So good morning and welcome to Home Depot's 2017 Investor and Analyst Conference. This morning you'll be hearing from Craig Meniere, our Chairman, CEO and President Ann Marie Campbell, Executive Vice President, U. S. Stores and Ted Decker, Executive Vice President, Merchandising as well as Kevin Hoffman, President of Online and Chief Marketing Officer. Chief Executive Officer, and
then we'll take a 15 minute break.
After the break, our speakers will be Bill Lenny, Executive Vice President, Outside Sales and Service Chairman Mark Holyfield, Executive Vice President, Supply Chain and Product Development and Carol Tamay, our CFO and Executive Vice President, Corporate Services. At the conclusion of our second session, we will open the mic for our question and answer period. I would like to remind everyone that today's presentations made by our executives include forward looking may include Forward Looking Statements as defined by the Private Securities Litigation Reform Act of 1995. Chief Financial Officer of Chief Financial Officer of
Chief Financial Officer of Chief Financial Officer of Investor Relations. Please note that
these statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. Chief Financial Officer. These risks and uncertainties include, but are not limited to, the factors identified on this slide and in our filings with the Securities and Exchange Commission. Today's presentations also include certain non GAAP measures. Reconciliation of these measures can be found on our website at ir.homedepot.com.
It is now my pleasure to introduce our Chairman, CEO and President, Craig
Meniere.
Chief Financial Officer. Let me start by thanking you all for taking the
time to be with us here today.
Over the next couple of hours, we're going to provide an update on our progress against our commitments that we made at our 2015 Investor Conference and share with you our approach for the next 3 years Chief Executive Officer, to position The Home Depot to continue to win in the market. I'm going to touch on our progress in meeting our current targets, Chief Financial Officer, the definition of the One Home Depot experience, the changing retail environment and where we are investing to address the changes that we are facing. The team will explain how we will enhance the customer experience, Chief Financial Officer.
Chief Financial Officer. First, we're on
track to hit our targets. In December 15, we told you that we would grow our sales to $101,000,000,000 by 2018, up from $88,500,000,000 in 2015, Which was the equivalent to opening over 300 new Home Depot stores, which we didn't do. We're on track to achieve the sales result. Chief Financial Officer. Our 2018 operating margin target was 14.5%, growing from 13.3%.
Chief Financial Officer and our 2018 return on invested capital was 35%, expanding from 28%. Chief Financial Officer. In fact, we're actually poised to exceed all three of these targets by the end of 2018. Chief Executive Officer. We have completed several of the initiatives that you see here on this page, which support our 5 key strategies.
Chief Executive Officer. I will not take you through each one of these, but I want to highlight a few of them, because this is a journey that we're on Chief Executive Officer and we continue to focus on creating the One Home Depot experience. Let me take a few minutes and share with you what we mean by the One Home Depot experience. Our customers no longer think of us in terms of separate channels. They don't think of us as a brick and mortar channel and a digital channel separately.
We want to enable the engagement with a seamlessness Across channels, but candidly, that's not how we were built. Now there's a lot of work that has been done, but we must Continue to tie together that seamless flow of information across all channels for both our customers and our associates. So as the customer continues to blend the channels of engagement with the Home Depot, we must invest in the One Home Depot experience. Chief Financial Officer. Under the strategy of connecting associates to customer needs, we've made adjustments to our store fulfillment teams to Chief Financial Officer.
To consolidate and improve the customer experience around buy online pickup in store, buy online ship to store and buy online deliver from store. Chief Financial Officer. We consolidated our outside sales force to better align capabilities of our Home Depot and Interline teams to address
Chief Commercial Officer.
Supporting our strategy of connecting product and services to the customer needs, our merchant teams has Chief Financial Officer. Increase the collaboration with our suppliers to drive innovation and efficiency, leading to greater value for our customers in our product. At the end of the day, product is why customers come to The Home Depot and we must meet the local needs of our customers.
Chief
Executive Officer. For our customers and shareholders. We have continued to focus on having product available for sale through initiatives like Project
Chief Executive Officer for our business.
We've talked a lot about our focus on our interconnected experience. The front door of our store is no longer at the front door of our stores. It's in the customer's pocket. It's on the job site. It's in their home.
Chief Executive Officer. Developing the One Home Depot experience by bringing the physical and digital worlds together with the ability to channel, the scale of Home Depot required us to complete a replatform of our website. This replatform gives us the ability to create differentiated experiences for the customers going forward. Chief Executive Officer. Of course, we remain focused on innovating our business model to drive productivity that The Home Depot is known for over the years.
While we are pleased with the results that we've delivered, there is more work for us to do in order to continue to drive productivity. So let's talk about the changing retail environment. As you can see, the retail landscape is changing at unprecedented rates. Chief Executive Officer. Some say that it's more changed in the last 3 years than the last 10 or 20 years.
Clearly, the customer is engaging in an increasing way in the digital channel, but brick and mortar still matters. Chief Financial Officer. The way customers research product has changed. Instead of going to a store to browse in the aisles, available to customers changed drastically. All of these changes have to be reflected and brought to life in the customer shopping experience.
Chief Financial Officer. Within the context of this change in retail environment, customer expectations are increasing. It's imperative that we address These evolving needs with increased speed. More customers now expect improved product delivery, Chief Financial Officer, our Chief Financial Officer, our Chief
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Chief Executive Officer.
Back then, we talked to you about how we viewed each of our product categories through the lens of potential Internet Competition and Opportunity. At the time, we thought that there were some categories that were far removed from Internet competition. This framework was an organizing principle for us in 2012, when we were still gravitating towards a 2 channel view of the world. Today, we've learned that even products and categories where the store delivers the best value, Chief Financial Officer. The experience oftentimes starts in the digital world.
No categories are excluded from an interconnected world Chief Financial Officer and we must invest to deliver the best interconnected experience possible. Chief Financial Officer. So let's now take a look at the investments going forward. While our 5 key strategies are still relevant in this changing retail environment, Chief Financial Officer. We have to step up our investments to position ourselves for the future and address the changes that we face.
Chief Financial Officer. The customer views us as one Home Depot, as I previously mentioned, and that's just not how we were built. We were built in silos, Chief Financial Officer. With STORE serving as our original platform and then adding the online component over the years, but still in a siloed capacity. Chief Executive Officer.
In order to continue the journey to create the One Home Depot experience, we have to de silo ourselves, Chief Financial Officer. Leverage our scale and invest in growth in the future. We will invest in our physical stores, our associates, product and innovation, our professional customers, our services business and our supply chain. Chief Financial Officer. And underlying all of these investments is our continued investment in IT to create the seamless One Home Depot interconnected experience.
When a customer comes to our physical store, Chief Executive Officer. Our stores must be completely interconnected Chief Financial Officer for us to be able to leverage the scale that we have in our total asset base. So we will invest in the physical experience Chief Financial Officer. Lots of customers that visit our store know exactly what they want and are looking to get in and get out quick. Chief Executive Officer.
Anne Marie will discuss that we'll invest in the front end experience to facilitate fast, easy checkout to drive in our stores and we will invest in capabilities to make that an easy experience. The Home Depot store is also the hub for complex transactions that take place in home improvement. Chief Executive Officer. That might be a plumbing or an electrical problem that you're trying to solve or a complex configuration like a kitchen. Chief Executive Officer.
We will lean into this opportunity and that means investing in our associates.
Chief Financial Officer.
Many of these complex transactions have historically required associate knowledge of complex systems Chief Financial Officer. We will invest in simplified associate tools to improve the productivity and support what we Chief Executive Officer. Our goal is to make it easier for our associates to serve customers and provide an outstanding experience. Our associates are the face of Home Depot and we'll continue to invest in them. Chief Financial Officer.
We'll invest in wage, we'll invest in more scheduling flexibility and in tools to drive productivity.
Chief Executive Officer. Product is king
and the art side of the art and science of retail is still hugely important. Chief Financial Officer. We intend to use our merchants to add value in creating a curated assortment across channels. Chief Financial Officer. This has been an effective strategy against all types of competitors that we've faced over the years.
Chief Executive Officer. We sell the same categories of goods that many others sell, but we don't often sell the same products within those categories. Localization and speed to market are important and we will invest to achieve a first to market approach. Chief Financial Officer. We will invest to enhance the digital experience around product to improve search and the selection process within categories.
Chief Executive Officer. All of this will be done within the context of an interconnected experience, which we know drives customers to the physical world. Chief Financial Officer. As Ted will discuss, our research tells us that customers give us the right to play digitally in categories related to In select regions across the country with a limited assortment. We could actually have a much deeper assortment for the convenience team of directors and managers.
We can leverage our scale and infrastructure to provide great value for the consumer Chief Financial Officer in this category. The changing demographics in the U. S. Offers us an opportunity with our professional customers and our services business. Chief Financial Officer.
The aging baby boomers more frequently is looking to have projects done for them, either by hiring a pro connected through our physical stores. Customers are moving online to begin the shopping experience in this space, Chief Financial Officer, and we will invest to connect our services business to the digital world. As Bill will discuss, We serve many types of pros and their needs vary based on who they are. The pro is becoming more and more digitally Chief Executive Officer, and within some segments, the digital experience itself. We're going to invest to enhance Chief Financial Officer, the business to business digital capabilities in a new B2B website experience.
This will be a customized experience to meet the needs of specific needs of a specific customer. Our pro and our DIY customers expect retailers to adapt to their changing delivery needs. You'll hear from Mark, our intent will be to leverage the capabilities that we've built upstream in our network, Chief Executive Officer, while significantly improving the downstream proficiencies, leveraging our scale and our convenient locations. Chief Financial Officer. The goal is to create the fastest, most efficient delivery in home improvement.
Chief Financial Officer. And while
our comments today are U. S. Centric, the capabilities that we've been discussing will extend to our investments in Canada and Mexico as Well. They are facing the same type of changing environments that we are here in the U. S.
We will lean into supply chain, Chief Financial Officer, the digital experience and the creation of the interconnected One Home Depot experience in both countries as well. Chief Financial Officer. The virtual cycle of productivity at The Home Depot is what has allowed us to improve the customer experience, our approach to technology development will drive productivity and speed. Chief Financial Officer. Our focus on the elimination of waste across the value chain, improved processes, enabling those processes through simplified systems Chief Executive Officer, will support the virtuous productivity cycle.
We are investing not only to protect our position, but we are investing to leverage our scale. The products and services are still a small part of a 6 $100,000,000,000 addressable market. Our market includes home improvement products and services and MRO or maintenance, Chair and Operations Products. Our desired outcome of the investments that we're making Chief Financial Officer, is to position ourselves for outsized growth for the long term and to continue to create value for our customers Chief Financial Officer and our shareholders. We have captured market shares recovered from the economic downturn of 2,007 to 2,009.
Chief Financial Officer. We want to position ourselves for the same type of opportunity going forward in this changing retail environment. Our Chief Financial Officer. Our objectives in the business have stayed the same as does our strategic framework. Our goals our enhanced and our initiatives will continue to evolve as we meet the changing requirements of our customer.
Chief Financial Officer. Our objectives and strategies create value for all. As Carol will discuss, our target is to grow our business to a range between $115,000,000,000 $120,000,000,000 in sales by 2020. Chief Financial Officer. We plan to invest operating margin rate to accelerate our capabilities, Chief Executive Officer, it could grow as high as 15% and position The Home Depot to be a stronger competitor in the future.
Chief Financial Officer.
We expect this to result in an increase on return on invested capital to as high as 40%. Chief Executive Officer. Today, I've talked to you about change and our need to stay ahead of it. Chief Executive Officer. As we invest in the One Home Depot experience, I'd like to share with you what's not changing, our culture.
Chief Financial Officer. Our culture is the greatest gift we've received from our founders and I truly believe it's a competitive advantage in the market. Chief Financial Officer. Our culture is represented by these two powerful symbols. Our values wheel, which guides the decisions that we make in our business Chief Executive Officer and our inverted pyramid who defines who's most important in our business, our customers and our frontline associates.
Chief Executive Officer.
Once again, I thank you very much for investing your time in The Home Depot today. And with that, I'd like to introduce and Marie Campbell, our Executive Vice President of U. S. Stores.
Chief
Executive Officer. Good morning, everyone. Today, Chief. Hi, chaiseons in retail, from the lens of both the customer and the associate experience. As the retail environment evolves, Chief Financial Officer.
We will push boundaries to consistently exceed customer expectations and deliver a best in class customer experience across all channels. Home Depot is evolving to enhance the interconnected experience. Chief Financial Officer. For many types of customers, that experience spreads well beyond the four walls of our stores. Chief Executive Officer.
