Good day,
ladies and gentlemen. Welcome to The Home Depot First Quarter 2018 Earnings Conference Call. Today's call is being recorded. At this time, I'd like to turn the conference over to Isabelle Jansy, Vice President of Investor Relations. Please go ahead.
Thank you, Catherine, and good morning. Joining us on our call today are Craig Meniere, Questions will be limited to analysts and investors. And 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 caused actual results to differ materially from our expectations and projections. These risks and Certainties include, but are not limited to, the factors identified in the release and in our filings with the Securities and Exchange Today's presentation will also include certain non GAAP measures. Reconciliation of these measures is provided on our Web Now let me turn the call over to Craig.
Thank you, Isabelle, and good morning, everyone. Sales With U. S. Comps of positive 3.9 percent. Diluted earnings per share were $2.08 in the first We are pleased with our performance in the Q1 and the fundamentals of our business remain solid.
As Ted will 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 You've heard us talk about the bathtub We expect that effect to be true this year. And 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 As pro sales once again outpaced DIY sales in the quarter. Investments aimed at deepening our relationship with our pro customers enhanced associate tools in the store and expanded delivery capabilities are gaining traction with the pros. In Delivery for example, we augmented our 2 hour and 4 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 Online traffic growth was healthy and our Q1 online sales grew approximately 20% from the Q1 of 2017.
During the quarter, we began to launch the customers' ability to attach installed 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 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 will recall at our investor conference in December, We outlined our commitment to accelerate an accelerated investment plan to create the 1 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, but we remain very excited about the work and opportunities ahead
as we focus
A delay in the spring selling season is not without its challenges. But 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.
And with that, let me turn the call over to Ted. Thanks, Craig, and good morning, everyone. As you heard from Craig, we are pleased with our performance in the quarter. Excluding our seasonal business, sales exceeded our We saw significant strength in our
Pro business,
interior projects and maintenance and repair categories. The extreme winter weather in the quarter had Negative impact on our Garden categories, which historically represent around 15% to 20% of our first quarter 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 in our Garden departments were negative with lighting comps reflection of LED price deflation. All other merchandising departments We're at or above the company average.
In the Q1, comp average ticket increased 5.8% and comp Transactions decreased 1.5%. If we exclude our Garden business, we saw positive comp transaction growth. Modity 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 The quarter was strong results in safety and security, water heaters, plumbing repair, pipe and fitting and air circulation. As you heard from Craig, in the Q1, we saw continued traction with our Pro. Pro heavy categories like lumber, In addition, we are building engagement and enabling our associates to target specific customers, which is driving expansion In Interline Brands alone, we saw sales growth ahead of the company average. We also saw Customer appetite for big ticket projects.
Big ticket sales in the Q1 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 Q1, we hosted our Presidents' Day and Spring Black Friday events. Our stores did a fantastic a great 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 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 2nd 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 in firmly to bring our new Rio dipladenia plants to market.
These plants are low maintenance, drought tolerant and 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 offerings across all of our categories and our upcoming events. During the Q2, we will host our Memorial Day, Father's Day and 4th 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
Thank you, Ted, and good morning, everyone. Before we discuss our Q1 results, I want to mention a change in our accounting policy. During the quarter, we adopted ASU number 20 fourteen-nine, 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 Looking at our Q1 results, the change in accounting caused a $131,000,000 increase to gross and a corresponding $131,000,000 increase to operating expenses.
Note that the $131,000,000 increase in Gross profit was driven by a $33,000,000 net increase in sales and a $98,000,000 decrease in cost of goods sold. While we did not recast our historical financial statements to reflect to this accounting change, included in today's press It's a quarterly pro form a view that shows the impact of the accounting standard as if it had been in place during fiscal 2017. So with that, let's move on to our Q1 results. In the Q1, Total sales were $24,900,000,000 an increase of 4.4% from last year. Versus last year, Our total company comps were positive 4.2% for the quarter, with positive comps of 5.6% in for the quarter with positive comps of 5.1% in February, 5.5% in March In the Q1, 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 $131,000,000 or 48 basis points of gross margin expansion due to the new accounting standard. 2nd, we experienced 14 basis points of gross margin expansion Due to changes in mix and the gross margin benefits of recent acquisitions. Finally, we experienced 22 basis points of gross margin contraction due to higher shrink and higher transportation costs in our supply chain 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.
