores, some of the things we've done in the past to make sure that we secure our product.
But in addition to that, we're working through initiatives from a technology perspective as well, because we want to make sure that we have To release some of this pressure, we are also working on the initiatives in the long term.
And so when would you expect that trend, if you will, to start to reverse?
We have an expectation in the stores that we have implemented some of The initiative that will start to bend the curve. But as I said, we have done that in our high risk stores first. And we want to make sure that as we protect At the top line, we're mitigating and really creating a good experience for customers. So we're going to continue to monitor, But some of the things we've seen in the short term has been really positive in these high risk stores that we've implemented.
Okay. Thanks a lot, guys.
Our next question comes from the line of Steve Forbes with Guggenheim. Please proceed with your question.
Good morning.
Good morning.
I wanted to follow-up on the investment plan for this year. So I think you called out Yes, dollars 44,000,000 of pressure right from higher spend this year. But can you just remind us what the plan is for the whole year Relative to 2018, because I thought I guess both in absolute dollars, because I thought the P and L pressure was going to be similar, right, same dollar Impact 2019 versus 2018. So should we expect a reversal or a benefit in the Q4?
The investment plan actually ramped through this.
Yes. Yes. The investment plan ramps actually from a total and remember, I'm calling out capital and expense here, But a total investment plan of about $3,300,000,000 last year ramping to an investment plan of about $3,600,000,000 this year. And so we and that's in line with the plan that we set back in 2017. And so the expense Year over year is really sort of in line with that lift as well because expenses generally lift with the capital.
So just a follow-up on that. So can you help us break that down between capital and expenses? Or is it really just the incremental? Is $100,000,000 spread between those two numbers.
It's actually so The breakdown for 2019 is about $2,600,000,000 in capital and about $1,000,000,000 in expense, which is higher than last year's levels. But it really is just that increment of ramping up to $1,000,000,000 in expense that you see in the P and L. And The cadence of those investments quarter to quarter over the year are relatively steady, ramping up through the year and peaking in Q4. As you would expect, as we continue to ramp investment up, and investment will be higher in 2020 than it was in 2019.
Thank you.
Our next question comes from the line of Christopher Horvers with JPMorgan. Please proceed with your question.
Thanks. Good morning. The market growth has moderated in 'nineteen relative to the past couple of years. Was that your expectation coming in? And do you think that lower mortgage rates allow the market growth rate to reaccelerate from here?
So I think it was sort of a base case 4% market growth rate was a 3 year plan or do you think that maybe that market growth rate moderates a bit Further, given we're later into the cycle?
I mean, when we shared at the beginning of this year, we did expect that The market growth will be slightly less than it was in the previous year. And so that was part of our overall expectations. I mean, when we look at the market in total, however, We play in a $600,000,000,000 market that we own about 17% of. And if you look at 3rd party data, It would indicate that we took significant share in Q3. And so we look at this as opportunity going forward.
We always talk to the merchants about
the fact that we don't own enough share to worry about About
the market growth itself, we just need to stay focused on the customer and continue to drive the business.
I think there's another point to that, Chris, which is really just looking at the headline of 4% market growth. And what we experienced in assumption of 4% lower down to around 3%. And in fact, the fact that we're guiding 3.5% today shows that think we're getting about 0.5 point from initiatives.
And so do you expect so I guess the puts and takes as you look forward, you've got The benefits from initiatives, which I think back to the 3 year plan, you had expected that to ramp or I guess even over the 5 year plan. But then on the other side, you have sort of the rate factor. So do you think that rates Allow the underlying market growth rate to reaccelerate and maybe get back some of the deflation, so the underlying growth rate actually Could be better as you look forward?
What I would say is, the macro and housing environments have played out Right in line with our expectations and the description we would use is housing is healthy and stable. There's no doubt that recent movements in the rate environment are going to create support for that stability. But as we've said for many years, we expected that we would see back from 2012, A period of moderate housing recovery and a period of sharp housing recovery and then a period of stability in housing And that has played out. And so I would say again, housing is healthy and stable. The rate environment certainly provides support to that.
That's very helpful. So my follow-up is, on the extended season, that was an impressive traffic number. Do you think that extended season Was weather understand you lapped hurricane last year, but was the just the extended season additive To comp for this quarter?
Hey, Chris, it's Ted.
Yes and no. I'd say certainly the extended season, we did well in things like exterior stains and paint Some garden projects, but then in the Southeast in particular, we had heavy drought as well. So there's some give and take with that. I think On the margin, we did do better with the extended season. I would say though that the fundamental Drivers of the business is the bigger story.
When we think about this balance It really plays out that way, but to see 1.8% growth in ticket, 1.8% growth in transactions, Real underlying story is also unit growth. We saw our strongest units, as Craig called out, in a year. And if you adjust Or as we've always called it, the bathtub effect for spring, or if you have a weak Q1, you have a stronger Q2 depending on whether when the weather hits. When you normalize for the Bathtub effect, this was our strongest units in 2 years Across the entire business. As Craig said, it's across geographies and it's actually across the store where we're seeing this unit productivity.