Kevin will talk to you later about the investments we are making in our digital properties, while I will focus my comments on our stores. Chief Executive Officer. Indeed, the core of the One Home Depot experience is our stores. Chief Financial Officer. It remains the hub and in order to deliver on the convenience and value that all customers seek, there are several key areas of investment that I'm going to talk to you about.
Starting with, the store is still the hub, So we must invest to keep them relevant. We're investing to improve convenience and speed of the customer shopping experience. We're also invested in capabilities to drive productivity and improve our in stock Chief Financial Officer and on shelf availability. We're investing to make our store associates more productive. Chief Financial Officer.
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Chief Executive Officer, our Chief Executive Officer, Chief Financial Officer. Our stores are still the hub. As Craig mentioned, while the retail environment evolved, Chief Financial Officer. Our store remains core to the 1 Home Depot experience. Within this journey, our website has CHUM, the front door of our stores, expanding our reach and influence in a very powerful way.
Chief Financial Officer. And while data suggest that customers are actively leveraging our website, it also indicates team. That all website is often the beginning, but not the end of their journey as the store is typically the next stop. Chief Financial Officer. 90% of the U.
S. Population lives within a 10 mile radius of a Home Depot store. Chief Executive Officer. 45% of online orders are picked up in the store and over 85% of online returns our completed in our stores. Our stores are the hub of an interconnected Chief Financial Officer,
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And given the results of these pilots, we have the confidence that our investments are targeted improvements that will be most Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, which leads me to my next main topic, Chief Executive Officer, how we're investing to improve convenience and speed of the shopping experience. The first customer pain point we set out to solve Chief Financial Officer, is around navigation. How customers navigate our stores is critical and our way through initiative team is aimed at improving the convenience of this experience through a more a new, more intuitive sign package and better lighting. Chief Executive Officer. We have invested in a better digital navigation experience through store specific maps on mobile, which allows customers to pinpoint the aisle and bay location of an item they're looking for in the store.
Chief Financial Officer. Millions of customers are exposed to our online and in store navigation features on a daily basis. Customer feedback has told us that these new wayfinding enhancements make it easy and simpler for customers to find the products they're looking for without the help of a store associate, if their need is to be in and Chief Executive Officer, our customer service scores in the category of easy to find Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, Chief Executive Officer. The second pain point for customers centers around checkout. We piloted a redesign of our front end Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our
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Chief Financial Officer. Our customer service scores and checkout time satisfaction and ease of online order pickup have both increased by 2 100 basis points, while our order pickup time has seen a 17% reduction. Chief Financial Officer. Given these pilot results, we are confident that these investments will help to drive and enhance Chief Customer Experience. We will be completing the rollout of these initiatives over the next 3 years.
Chief Financial Officer.
That brings me
to my 3rd topic, which centers on investing in capabilities to drive productivity and improve our in stock and on shelf availability. Excellent customer service starts with B in stock. But beyond just having the product in stock, Chief Executive Officer. It has to be on the shelf for a customer to purchase, not stored in an overhead. This Chief Financial Officer.
This is why improving freight handling through our end to end initiatives is so critical. The movement of freight as both a customer service and a productivity component to it that we have to get right. During our 2015 investor conference, Chief Financial Officer. We discussed several different documented processes we would be rolling out to improve freight handling in our stores. Chief Executive Officer.
We talked to you about initiatives such as Smart Sort, manual floor load, engineered unload and directed pack out, Chief Executive Officer, all designed to seamlessly move freight from the receiving area in the back of our stores to the shelves.
Chief Executive Officer.
We also enhanced the process for moving products from our overhead to shelf to Bay directed pack down and Smart Lift. Chief Financial Officer. All of these enhanced capabilities are a part of our end to end initiative, which creates a consistent process Chief Executive Officer for every store to optimize how product flows from truck to shelf. Our focus on end to end in partnership with Mark and the supply chain team has yielded great results over the past several years. Chief Executive Officer.
We have seen a 10% reduction in pack out time and there has been a 30% reduction in time spent Chief Financial Officer, looking for products in the overhead. For our receiving associates, the number of footsteps required to stage product A decline 19 miles annually per associate. And although the results of our end to end initiative have been positive,
Chief Financial Officer. There's still more
that can and must be done. This is a journey, and we will continue to invest in our end to end processes Chief Financial Officer, within the store to adapt to our evolving supply chain and delivery capabilities. This brings me to my 4th point. Chief Financial Officer. We will invest to make our associates more productive.
Investing to simplify our systems And the selling tools that they use to service our customers is a good place to start. Today, Chief Executive Officer. Our associates use up to 10 different systems to sell and manage orders across appliances, kitchen, pro, deliveries, etcetera. Navigating the various systems requires extensive associate training and translates to increased customer wait times. There is an opportunity here to improve the experience from both Chief Financial Officer, a customer and an associate perspective.
So another area of investment focuses on system consolidates all these different systems onto one user interface that is simple Chief Financial Officer, an intuitive for any associate to use with minimal training. It doesn't matter if an associate is working their 1st day at the Home Depot or is a 30 year veteran. The new simplified system enables them to sell, find, track, release and deliver any customer order. This is the embodiment of the universal or 1st day associate that Craig mentioned earlier. Across a variety of order types, Chief Executive Officer.
Early results have shown reduced customer transaction time by up to 35% to 50%, Chief Financial Officer, again, helping us deliver the convenience and experience our customers desire, while also helping our associates to be more productive Chief Financial Officer. Less time spent learning and navigating our systems means more time in the aisle, Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive
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Chief Executive Officer, our Chief Executive Officer, Chief Financial Officer. Finally, we must invest in our associates because they drive the customer experience. Maintaining a competitive and agile workforce is a key priority, and its need has never been greater. Chief Executive Officer. Making sure knowledgeable associates are accessible to our customers when they do need to engage on a more complex product project or issue is critical for delivering a best in class customer experience.
We are enhancing our labor model to better associates' activity with customer needs. We're also implementing technology solutions like MyView Chief Executive Officer, to help associates know our customers better, which I'm sure many of you saw during the past demos outside. Chief Financial Officer. Our associates are our differentiator, and we can't sustain the customer experience we strive to deliver without them. Chief Executive Officer.
We must invest in them to remain competitive in wages and benefits as well as implement tools that generally make their lives easier. Chief Financial Officer. For example, our new workforce management tool will improve associate flexibility by allowing them to swap schedules, Chief Executive Officer. We work at multiple locations and view their schedules from their mobile device. Our customers continue to rely on our associates, to help on complex projects.
Collectively, Home Depot Associates Our associates are trusted advisers for customers, and we will continue to invest in their experience Chief Financial Officer and Productivity in a Meaningful Way. Before I finish, I do want to touch briefly on the way we serve our communities. Chief Financial Officer. At Home Depot, we are more than a store. Serving our communities is an important part of our core values, Chief Financial Officer, and our associates live out this value through their actions every single day.
We are a place where families learn and spend time together, building their dreams one project at a time. Chief Executive Officer. Other customer workshops on a variety of projects are also very popular. The work our associates do also extend beyond the four walls of our store. They are there serving our communities Chief Financial Officer, in their time of need, as we just witnessed in the Q3.
In a period marked by unprecedented number of natural Chief Executive Officer, our associates were there for those impacted, working tirelessly and under Chief Financial Officer. To get product into the hands of those who needed it, often as they too face disruption in their own lives. Chief Financial Officer. Beyond serving our communities, Home Depot is committed to serving those who have served us, our veterans. Chief Executive Officer.
Since 2011, the Home Depot Foundation has improved more than 34,000 Chief Financial Officer of the U. S. And we have pledged a $250,000,000 for veteran related causes by 2020. Chief Executive Officer. In an organization of over 400,000 associates, I know that I speak on behalf of the entire leadership team in saying that we are incredibly proud of the various ways our associates serve our communities, Chief Financial Officer, and we will continue to do so going forward.
In closing, we're excited about the opportunities ahead Chief Financial Officer, as we strive to deliver the 1 Home Depot experience by investing in both our stores and associates. Chief Executive Officer. We will do this by while remaining committed to our culture and values, proudly serving our customers, communities
Chief Executive
Officer and Veterans. Thank you. And now it is my pleasure to introduce our Executive Vice President of Merchandising,
Chief Executive
Officer. Good morning. Chief Financial Officer. Today, I'm thrilled to review how we will maintain our position as the number one retailer in product authority for home improvement.
Chief Financial Officer.
3 years ago, in coordination with Craig's overall strategy, we established 3 objectives for the merchandising organization.
Chief Financial Officer.
We want to maintain our momentum, be the best at balancing the art and science of retail and increase collaboration with each of our supplier partners. Chief Executive Officer. These objectives have been successfully guiding our strategies and we don't plan to change. Chief Financial Officer. We are however going to add another objective to emphasize our desire to satisfy customers' rising expectations.
Chief Financial Officer. As Anne Marie highlighted, we will also work in merchandising to deliver the best interconnected customer experience in retail. Chief Executive Officer. We're a sales driven organization and we won't change our strategy of driving the top line with an emphasis on traffic, transactions in units. The Home Depot has been winning in the marketplace.
We've taken share Since the housing recovery started and we plan to keep that going. We'll maintain our momentum by focusing on product,
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We all know that new sells and our suppliers are investing in hiring the best and brightest engineers Chief
Executive Officer to innovate and develop new product.
Our supplier partners trust Home Depot to launch new products, Milwaukee and Makita. These new and exclusive programs continue to grow and the brands we sell $15,000,000 revitalization of our tool corrals, drive events like Ryobi Days and Gift Center and leverage our pro customer base. Chief
Financial Officer.
Chief Executive Officer and Cordless Technology has expanded into more categories like outdoor power equipment, lighting and pneumatics. Chief Financial Officer. This type of product authority is happening across the store. And another example is in our bath business. Chief Financial Officer.
We offer the leading lineup of brands in the industry like Kohler and Delta, Moen and American Standard. Chief Executive Officer, complemented by our leading private label brands like Glacier Bay, Hampton Bay and Home Decorators Collection. Chief Executive Officer. While you see some of these brands at other outlets, Home Depot has many exclusives like Delta toilets and product launches Chief Executive Officer, like the Moen Press and Mark Bath Accessories. Our merchants and trend and design team partner closely with our suppliers Chief Executive Officer to introduce new styles, finishes and innovations that help our customers complete their dream projects Chief Executive Officer, and we continue to invest in merchandising resets in our stores and product presentation online Chief Executive
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So our customers had to make at least one extra shopping trip to complete their holiday decorations. Chief Executive Officer. Over time, we added more lights, artificial trees and ornaments. Today, we have a destination assortment of innovative products Chief Executive Officer, with great design and value. And we've developed equally successful programs in Halloween, Chief Executive Officer, our Chief Executive Officer, our Chief Executive
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In the right to win in several home decor categories. We believe we are well positioned to help our customers complete their decor oriented projects with items like housewares, tabletop, interior furniture, wall decor and textiles. Chief Executive Officer and consumers are increasingly purchasing the core categories online. So our efforts will largely be digital, where we will leverage our traffic and customer base for a natural scale advantage. Over the last year, we've selectively onboarded Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, Chief Executive Officer.
We're also investing in our interconnected decor shopping experience with enhanced photography, shop by room or collection capabilities and style guides. And we are leveraging our existing capabilities to reintroduce home decor catalogs like the one each of you should have at your seat. We're pleased with our results and are accelerating our decor investments. Chief Financial Officer. Now turning to value.
Our pricing strategy remains unchanged since our founders, Bernie and Arthur decided The customer should be able to get the same great price Monday through Sunday versus having to wait for a deal. Chief Executive Officer. It all starts with our everyday low price. And if anyone is buying more, we offer the same everyday lower bulk price. Chief Financial Officer.
This price philosophy is particularly important to our Pro customers who count on us to be priced right every day. Chief Financial Officer. And to ensure we remain priced right, we continue to invest in tools and technology to help merchants make sure we have the best value in the marketplace. Chief Executive Officer. Moving to service, having great products at the right value is fundamental, But our customers also come to our stores for great service and nobody is better at providing that service than Anne Marie in the United States, Chief Executive Officer, Jeff in Canada and Sergio in Mexico and their collective team of some 400,000 strong associates.
Chief Financial Officer. There is a buzz in a Home Depot store. The environment is electric as our associates help customers Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer,
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Now turning to our objective of balancing the art and science of retail. Whenever I talk about balancing the art and science of retail, I'm careful to emphasize that we will always start with the art. Product is king. Our merchants are worldwide authorities in their categories and few others sell more product than each of our merchants in their respective categories. Chief Financial Officer.
