Good day, ladies and gentlemen. Welcome to The Home Depot First Quarter 2018 Earnings Conference Call. Today's call is being recorded. If you would like to ask a question any time during today's conference, please press the star key followed by the digit one on your touch-tone telephone. At this time, I'd like to turn the conference over to Isabel Janci, Vice President of Investor Relations. Please go ahead.
Thank you, Catherine. Good morning. Joining us on our call today are Craig Menear, Chairman, CEO, and President, Ted Decker, Executive Vice President of Merchandising, and Carol Tomé, Chief Financial Officer and Executive Vice President, Corporate Services. Following our prepared remarks, the call will be open for questions. Questions will be limited to analysts and investors. As a reminder, we would appreciate it if participants would limit themselves to one question with one follow-up. If we are unable to get to your question during the call, please call Investor Relations at 770-384-2387. Before I turn the call over to Craig, let me remind you that today's press release and the presentations made by our executives include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.
These statements are subject to risks and uncertainties and could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in the release and in our filings with the Securities and Exchange Commission. Today's presentations will also include certain non-GAAP measures. Reconciliation of these measures is provided on our website. Now, let me turn the call over to Craig.
Thank you, Isabel, good morning, everyone. Sales for the first quarter were $24.9 billion, up 4.4% from last year. Comp sales were up 4.2% from last year, with U.S. comps of + 3.9%. Diluted earnings per share were $2.08 in the first quarter. We are pleased with our performance in the first quarter, and the fundamentals of our business remain solid. As Ted will detail, excluding weather-impacted categories, our pro and core interior project business remained strong in the quarter, and we saw healthy growth in maintenance and repair categories. From a geographic perspective, weather impacts can be seen in the variability of performance across Canada, our three U.S. divisions and 19 regions. Our largest division is the Northern Division, which posted flat comps due to weakness in our seasonal categories.
The Southern and Western Division saw relatively better weather trends and comped above the company average. On the international front, Canada posted a slightly negative comp in local currency, while Mexico posted positive comps in local currency. You've heard us talk about the bathtub effect based on when spring breaks, where weak seasonal sales in the first quarter are counterbalanced by strength in the second quarter. We expect that effect to be true this year. Over the past few weeks, as spring has finally arrived through the U.S. and Canada, we are seeing strong customer demand. Part of the strength we saw in the business can be attributed to the health of our pro customer as pro sales, once again, outpaced DIY sales in the quarter. Investments aimed at deepening our relationship with our pro customers are yielding increased engagement, which translates to incremental spend.
While still early, the combination of enhanced associate tools in the store and expanded delivery capabilities are gaining traction with the pros. In delivery, for example, we augmented our two-hour and four-hour delivery window options with same-day car and van delivery in select markets. These efforts helped drive double-digit delivered sales growth in the quarter. Our interconnected retail strategy continues to resonate with our customers. Online traffic growth was healthy, and our first quarter online sales grew approximately 20% from the first quarter of 2017. During the quarter, we began to launch the customer's ability to attach install services when they buy certain products online in select markets. For example, in certain markets, if you purchase a faucet online and want to include the installation of the faucet in your purchase, we now enable this experience.
We continue to invest in the interconnected shopping experience and see a positive response from our customers in the form of improved customer satisfaction scores, better conversion, and increased sales. As we continue to make the shopping experience more convenient for our customers, another area of focus and differentiation is our supply chain. The flexibility of our supply chain is a competitive advantage, particularly when unpredictable weather results in spiky demand patterns. In-stock levels are at record highs as our shelves are fully stocked with products our customers need to get their projects done. Let me touch briefly on our long-term strategic priorities. You'll recall at our investor conference in December, we outlined our commitment to accelerated investment plan to create the one The Home Depot Experience for our customers. I'm pleased to report that our key initiatives are on track.
We implemented our enhanced wayfinding sign and store refresh package in nearly 250 stores during the quarter and intend to pilot our first new supply chain facility starting this summer. It is still early days, we remain very excited about the work and opportunities ahead as we focus on enhancing the customer experience by investing in our business and in our associates. Our associates consistently execute. A delay in the spring selling season is not without its challenges. Given the company-wide alignment and coordination of our store teams, merchants, vendor partners, and supply chain, coupled with a favorable housing backdrop, we are poised to deliver a strong 2018. I'd like to close by thanking our associates for their dedication, hard work, and commitment to our customers. With that, let me turn the call over to Ted.
Thanks, Craig. Good morning, everyone. As you heard from Craig, we are pleased with our performance in the quarter. Excluding our seasonal business, sales exceeded our expectations. We saw significant strength in our pro business, interior projects, and maintenance and repair categories. The extreme winter weather in the quarter had a negative impact on our garden categories, which historically represent around 15%-20% of our first quarter sales. Our garden departments had negative comps in the quarter, driven by softness in chemicals, fertilizer, mulch, and live goods, just to name a few. Looking at our departments, appliances, electrical, and lumber had double-digit comps in the quarter. Lighting and our garden departments were negative, with lighting comps reflection of LED price deflation. All other merchandising departments were at or above the company average.