Specifically, the new accounting standard resulted in a $131,000,000 increase in our operating expenses and caused 50 Expenses related to our strategic investment plan resulted in approximately 50 6 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 Q1 was 13.6%, decreased by $2,000,000 to $239,000,000 and our effective tax rate was 23 5% compared to 35.2% in the Q1 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 Q1 were $2.08 quarter, we opened 1 new store in Stamford, Connecticut for an ending store count of 2,285. Selling square footage at the The quarter was 238,000,000 square feet. Total sales per square foot for the Q1 were $4.12 Up 4.5 percent from last year. At the end of the quarter, merchandise inventories were $14,400,000,000 up 6 from last year. Inventory turns were 4.9 times, 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 company, our May comp sales are double digit positive. Moving on to capital allocation. In the Q1, we repurchased $1,000,000,000 or approximately 4,700,000 shares of outstanding stock. As of today, we are targeting $4,000,000,000 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%, 3 70 basis points Higher than the Q1 of fiscal 2017. As we look to the remainder of the year, we are encouraged by what we are of our business. Unemployment is the lowest it has been since 2000. Wages are increasing. Home prices are appreciating, 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 Q4 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 backdrop guidance we gave at the beginning of the year. Recall that fiscal 2018 will include a 53rd week, so the Q4 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 We now expect our 2018 operating expenses to grow at approximately 144% 28% to $9.31 I also want to take a brief moment to comment on our long term financial targets.
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 and instructions on our website to assist you with your modeling. And with that, I'd like to thank you for your participation in today's call. And Catherine, we are now ready for questions.
Thank you. We'll hear is from Simeon Gutman with Morgan Stanley.
Thanks. Good morning. My first question, it's all about weather and it's got a couple of Can you clarify, you said Garden was negative. Is April the largest month for Garden? And then 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?
So in terms of Garden, April is not necessarily the biggest month in Garden. Generally, that is And we actually don't break out the divisional numbers. But it's Northern Division is our largest
Okay. And maybe just a follow-up. The remaining divisions, I guess, Southern and Western, were those trajectories similar? Was there a big discrepancy between them? And then have their quarter to date trends held up?
I'm assuming Northern is the one that's been broken that's breaking out, But has Southern and Western, 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. And if you look at the performance in the Q1, the Southern had a slightly higher comp than the Western division, but remember the Southern division had some hurricane related sales in it. So 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. And my follow-up question, I think the issue the market is contemplating here is the cycle question versus what the weather is doing. And so 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.
And Craig, maybe we could just quantify that for you. If you backed out The Gardens, our comp for the quarter would have been 6 point
And our next question comes from Michael Lasser with UBS.
Good morning. Thanks a lot for taking my question. So of that 2 basis point impact from the weather, is that a net number, so that's net of the hurricane benefit? And what percentage of that 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.
And my second question is on the initiatives that you outlined, both the 200 stores that you touched with your new signage package. What comp are you seeing those stores produce above and beyond the corporate average? And then as part of that, can you also touch on your pro delivery initiatives? Is that helping you more with existing Summaries or customers who really haven't done business with in the past?
So let me I'll touch on the store minute here and Mark Holyfield is here and can speak to the delivery. 250 stores that we implemented the new signing and And refresh packaging, we're obviously just completing those. We did that investment for our stores Over a couple of year period or doing that because of the pilots that we ran previous to that. So we've built that lift Into our guidance and that's something that we're rolling here over the next 2 years across all the stores.