Merchants are the customers' advocate and they literally scour the globe for the best products, brands and value. While others may list overwhelming choice, our merchants select the best products and curate the right assortments in our stores, while offering a more expansive set of Selection Online. We're also focused on the science of merchandising. We are building capabilities Chief Financial Officer and Chief Financial Officer and Chief
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and Chief Executive Officer and Chief Executive Officer and Chief Executive Officer and Chief Executive Officer and Chief Executive Officer and Chief Executive Officer and Chief Executive Officer and Chief Executive Officer Chief Financial Officer. For example, a few years ago, we built a proprietary assortment planning tool, which helps us cluster our stores and customize assortments to fit localized demand. Chief Financial Officer. We've built pricing tools to ensure we have the best value in the market. We're building much better space optimization tools to improve in stock levels while driving turns.
And now, we are investing in new capabilities to implement a cycle of continuous improvement. Chief Financial Officer. Previously, we would wait for a category to degrade, then we would launch a comprehensive line review, which takes months to implement changes. We're now establishing the process and tools to continuously review our assortments, line structure and space requirements, Chief Financial Officer, our merchants can better sustain category performance. Our aim is to ride the crest of the wave rather than degrade and have to reset.
Chief Executive Officer. To accomplish this at scale, we're building out the technology to support an automated end to end process Chief
Executive Officer, our Chief Executive
Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, Chief Financial Officer. Going forward, we'll be even more agile and we'll update our assortments or change space assignments more frequently and with better accuracy. Chief Executive
Officer. Let's talk about
collaboration. We want to become even more aligned with our supplier partners.
Our
Meniere, our Chief Financial Officer. We create more value while better serving the customer. Chief Executive Officer. Over the past several years, our suppliers' response to this objective has been tremendous.
We've shared data,
I'll highlight our recent success with Weber. Weber asked to partner with us on the launch of their upgraded Genesis 2 Grill. Chief Executive Officer. Together, we developed a pre launch marketing campaign, enriched online assets and sold pre orders. Chief Financial Officer.
After launch, our associates brought the product to life in our stores through various events. We carried that spring momentum in the fall and Weber was one our Chief Executive Officer of our seasonally relevant brands integrated into our college game day campaign, which allowed us to drive sales in a fun way. Let's take a look at the commercial.
Hey, aren't you Kirk Herbstreit? No, I get that all the time, but I do love game day.
Oh, love Of game day.
You're Desmond Howard, out Wish.
Well, you're doing any tailgating this weekend?
Yes.
And we've got everything you might need, charcoal, Grills, even generators. We'll get you ready for game day.
Okay, you're the core seller.
Chief
Executive Officer. Based on our strong results and collaboration, The Home Depot will have 2 Weber Grill exclusives this spring and we'll maintain our position as the number one Weber retailer. Chief Executive Officer. Since Home Depot was founded, we've differentiated ourselves from other retailers by delivering a 3 pronged value proposition That includes the best products at everyday low prices and with great customer service. However, in the new age of retail, customers expect even more.
As Craig and Anne Marie mentioned, the customer expects a seamless interconnected shopping experience Chief Financial Officer, where they can easily weave between the physical and digital worlds. Our merchants work closely with online leaders Chief Executive Officer to create an easy and frictionless shopping experience. Over the last several years, we've invested in our interconnected experience Chief Executive Officer to enhance and scale our capabilities. We've built a new customer order management system, we've rebuilt our e commerce platform, Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, Chief Executive Officer, all of which to support our customers' ability to interact with us how, when and where they want. However, we have much more to do Chief Executive Officer and Kevin will review our initiatives on how we're going to improve the overall experience.
To close, Chief Financial Officer. While we sell the same categories of goods as others in our industry, we don't sell the same products nor sell them the same way. Chief Financial Officer. We are the number one retailer for product authority in home improvement and we will continue to take share and win Interconnected Customer Experience. Thank you.
And now I'd like to introduce our President of Online and Chief Marketing
Chief Financial Officer. Good morning, everyone. My time with you today is going to center on how we are progressing in the areas of marketing and online. Chief Financial Officer. Now a couple of years ago, we consolidated those two functions as the increasingly digital world of marketing and media Chief Financial Officer, began to heavily intersect with the evolving shopping habits of our customers.
There's really just a couple of key points that I hope you take away from me today. Chief Financial Officer. First, we've made a ton of progress in leveraging all of the assets and capabilities that we have. Chief Financial Officer. 2nd, I'm going to show you how we are aligning with the One Home Depot strategy and we're investing to create the best interconnected customer experience.
Chief Executive Officer. It's an experience that is more flexible, more personal and more easy for our customers. So let me just start with the first point and some specifics on our progress. We've done a lot of work over the last few years in marketing to digital and our spend on digital channels is now well north of 50%. But it's not just where we are advertising that has changed, Chief Executive Officer.
The most recent data suggests that a majority of consumers use more than one device at a time while they're consuming media. Chief Financial Officer. So it's increasingly difficult to not only capture, but keep the attention of the customer. It's for these reasons that we leverage some of the most sophisticated marketing tactics in the industry and we're seeing great returns and payback. Chief Executive Officer.
Not only because we've chased the customer to those new media consumption models, but because we've sharpened our tactics. Chief Executive Officer. Productivity has always been a hallmark of The Home Depot and our marketing team continues to prove that. Chief Financial Officer. We've also seen strong results in our online business.
Our most important currency to the collective team comes in the form of visits. It's our reach. It's how we connect with the consumer. And we know that 60% of all of our sales in store or online our Chief Financial Officer, and we've continued to maintain our traffic advantage.
Chief Financial Officer.
We will surpass 1,800,000,000 visits this year and our digital visits now rival our physical store transactions. Chief Financial Officer. We've grown the online business by approximately $1,000,000,000 in each of the last 4 years and our online sales Penetration is about 6.4%, approximately double our nearest traditional competitor. Home Depot now has one of the largest e commerce operations in the country. The 7th largest is ranked by Internet retailer Chief Financial Officer and we continue to take share in key categories.
These interconnected retail efforts continue to be a key growth engine for our overall business and over the last few years they've contributed approximately 20% of the company's total growth. Chief Financial Officer. For our online progress, it's not just about a website. And as we've said many times, it's about the interconnected experience. Chief Executive Officer.
About 45% of our online orders leverage the store in some way for fulfillment. 10% of our online orders actually originate in the store Chief Financial Officer, as customers and associates interact together. And the vast majority of our online returns leverage the stores for a convenient return destination. Chief Financial Officer. Also, our online assets are leveraged by our store associates as an important customer service tool.
So there's a number of key industry benchmarks that also point to our solid progress. For example, there's a research firm called L2, which studies all things digital and e commerce. They measure over 65 retailers
in
the areas of mobile, social media, e commerce and digital marketing Chief Executive Officer and they've recognized The Home Depot as the top ranked big box retailer for 3 years in a row. Chief Financial Officer. Now, while external validation is nice to hear, our benchmark will continue to be making improvements in customer satisfaction and ease of use Chief Financial Officer
and we still have lots of work
to do. So we'll continue to invest to make sure we are in lockstep with the customer. Chief Financial Officer.
So now that I've hit on
some progress, let's talk about key investment areas that we plan to do going forward. Our marketing and online teams will be driving the One Home Depot experience. Let me break down for you what that means. The foundation of the experience, Chief Executive Officer, the anchor point of the experience. It's about the products and the solutions that the customer needs.
It's what's in the proverbial box. Chief Executive Officer. It has to start with being in stock, the right quantities and importantly the right brands. We can never forget Chief Executive Officer, that the customer is engaging with the Home Depot looking for products and solutions to help them get their projects done. Chief Executive Officer.
However, how the customer is engaging around that product, of course that's changing fast. We'll talk about the 3 areas that we'll be investing in Chief Executive Officer, to enable that best interconnected experience. First, we'll be investing to be flexible. We need to allow the customer to shop how, when and where they want, any time of day, any device, any shopping method. Being flexible means allowing the customer to engage on the customer's terms.
The flexibility doesn't just apply to the shopping part of the journey, it transcends into fulfillment. Chief Executive Officer. The customer expects us to have the full buffet of fulfillment choices. So that's what we mean by flexible. Chief Executive Officer.
Next, having the best interconnected experience will require us to be more personal. Quite simply, we need to understand the personal and unique needs of each customer. Knowing them allows us to target the customer more appropriately, targeting them at the right moment Chief Executive Officer with the right content, the right expertise and of course the right offers. Chief Executive Officer. And lastly, all of this has to be easy.
At the end of the day, we want the right products and the right solutions Purchased and put to use in a frictionless way. So I'll give you some detail and some examples on investments we'll be making starting at the top, Chief Executive Officer, how we're trying to become a more personal retailer. Becoming more personal will all start with the power of our data. Chief Financial Officer. Through our size and our scale, we have a great deal of data on our customers, their homes, their businesses and their preferences and needs.
Chief Financial Officer. We have most of the U. S. In our database and nearly 50,000,000 households of the country have been active with us in the last 12 months. Chief Financial Officer.
Through those interactions, we are now modeling 1,700,000,000,000 data points a week just from our own data sets. Chief Financial Officer. And we leverage our data combined with 3rd party data sets. We have an enormous opportunity to understand communities, neighborhoods Chief Financial Officer and Businesses at Scale. This is all in the quest to understand our customers better.
Chief Financial Officer. So data will be at the core of our marketing efforts and a substantial investment focus for us. This data is powerful at the transactional level, Chief Financial Officer, but it's also helpful in understanding macro themes. For example, a keen interest, the largest demographic being the millennials Chief Financial Officer. And over the next decade, they will have a significant home improvement spend.
We break this large demographic into 2 groups, Chief Financial Officer, the younger and the older classes of millennials. The older millennials now in their late 20s early 30s our exhibiting all the same homeownership trends that previous groups did just with a slight delay. And what's great is that they have a real pride of authorship. They're looking to put their own mark on their homes and they consider themselves Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our
Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer,
our Chief Executive Officer, Chief Financial Officer, as they have an affinity towards our brand just as much if not more than other groups do. Chief Financial Officer. So knowing our customers at the transactional level and at the macro level like I just showed you will allow us to target them and reach them more effectively, Chief Executive Officer, reaching them in the right ways at the right time in the channels that they are most likely to be open to messages and influencing.
Chief Executive Officer.
As our customers morph their media consumption habits, we have been and will continue to be right there with them. Our targeting capability leverages some of the most sophisticated technologies available in the market. Here are some examples of that in the digital world. Chief Executive Officer. We were one of the first to explore new concepts like weather triggering ads.
These ads are only deployed and invested in when the weather is right Chief Executive Officer, our local inventory ads which deploys advertising dollars appropriately based on the inventory levels we have in a specific store or market. Chief Executive Officer. And then there's geofencing. This leverages mobile location technology to understand customer traffic patterns, Chief Financial Officer, understanding neighborhoods where we are over or under penetrated and even putting geofences around bricks and mortar stores We're also leveraging partners like Pinterest, Chief Executive Officer, leveraging their shop the look capabilities, allowing us to target the customers early on in their home improvement journey, picking up key signals they're giving off like Style cues, product tastes or project interests. We'll be investing in these areas significantly as the digital world provides us Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer,
our Chief Executive Officer, our Chief Executive Officer, our Chief Executive
Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, Even as viewership in these traditional channels declines. Our improvements, they're largely due to our buying tactics and scale. Chief Financial Officer. However, it's now becoming possible to target more surgically even in these traditional channels and we'll be investing in those capabilities as well. Chief Financial Officer.
Here's an example. Using our data to understand pro versus consumer households, Chief Executive Officer. We now have the capability to have 2 households both in the same neighborhood watching the same program at the same time, in this case Monday Night Football. Chief Executive Officer. We can serve them ads based on their interest and what we know about that household.
What you see here is we have a run going on right now which shows Household that shop like a consumer, they'll see Holiday Gift Center and Holiday Decor on the left. Household that shop like a pro, Chief Executive Officer. They're seeing offers and services that are relevant to the contractor on the right. So our data allows us to know our customer at a more individual level. Our targeting capability will help us get to them at the right place at the right time and we aspire to have all of our messages Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our
Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our
Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, Chief Executive Officer, to speak to them at an individual level. The world of traditional one size fits all messaging is quickly falling behind us. Chief Executive Officer. We've got diverse customer groups. Here you see an affluent baby boomer, a pro and a millennial who happens to be a new homeowner.
Chief Financial Officer. The reality is we're peppering them with too much and sometimes we regress to a lowest common denominator approach. We try to find the one message that somewhat appeals to all of them, but each of these customers has different needs and a different level of expertise.
Chief Financial Officer. As our ability
to know the customer matures, we no longer have to hope that one message is sufficient for millions of different customers. Chief Executive Officer. We are building the capability and investing to tailor our messages at scale. The affluent baby boomer We'll get a message which may be more aspirational in nature or a message about our turnkey solutions, our services business for example. Our pro can get messages that help them save time, save money, win more jobs.