In the first quarter, comp average ticket increased 5.8% and comp transactions decreased 1.5%. If we exclude our garden business, we saw positive comp transaction growth. Commodity price inflation in lumber, building materials, and copper positively impacted average ticket growth by approximately 111 basis points. Foreign exchange rates also positively impacted average ticket growth by approximately 41 basis points. While cold and wet weather impacted some outdoor-related projects, this didn't prevent our customers from completing a variety of interior projects. Categories like interior doors, bath fixtures, storage and organization, interior paint, door locks, ceiling fans, and window treatments all had comps above the company average. Core maintenance and repair categories also performed well during the quarter, with strong results in safety and security, water heaters, plumbing repair, pipe and fitting, and air circulation.
As you heard from Craig, in the first quarter, we saw continued traction with our pro. Pro-heavy categories like lumber, gypsum, insulation, pneumatics, wiring devices, and flooring tools all had comps above the company average. In addition, we are building engagement and enabling our associates to target specific customers, which is driving expansion of categories and services sold. In Interline Brands alone, we saw sales growth ahead of the company average. We also saw a healthy customer appetite for big ticket projects. Big ticket sales in the first quarter, or transactions over $900, were up 10%. The increase in big ticket sales was driven in part by vinyl plank flooring, appliances, and various lumber and building materials categories. In the first quarter, we hosted our President's Day and Spring Black Friday events. Our stores did a fantastic job executing these events, and our customers responded.
During the event, we saw great results in several tool categories and cleaning. One of our core strategies as merchants is to balance the art and science of retail, both in store and online. Over the last year, we made several improvements to our interconnected shopping experience, including better product content, refreshed mobile experience, improved inventory visibility, and faster checkout. These investments have helped drive a more seamless, frictionless customer experience, and conversion rates in the first quarter increased more than 10% year-over-year across all devices. Now let's turn our attention to the second quarter. Just in time for the warmer weather, we are excited to introduce a fantastic new innovative product in our outdoor garden category. We have partnered with Syngenta and Fernlea to bring our new Rio dipladenia plants to market. These plants are low-maintenance, drought-tolerant, and have reoccurring blooms throughout the growing season.
Rio is available in all of our U.S. stores and is a big box exclusive to The Home Depot. In addition, we are very happy to announce the extension of our PPG partnership with the launch of Olympic exterior stains. With this launch, Olympic brings 80 years of trust and brand recognition into our stores. This broadens our assortment in our paint department, providing customers choice with a strong lineup of products across the category. We are also thrilled about new product offerings across all of our categories and our upcoming events. During the second quarter, we will host our Memorial Day, Father's Day, and Fourth of July events, where we will be offering more great values and special buys for our customers. With that, I'd like to turn the call over to Carol.
Thank you, Ted. Good morning, everyone. Before we discuss our first quarter results, I want to mention a change in our accounting policy. During the quarter, we adopted ASU 2014-09, which pertains to Revenue Recognition. This standard changes the way we account for certain items related to our private label credit card and gift card programs. While the new standard changes the geography of certain items on our income statement, it has no impact on operating profits. Looking at our first quarter results, the change in accounting caused a $131 million increase to gross profit and a corresponding $131 million increase to operating expenses.
Note that the $131 million increase in gross profit was driven by a $33 million net increase in sales and a $98 million decrease in cost of goods sold. While we did not recast our historical financial statements to reflect this accounting change, included in today's press release is a quarterly pro forma view that shows the impact of the accounting standard as if it had been in place during fiscal 2017. With that, let's move on to our first quarter results. In the first quarter, total sales were $24.9 billion, an increase of 4.4% from last year. Versus last year, a weaker U.S. dollar positively impacted total sales growth by approximately $104 million, or 0.4%.
Our total company comps were positive 4.2% for the quarter, with positive comps of 5.6% in February, 5.9% in March, and 2.2% in April. Comps in the U.S. were positive 3.9% for the quarter, with positive comps of 5.1% in February, 5.5% in March, and 2% in April. As you may have personally experienced, April was one of the coldest and snowiest months in more than 20 years. In the first quarter, our gross margin was 34.5%, an increase of 40 basis points from last year. The increase in our gross margin year-over-year reflects the following factors. First, we experienced $131 million or 48 basis points of gross margin expansion due to the new accounting standard.
Second, we experienced 14 basis points of gross margin expansion due to changes in mix and the gross margin benefit of recent acquisitions. We experienced 22 basis points of gross margin contraction due to higher shrink and higher transportation costs in our supply chain than what we experienced last year. In the first quarter, operating expense as a percent of sales increased by 87 basis points to 21%. Our operating expense reflects the impact of the new accounting standard, the impact of the strategic investment plan we laid out at our December investor conference, and ongoing expense control. The new accounting standard resulted in a $131 million increase in our operating expenses and caused 50 basis points of operating expense deleverage. Expenses related to our strategic investment plan resulted in approximately 56 basis points of operating expense deleverage.
Finally, we drove 19 basis points of expense leverage due to ongoing productivity actions in the core business. Our operating margin for the first quarter was 13.6%, a decrease of 47 basis points from last year. For the quarter, interest and other expense decreased by $2 million to $239 million, and our effective tax rate was 23.5% compared to 35.2% in the first quarter of fiscal 2017. The decrease in our effective tax rate reflects, for the most part, the benefit of tax reform. For the year, we expect our effective tax rate to be approximately 26%. Our diluted earnings per share for the first quarter were $2.08, an increase of 24.6% from last year. Moving on to some additional highlights.