And 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. And our Pro customers, our existing Pro customers and new customers are using the 2 and 4 hour windows.
So our math isn't perfect, but our modeling would suggest The majority of these delivered sales are incremental.
Incremental for customers that you're already doing business with or More so attracting customers who you both. Got it. All right. Thank you so much and good luck.
Yes. Thank you.
Thank you.
We'll continue on to Zach Fadem with Wells Fargo.
Hey, good morning. Could you talk a little bit about environment in the paint category, have you started to see any step change there in terms of promotions? And any thoughts on what you think the key drivers are for you to
Sure. I would say that the paint promotional environment is certainly for us, it's the exact same With our paint performance, our comp was at the company average, and we saw the strongest interior With our brands, we have the best brand with Bayer in the marketplace. We're thrilled with our expansion of PPG and Anne and team are doing a Fantastic job of selling in the stores.
Got it. And to follow-up, as input costs for items like lumber and building there any concern in your mind on your ability to pass along the higher prices to customers in this environment?
Well, we're the two areas We've seen the largest cost requests are in clear commodities, so looking at Rubber 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. So 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, but 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 On the tariff.
Got it. Thanks so much, guys. Appreciate the time.
Our next question comes from Steve Warbs with Guggenheim Securities.
Good morning.
Good morning.
So you mentioned piloting the first new supply chain facility Summer, but can you help us or help expand on that? What type of facility is it? And 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?
It's Mark Hollifield here. The facilities we're going to be doing first Our market delivery operations, which are the hubs out there. These are stockless locations There 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 1st local direct fulfillment
And Steve, I'd like you to remember that this is a 5 year plan. We've committed $1,200,000,000 in our supply chain over the next 5 years. We will spend as much in year 4, as 5 as we do in year 1 through 3. So it's definitely going to ramp up over time, isn't it Mark?
Yes. I mean perhaps a way to If you think back to our RDC rollout years ago, in the 1st year We won RDC. In 2,008, we did 4, 2009, we did 7, 2010, we did 7. So you'll see a ramp somewhat similar to that across the 5 years of the supply chain transformation ahead.
Thank you. And then just a quick follow-up on retail services. So recognize 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. So Can you touch on how that business performed during the quarter?
Yes. Our services business, it represents about 4% of our total sales and grew low single digit, really driven by HVAC Window Treatment.
Yes. Thank
you. There
wasn't much exterior business happening.
Thank you.
Yes.
We'll continue on to Keith Hughes with SunTrust.
Thank you, Evan. Another product question,
specifically in flooring, you've been very well in flooring, Particularly carpet, which is kind of a declining industry, but if you've called out luxury vinyl plank, I assume you mean LVT there is growing well. Could you talk about your hard service offering, how that's growing and what you see for the future? Yes. Overall flooring, again, we're very happy. Our comps a fantastic product, solid or waterproof, a final product that looks like tile and or wood.
The rest of the business is solid. I mean, a lot of sales moving into that LVT a product, but the rest of the business is sort of low single digit comp.
Okay. Thank you.
Our next question comes from Chris Forvers with JPMorgan.
Hi, good morning. This is Tori on for Chris.
Good morning.
From prior quarters, it would seem that Pro was comping 10%. Is that fair and can you talk about the performance of Pro in the Q1 and if you think that impacted the business?
Well, we certainly had a strong pro quarter and it outpaced the DIY business in total, largely due to the fact that The Garden business was obviously down dramatically in the DIY space, but we're very pleased with our pro. And Bill, I don't know Do 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 passes. And 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.
And then as a result, we're seeing accelerated growth in the accounts that are managed by our POSAs. So Great strength in Pro and top performing Pro trades. We're our renovator and remodeler, our property investors and property managers. So We're pleased with the progress and the trajectory of the business.
And as my follow-up, following up on the May commentary, 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 It's
lifting.