In The millennial new homeowner will now receive messages about the content of what's possible, content on how to do a project, Chief Executive Officer, all rich in the images that actually fit their reality, the reality of the new fixer upper they just bought. Chief Executive Officer. Overall, when we form a more personal connection with the customer, knowing them, targeting them effectively with tailored messages, Chief Executive Officer. We will drive outsized growth for Home Depot. So back to creating that best interconnected experience we just went through how we're going to invest Chief Executive Officer to reach our customers in a more personal way.
Now let's talk about investments we need to make to become more flexible and easy to do business with. Chief Executive Officer. Now being flexible, we need to allow the customer to engage and shop and get fulfillment on their terms. We have Ben and we'll continue to invest in these areas. That means we've had to invest in digital infrastructure.
This is the ecosystem required to handle Billions of visits from every device imaginable, handling millions of products and the infrastructure to create that more personalized shopping experience I was just mentioning. Chief Executive Officer. We recently went live with an entirely new e commerce ecosystem, which should serve our business well. Chief Executive Officer. It also allows for the agility and the scalability that today's e commerce world demands.
As the new shopping methods emerge in the next few years, Chief
Financial Officer. We'll be investing to make sure we are there.
Being flexible also means continuing to invest in fulfillment capabilities. That's Chief Executive Officer, Mark Hollyfield will be discussing our fulfillment and delivery investments in detail. And lastly, we'll be significantly investing in our experiences and capabilities. Chief Executive Officer. For years, we've had voice enabled search and image search capabilities in our app.
These experiences Chief Executive Officer. We're probably 1 to 2 years ahead of the customer, but it provided us valuable lessons as the technology becomes more accepted in mainstream. Chief Financial Officer. We've dabbled in augmented reality and we're positioned well once the technology becomes more mainstream. And we've recently partnered with Google and are live on the Google Home Devices leaning in to voice enabled shopping.
Improved experiences are all about making it easier for our customers. Chief Financial Officer. Let me give you some examples on investments we'll be making. We will invest into capabilities Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, The customer is going to expect to land on an experience that also understands their location, understanding if you're in your home, at your place of business Or in a store or not. In the example you see here, there are different product recommendations for Atlanta versus Boston.
Chief Financial Officer. We will also invest to build machinery to be more context aware, understanding if the customer is just looking for a simple $100 item or if they're team. Contemplating a full remodel project or understanding if they've been engaged for the last few weeks trying to get inspired and maybe they just need some design help. Chief Executive Officer. These are all important contextual elements that are vital to creating a great and easy customer experience.
Chief Executive Officer. We will be investing to gather intelligence in real time to personalize the experience by the customer's context and provide the best products, content and services for their need and situation. And lastly being Persona Aware, personalized content curated for individuals, Consumer versus pros, DIY enthusiasts or novices. We will invest heavily to become a more personal store for the customer. Chief Executive Officer.
For example, when we recommend products to the pros, we'll show them case packs and pro grade brands. For the consumer, we'll show them individual quantities. Chief Executive Officer. To help illustrate, let's go back to our affluent baby boomer, our pro and our millennial new homeowner That we were marketing to in a more personal way. Not only will the marketing message be catered to them, but when they land inside the Home Depot experience, They will also need to have an equivalent personalized shopping experience.
Our affluent baby boomer will get an experience to buy and our pro will have an experience to buy in bulk. We know he has bought this water heater 500 times. They know exactly what they're looking for. They care about price, inventory availability and how quickly we can get the product to their job site. And our millennials, well, they need content, how to determine what size to buy, gas versus electric, tank versus tankless, Chief Executive Officer.
They're looking for someone to help them with this first time intimidating purchase. So investments to enable these experiences Chief Executive
Officer, who will make it easier for
the customer. So today hopefully I got across my primary two points. First, How we continue to make considerable progress in the areas of marketing and online. And second, that we'll be investing to create the best interconnected experience. We intend to do that by having all the flexible shopping and fulfillment options Chief Executive Officer, the customer is growing to expect and having a more personal connection with them and of course making it easy for them to improve their homes.
Chief Executive Officer. All right. Ladies and gentlemen, we're going to take our morning break. We're going to take a 15 minute break. We'll start back at 10:30.
Chairman. Chief. Chief Chief. Chief Executive Officer.
Ladies and gentlemen, our next session will begin in 5 minutes. If you'll start making your way back to your seats.
Chief Chief Chief Chief.
Ladies and gentlemen, our next session is about to begin. As a courtesy to those, Meniere, our Chief Financial
Officer.
Chief.
Chief. Ladies and gentlemen, we're going to go and get started back. If you'll go ahead and take your seats, we will begin here in just a moment.
Chief Executive Officer. Well, welcome back.
And as
a reminder, please silence your phone. And now I'd like to welcome and introduce to you Executive Vice President, Outside Sales and Service, Bill Lenny.
Chief Executive Officer.
Well, thank you and good morning. Chief Financial Officer. I am truly excited to be here today to talk to you about our strategy for both the pro and home services business. At our 2015 investor conference, I talked about how we were starting the journey towards 1 Home Depot for pros. That journey is gaining steam.
Chief Executive Officer. We're moving from acting as a convenience store for our pros to being the primary source for all of their product needs. Chief Financial Officer. We are laser focused on servicing our renovator customer and our transactional pro who are the foundation of our business. Chief Executive Officer.
We're also building upon our MRO offering by strengthening our account management, assortment and delivery capabilities. Chief Financial Officer. Finally, we continue to leverage our service providers, which in many cases are our best pros to deliver a great experience for the Do It For Me customer. With over 40% sales penetration, serving the Pro is important to our success. What we're doing is working.
Chief Financial Officer. For the past several years, Pro sales have outpaced the DIY business with consistent double digit comps. Our average Pro customer spends more than $6,000 per year with us. That is the average. Chief Financial Officer.
We have many customers who spend 7 figures with us and other pros who spend below the $6,000 average. Chief Executive Officer. This builds opportunity as we continue to better know and service our pros. 2 years ago, we stated our goal was to create a frictionless experience for the professional customer. The learnings garnered from the Interline acquisition Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief
Executive Officer, our Chief Executive
Officer, our Chief Executive Officer,
our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief
Executive Officer, our Chief Executive Officer, single unified outside sales force that complements our internal sales teams. We have aligned our resources around the end markets we Sure. Enabling our sales professional to become experts in their field and provide great value and insights to their customers. Chief Financial Officer. We have 4 targeted customer categories.
The first is the renovator remodeler, who we are very familiar with as they are the traditional Home Depot Pro customer. 2nd is a multifamily property manager, who requires MRO products for ongoing operations, Chief
Financial Officer,
Chief Financial Officer, such as schools and hospitals, who function similarly to our multifamily customer with frequent MRO purchases. Chief Executive Officer. And lastly, we serve the specialty trades, such as plumbing, HVAC and electrical contractors, Chief Financial Officer, who require the right assortment, customer support and inventory solutions for their businesses. We're not just aligning our sales teams, Chief Executive Officer.
We're aligning the full
organization, including online and marketing as we strive towards a more personalized experience for our customers.
Chief Executive Officer. One thing
that we've learned is there's no silver bullet that allows you to win the Pro's business. It's just not that simple. Chief Executive Officer. Instead, we're going to market with an integrated one Home Depot approach, which leverages our scale, Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, Chief Financial Officer. Our large scale works in our favor.
Our stores are conveniently located close to pro job sites. Chief Executive Officer. Our products are globally sourced, offering innovation and great values, saving pros both time and money. One Home Depot also means building strong relationships by leveraging data and creating a single view of the customer across the company. Chief Executive Officer.
We offer PROs the products and expertise they need, leveraging our inside and outside sales force. Chief Financial Officer. The Interline integration has progressed nicely with pro MRO now rolled out in our U. S. Stores, allowing customers in Home Depot stores access to Interline's assortment.
We continue to ramp up our Pro purchase program, which gives Interline customers the ability to shop in our stores Chief Financial Officer, using their house account. Both of these offerings have resonated with our pros as the most active users are spending more Chief Financial Officer, and Interline. As we discussed, customer expectations in retail are changing. Chief Financial Officer. We're witnessing a shift towards digital platforms.
In some regards, segments of the pros are no different. Chief Executive Officer. As a result, we're focused on creating the best customer experience for these pros, developing capabilities to meet their needs. Chief Financial Officer. Our next big step is to offer a robust integrated digital platform solution.
Chief Financial Officer. We plan to do this through a true B2B website via homedepot.com, which I'll discuss in more detail in a few moments. Chief Executive Officer. We're building out enhanced capabilities around tool rental, which is another way for us to engage our pros. Chief Executive Officer.
We know that over 90% of our PROs plan to rent equipment in the next year, but only a small portion, about 10% rent from us. Chief Executive Officer. The acquisition of Compact Power expands our tool rental offering and enables the pro to do more under one umbrella. Chief Executive Officer. We're investing to improve the digital experience for Tool Rental, including online and mobile reservations as well as enhancing equipment delivery to improve the rental experience.
Last year, we rolled out our upgraded store delivery system, Chief Executive Officer, offering reliable 2 and 4 hour delivery windows. Our PROs have responded positively to this offering Chief Financial Officer. And the utilization and sales continue to increase every week. But there's more that we can do. Chief Financial Officer.
As you will hear from Mark, we're embarking upon a path to offer the fastest, most efficient delivery in home improvement. Truly knowing the customer is vital to winning in the pro space. Today, we know our pro customers better than ever And this is allowing our teams to build stronger relationships and gain share of the Pro's wallet. Let me give you a little more color on this. Our transactional Pro remains the core of our business and we serve that customer every day in our stores as well as with their Pro Extra membership.
Our midsized customers, ones that may have multiple crews on job sites require a bit more of a high touch service. Chief Executive Officer. We assign specific accounts to our Pro associates in the stores or POSAs, so PROs are better recognized and rewarded in our stores. The results have been stellar with assigned account spending over 20% more with us Chief
Financial Officer on a year over year basis.
Finally, we manage our largest accounts through our outside sales force. Chief Executive Officer. These sales professionals have deep relationships with their respective accounts. They are experts in diagnosing Chief Financial Officer and servicing the needs of their customers and summoning the full suite of services we offer in order to fulfill those needs. Chief Financial Officer.
We recognize the need to equip our associates for success. One of the ways our bosses have been able to deliver a 20% growth in account spend Chief Financial Officer, is through the MyView tool found at the ProDesk. MyView provides store and customer data Chief Financial Officer, in a simple format that arms our pro sales associates with the information they need, empowering them to serve our customers better. Chief Executive Officer. Here's an example of the store level data that Epasa sees when they go into my view at the ProDesk.
Chief Financial Officer. As you can see, it paints a clear picture of activity at the store level as well as customer specific information. Chief Financial Officer. When the associate drills down, he or she can get a great view of their customer spend pattern as well as potential opportunities for growth. Chief Financial Officer.
The associates focus on 2 key areas of growth to help their Pro customers. Products, which are merchandising categories Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer,
our Chief Executive Officer, our Chief
Executive Officer, our Chief Executive Officer, our Chief Executive Officer, like credit, tool rental and delivery. New this year are alerts. Alerts indicate potential opportunities customers may be missing based on their buying habits. Finally, there are additional product suggestions that may make sense given how similar customers spend with us today. All of these data points help facilitate a conversation between and our pros, allowing them to highlight what we bring to the table in a tailored fashion.
Chief Financial Officer. As I mentioned, we're currently working on a B2B website. The goal here is to combine all of our capabilities in a way Chief Executive Officer, that provides a personalized experience for any type of pro. This site will leverage our existing homedepot.com platform Chief Executive Officer and require authentication using valid customer credentials. The site will operate under a couple of key tenants.
Chief Financial Officer. The first tenant is one account. With this, customers will be able to order products in a manner that suits them. Chief Financial Officer. For institutional and multifamily customers, that means features such as workflow management, budgeting, GL Coating and Approvals.
For general contractors who may have several associates who purchase on their behalf, Chief Financial Officer. We'll provide dynamic item list, order history and one place to house all of their outstanding quotes. Chief Executive Officer. The second tenant is one catalog. Here, we'll provide a complete catalog combining the products from our stores, homedepot.com Chief Executive Officer and InnoLine that can be shopped wherever and however the customer wants.
We believe that by combining one account Chief Financial Officer. In one catalog in a digital experience, coupled with our physical locations and delivery capabilities, Chief Financial Officer. We believe the capabilities mentioned like delivery, tool rental, Chief Executive Officer. My view and the new B2B website will lead to increased engagement. The more dimensional our relationship is with the pro,
Chief Executive Officer, the more the pro spends with us.