During the quarter, we opened one new store in Stamford, Connecticut, for an ending store count of 2,285. Selling square footage at the end of the quarter was 238 million sq ft. Total sales per square foot for the first quarter were $412, up 4.5% from last year. At the end of the quarter, merchandise inventories were $14.4 billion, up 6% from last year. Inventory turns were 4.9 x, up slightly from last year. While spring was a reluctant bride, she has arrived, and our stores have the inventory necessary to meet demand, which is a good thing. As month- to- date, for The Home Depot, our May comp sales are double-digit positive. Moving on to capital allocation.
In the first quarter, we repurchased $1 billion, or approximately 4.7 million shares of outstanding stock. As of today, we are targeting $4 billion of share repurchases for fiscal 2018. Computed on the average of beginning and ending long-term debt and equity for the trailing 12 months, return on invested capital was approximately 36%, 370 basis points higher than the first quarter of fiscal 2017. As we look to the remainder of the year, we are encouraged by what we are seeing in housing and the broader economic environment. The U.S. economy is strong and housing fundamentals continue to be supportive of our business. Unemployment is the lowest it has been since 2000. Wages are increasing.
Home prices are appreciating, buoyed by a housing shortage in the U.S. While interest rates are rising, this is indicative of a strong economy. At these levels, we do not expect interest rates to lead to a slowdown in customer desires or demand. That's why today we are reaffirming the sales and earnings per share growth guidance that we laid out at our fourth quarter earnings call, adjusting certain items solely for the change in accounting standard. Remember that we guide off of GAAP. The new accounting standard will not affect our earnings per share guidance, but it will impact sales growth and the gross margin and expense growth factor guidance we gave at the beginning of the year. Recall that fiscal 2018 will include a 53rd week, so the fourth quarter of fiscal 2018 will consist of 14 weeks.
For fiscal 2018, we now expect sales to increase by approximately 6.7%, with positive comps as calculated on a 52-week basis of approximately 5%. Reflecting the new accounting standard, we now expect our 2018 gross margin to increase by approximately 45 basis points. Reflecting the new accounting standard, we now expect our 2018 operating expenses to grow at approximately 144% of our sales growth rate. For earnings per share, we expect fiscal 2018 diluted earnings per share to grow approximately 28% to $9.31. I also wanna take a brief moment to comment on our long-term financial targets. The new accounting standard does not change our sales growth or operating margin targets for fiscal 2020.
Because the accounting change did affect the geography of certain items on the income statement, we have posted an update to our December investor conference materials on our website to assist you with your modeling. With that, I'd like to thank you for your participation in today's call. Catherine, we are now ready for questions.
Thank you. Ladies and gentlemen, as a reminder, it's star one for questions. We'll hear first from Simeon Gutman with Morgan Stanley.
Thanks. Good morning. My first question, it's all about weather, it's got a couple parts. Can you clarify, you said garden was negative. Is April the largest month for garden? You also mentioned that Northern is your biggest division. If we assume it's, let's say, 40%, I think that would imply Southern and Western would be north of, like, 6%, 6.5%. Is that fair?
In terms of garden, April is not necessarily the biggest month in garden. Generally, that is May. We actually don't break out the divisional numbers. Northern Division is our largest division.
Okay. Maybe just to follow up, where the remaining divisions, I guess Southern and Western Divisions, were those trajectories similar, or was there a big discrepancy between them? Have their quarter to date trends held up? I'm assuming Northern Division is the one that's breaking out, but has Southern and Western Divisions stayed the same or strengthened?
Actually, all areas are breaking out with the change in the weather.
We're so pleased with the performance across our geographies. If you look at the performance in the first quarter, the Southern Division had a slightly higher comp than the Western Division. Remember, the Southern Division had some hurricane-related sales in it. If you normalize for hurricanes, the divisions performed pretty much the way they should have performed. It was really in the North, and it's come back, and the whole business is coming back.
Okay. My follow-up question, I think the issue the market's contemplating here is, you know, the cycle question versus what the weather's doing. I don't know how you look at it, but if there is something that's slowing that's more than weather, and it doesn't seem like that's the case, I guess, how obvious are these signals and how much lead time do you think you have to be able to see them?
I mean, first of all, this clearly is really a garden story for us. The miss in terms of garden was significant against what we planned.
Craig, maybe we could just quantify that for you. If you backed out the gardens, our comp for the quarter would have been 6.5%.
Right. Okay. Well, thank you for the color and good quarter, other than the weather.
Thank you.
Our next question comes from Michael Lasser with UBS.
Good morning. Thanks a lot for taking my question. Of that 230 basis points impact from the weather, is that a net number, so that's net of the hurricane benefit? What percentage of those sales do you expect to recoup in the second quarter?
The storm-affected sales were roughly 135 basis point impact, and we actually expect to capture the majority of those sales, and as we're seeing that happen in May.
My second question is on the initiatives that you outlined, both the 200 stores that you touched with your new signage package, you know, what comp are you seeing those stores produce above and beyond the corporate average? Then as part of that, can you also touch on your pro delivery initiatives? Is that helping you more with existing customers or customers who really haven't done business with in the past?