Thank you.
Our next question comes from Seth Sigman with Credit
Thanks. Hey, guys. Good morning.
Good morning.
A couple of follow-up questions here. So first just on the delivery from the store, it's continued to grow at this double 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, But we are seeing very nice growth. And as Mark said earlier, that is attracting both incremental business with current customers and new customers
Okay. And then when you look at the online growth this quarter, up 20%, obviously very strong Again, is it fair to assume there was really little weather impact there? And you discussed a couple of things that may be helping. Any more insight into where the growth is coming 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.
So let me I'll answer the second part of that and I'll turn it over to Kevin Hoffman. From a profitability standpoint, we run this On a portfolio basis, and it's an interconnected experience. So in many, 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.
So we manage the portfolio, If you will, on a profit basis across the channels.
Excuse me, just from the health of the online So 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, But just 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, And that was some of our fastest growth. And really across the store, flooring did great, plumbing did great, electrical did great. We were very pleased.
So 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, for example. So it's kind of funny, but there actually is an impact.
Okay, understood.
We'll continue on to Brian Nagel with Oppenheimer.
So my first question, just on ticket growth. Clearly, a lot of discussion here on weather. If you look at 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.
And I have a follow-up.
I'm assuming you're referring to the $900 and above.
Or the average ticket of 5.8.
Or the average ticket 5.8.
Yes, I was just talking more about the number in the press, the average ticket of 5.8.
Okay.
So if you look at the average ticket of 5.8, think about the Commodity impact plus the FX impact and that gets you back to kind of where we've been running all of 20
Okay. So it's been there's not there hasn't been much change in it besides that?
No, not
at all. Right.
Okay, that's helpful. Then the second question I have, I guess, from a bigger picture perspective, we talk a lot about just you mentioned a lot just the ongoing strength of the macro environment. Clearly, looking at my screen right now, we do have rates rising, albeit off of lower, historically low levels. The question I have for you is, What do you watch? I mean, as you watch 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 impact of higher rates upon your business.
Yes. So there are a number of things that we look at obviously. During the recovery, we were always looking for green shoots And now we're looking for red flags. Likely 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 20 Historical mortgages over the past, well, gosh, 50 some odd years is 5.8%. So we are considerably under those historical mortgage rates, but we are super focused on the affordability index And what that means in terms of performance by market. So if you look at the affordability index for the country at large, it's 100 and 52%, which is still very good. The average or again decades is about 100 and So if the affordability index were to reach 127 or under that would certainly be a red flag. And then we look at rising home prices coupled with rising mortgage rates, you 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?
So I will call out 2 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. So you can't just look At housing prices and interest rates to say, uh-oh, you got to then look at what's happening to the economy. So it's getting a bit more complicated than it has in the has because there are all these influences of business.
But certainly, if I stop talking and just tell you what we look at every day, we look at ticket and transactions, ticket and transactions, because if you go back to the last recession, ignoring the housing downturn recession, but the last recession The United States had 2,001, our ticket was flat. So we're looking at that. And then of course, transactions, because transactions could be an indicator of a few things, right? It 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. Yes.
Our next question comes from Elizabeth Ithaca with Bank of America Merrill Lynch.
Hi, good morning guys.
I
think you had expected before to 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
And then 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? And then how frequently are you able to adjust your online pricing to stay competitive?
So, first of all, what I'd It's largely our business online is incremental sales. We're growing the categories in store at the same time that we're growing online. And I'll let Kevin speak to the categories. Yes.
As I mentioned, so strength in our core tools department, our plumbing department, our electrical department, really the 4 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 customer, the experience and all the things that we bring to the table. So very actively monitoring and managing the price Online just like we do in the store.
We can move prices obviously online instantaneously. We purposely of how it impacts the store environment, move prices in the store at a different rate than
we do online. And I don't want to 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 Inventory availability. So while they're not transacting as much online in those departments, we have great traffic on
We'll continue on to Seth Basham with Wedbush Securities. Is.