Engagement across dimensions is a true driver of value. Chief Financial Officer. We are seeing the value of multidimensional engagement through real time data. When a pro enrolls in Pro Extra, We see their spend increase. As that Pro Extra member begins to shop multi channel, we see the spend increase again.
Chief Financial Officer. As we increase our touch points with pros, they reward us with their loyalty. We believe that the personalized experience we're creating Chief Financial Officer, through One Home Depot can lead to exponential growth. As we appeal the new pros that weren't shopping with us before and earn additional share of wallet with our existing customers. Our pros are the key to our home services business.
Chief Financial Officer. There is no way greater to gain a customer for life than performing a quality service for them in their home, especially for those large investments like a kitchen remodel or whole home window replacement. Chief Financial Officer. We gain that trust by delivering quality service and standing behind our work. Chief Executive Officer.
We partner with over 100,000 badged installers and complete well over 2,000,000 installations per year, Chief Financial Officer, all while building a best in class compliance program consistent with our high standards. Our Chief Financial Officer. Our voice of the customer rates our customer satisfaction with their installation experience. We're proud of our current score of 4.33 on a 5 point scale. We're building out an interconnected experience for home services, Chief Financial Officer, just like we did for our core businesses a few years ago.
We're investing to bring services to life in the digital world Chief Financial Officer, where most customers now begin their shopping experience, leveraging both our physical and digital assets. Chief Financial Officer. As I close out, I want to bring us back to where we began. We've made tremendous progress. Our Pro business has never been stronger.
Chief Financial Officer and I'm excited about the investments we're making around engagement to ensure that success continues. Chief Executive Officer. Our traditional Renovator Pro and MRO businesses are blending together as we leverage our assets. Chief Financial Officer. We're creating a personalized B2B experience that's powered by One Home Depot.
Our Home Services businesses in many ways is an extension of our PRO strategy as we leverage key installer relationships on a local basis. I'm confident in our ability to build upon recent successes and continue gaining new customers, as well as selling more products and services to our existing ones. And now to talk more about our supply chain, Chief Executive Vice President of Supply Chain and Product Development, Mark Holyfield.
Chief. Chief Financial Officer.
Thank you,
Bill. Good morning, everyone. We heard Craig and my colleagues articulate the goal of creating the one Home Depot experience for our customers.
Chief Executive Officer.
We're very excited about the work ahead to deliver on that in our supply chain. More than ever, a great customer experience Chief Executive Officer. Given the changing needs of our customers, we are committing Chief Executive Officer, to create the fastest and most efficient delivery in home improvement. Let's pause on those words there for a moment. Fastest, our customers want options, speedy options, time definite options and low cost options, next day and same day delivery.
And customers now expect free or low cost options to also be quick. Most efficient, Chief Financial Officer. The low cost producer always wins. We see that in our supply chain and we will leverage our scale Chief Executive Officer, to provide low cost efficient options for direct to customer delivery as well. In Home Improvement, we are not all Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, Chief Executive Officer.
That means we will have the right delivery options for the wide range of requirements in home improvement, especially for our pro customers. Chief Executive Officer. We will have the right home improvement products in the right places for fast delivery. Home improvement is our core competency, the driver of our scale, the driver of our customers' unique requirements and where our competitive advantage will continue to live. Chief Financial Officer.
Let's think about our supply chain in a new way, an upstream and a downstream. The way to think about this is the upstream supply chain moves product our stores and direct fulfillment centers. And the downstream supply chain delivers to our customers directly. Chief Financial Officer. My talk today will be about, 1st, where we are now in our supply chain second, what we'll do to further Improve our leverage in our upstream network, where today we may have we have a competitive advantage.
And third, perhaps most importantly, Chief Executive Officer, how we will build a competitive advantage in our downstream network, creating the fastest and most efficient delivery in home improvement. Chief Financial Officer. First, where are we now in supply chain? As most of you know, starting a bit late in our history, over the last 10 years, we've invested heavily in our upstream supply chain supporting our stores. As you see there above the tape, Chief Financial Officer.
We've made progress in creating an optimal flow network with our RDCs, rapid deployment centers, improving our inventory management capabilities And driving further efficiency with our continuing supply chain think initiative. And more recently, they're below the tape. Chief Financial Officer. In the last 4 years or so, we've invested more heavily in what we call the downstream, the direct to customer or delivery supply chain. Chief Financial Officer.
We've implemented new interconnected customer offerings like buy online, ship to store and buy online, deliver from store. Chief Executive Officer. We built direct fulfillment centers, creating a 2 day ground parcel network. We acquired Interline Brands, the MRO distributor, Chief Executive Officer and we enabled new pro focused deliver from store capabilities like 2 and 4 hour delivery windows. Chief Executive Officer.
Thanks for the work we've done over the past several years. We now possess a competitive advantage in the upstream. We're positioned well for growth in our delivery offerings Chief Financial Officer. And we have unique scale in home improvement upon which to build a competitive advantage in the downstream. Chief Executive Officer.
In terms of scale and home improvement, no one matches ours. We move more home improvement goods than anyone else. Chief Executive Officer. That includes across the oceans, over the rails and on the road. We're the 3rd largest container importer overall in the U.
S, Giving us unique scale in imports. We manage thousands of inbound truckloads per week in our transportation team, giving us excellent scale in the trucking market. Chief Executive Officer. And in delivery, we're geared for the unique requirements of home improvement, particularly for pro customers from parcel freight Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our
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We are further automating distribution centers, to handle more volume and more SKUs. In our SDC, stocking distribution Chief Executive Officer. We're working to further optimize our flow of goods, including seasonal and imports. At our last investor conference, we introduced our supply chain strength initiative. This program continues.
Through better planning and collaboration with our suppliers, we reduced the variability and unpredictability of Chief Executive Officer of Product Lead Time. In addition, using intelligent truckload rounding algorithms, making data driven optimization decisions on inventory And transportation costs, we order more full truckloads. That product then flows to the store in a much more orderly and level fashion, Chief Financial Officer, providing our store associates a more predictable and stable flow of freight. At this point, about 70% of our RDC dollar flow is on sync. Chief Executive Officer.
We're now expanding CINC to our import flows and to our SDC platform. Our progress in supply chain has not Chief Executive Officer. We're expanding our DCs to allow more volume and developing direct fulfillment capabilities. In Canada, we're increasing our interconnected capabilities, enabling buy online, ship to store and buy online, deliver from store Chief Executive Officer and taking more control of the appliance delivery customer experience. Shifting to the U.
S. In the current state of our downstream supply chain, over the last few years, we've continued to expand our capabilities. We've built a network of direct fulfillment centers. Chief Financial Officer. These DFCs give us the ability to reach 95% of the U.
S. Population in 2 days or less Chief Financial Officer, and 30% in one day. We're continuously onboarding SKUs to these direct fulfillment centers and today we stock thousands of SKUs, extending our assortment beyond our stores. And beyond what we choose to stock our Chief Financial Officer. Ourselves, we work with our suppliers to offer a total of over 1,000,000 SKUs online for delivery and we manage most of those deliveries ourselves to ensure fast Chief Executive Officer and Efficient Customer Experiences.
In our stores, we've continued to improve our deliver from store Chief Operating Officer, our Chief Financial Officer, our Chief Financial Officer, our Chief Financial Officer, our Chief Financial Officer, our Chief Financial Officer, our Chief Financial Officer, our Chief Financial Officer, our Chief Financial Officer, Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer,
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Chief Executive Officer.
But despite all the progress in our downstream, our delivery, it's simply not good enough for the future. Chief Financial Officer. Today, our downstream delivery network is fragmented with 4 disparate unconnected components that operate largely independently. Our store based delivery, our online delivery from direct fulfillment centers and vendors, our appliance delivery and our Interline Brands delivery. Our stores while they have all our key SKUs close to our customers, they're not often the most efficient place to pick, pack and ship customer delivery orders, particularly in our top 40 markets.
Our direct fulfillment centers, as efficient as they are, they aren't close enough to provide one day parcel service 70% of our customers. And they aren't fully stocked with some of the most important home improvement SKUs. Our appliance delivery is today a standalone outside network that we can't leverage for other big and bulky deliveries. Our Interline Brands business with separate operations and delivery for MRO customers presents an opportunity for leverage of all of our supply chain capabilities. Chief Financial Officer.
Finally, we have the opportunity to link our downstream network more fully with our best in class upstream network. Chief Financial Officer. The ideal supply chain of our future is one where we fully control downstream fulfillment and delivery, one where we are closer to our team members with more of the most important SKUs. 1, Home Depot supply chain, where we leverage our scale and competitive advantage in our to build competitive advantage in our downstream network. With 1 Home Depot supply chain for the future, Chief Executive Officer.
We will create the fastest and most efficient delivery in home improvement. What will it take to fulfill that vision? Chief Financial Officer. Over the next 5 years, we will invest to transform our downstream supply chain with new direct fulfillment centers and delivery capabilities. Chief Executive Officer.
We will build more direct fulfillment centers. These will be closer to our customers, stock the most important SKUs Chief Financial Officer and to plan much of our store based delivery in our top 40 markets. 2nd, in addition to the DFCs, we'll open market delivery Chief Operating Officer, in about 100 locations. These stockless market delivery operations will be cross docks Chief Executive Officer, that allow consolidation and sortation capability for big and bulky freight and parcel freight and extend our delivery reach. Chief Financial Officer.
And 3rd, in secondary markets, we'll consolidate store based delivery in fewer stores or market delivery stores. Chief Financial Officer. And all of this will be linked to our upstream network to make truly one Home Depot supply chain. Chief Executive Officer. Let's talk about those direct fulfillment centers first.
In our top 40 markets, we will serve customers with next day and same day delivery from new direct fulfillment centers. We expect to open a few more direct fulfillment centers similar to and in addition to our existing DFCs, Call them Parcel Plus. These centers will be located to further augment our parcel shipping capabilities along with other categories shipped via truck. Chief Executive Officer. They'll have SKU capacity to continue to offer an extended assortment beyond our stores.
More centers means faster delivery of these SKUs to customers. Additionally, we expect to open about 40 flatbed direct fulfillment centers to serve our top 40 markets. Chief Financial Officer. These centers will specialize in big and bulky building material SKUs that are most effectively delivered on our flatbed trucks. Think of lumber, building materials, flooring and the like delivered on a next day and same day basis.
Chief Financial Officer. Finally, in addition to the flatbed DCs, we expect to open about 25 local direct fulfillment centers team members that will carry the most delivered store SKUs and interline MRO SKUs. With 25 of these, We will be able to deliver these SKUs on a next day and same day basis direct to customers in our top 40 markets. Chief Financial Officer. With these centers in place, in those top 40 markets, we'll be able to minimize our stores role in pick, pack and ship of next day deliveries as these are more efficiently accomplished in a direct fulfillment center.
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Executive Officer for immediate dispatch.
With these local hubs in about 100 locations, we expect to enable the fastest Chief Executive Officer and most efficient delivery of these home improvement goods. With the direct fulfillment centers and market delivery operations, we expect to largely supplant store based delivery in our top 40 markets. But beyond those markets and our secondary markets with multiple stores, We have the opportunity to drive efficiency by consolidating delivery in fewer stores. For example, in our Greenville, South Carolina pilot location, Chief Executive Officer. We have consolidated delivery from 6 stores to 2, driving efficiency as we increase labor productivity in picking and transportation productivity through better delivery route density.
The result of these investments will drive needs of home improvement, particularly for Pro customers. Today, our stores provide next day and same day fulfillment and delivery Chief Financial Officer, our parcel plus direct fulfillment centers augment that with an extended SKU mix. Our future investments in local and flatbed BFCs will supplant store delivery with more efficient next day and same day fulfillment of all our SKU offerings including flatbed goods. And our market delivery operations will result in a market leading appliance and big and bulky delivery capability on top of that. All of that will work to create the fastest and most efficient delivery in home improvement.
We're excited about the supply chain journey ahead. Given the scope and scale of the effort, we expect it will take about 5 years to get to the full capabilities I've described. Chief Financial Officer. We have a good start with our upstream network and our existing store based delivery and direct fulfillment centers. Chief Executive Officer.
In the downstream, in 2018, we expect to pilot local flatbed DFCs and market delivery operations Chief Financial Officer
with a rollout of all
of these platforms through 2022. Over this timeframe, we'll continue to optimize our upstream as well Chief Financial Officer, to leverage and extend our competitive advantage there. All told, we expect a capital investment of about $1,200,000,000 Chief Financial Officer of Investor Relations in our supply chain over the 5 year period. It's difficult to fully convey how we view our supply chain from these slides.