Let me I'll touch on the store minute here, and then Mark Holifield is here and can speak to the delivery. 250 stores that we implemented the new signing and refresh package in, we're obviously just completing those. We did that investment for our stores over a couple year period or are doing that because of the pilots that we ran previous.
To that. We've built that lift into our guidance. That, you know, that's something that we're rolling here over the next two years across all the stores.
Craig, on the new delivery, that's out there, the car and van delivery, that's really driving sales across the range. We have a lot of buy online deliver from store customers who are trying out the car and van delivery. Our pro customers, our existing pro customers and new customers are using the two and four-hour windows.
Our math isn't perfect, but our modeling would suggest that the majority of these delivered sales are incremental.
In incremental for customers that you're already doing business with.
No.
More so attracting customers who you. Both. Got it.
It's both Michael.
All right. Thank you so much and good luck.
Yeah. Thank you.
Thank you.
We'll continue on to Zachary Fadem with Wells Fargo.
Good morning. Could you talk a little bit about the competitive environment in the paint category? Have you started to see any step change there in terms of promotions? Any thoughts on what you think the key drivers are for you to maintain and win share in the category this year?
Sure. I would say that the paint promotional environment is certainly for us, it's the exact same year-over-year. We're not seeing any more promotion out of others in the marketplace either. We are very happy with our paint performance. Our comp was at the company average. We saw the strongest interior paint comp and gallon performance we've seen in a long time. We're happy with our brands. We have the best brand with Behr in the marketplace. We're thrilled with our expansion of PPG. Ann and team are doing a fantastic job of selling in the stores.
Got it. To follow up, as input costs for items like lumber and building materials continue to grind higher, first of all, what are your expectations there for the year? You know, is there any concern in your mind on your ability to pass along the higher prices to customers in this environment?
Well, you know, the two areas we've seen, the largest cost requests are in clear commodities, so looking at lumber and copper, for example. Those generally, the market passes on. Most of those products are priced weekly in well-known pricing indexes, and the market tends to follow that. We've had no problem passing that on. I will say lumber and panel prices are at historic highs. We don't see that abating at all. We're up about 30% year-over-year. Certainly don't want it to go a whole lot higher. For right now, we've been able to pass on and not seeing degradation in units. The other area is in things like laundry, where you had a very specific tariff.
The entire industry has accepted that cost increase based on the tariff. You're seeing retails in all competitors that have gone up more or less mirroring the impact from the tariff.
Got it. Thanks so much, guys. Appreciate the time.
Our next question comes from Steve Forbes with Guggenheim Securities.
Good morning.
Good morning.
You mentioned piloting the first new supply chain facility this summer. Can you help us or help expand on that? You know, what type of facility is it? Maybe just give us your updated plan for this year as far as how many and what type of facilities you plan on opening in 2018.
Yeah. It's Mark Holifield here. The facilities we're going to be doing first are our market delivery operations, which are the hubs out there. These are stockless locations that will be delivery hubs for big and bulky product like appliances and vanities and things like that. Later this year, we'll be testing our flatbed distribution capability and opening our first local direct fulfillment center.
Steve , I'd like you to remember that this is a five-year plan. We've committed $1.2 billion in our supply chain over the next five years. We will spend as much in year 4 as 5 as we do in year 1 through 3. It's definitely gonna ramp up over time. Isn't it, Mark?
Yes. I mean, perhaps a way to think about this is if you think back to our RDC rollout years ago, in the first year, 2007, we had exactly one RDC. In 2008, we did four. 2009, we did seven. 2010, we did seven. You'll see a ramp somewhat similar to that across the five years of the supply chain transformation ahead.
Thank you. Then just a quick follow-up. On retail services, it's recognized the percentage of revenue here, but it's a topic I find interesting as you think about the opportunity to build brand awareness and share of wallet, right, with the DIY consumer here. Can you touch on how that business performed during the quarter?
Yeah. Our services business, it represents about 4% of our total sales and grew low single digit, really driven by HVAC and window treatment.
Yep.
Thank you.
Wasn't much exterior business happening.
Thank you.
Yep.
We'll continue on to Keith Hughes with SunTrust.
I think you have another product question. Specifically in flooring, you've done very well in flooring the last several years, particularly carpet, which is kind of a declining industry. As you've called out, luxury vinyl plank, I assume you mean LVT there is growing well. Could you talk about your hard surface offering, how that's growing and what you see for the future?
Yes. Overall, flooring, again, we're very happy. Our comps in flooring were above the company average, for sure led by the LVT. That product is just a fantastic product with solid or waterproof, a final product that looks like tile and or wood. The rest of the business is solid. I mean, lot of sales moving into that LVT product. You know, the rest of the business is sort of low single-digit comp.
Okay. Thank you.
Our next question comes from Chris Horvers with JPMorgan.
Hi, good morning. This is Torian for Chris.
Good morning.
From prior quarters, it would seem that Pro is comping 10%. Is that fair? Can you talk about the performance of Pro in the first quarter, and if you think that impacted the business?