Very helpful. Have a great holiday season.
Thank you.
Our next question comes from the line of Michael Baker with Nomura. Please proceed with your question.
Thanks. A couple of follow ups on the gross margin. First, what are you seeing competitively in terms of pricing? And if you could touch on the paint category in particular? And then second, as it relates to tariffs, you said you are you think you can manage tariffs.
What does manage Does that mean it has an impact on gross margins, but you can offset it elsewhere? Or basically, what are tariffs doing to the gross margins? Thanks.
So from a competitive standpoint to begin with, we see a continued Escalated promotional environment in the marketplace, that would include the categories of paint, That doesn't seem to be abating whatsoever. Ted and the merchant team are sticking to our strategy delivering great everyday value to our customers. We know that that's the long term right approach for the business And has played well for us over time. So that is absolutely. Ted, I don't know if you want to comment on the tariffs.
Yes. On tariffs, Since this started, we said we believed it's manageable. And when I say that, Our finance teams, merchants and data analytics teams have really drilled into the overall Impact in the business, we know down to the SKU level, the point of origin, And if you also have to put price through, you are going to retard unit productivity. So Each of Home Depot and our supplier partners are laser focused on maintaining unit growth in So we will work on mitigating the tariff impact to change country of origin, to change makeup of the product itself, to add other features and benefits that can SKU level buildup of tariff impacts, we have offset well over half. So out of the gate, there is No impact on well over half of the potential tariff impact to our business, again, working closely with our supplier And with the balance of the impact, that is a manageable set of actions we're taking across the portfolio, Not necessarily in the tariff SKUs themselves, but we have moved on some retails and that's implied When I said we're measuring the various elasticities and where we've had to move and where we've acted in a portfolio fashion, So I would sum all that up to the context that we believe it's manageable.
Thanks. That's a lot of color and very helpful. One more, just a follow-up to a previous question. Just on the housing and the macro, I get that you're talking about it being stable. But if we just look at simply simple measures of existing home sales, they have picked up Are you surprised that comps aren't accelerating on the back of housing?
Or should we expect that maybe early next year?
I go back, Mike, to the base kind of comp
that Richard walked through with you as we look
forward. And the underlying health of the business is very solid. Great transaction growth, great unit growth, broad Based across the business, if you candidly look at where we thought this year would play out to where we are today, I mean, 70 plus percent of the variance to the current year to date performance is lumber deflation, plain and simple.
So we feel
good about the environment.
Our next question comes from the line of Karen Short with Barclays. Please proceed with your question.
Hi, thanks very much. Just A question housekeeping. Last quarter, you gave big ticket growth by month. So I was wondering if you would be willing to provide that this quarter? And then I had a bigger picture question.
I don't think we have that with us here right now. We can provide that want to call in the Investor Relations department.
Okay. And then switching to the 2020 investment comments. So You commented that the 2020 investment would be higher versus 2019. So I guess the question is, does that comment apply to both expense And capital and then within the expense, is that still more skewed to D and A versus SG and A?
Look, we've got our investor conference in a couple of weeks, and we'll provide all the color around this at that time. Right now, we are laser focused on delivering the
Our next question comes from the line of Zack Fadem with Wells Fargo. Please proceed with your question.
Hey, good morning.
So following up on the SG and A
investment question for this year, you spent 2.70 Question for this year, you spent $277,000,000 in the quarter. That gets me to about $820,000,000 in operating expenses so For this year, if my math is right. So how much of this would you categorize as strategic versus business as usual investment? And then I just want to confirm you don't expect the strategic investments to step down in Q4 to get to that $1,000,000,000 for the year that you've talked about?
So all of the investment that we call out is strategic investment Of $277,000,000 in Q3. We've guided to a Plan number of around $1,000,000,000 and will be north of $1,000,000,000 this year, right in line with expectations as we set them out At the beginning of the year.
Okay. And then on the 100 basis point calendar headwind in October, Could you expand on that just a little bit more? I just want to confirm that this will be a similar benefit to November. And then when you think about The moving parts lumber deflation in Q4 and then the hurricane headwind perhaps subsiding, why do you think the implied 5% -ish Comp in Q4 is the right place to land. And are there any other moving parts that we should keep in mind?
Yes. I'll speak To the event, so from a merchandising calendar, it's very heavy this time of year. So we set Our pro Black Friday, we bring in great values for our pro. We bring in Appliance Black Friday, which is a very, very large appliance event. And then we set our gift center, which is A lot of power tools, power tool accessories, hand tools, gifting items.
All of those initiatives Kicked off on the calendar a week late relative to comp. And that's we're quite confident that that's the number Of the 100 basis points and we see that flowing into Q4. And some of that
Our next question comes from the line of Peter Benedict with Baird. Please proceed
Sorry guys, I'm taking mute off. So my question is just around the pro B2B sign up cadence. You've talked about the 135 or so 1,000 that Sign up early in the year. Are you guys still expecting $1,000,000 by the end of the year or have you kind of slowed the sign ups because of some of the tech issues that you were talking about?