Chief Financial Officer. Our distribution network is specifically designed to handle all types of home improvement our For most of our store products, our rapid deployment centers are the most efficient path. These buildings are equipped with advanced automation technologies that Chief Financial Officer, our Chief Financial Officer, our Chief Financial Officer, our Chief Financial Officer, our Chief Financial Officer, Chief Financial Officer. Direct fulfillment centers are also automated and handle a wide variety of products. Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, Chief
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This combination of automation and our orange blooded associates enables product to move through our facilities in minutes. Chief Financial Officer. These fulfillment centers are strategically located throughout the U. S. To reach customers in 2 days or less.
Chief Financial Officer. Our vision is to transform our distribution network to provide even faster delivery service of one day or less nationwide. Chief Financial Officer. Home improvement merchandise comes in all shapes and sizes. Many products are too large to write on a conveyor and require specialized handling and storage.
Chief
Financial Officer.
Some of our largest and heaviest freight, light lumber and siding, rolls in by rail. Our network of bulk distribution centers are designed to process these big and bulky items and get them to our stores fast and efficiently. Chief Executive Officer, our Chief Executive
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Officer, Chief Financial Officer. When it comes to delivering product to our customers, The Home Depot is developing a network to ensure customers can get it delivered Chief Financial Officer. These deliveries vary from parcels at the doorstep Chief Executive Officer, our
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Executive Officer. Chief Executive Officer.
We're very excited about the future of our supply chain. When I started in retail supply chain all those years ago and we didn't even call it supply chain back Chairman. It was pretty much all about moving brown boxes from dock to dock as efficiently as possible. Today, it's much more than that. Chief Executive Officer.
It's creating a great customer experience at the moment of truth in retail, when we connect customers with product, Chief Financial Officer. Given the opportunity ahead, there is no more exciting place Chief Financial Officer,
Thank you, Mark. And let me add my welcome to our investors and analysts. We are glad that you joined us today, and we are delighted to have this opportunity to update on our One Home Depot strategy and financial outlook. Today, I'd like to cover 4 topics. 1st, quickly discuss our fiscal 2017 financial guidance 2nd, share with you our point of view on the economy and the state of the U.
S. Housing market Chief Financial Officer, our 2020 financial targets and finally, wrap it up with a discussion on capital allocation. Chief Financial Officer. Let's start by taking a quick look at our 2017 guidance. In November, we updated our sales and earnings per share growth guidance, and we confirm that guidance today.
We expect fiscal 2017 sales to increase by approximately 6.3% with comp sales growth of approximately 6.5%. With that, we expect our operating margin to approach 14.6%. Chief Financial Officer. As for earnings per share, we project fiscal 2017 diluted earnings per share to increase by approximately 14% to $7.36 By delivering these results, for the 4th quarter in a row, Chief Financial Officer. We will be reporting the highest sales operating margin and diluted earnings per share in our company history.
Chief Financial Officer. As a leadership team, we have a solid record of establishing financial targets and then meeting or exceeding those targets. Chief Financial Officer. It's been a journey. We first established operating margin and return on invested capital targets back in 2,009.
Chief Financial Officer. Since then, every 2 or 3 years, we have raised the targets. The last time we set financial targets was at our 2015 Investor Conference. At that time, we believe we would reach Chain Investor Conference. At that time, we believe we would reach an operating margin of 14.5% Chief Financial Officer and return on invested capital of 35% by fiscal 2018.
We will exceed our 2018 operating margin target this year and achieve our return on invested capital target in 2018. As you heard from Craig, today we are introducing our fiscal 2020 financial targets, and I'll cover those targets in detail in just a few minutes. But before I do that, I'd like to turn to our view of the economy and the U. S. Housing market.
We think the U. S. Economy is healthy and we will see continued growth for several years. In addition, housing related drivers of home improvement spending are trending nicely, Chief Financial Officer, and today's consumer spending behavior favors home improvement. And while my macro comments are U.
S. Centric, Chief Financial Officer. We also have favorable economic conditions in Canada and Mexico. As you can tell, our outlook is quite positive. Chief Financial Officer.
Let's take a deeper look at the drivers of our business. While the U. S. Has been an economic recovery since the Q3 of 2,009. U.
S. GDP is expected to grow over the next several years, making this the longest recovery on record. Chief Financial Officer. One reason we are confident that the recovery will continue is that during this recovery, the cumulative GDP growth rate is just 19%, well below the historical average of 26%. Chief Financial Officer.
GDP growth is the foundation from which we build our sales growth plan. The current U. S. GDP growth forecast over the next several years is over 2% annually. And just a comment on tax reform.
Chief Financial Officer. If tax reform is enacted, we expect U. S. GDP growth forecast to increase, which would be good for our business. Further, we think concerns over certain housing related provisions in the proposed legislation are overblown.
Chief Financial Officer. And finally, not only with tax reform fuel the economy and create jobs, but with tax reform, Chief Financial Officer, the Home Depot would have an immediate and significant benefit to our tax expense and cash taxes. Chief Financial Officer. Before we review the housing market, let's look at consumers. Unemployment has shown a marked improvement and is nearing levels not seen since 2000.
Interestingly, consumers are spending, but they are spending differently. Chief Financial Officer. With the exception of home improvement, consumers are spending more on experiences than they are on goods. So why are consumers spending on home improvement? Well, there are 4 main drivers of home improvement spend, household formation, home price appreciation, Chief Financial Officer, Housing Turnover and the Age of Housing Stock.
We rank the drivers on the level of impact from lowest, Chief Financial Officer, noted by an equal sign to highest, noted by 2 plus signs. Recently, Chief Financial Officer.
Home price appreciation and
housing turnover have had 2 plus signs. In other words, the biggest impact on spend. Chief Financial Officer. Looking ahead, we think household formation, home price appreciation and the age of housing stock will have the biggest impact on spend. Chief Financial Officer.
Household formation has been slow to recover, but we are finally starting to see formation in excess of historical averages. Chief Executive Officer. This should continue for a while as about 1 third of all Americans between the ages of 1834 are still living at home with their parents. And the good news is that as millennials start to form families, they are moving into houses. Chief Financial Officer.
We believe home price appreciation has been and will continue to be a key contributor to our sales growth. Chief Financial Officer. Once homeowners view their home as an investment and not an expense, we believe they spend more money on their homes. Chief Financial Officer. It is in a way a wealth effect.
With lower mortgage ratios and lower levels of negative equity, people feel like they have more money to spend. In fact, today, there are only about 3,000,000 homeowners with negative equity. Chief Financial Officer. And since 2011, homeowners with home equity have seen their equity grow by 122 percent or $64,000 per housing unit. Looking at this chart, while the National Home Price Composite Index has fully recovered, Chief Financial Officer.
There are still many large cities that have not yet recovered. And for cities that have recovered, the economic environment is very good Chief Financial Officer, and continued price appreciation is expected. We see this wealth effect translate to big ticket spending. Chief Executive Officer. For us, big tickets are transactions over $900 and we have seen growth in big ticket spending every quarter Chief Financial Officer since the Q2 of 2011.
But as you can see from this chart, the average spend per large home improvement project Chief Financial Officer, has not yet returned to the level seen at peak. Homeowners extract equity from their homes using HELOCs or second mortgages. Chief Financial Officer. We've seen an increase in borrowing activity, but considerable capacity remains. Looking at housing turnover, Chief Financial Officer.
We expect houses to turn at 4% of units. Turnover will be a driver of spend, but only a driver of growth as households increase. Chief Financial Officer. Candidly, we have a housing shortage in this country with only 3.9 months of supply. In a normal housing environment, you would expect to see 6 months of July.
While the housing shortage could put pressure on turnover, it helps support home price appreciation. Chief Financial Officer. And one last
comment on home price appreciation.
The watch out is if home prices rise to a point where the affordability index is in peril. Chief Financial Officer. With an affordability index of 150%, there is plenty of room to grow before we run into that risk. Chief Financial Officer. The same holds true in the face of potentially higher mortgage interest rates.
Our analysis shows that every 25 basis point increase in mortgage rates drives $40 in additional mortgage expense per month. Chief Financial Officer. Mortgage rates have a long way to go before the affordability index is negatively impacted. Chief Financial Officer. The age of the housing stock is going to be an increasingly important driver to our sales.
We know we have an aging housing stock in the United States. Chief Financial Officer. Today, over 65% of the stock is 30 plus years old. Looking to 2020, 54% of the housing stock will be greater than 40 years old. Home improvement spending in a house over 40 years old Chief Financial Officer, is about 30% more than what is spent in a house under 10 years old.
To wrap up our discussion on housing, Chief Financial Officer. I'm going to end with private fixed residential investment. For years, we have used this measure. 1st, as a way to understand historical averages. Chief Financial Officer, our Chief Financial Officer, our Chief Financial Officer, and our Chief Financial Officer, and now simply as a way to understand where we are in the recovery.
Chief Financial Officer. Based on the current data, PFRI would suggest that we are in the 7th inning of the housing recovery. But what PFRI doesn't predict Chief Financial Officer, is what will happen to home improvement spending as housing ages and as the economic recovery continues. Chief Financial Officer. So for us, PFRI is just a data point, but that's all.
Looking ahead, we will focus on the drivers of home improvement spending, household formation, Chief Financial Officer, Housing Turnover, Home Price Appreciation and the Age of the Housing Stock. Now let's turn to our longer term financial targets. Chief Financial Officer. You often hear me say that our operating margin wants to lift and that's because our financial model epitomizes operating leverage. Chief Financial Officer.
As sales grow, we leveraged fixed costs and expand our operating margins. Further, payroll, our largest expense grows with sales, but not at the same rate, driving operating margin expansion. Chief Financial Officer. Finally, productivity is a virtuous cycle at The Home Depot. So looking ahead in a BAU our business as usual environment, our operating margin will lift.
On this chart, we are showing Chief Financial Officer, our Chief Financial Officer, our Chief Financial Officer, our Chief Financial Officer, our Chief Financial Officer, our Chief Financial Officer, our Chief Financial Officer, our Chief Financial Officer, our Chief Financial Officer,
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our Chief Financial Officer, our Chief Financial Officer, Chief Financial Officer, our Chief Financial Officer, our Chief Financial Officer, our Chief Financial Officer, our Chief Financial Officer, our Chief Financial Officer, our Chief Financial Officer, our Chief Financial Officer, our Chief Financial Officer, our Chief Financial Officer, our Chief Financial Officer, our Chief Financial Officer, our Chief Financial Officer, Chief Financial Officer. Retail is changing. Further, associate needs, things like the need for flexible hours, higher wage and benefits are also changing. So we are planning to accelerate our investments and reinvest our operating margin Chansion. Rather than growing our operating margin by 100 basis points, we will be largely reinvesting our operating margin expansion.
Chief Financial Officer. We define investments as incremental capital and expense dollars. In other words, incremental cash outlays. Chief Financial Officer. Over the next 3 years, we will nearly double our investments from what would have been spent in our BA UK.
Chief Financial Officer. Today, our leaders have shared the key areas of One Home Depot Investment, from investing in our stores to investing in our supply chain, investing team in our supply chain, investing in our digital experience, investing in our merchandising experience and in our people. Chief Financial Officer. As you look at the allocation of spending, you can see we are planning a material step up of spending in our stores, supply chain, Chief Financial Officer, which includes People Investments. As we turn to our long term financial targets, Chief Financial Officer.
Note that today, we're going to talk about 2020 targets. And in our February earnings call, we will provide specific guidance for fiscal 2018. Chief Financial Officer. So starting with sales. Using our directionally correct, but imperfect sales forecasting model, we believe our BAU comp sales growth Chief
Financial Officer, will average around 4%.
This assumes U. S. GDP growth in the 2% area, plus 200 basis points of growth coming from the 4 housing drivers I highlighted earlier. We have similar growth forecasts in Canada and Mexico. Chief Financial Officer.
When we include the sales benefit tied to our accelerated investments, we think our annual sales growth ranges from 4.5% to 6%. Chief Financial Officer. The reason for the range is that for some of the investments like store environment, we had a good idea of the sales lift as we've been in a pilot for the past year. In other cases, we estimated the sales lift based on what we should be able to do. Chief Financial Officer.
Finally, in the case of 1 Home Depot supply chain, we don't expect the sales benefit to occur until the initiative is complete. Chief Financial Officer. Included in our sales growth forecast are a handful of new store openings every year. These new stores fill voids, Chief Financial Officer, but will not be a significant driver of growth. Turning to gross margin, our largest cost pool is cost of goods sold.