Well, we certainly had a strong Pro quarter. It outpaced the DIY business in total, largely, you know, due to the fact that, you know, the garden business was obviously down dramatically in the, in the DIY space. But we're very pleased with our Pro. Bill, I don't know if you want to add to that.
Well, Craig, just kind of a follow-up on engagement. Craig mentioned the tools that we're providing to our account managers in the stores are POSAs. As they get more engaged, we are seeing customers expand the number of categories that they purchase. We're seeing them start to utilize more services like delivery. As a result, we're seeing accelerated growth in the accounts that are managed by our POSA. Great strength in Pro and top-performing Pro trades were our renovator/remodeler, our property investors, and property managers. We're pleased with the progress and the trajectory of the business.
As my follow-up, following up on the May commentary, can you talk about what you've seen from the acceleration, from Pro versus DIY quarter- to- date?
I mean, we're seeing both in May. The whole store is lifting.
Thank you.
Our next question comes from Seth Sigman with Credit Suisse.
Thanks. Hey, guys. Good morning.
Good morning.
A couple follow-up questions here. First, just on the delivery from the store. It's continued to grow at this double-digit rate, pretty much since you guys have rolled it out. Can you help us understand how meaningful that is today in terms of the overall contribution and also the influence that it may be having in driving higher transaction size? Because it does seem to be a big differentiator for you. Thanks.
We're pleased overall with what's happening on the delivery side of the business. We don't break out those numbers specifically. We are seeing very nice growth. As Mark said earlier, that is attracting both incremental business with current customers and new customers into the business.
Okay. When you look at the online growth this quarter of 20%, obviously very strong again, is it fair to assume there was really little weather impact there? You discussed a couple things that may be helping. Any and more insight into where the growth is coming from, the types of categories, and also from a profitability perspective, just the progress that you're making there in improving the margins in that business. Thank you.
I'll answer the second part of that, and I'll turn it over to Kevin Hofmann. From a profitability standpoint, we run this on a portfolio basis, and it's an interconnected experience. In, you know, many cases, the experience starts in the digital world. It may finish in the physical world. Over 45% of our orders, the customer chooses to pick up in one of our stores. We manage the portfolio, if you will, on a profit basis across the channels.
Just from the health of the online business. We were really pleased with the traffic growth we saw. Ted mentioned we had double-digit improvement in our conversion rates because of the experiential improvements we've been putting in place. Super excited. Some of our fastest-growing sales are what we call those interconnected sales, where the customer is buying online, picking up in store, buying online, shipping to store. That was some of our fastest growth. Really across the store. Flooring did great. Plumbing did great. Electrical did great. We were very pleased.
Seth, there actually is an impact from a seasonal standpoint in the online business. When it's snowing on the ground in April, people aren't really looking online for patio furniture.
Right.
for example.
Yeah.
It's kind of funny, but there actually is an impact.
Okay, understood. Thanks very much.
Yep, you bet.
We'll continue on to Brian Nagel with Oppenheimer.
Hi, good morning.
Morning.
My first question, just on ticket growth. Clearly a lot of discussion here on weather. If you look at that, the ticket growth, it tracked higher in the quarter and I think one of the highest rates in a while. What's behind that, and how should we view the sustainability of that metric? I have a follow-up.
I'm assuming you're referring to the $900 and above.
The average ticket of $5.8.
The average ticket of $5.80.
I was just talking more about the number in the press release, the average ticket of $5.8.
Okay.
If you look at the average ticket of $5.8, think about the commodity impact plus the FX impact, that gets you back to kind of where we've been running all of 2017 quarter by quarter.
Okay. There really hasn't been much change then besides that.
No.
Not at all. Right.
Okay, that's helpful. The second question I have, and I guess from a bigger picture perspective, you know, we talk a lot about just, you mentioned a lot just the ongoing strength of the macro environment. You know, clearly, looking at my screen right now, we do have rates, you know, rising, albeit off of lower historically low levels. The question I have is.
What do you watch? I mean, You guys do a very good job of watching a lot of factors out there. What are you watching for maybe some potential early indications of an impact of higher rates upon your business?
Yeah. There are a number of things that we look at. Obviously, you know, during the recovery, we were always looking for green shoots, and now we're looking for red flags. Luckily, we're not seeing any of those, but here's what we're looking at. As you see, rates are going up. 30-year mortgage, I don't know what your screen is showing. The last time I looked, it was about 4.6%, and it's on its way up, projected to be at least 5% by 2020. You know, historical mortgages over the past, well, gosh, 50 some odd years is 5.8%. We are considerably under those historical mortgage rates. We are super focused on the affordability index and what that means in terms of performance by market.
If you look at the affordability index for the country at large, it's 152%, which is still very good. The average or again decades is about 127. If the affordability index were to reach 127 or under, that would certainly be a red flag. Then we look at rising home prices coupled with rising mortgage rates to see in markets where you might argue there's an overheated housing market, or at least certainly one that's on fire, is there anything happening to our business? I will call out two markets, Denver, Colorado, and Seattle, Washington, both that have seen extraordinary expansion in home price appreciation. The business there is very good, and the reason is because the economy is very good.