No, we still expect to onboard about 1,000,000 customers during the year. And we're on boarded a number of them at the tail end of Q3, right, Bill?
Yes. Peter, we finished Q3 just above 780,000 pros that have been migrated onto the website. And we continue to add new capabilities as we go through the quarter. We now accept the Pro purchase card Our legacy and aligned customers that they can buy on homedefort.com. We've done things like introduce buy it again functionality.
And we've made new user registration automatic. So as we have new customers signing up onto our Pro Extra platform, We can vet those customers at the time of sign up and we can automatically migrate them to the B2B website. So We're on track with customer migration and on track with all of the capabilities.
So that million target,
Roughly what percent of your PROs does that represent?
And I guess what kind of penetration you guys think you can get longer term?
If you look at it, we think we can get all of our Pros our verified Pro customers Migrated on to the website over the long term. So that would represent about 30%?
Yes, about 30% of the total.
Of the total Right now. And as we continue
to build the base of capabilities, then we'll obviously do more as We had originally planned to then make that knowledgeable to our pros and market to them accordingly.
Okay, great. And just my one follow-up would be just getting back to a question a little bit earlier, just around trade down. I know you mentioned some things around how you're trying to manage your last season, whatnot. But I'm Even absent of tariffs, have you seen any sign of trade down either within certain categories or whatnot, where maybe some of the pros are opting for More middle line product as opposed to higher end? I was curious if you're seeing anything there.
No, no, we're not. So Couple of points of observation there. Appliances, for example, we continue to see Trade up across just great innovation in clients' business. We've introduced Bosch, which is Approaching the higher, highest end of the category and picking up lots of net new business there. And then Seeing great pickup and these are all higher price points with the innovation of Corpus technology and outdoor power equipment.
Our next question comes from the line of Seth Sigman with Credit Suisse. Please proceed with your question.
Hey, guys. Good morning. I did want to follow-up on that last So when we look at your average ticket on a comp basis up 1.8%, pretty similar to last quarter where it was 2%. Yes, I'm surprised it's not accelerating more. It sounds like you had a little bit less commodity deflation this quarter, big ticket trends seem pretty healthy, Maybe had a little bit of inflation on the back of tariffs.
So I'm just curious, is there something else that's holding back the ticket growth? Maybe is that the related to Black Friday where you have a lot of big ticket categories or something else maybe?
Yes. Seth, that's exactly it. The big delta would be the events for the holiday promotions. So think of appliances, your average Ticket on appliance, gifting, portable power tools, combo kits, etcetera. So that 100 basis point isn't that shifted isn't entirely ticket, but much more so than transactions.
And I'd just say, Seth, that again, when we think about the big ticket in this quarter, over $1,000 at 4.8%, hurricane adjusted markets at 5.5. That is right in line with our expectations.
Yes. Okay. That makes sense. And then just to follow back up on tariffs. It sounds like you guys have managed that really well and have found some offsets.
How do we think about the same SKU inflation that is that you're seeing in the business And then just the second part of that, there have been some exclusions announced recently in certain categories that you do play in. I'm just curious
Sure. I would say on the contribution of tariff to that Ticket growth, it's actually a very nominal amount. It's by far lower than, for example, the introduction of sales of New innovative higher priced AUR items is a far bigger driver of that 1.8% than any price moves we would have made associated with tariffs. And on the exclusions, we're working through that. It was last Friday, we had a number of exclusions announced, a number in the flooring category that We're working our way through.
Very optimistic about what that is going to mean for vinyl plank. We believe most of our luxury vinyl plank, which has been our fastest growing category and a number of those items are Seemingly going to be on the exclusion list. Again, we're working through the details, but we're very encouraged. Okay.
Thanks for that.
Christine, we have time for one more question.
Thank you. Our final question will come from the line of Kate McShane with Goldman Sachs. Please proceed with your question.
Hi. Thanks so much for taking my question. I just wanted to you mentioned that the Pro was still outpacing DIY. I just wondered if you had seen any changes in the delta between the Pro and DIY trends?
I think if we look at the last few quarters, the delta hasn't changed dramatically, but we did see the PROs And some in this quarter. Yes.
So both strengthened. But and then the one comment I would make about the pro business is We're seeing Ted talked a little bit about the unit comps, which are very encouraging, but the growth in Pro was primarily through transactions Versus ticket. So just good broad based strength
on the business.
Okay. Thank you for that color. I just had one follow-up question unrelated just with regards to the macro environment. If you could talk about any differential
And in the Q3, it was actually the narrowest we've seen in quite some time. And that includes all states,
Thank you. You bet.
Ms. Jansy, I would now like to turn the floor back over to you for closing comments.
Thank you for joining us today. We look forward to seeing many of you at our Investor Conference in December.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.