Chief Financial Officer. Within cost of goods, we have a number of efforts underway to drive productivity. For example, we have a cost out team that works hand in hand with our CFO, to better understand what the right cost should be, identify strategic cost out opportunities and address cost increase requests. Chief Financial Officer. From a gross margin rate perspective, however, we are planning for our gross margin rate to decline by 40 basis points Chief Financial Officer, as we reinvest cost out into lower margin categories and invest in One Home Depot supply chain.
From an expense perspective, in a BAU environment, we would expect our expenses to grow at 50% the rate of our sales growth. Chief Financial Officer. But because of our accelerated investments, our expense growth factor will change. Over the next 3 years, we expect to leverage expenses by 20 basis points to 80 basis points with the range being a function of sales growth. As we think about operating margin, Chief Financial Officer.
It's a function of the sales environment. In a 4.5% sales growth environment, our 2020 operating margin will be flattish to what we expect to report for fiscal 2017. In a 6% sales growth environment, our operating margin will grow by 40 basis points. Chief Financial Officer. You can see the power of our financial model on this chart.
Over the next 3 years, we can nearly double our investments and keep operating margin flattish and with higher sales coming from the investments drive operating margin expansion.
Chief Financial Officer.
Turning to capital allocation. While we are accelerating our investment plan, our disciplined and balanced approach won't change. Chief Financial Officer. Over the next 3 years, we are planning to generate over $37,000,000,000 in cash from the business. Included in this
cash projection is a
slight improvement in inventory is a slight improvement in inventory terms. We will use our cash to invest in the business, pay dividends and buyback our shares. Chief Financial Officer. Now I know it can be confusing to think of investments as both expense and capital. I've already discussed expenses.
On the capital spending front, you should model average annual capital spending of $2,700,000,000 Chief Financial Officer. This spending will take our average annual depreciation expense to $2,600,000,000 which is included in the expense assumptions I just discussed. Chief Financial Officer. To give you a bit more color on how we are thinking about our investments, you can see for each, we've modeled an expected return on investment coming from sales coming from sales lift, productivity and or higher customer satisfaction. Even in the face of accelerated investments, Chief Financial Officer.
We are not changing our 3 shareholder return principles. Our dividend principle is to target a dividend payout of approximately 55% of earnings Chief Financial Officer, with a goal of increasing our dividend every year. From a return on capital perspective, our goal is to maintain a high return on invested Capital, benchmarking all uses of excess liquidity against the value created for our shareholders through repurchases. Chief Financial Officer. And finally, our share repurchase principle is to use excess cash to repurchase shares as long as it's value creating.
Chief Financial Officer. This chart highlights our focused and disciplined approach to optimizing invested capital. Back in 2,008, we had 29 point $2,000,000,000 of invested capital with a return on capital of 9.5%. Fast forward to the end of fiscal team and we expect to have invested capital of $27,200,000,000 with a return on that capital of over 34%. Chief Financial Officer.
And looking ahead, we believe we can drive our return on invested capital close to 40% by 2020. Chief Financial Officer. Today, we have $24,750,000,000 of long term debt. The staggered maturities and weighted average cost of this debt portfolio Chief Financial Officer, provides a competitive advantage and our strong long term debt ratings of A provide operating and financial flexibility. Chief Financial Officer.
By the end of fiscal 2017, we project our adjusted debt to EBITDAR ratio to be about 1.9 times, close to our target of 2 times. Chief Financial Officer. As our earnings grow against this target, however, our borrowing capacity will grow. We project borrowing capacity of about 5 point $7,000,000,000 by the end of fiscal 2020, which provides ample flexibility. Chairman.
As for share repurchases, we've been repurchasing our shares since 2002 and through the 1st 9 months of fiscal 2017, had repurchased approximately 1 point 3,000,000,000 shares for $73,000,000,000 at an average price of about $54 per share. Chief Financial Officer. We intend to repurchase $2,100,000,000 in the Q4 of fiscal 2017, bringing fiscal 2017 share repurchases to $8,000,000,000 Chief Financial Officer. Looking to 2020, we are targeting $12,500,000,000 in share repurchases using excess cash. Chief Financial Officer.
As a result, today our Board of Directors authorized a new $15,000,000,000 share repurchase program replacing our existing authorization.
Chief Financial Officer.
The $12,500,000,000 in future share repurchase is the basis for our 2020 return on invested capital target. Chief Executive Officer. If you look back over the past 9 years, the power of the Home Depot has been seen in our financial results. Chief Financial Officer. As we look ahead to 1 Home Depot, you can see the same is true.
Over the next 3 years, we plan to nearly double our investments Chief Financial Officer, and yet our operating margin could reach as high as 15%. We are investing in the future of our company. Chief Financial Officer. We are investing to enhance the customer experience and we are investing to create value. Chief Financial Officer.
So we thank you for your time today. And we're now going to break into our Q and A session. So I'd like to invite all my partners up to the stage. Just
team. This is
going to work as we have 3 of my colleagues from Investor Relations with microphones moving around the audience, Sean, Luke and Elizabeth. You have a question, please raise your hand and wait until the microphone gets to you. We want those who are joining us on the web to be able hear your question. And also, please state your name and the name of your firm before asking your question. So let's get started.
It's Michael Lasser from UBS. And this can go to anyone. But presumably, Home Depot has been investing Chief Financial Officer. Throughout its history, so what is different now functionally? And we've become accustomed to Chief Executive Officer, you exceeding the goals that you set forth from a sales perspective and from an expense perspective.
So is there going to be a different mindset Chief Financial Officer in how you might manage some of that outperformance. Will you reinvest that in the business? And then one last question to put it all in. You're doing a lot with the supply chain and moving away from the delivery to the stores. Could you conceivably close some stores, because you are adding a lot of capacity over the next few years.
Thank you. So Michael,
I think It wouldn't be right to think about us changing our mindset in terms of Trying to work hard to deliver and or exceed as Carol said in her comments, what we set out to do. Chief Executive Officer. We are a group that is committed to delivering on performance Chief Executive Officer and our objective would be to go out and achieve at or above what we've committed to. And on the second element, no, I don't think we look at closing any stores. We have plenty of opportunity.
We have merchants lined up waiting for space.
Yes.
Yaron Wainwright with BMO. Ted, it's for you, I guess. Chief. As you look at the amount of inventory that continues to come out of the stores and it will continue to evolve more, What businesses do you think as you look out the next 5 to 10 years, could you get into that you're not into today, the way you've gotten into Halloween or the way you got into cleaning supplies or
Chief Financial Officer. Now automotive, how
do you how does the store change over time with that regard? And then my second question to you would be lumber and building prices are record levels. At what point do they get to where it starts to have an impact on units and therefore starts to
have an impact team. On the ability of people to repair, remodel their home. Thanks. So on the first one, we've always experimented with new categories in space. So you referenced auto, that's taken a number of days in the stores.
Craig mentioned pool. I mean, we have a very, very modest pool business that's usually in outside garden. So we can do a lot with the categories we have, but something like the decor we mentioned, that again is the customer taking us Chief Executive Officer, and we think anything we would do is going to be adjacent to our business and it's going to be where the customer is going to give Home Depot the right to play and the authority to win. On the lumber price, Each of framing and panel prices are 20 plus percent over last year And panel in particular had really spiked. That was up as 40 plus percent higher than last year, and we were starting to see some unit pressure.
Chief Financial Officer. Fortunately, over the last several weeks, we've seen a dramatic decrease in panel prices. So each of panel in Framing are about 20% over LY. So that pressure we were starting to see on units is abated a bit. So, I don't see any pressure going forward to demand because of pricing and building materials.
One additional comment on your first question. Chief Financial Officer. When you look at what's happened in terms of growth per box over the last 3 years, there's an opportunity in Some categories to actually add more space for holding capacity and really improve the sales opportunity that exists within
Hi, it's Mike Baker from Deutsche Bank over here. So Carol, you had Chief Financial Officer. I mentioned investing cost out in lower margin categories in supply chain. You didn't talk about price or promotional Activity or anything along those lines. So, is any of that contemplated in that 40 basis point decline in gross margins?
That's question 1. Question 2, really simply, your sales guidance is about 50 basis points to 150 basis points higher than your base comp. So So it cannot be considered what you guys would anticipate for share gains. Is that another way to think about the drivers from those key initiatives? Thanks.
Chief Financial Officer. Sure. So first to your first question, we are investing 40 basis points of gross margin over the next 3 years. Chief of that comes from the investments that we're making in our supply chain. So we have start up costs as Mark Holyfield builds out our new supply chain.
We also have some depreciation expense associated with those supply chain assets that will flow through the cost of goods. So that's 15 of the 40. The remaining 25 comes really from mix. We still have $1,000,000,000 of sales that have not recovered from the last recession. And those $1,000,000,000 are in very low margin category.
So we expect those sales to grow. That puts pressure on the margin. We have a bang up appliance business. We love our appliances, and we don't like oh, well, the margin is Chairman, but it puts pressure on the overall sales performance. So really is a mixed story.
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Officer, Chad several pilots underway where we have seen actual lift, we wanted to put that lift in. And based on our directionally correct, but imperfect model. Anything over that base case would be implied market share gains. Now you might say, well, my follow on question to that Carol is, why don't why aren't you lifting even higher Chief Financial Officer, based on the performance that you're delivering in 2017. Well, as you know, we are a team that tends to put team leader, a plan that we beat.
In fact, we beat our plan every year since 2,009.
Hi, Scott Ciccarelli, RBC. Another follow-up question on the gross margin. Can you help us And what kind of vendor support you're looking for, looking at in that contemplation, especially if mix seems to be the primary pressure? And then related to that, is there any contemplation regarding incremental pricing competition from some of the e commerce players out there?
So is it related to vendors? I mean we obviously work with our suppliers to try to figure out how collectively we can take cost out of the entire value Chane. That's what Project Sync is all about. That's what we'll continue to do. We want to be able to not only drive efficiency for ourselves, That Ted and the team has had around collaboration and what we're doing with Mark and supply chain.
We think there's enormous opportunity To drive value for both our vendor partners as well as ourselves in that process.
Chief Executive Officer
and then the expectation for incremental price competition from e commerce players?
I mean, that's the team that worked hard to make sure we're priced right Every day.
We're comfortable where we're priced down and we believe we have the best Everyday value in the marketplace, we're not seeing any heightened promotional activity in the marketplace. Our focus is more on everyday versus Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our
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Officer, Scott Mushkin from Wolfe Research. So I had one clarification and two questions. So the clarification was on Carol, you said Included in the sales forecast is not a lot of the 1 Home Depot. I just wanted to get some clarity on that.
Sure.
And then the Two questions are capacity. How much capacity are you guys adding? Do you have like kind of the store equivalent? I think it would be good to know. And then the second question is, If we do get this tax windfall, corporate tax reduction, where does that money go?
Thanks.
Right. So when we built our sales forecast 4 point to 6%. That included lifts from known pilots as well as what we should be able to do Chief Financial Officer, based on all the great activity underway, but did not include any sales benefit from One Home Depot supply chain. The only thing Chief Financial Officer, our Chief Financial Officer, our Chief
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Financial Officer, our Chief Financial Officer, our Chief Financial Officer, our Chief Financial Officer, our Chief Financial Officer, our Chief Financial Officer, our Chief Financial Officer, our Chief Financial Officer, there. We're obviously rolling this out over a 5 year period and we wanted to plan for that fairly conservative way. Perhaps I can address the tax Chief Element. So we are proponents of tax reform. We'll see if it actually gets out of conference and becomes a law.
Chief Executive Officer. But if it does, in its current state, it will be significant for the Home Depot. You could you can do the math, but the immediate benefit might be $1,600,000,000 So what will we do with that? We will spend it. Cash is fungible at the Home Depot.
We've just announced a fairly major investment plan over the next 3 years, accelerate what we would have done. So we've got lots of opportunities to use that cash.
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Chief Financial
Officer. Hey, guys. Peter Benedict at Baird. For Ted, first, the accelerated push into the core, Chief Financial Officer. Can you talk a little bit about how that's going to be executed?
Is it primarily organic? Is there any room for strategic M and A as you look out to that category over the Chief Executive Officer. And then maybe Mark, if you could speak to the downstream redesign that you've got envisioned here. Chief Executive Officer. How do the risks stack up relative to a lot of the stuff you've done upstream here over your career at Home Depot?
Thank you.
On digital decor, it's certainly largely an organic initiative, but that's the way our team is thinking about it.
Chief Financial Officer.
As we said, the customer has given us
permission to play here. We have a lot of
these product categories today in This is essentially an experience driven initiative. We'll certainly onboard Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer,
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Chief Executive Officer, we really have been in this business with Home Decorators Collection for almost what the last 10 years overall. And so just think of it as we're going to take advantage of the opportunity we have there as we've built through our stores and using that brand in our stores Plus the direct business of $1,000,000,000 plus brand.