You can't just look at housing prices and interest rates to say, "Uh-oh," you gotta then look at what's happening to the economy. It's getting a bit more complicated than it has in the past because there are all these influences of business. Certainly, if I stop talking and just tell you what we look at every day, we look at ticket and transactions, ticket and transactions. If you go back to the last recession, ignoring the housing downturn recession, but the last recession in the U.S. had 2001, our ticket was flat. We're looking at that. Then, of course, transactions, because transactions could be an indicator of a few things, right? They could be an indicator of a slowdown in demand or an indicator that a competitor is taking your customer away. Hopefully that's helpful, Brian.
No, that's all very helpful. I appreciate it. Thank you.
Yeah.
Our next question comes from Elizabeth Suzuki with Bank of America Merrill Lynch.
Hi. Good morning, guys.
Good morning.
I think you had expected before to experience a similar net sales impact from Harvey and Irma in 2018 as in 2017. Is that still the expectation, and will the benefit be limited to the first half, or could there be some residual benefit in the second half as well?
Our expectation is that the sales will be the same year-on-year. The majority of the benefit will occur in the first half. There may be some trail on benefit in the back half because the issues in Puerto Rico are so dramatic, but it won't be material to the company.
Okay. Sort of shifting over to online, I mean, what are the product categories that are doing well online and which are more traditionally sold in store and don't do very well online? How frequently are you able to adjust your online pricing to stay competitive?
First of all, what I'd say is largely our business online is incremental sales. We're growing the categories in store at the same time that we're growing online. I'll let Kevin speak to the categories.
As mentioned, still strength in our core tools department, our plumbing department, our electrical department. Really, the core of the store has been performing very nicely. We've got a great bath business online as well. In your question around pricing, it's just like how we think about it in the store of being priced competitively every day and making sure that we differentiate not just on price, but on the full service offering to the customer, the experience and all the things that we bring to the table. Very actively monitoring and managing the price situation online just like we do in the store.
We can move prices obviously online, you know, instantaneously. We purposely, because of how it impacts the store environment, move prices in the store at a different rate than we do online.
Great. Thank you. Oh, go ahead.
I don't wanna forget the interconnected aspect of our online business as well because things like the lumber department pages or building material pages are some of our most active pages because the pros are looking at price and inventory availability. While they're not transacting as much online in those departments, we have great traffic on those pages.
Great. Thanks very much.
We'll continue on to Seth Basham with Wedbush Securities.
Thanks a lot, and good morning.
Good morning.
Can you guys give us some color on the comp or the growth in comp transactions by ticket size?
Yes. We talked about big ticket already. I suspect you're wanting to know what happened with the smaller ticket.
Correct.
Yes. As you would anticipate for transactions with tickets of $50 or less, they were down year-over-year. That was because of our garden business. I can make this really real for you if you just think about penetration of tender. You may say, "Why?" If you look at penetration of tender in the quarter, our private label credit card penetration increased by 50 basis points. While at the same time, our cash tender decreased by 50 basis points, and that was all related to our garden business, which is a smaller ticket activity.
Fair enough. If you think about the transaction growth overall, ex garden, how positive was it, and how does that compare to recent quarterly trends?
It was a positive 1.1% for the quarter. Continues to be positive. As we said, May comps for the company are double-digit positive.
Thank you.
We'll now hear from Dennis McGill with Zelman & Associates.
Hi, good morning. Thank you. First question just had to do with the pilot program on the delivery from car and van. Can you maybe elaborate a little bit there what you're seeing from that uptake, and particularly at the category or customer level, are you seeing Pro versus DIY be more heavy with that uptake?
It's still early days. Customers are choosing to purchase all sorts of things. It could be a pro on a job site needing something. There's a lot also on the buy online deliver from storefront. It's interesting to see where it goes. It's not taking a real pattern at this point.
Okay, great. Carol, can you elaborate on the transportation cost increase that you experienced in the quarter, the deleverage there? Is that fuel alone, or are you seeing any issue with availability, and where do you see that trending for the year within guidance?
No, it wasn't fuel alone. We had 8 basis points of gross margin contraction in transportation, of which 3 basis points was fuel, and 5 basis points was the pressure in transportation. You know, we're not alone. All companies are facing higher transportation costs. As you know, as our practice, we will figure out a way to work through this, but we've certainly got some challenges ahead.
Okay, thank you, guys.
Our next question will come from Dan Binder with Jefferies.
Hi, it's Dan Binder. Thank you. Carol, you mentioned a margin mix impact on gross margin. Was that primarily from the seasonal mix, and how should we think about that for Q2? My second question was around credit. Just curious if we can get your thoughts on demand for credit, use of the credit lines that are out there, average spending on credit and delinquencies.
On the margin expansion that came from mix and acquisitions, that was 14 basis points in total, of which 6 basis points was mix and 8 basis points came from our recent acquisitions. Those acquisitions being The Company Store and Compact Power. As we look to the second quarter, obviously with an increase in penetration of the garden business, which is a lower margin category, that's gonna impact the gross margin. We're gonna have benefit in other areas too. Nothing comes to our attention that says we can't deliver the gross margin guidance that we just provided and updated with you today. On our private label credit card, really pleased with the performance. As I mentioned, we saw a 50 basis point improvement in penetration year-on-year. What we're seeing is a very healthy portfolio.