Thanks a lot and good morning. Good morning. Could 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. So I suspect you're wanting to know what happened with the smaller ticket?
Correct.
Yes. So as you would anticipate for transactions with tickets of $50 or less, they were down year on year. That was because of our Garden business. And I can make this really real for you if you just think about penetration of tender and you may say why. If you look at penetration of tender in the quarter, our private label credit card 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 This is a smaller ticket activity.
Fair enough. If you think about the transaction growth overall How positive was it and how does that compare to recent quarterly trends?
It was a positive 1.1% for the quarter
We'll now hear from Dennis McGill with Zelman and Associates.
Hi, good morning. Thank you. First question just had to do 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 And customers are choosing to purchase all sorts of things. It could be a pro on a job site needing something, but there's a lot Also on the buy online, deliver from storefront. So it's interesting to see where it goes. It's Not taking a real pattern at this point.
Okay, great. And then Carol, can you elaborate on the transportation cost increase that you In the quarter, the deleverage there, is that fuel alone? 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 on transportation. We're not alone. All companies are facing higher And as you know, as our practice, we will figure out a way to work through this, but we certainly got some challenges ahead.
Our next question will come from Dan Binder with Jefferies.
Hi, it's Dan Vinder. 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?
And then my second question was around credit. And just curious if you can get your thoughts on Demand for credit, use of the credit lines that are out there, average spending on credit and delinquencies.
Yes. So 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 Q2, obviously, with an increase in penetration of the Garden business, which is a lower margin category, that's an impact of gross margin, but we're going to have benefit in other areas too. So nothing comes to our attention that says we can't deliver the gross margin guidance that we just provided and updated with you 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, but it's over $12,000,000,000 We had a 1,000,000 new is around 29% for the Pro, utilization is around 23% and our approval rates are north of 70% for both the consumer and the pro. Part of the change in accounting for us Moving all of the aspects of our private label credit card up to the revenue line and included in the benefit that we removed Out of our selling expenses and moved up to the revenue line was Gainshare. Gainshare is our profit sharing program with Citi who underwrites this card for us. The way the portfolio has gains is there's an EBIT 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 got to make sure that the portfolio doesn't have high losses because that could impact your gainshare. And our losses, this is long winded answer to your question, But our losses are running at or below historical averages. So the portfolio was very healthy.
Great color. Thank you.
Yes.
Our next question comes from Chuck Grom with Gordon Haskett.
Hi, thanks. Good morning. Just on the gross margin line, just to follow-up on the transportation Just wondering if you could characterize how they came in relative to your original expectations? And then I have a follow-up.
We didn't anticipate deleveraging the supply chain in the Q1 to the extent that we did. The team did an awesome job though of managing likely demand pressure coming from all kinds of areas. So, man is through it.
Okay. So, you would Expect that headwind to continue over the balance of the year.
No, there's definitely pressure coming at us for the balance of the year, but we'll manage through it.
Okay. And then 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 and you recover most of it? Or do you lose 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 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. So the majority of this business will be recovered.
Okay. Thank you.
Yes.
We'll
was wondering if we 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 is driven by the millennial generation farming households. But 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. And 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. Just think about what that means for home improvement. Well, that's nothing but So that's just one trend.
Can you maybe dig into some of how the opportunities do And how you position yourself for some of those changes, just a little bit more?
Well, yes, 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 You think about bath remodels and the ability to put in walk in showers, for example, so that you don't You 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, if you think about security, so 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.
Hey guys, thanks for taking
the question and appreciate the Sanford, Connecticut store. The
store,
we made $1,000,000 the 1st 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 The purpose is incremental. So 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, but we really haven't had to do that at all.
No, I'd say, Craig, the space that we're doing speaks more The interconnected nature of our online business, we're putting lockers in the front of our stores. We'll do about 1,000 lockers this year. And we're also adding some bigger holding area for bulkier items near the front of the store. So 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 quarter.