The average net receivable, which obviously isn't underwritten by us, it's underwritten by a third party, it's over $12 billion. We had a million new accounts open year on year, We're seeing, you know, pretty good utilization on those accounts. For the consumer, the utilization's around 29%. For the pro, the utilization is around 23%. Our approval rates are north of 70% for both the consumer and the pro. You know, part of the change in accounting for us is moving all of the aspects of our private label credit card up to the revenue line. Included in the benefit that we removed out of our selling expenses and moved up to the revenue line was gain share.
Gain share is our profit sharing program with Citi, who underwrites this card for us. The way the portfolio has gains is there's an EBIT threshold it must earn, and then anything over that EBIT threshold, we share in it, and that percentage of sharing changes over time. Embedded in that EBIT threshold, of course, is that you've gotta make sure that the portfolio doesn't have high losses because that could impact your gain share. Our losses, this is a long-winded answer to your question, but our losses are running at or below historical averages, so the portfolio is very healthy.
A great color. Thank you.
Yep.
Our next question comes from Chuck Grom with Gordon Haskett.
Hi. Thanks. Good morning. On the gross margin line, to follow up on the transportation costs. Wondering if you could characterize how they came in relative to your original expectations. I have a follow-up.
We didn't anticipate deleveraging the supply chain in the first quarter to the extent that we did. The team did an awesome job, though, of managing spiky demand pressure coming from all kinds of areas. Managed through it.
Okay. You would expect that headwind to continue over the balance of the year?
No, there's definitely pressure of coming at us for the balance of the year, but we'll manage through it.
Okay. Just on the weather here, obviously, you guys have a lot of experience dealing with it. When you think about it, does business get simply delayed here or, and you recover most of it? Or do you lose some of it because the window just simply closes?
No, we'll actually recover most of the business. There may be a piece here and there that, you know, you miss, like part of pre-emergence, but even in that, we feel like we're getting most of that business right now, particularly in the north. The majority of this business will be recovered.
Okay. Thank you.
Yep.
We'll continue on to Matt McClintock with Barclays.
Hi. Yes. Good morning, everyone. McClintock.
Carol, I was wondering if we could take the housing question from a more of a generational perspective. It seems like a lot of the long-term optimism for the housing market to stay strong is driven by the millennial generation forming households. Can you talk about maybe trend changes that you're seeing in the other generations? And I only ask because it seems like a lot of the story of baby boomers, maybe moving, downsizing their household seems to be kind of minimizing. Thanks.
Well, as we look at mobility rates, we see mobility rates declining by all age cohorts, particularly baby boomers like me. There's been some great research that came out of the Harvard Joint Center for Housing Studies that suggests the desire is to age out in your home. If you think about what that means for home improvement, well, that's nothing but opportunity. That's just one trend.
Can you maybe dig into some of how the opportunities do change for you and how you position yourself for some of those changes just a little bit more?
Well, yeah. I mean, if you think about flooring, for example, that's something that people look at as they age in their home. How do you make sure you eliminate trip hazards? You think about bath remodels and the ability to put in walk-in showers, for example, so that you don't have to step into a bathtub where you have the potential to slip. You think about lighting around the home becomes an important factor both inside and outside the home. You think about security. There's lots of factors that go into how somebody thinks about changing their home if they're aging out in their home.
Perfect. Thank you very much for the color.
You're welcome.
Our next question comes from Peter Benedict with Baird.
Oh, hey, guys. Thanks for taking the question. Appreciate the Stamford, Connecticut store.
Great store.
Yeah.
It made $1 million the first week. It's an awesome store.
There you go. Well done. Given the traction online with categories like tools, electrical, bath, just can you remind us how you're rethinking the space allocation within the stores to take advantage of the opportunities across different categories? That's my first question.
Sure. I think as I mentioned earlier, our online business for all practical purposes is incremental. We actually haven't seen the need to make a lot of shifts in space. It's something that we look at on a continual basis. We really haven't had to do that at all.
I'd say, Craig, the space that we're doing speaks more to the interconnected nature of our online business, where we're putting lockers in the front of our stores. We'll do about 1,000 lockers this year. We're also adding some bigger holding area for bulkier items near the front of the store. Space allocation is more for online pickup than any merchandising changes in the bay.
46% of our online orders were picked up in a store in the first quarter.
Okay. That's terrific. Yeah, makes sense. Carol, back to kinda the red flags that you're keeping an eye on out there, how about what are you watching when you think about the leverage guardrail for the business? You know, interest rates are going up here, but, I mean, is there a level or a point at which the 2.0 becomes something that you're not comfortable with? How should we think about that?
Well, I'm really pleased with how we've managed our capital structure over the past several years. If you look at our the amount of debt that we have outstanding, long-term debt, excluding current maturities, $24 billion. The average maturity of that debt is 13.6 years. The coupon is 3.7%. The latter maturities go out 40 years. You know, we really worked hard to not put any financial risk into the company. With an adjusted debt to EBITDA target of 2 x, that implies, you know, we could get the debt paid off in a very short period of time. Comfortable with that leverage. Always gonna be mindful of, you know, not putting the company into financial distress, but real comfortable with where we are today.
Okay. Sounds good. Thank you very much, guys.
Thank you.
Our next question comes from John Baugh with Stifel.