Okay. That's terrific. Yes, it makes sense. And then, Kara, back to kind of 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?
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 or 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 $24,000,000,000 The average maturity of that debt is 13.6 years. The coupon is 3.7%. The latter maturities go out 40 years. So we've really worked hard to not put any financial risk into the company.
And with an adjusted debt to EBITDAR target of 2x, that implies we could get the debt paid off in a very short period of time. So comfortable with that leverage, always going to be mindful of 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 Gordon, I know you don't guide to that figure, but it sounds like May is well up. You've been running at 2 plus percent, I believe, is fairly consistently. Is there any thought around that number for the year in light of the start to the Q1?
Thank you.
So the 1.1 was for the quarter ex Our Garden business, it wasn't for April. So that was for the total quarter. And we think about the balance between ticket and transactions It's 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 would expect to see through the year or whether with a better top line That impact should dissipate a bit.
Sure. So I talked about expense deleverage and leverage as a percent 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. So the expense growth factor in the Q1 was 202% and the drivers of that were rev rec, which was 57 Investments in the business 70% and then what we call DAU, business as usual, 75%. In that business as usual, there's about 12% of acquisition related expenses, companies So if we focus then on the guidance that we gave for the year, clearly it's going to get better. And it's going to get better for a couple brings us to
a brief number of reasons.
First, we have $167,000,000 of hurricane related expenses in the back half that will not repeat. So you should model higher expense growth factor in the first half than the back half. Secondly, and you've heard Anne 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. So we should be driving more labor productivity than we saw in the Q1. Then if I focus simply on the investments in the Q1, the dollar amount of investments and I'm not going to call this out every quarter, but because we're just getting into this, I'll give you this color.
The dollar amount of the investments were $144,000,000 in the quarter. And those dollars were used for increased wages for our people, Advertising as we move to a more marketing technology platform, increases in display costs. You heard Craig Call out what we're doing inside the stores and then increase in headcount. We've got to have some people on board to help us do all of this investing. In fact, I believe we've hired 3.50 people alone in our IT organization.
So these are investments that we're making to reach those fills and operating margin targets that we laid out for 2020.
That is great detail. If I could follow-up on a couple of You made on the monthly trends. Was there any weather impact on the 1st 2 months of the quarter on February March? And 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?
Yes. So there definitely was impact still in the other months as well. And the recovery of that, you'll get a significant piece In May, but it will actually flow into June July as well.
That's great. Thank you, guys.
Yes.
Our next question comes from Scot Ciccarelli with RBC.
Good morning, guys. Good morning. So are you seeing a greater appetite for job site delivery from your pro customers? Certainly. Okay.
So obviously that is the case. Now over time, do you think that happens to change your historical Real estate advantage that you've had against some of your major competitors or maybe even open the door to higher levels of e commerce competition because then the physical location or physical structure of a Home Depot store maybe gets partly marginalized over time?
Actually, when you think about But our location and footprint will actually leverage that as an advantage overall to our business, We are well positioned across markets, including urban markets, and sit within 10 And Mark, I'd like to ask you to
take a question from the We outlined 40 flatbed distribution centers and we expect to open those to take some pressure off of the stores. But our stores are going to be in the delivery business 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 I
think the other thing you have to think about is actually not just the downstream portion of our supply chain 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.
And Catherine, we have time for one more question.
Thank you. And our final question this morning is from Alvaro Lacayo with Gabelli and 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 going to be a little bit higher than sort of what was guided on dividends and repurchases and just some commentary around if there's any updated thoughts there.
Yes. So 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 The second is to pay our dividend and anything that's left over goes to share repurchases.
Great. Thank you very much.
Thank you.
Thank you.
And I'll turn the floor back over to our speakers for any additional or
Thank you for joining us today. We look forward to speaking with you on the Q2 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.