Thank you. Good morning. Just quickly, since you're hyper-focused on the transactions, and thanks for the 1.1 number in April ex Garden. I know you don't guide to that figure, but it sounds like May is well up. You've been running a 2%+ I believe, fairly consistently. Is there any thought around that number for the year in light of the start to the first quarter? Thank you.
The one one was for the quarter ex our Garden business. It wasn't for April, so that was for the total quarter. You know, we think about the balance between ticket and transactions as being relatively even over time. That's how we planned the year.
Great. Thank you. Good luck.
Thank you.
Matt Fassler with Goldman Sachs has our next question.
Thanks so much, and good morning. My first question is for Carol. You spelled out a 56 basis point impact on the expense ratio from your investment plan. Can you spell out here at the outset of that program where some of that money went and whether that's the kind of impact you'd expect to see through the year, or whether with a better top line, that impact should dissipate a bit?
Sure. I talked about expense deleverage and leverage as a percent of sales. I didn't really talk about the expense growth factor, but let's use that nomenclature because that's how we've guided for the year. The expense growth factor in the first quarter was 202%, and the drivers of that were Revenue Recognition, which was 57%, investments in the business, 70%, and then what we call BAU, business as usual, 75%. In that business as usual, there's about 12% of acquisition-related expenses, companies that we've acquired. If we focus then on the guidance that we gave for the year, clearly it's gonna get better. It's gonna get better for a couple of reasons. First, we have $167 million of hurricane-related expenses in the back half that will not repeat.
You should model a higher expense growth factor in the first half than the back half. Secondly, you've heard Ann-Marie talk about this, we have a new labor model which more effectively allocates our hours to our activity. That starts to kick in, into June, we should be driving more labor productivity than we saw in the first quarter. If I focus simply on the investments in the first quarter, the dollar amount of investments, I'm not gonna call this out every quarter, because we're just getting into this, I'll give you this color. The dollar amount of the investments were $144 million in the quarter. Those dollars were used for increased wages for our people, for increased advertising as we move to a more marketing technology platform, increases in display costs.
You heard Craig call out what we're doing inside of the stores, increase in head count. We've gotta have some people on board to help us do all of this investing. In fact, I believe we've hired 350 people alone in our IT organization. These are investments that we're making to reach those sales and operating margin targets that we laid out for 2020.
That is great detail. If I could follow up on a couple of disclosures you made on the monthly trends. Was there any weather impact on the first two months of the quarter, on February and March? Then when you think about the bathtub effect, if April was really the only month that was impacted, do you tend to recapture most of those lost sales in the month of May, or does the bathtub effect push out till June or July?
There definitely was impact still in the other months as well. The recovery of that, you'll get a significant piece in May, but it will actually flow into June and July as well.
That's great. Thank you, guys.
Yep.
Our next question comes from Scot Ciccarelli with RBC.
Good morning, guys.
Morning.
Are you seeing a greater appetite for job site delivery from your pro customers?
Certainly.
Okay. Obviously that is the case. Over time, do you think that happens to change your historical real estate advantage that you've had against some of your major competitors? Maybe even open the door to higher levels of e-commerce competition because then, you know, the physical location or physical structure of a Home Depot store maybe gets, you know, partly marginalized over time?
Actually, when you think about our location and footprint, we'll actually leverage that as an advantage overall to our business, where we are well-positioned across markets, including urban markets, and sit within, you know, 10 mi of 90% of the U.S. population. No, we actually see this as an advantage. Mark.
I mean, you'll recall from the investor conference, we outlined 40 flatbed distribution centers, and we expect to open those to take some pressure off of the stores. Our stores are going to be in the delivery business, you know, in smaller markets for a good long time. They're still ideally located and a great place to originate those deliveries from. In urban markets, those flatbed distribution centers will take a lot of pressure off of those high-volume stores.
I think the other thing you have to think about is actually not just the downstream portion of our supply chain network, but the advantage that we actually have as a result of the upstream portion of our supply chain, moving goods from our suppliers to our stores and our distribution centers. It's those things working in combination that will create the fastest, most efficient delivery in home improvement.
Operator, we have time for one more question.
Thank you. Our final question this morning is from Alvaro Lacayo with Gabelli & Company.
Thank you. It's Alvaro Lacayo here. Just one question on an update on the capital allocation. Carol, last call you said you were going to provide us with an update later on given that cash flow from operations was going to be a little bit higher than sort of what was guided on dividends and repurchases. Just some commentary around if there's any updated thoughts there.
Yeah. We've been working on how to best use the cash that's coming off the business through lower taxes. We aren't announcing anything today. We have a board meeting this week, so we will keep you apprised. Expect a more thorough update at the end of the second quarter. With that, let me just say that our principles aren't changing. The first use of cash is to go back in support of the business and our strategic imperatives. The second is to pay our dividend. Anything that's left over goes to share repurchases.
Great. Thank you very much.
Thank you.
Thank you.
I'll turn the floor back over to our speakers for any additional or closing remarks.
Thank you for joining us today. We look forward to speaking with you on the second quarter earnings call in August.
Thank you. Ladies and gentlemen, again, that does conclude today's conference. Thank you all again for your participation. You may now disconnect.