Yes. In terms of the risk of the supply chain transformation, Chief Executive Officer. We've learned and we've seen others learn that big time supply chain transformation can be hard and fraught with risk. Chief Executive Officer. I think when we look at our path over the next several years, we know what we know how to do now and we know what we're just learning how to do.
Chief Executive Officer. What you saw on the slides there was the pilot of the new things that we haven't done yet in 2018. We're going to take a All walk run approach on those things to manage the risk. And we'll make sure we get it right before we go large. It'd be naive to think there won't be some turbulence as you transform a supply chain at this scale, but we'll work to minimize that and always take care of our Customer's
first. If I could add one other piece of color there, that's why we're targeting an inventory turn of 5.4x by 2020 Chief Financial Officer, to make sure that we don't put a turn target out that's too aggressive given that we have so much change underway. Customer service starts with in stock as Anne Marie told us, yes.
Chief Financial Officer.
Hi, it's Alan Rifkin with BTIG. So I certainly understand that for the next 3 years, a disproportionate amount of your spending is going to go toward the supply chain as well as enhancing your performance in the top 40 markets. If the proposed legislation passes And the mortgage interest deductibility drops to $500,000 one would presume that that's going to affect Chief Financial Officer. Disproportionately more people in these top 40 markets where the average home price is well above the U. S.
Average. Are you potentially investing In an area that may be susceptible to growth not being as strong as other parts of the country? And then related to that, if I may, Carol, what percentage of your revenues actually come today from the top 40 markets? And then I have a follow-up. Chief Mark.
Thank you. So 80% of our sales come from our top 40 markets, hence our focus on those markets. In terms of concerns about the proposed tax reform and limitations on mortgage interest deductibility. A few things to keep in mind. We don't know what the actual outcome is of the legislation, but let's just take the but let's just take the worst case, which is no more deducted you limit the deductions on over $500,000 Chief Financial Officer, no more than 5% of all mortgages in the United States are greater than $500,000 So we've already narrowed it down.
Chief Financial Officer. And then if you look at itemized
filers, only 22% of all filers actually itemize a mortgage deduction. So you really are narrowing down the risk. Not to say there wouldn't be some impact, but in terms of a significant impact to our overall business, we just think Oberblanc. We just don't think it's a problem.
Okay. Thank you. And a follow-up, if I may, for Mark. I thought I heard you say Chief Executive Officer, that the incremental spending in supply chain will be outsized for the next 5 years. I know that this is a 3 year plan that you're laying out.
I'm not trying to get you to commit 5 years, but for years 45, should we expect similar ramifications from spending on supply chain is what we're hearing today for the next 3 years? Chief Executive Officer.
Thank you.
Perhaps I could give a little color on that. If you look at the chart in your takeaway materials, there are 2 pie charts that show our spend. If you look at the pie chart related to supply chain, you can see the increase from our BAU investing case to our now accelerated investing case that delta is $600,000,000 Mark talked about a $1,200,000,000 capital plan, $600,000,000 will be spent in the 1st 3 years. The remaining $600,000,000 will be spent in years 45. Chief
Executive Officer. Thank you. Keith Hughes from SunTrust. I've heard a lot about investment today. Does the path you're on now change your view on acquisitions doing interline type transactions has increased in this view?
Chief Executive Officer.
No, actually our thought process around acquisition stays the same. We've been focused on really looking at things That bring a capability to the Home Depot that would be more efficient to buy than to build. And that's really where our mindset barges at today. Thank you. Chief Executive
Officer. Good morning. It's Matt Fassler from Goldman Sachs. And I think this will be for Mark. Two questions on supply chain.
First of all, you seem to be tilting strongly in favor of taking delivery out of the stores. I know different retailers have had different strategies discussed over the past couple of years. Can you talk about what you've seen logistically, economically, microeconomically to drive that decision. Secondly, consumers' expectations for the cost of delivery and the precision of delivery seems to be changing. They're looking to pay less.
What will this new evolving supply chain enable you to do in terms of changing the value proposition to consumers? And are you team about evolving your pricing structure as you roll these out. Thank you.
Yes. In terms of the store's role in delivery, Chief Executive Officer. I think the language there I used was largely supplant, which doesn't mean everything. We will still continue to have store based delivery. Virtually every store will continue to be in the delivery business to some degree, but think about it as in the major markets, we'll be able Chief Executive Officer, pull out most of the delivery from the stores.
If you think about the car and van delivery, that's the kind of delivery, that kind of express delivery That will continue to live in the stores. So we think 5 years from now, I'd guess that roughly half of the deliveries from Stores will be those kinds of low volume deliveries, car and van, because it's an express type service that we'll be implementing there. Also, I'd say, we have customers come in and say, I want that lumber. So we need to go get that lumber and deliver it to the customer. So Stores will continue to be in the delivery business, and in the rural stores, they will be the delivery hub.
In the market delivery stores and the secondary markets, Delivery and with the customer, on 90% of our online deliveries, it's Free because the customer meets the threshold there for free shipping. What we find in the local markets and stores today, Our customers are very willing to pay for added value services like very fast delivery or like that forklift that drops the product in the right place Chief Executive Officer on the customer's job site. So we'll continue to follow the customer and make sure that we're competitive with our offerings and delivery. It's not a one size fits all approach.
Chief Financial Officer. I think let me add to what Mark said as well, because in some of these urban stores, the delivery component and the queue that it takes up drives a ton of inefficiencies in the stores. So relieving the volume in those stores with this HiQ product give us the ability to really lean into some of the other areas that Mark talked about, whether it be the buy online, pick up in store or courier delivery, etcetera. So it should be a really great complement for the store and drive productivity and efficiency, both at the store and in D. C.
As well.
Chairman. Hi, it's Brian Nagel from Oppenheimer. So a couple of questions. First off, bigger picture, just obviously the big theme today is investments. Chief Financial Officer.
How dynamic is the investment plan? Meaning, Carol, you laid out a very good case that and I think we see this that the housing market in the United States It continues to recover nicely, but look 3 to 5 years can be a long time. We are we have been recovering for a while. So to what extent could you or would you Chief Executive Officer, pull back on moderated investments if the housing market began to not cooperate as much. And I have a follow-up.
So, let me tell you how we thought about it. Chief Financial Officer. We went back to the last recession, not the housing led recession, but the last time the United States was in a recession was 2,001. Chief Financial Officer, and we looked at our sales performance back in 2,001 and our sales were flat. So we modeled 0% comps for the next 3 years that kept the investing plan together to see what would happen to the business.
Chief Financial Officer. In that case, with a 0% comp and all the investing still happening, our operating margin falls to 12.3%. Chief Executive Officer. There are a number of retailers in the United States that would kill for a 12.3% operating margin. So I'm not at all suggesting that we might not modify if things come to be different than we think they would be.
But in terms of putting our company at risk, we are at not risk in terms of investing to make the best customer experience possible.
Brian, I think one of the smartest things we actually did in the economic downturn of 2,000 and 7 in 2008 was to continue to invest, build out the supply chain capability that allowed us to have the kind of outperformance That we've had over the past several years and that would be our mindset going in. Again, we do what's right based on whatever the situation was,
Chief Financial Officer. And then my follow-up, maybe 2 quick ones for Ted and Mark. First off, on the merchandising side, Private label exclusive brands have been a big part of the Home Depot. As we continue to push more digital and speak to the customer through those means, Do you push further into the private label and exclusive brands? Is there a new goal there, so to say?
No, I I wouldn't say it's a new goal. We think of it as the same mix. We have some great private label brands. Craig mentioned Home Decorators Collection that we've had for 10 years. That's a $1,000,000,000 brand.
I mean, that is a very strong decor oriented brand. On the other hand, you need to get some of these flagship known brand, the same way we have a Milwaukee power tool. You need fill in the blank brand in decor. So I see that same sort of mix online for decor is what we've done in the store from an assortment perspective.
Thanks. And then finally on the supply chain, is the build out being done completely in house or are you using some type of consultant outside consultants?
Chief Executive Officer. So far, we've developed this in house. We've one thing that I would say, we have a great team of people in our supply chain. I think I could All of our colleagues could say we have great teams behind us and that gives us confidence. I wouldn't rule out that we'd use consultants though for specific task within the supply chain, facility design, layout, those sorts of things.
So we'll no doubt as we go augment where appropriate with outside help, But we do have a great supply chain team that has developed the supply chain up to now.
Chairman. Dan Binder with Jefferies. I have 2 questions. First, around competition and second, around credit. Chief Executive Officer.
It's fair to say Home Depot has been improving its position, widening the moat through initiatives in merchandising, supply chain, etcetera. This level, the stepped up level of investment is way more significant. I'm just curious if you can discuss what you're seeing on the competitive landscape. Are you seeing threats to that moat? And what who or what channel you're most concerned about on the competitive landscape?
And then on credit, Obviously, a lot of talk about tax reform and that will benefit consumers, improving the economy. How are you thinking about credit extension as that Chief Financial Officer. Is there an appetite for greater risk? Is there anything built into sales for greater credit extension? Thanks.
Chief Executive Officer. I'll start on the competitive front. First of all, it would be important for you all to understand that we don't think about anything as a moat. Chief Executive Officer. We don't think we have a moat.
We don't think in those terms whatsoever. We wake up sufficiently paranoid every single day of our lives to make sure that we are driving a competitive value proposition in the market for the customer. And it's not that Chief
Executive Officer.
We're seeing anything radical that is causing us to take this increase in investment. This is being driven from the customer back. The changes that the customer are driving in retail is really sending the message to us that we need to accelerate our pace of change to be able to connect with the customer the way they want to connect. And unfortunately, over history, the roads littered with retailers that didn't change with our customers as their customer change and that's simply not an option for The Home Depot. We have to be there for our customers the way they want to engage with us.
Chief Financial Officer. And look, when it comes to competition overall, nobody is sitting still. I mean, there is nobody sitting back And sitting still, everybody is trying to improve. So we have to stay aggressive in the marketplace and position ourselves to win.
Credit is one of the value propositions that we offer to our customers as you know through our private label credit card. It makes up 23% of all tender in our Tours and online. So we love our private label program. In terms of extending risk, however, one reason Chief Financial Officer, who works so well for us is because it isn't a very risky portfolio. The loss rates this year are up slightly as you might expect, but under historical averages, and we like that actually.
You can tell from our overall posture, we're just conservative when it comes to taking too much Resc in certain areas. And so we're not going to do it on credit, but we will continue to promote our private label card inside of our stores and online because it is a great value prop.
Chief Financial Officer.
Budd Bugatch with Raymond James. Of the 11 point $1,000,000,000 of incremental investment in capital and expense. I think $5,000,000,000 is targeted at the stores. Can you give us a flavor of how that levels out between expense and capital and how does that impact wages and training expense and capital and how many of the stores get Chief.
Sure. So I've been thinking about how to best to answer this question because there's a lot of numbers flying around. But firstly, I'll just start big So the incremental investment is $5,400,000,000 of which $3,400,000,000 is capital $2,000,000,000 is expense. Then perhaps the easiest way to get our arms around how we're spending our money is to go back to the pie chart, where you can see BAU investment compared to now the total investment. And the delta between the pieces of the Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, You will see the increase, the accelerated investment is $2,600,000,000 of that amount, Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our
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Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, I know this is long winded, I apologize, but why is there expense associated with store capital? A good rule of thumb is that every time you go into a store to touch the store with a refresh, 20% to 25% of a dollar spent is expense because you've got fixed assets that you have to write off Chief Financial Officer, and then you have the labor just to get it done. The next piece of the pie that grows from our base case Chief Financial Officer, who is online and IT, and that's up about $1,200,000,000 Of that, 60% is capital, 40% is expense. If you continue around the pie, you can see that $600,000,000 delta for supply chain, that's all capital. And then finally, there's a big bucket called other.
And other is growing $1,000,000,000 from our BA UK. Of that other bucket, about 40% is capital and 60% is expense. What's in the other bucket, capital for Canada and Mexico and our tool rental business. What's in the expense bucket? Lots of things, including investments that we're making in our people that Anne Marie talked about.
And I'll just close this out and Diane, I apologize for going so long. I'll just close this out by reminding everyone that because we're stepping up our capital expenditures, our depreciation expense is also increasing. So over the next 3 years, dollars 1,000,000,000 of depreciation expense on top of what had been our BAU case. Hopefully, that's helpful.
Chief Financial Officer. Very, very much. Thank you. And just my follow-up for Mark on the appliance side, if you're going to increase, I think, the number of appliance service centers and Caius Delivery Centers. What other ramifications does that have for inventory?
And does it have an impact on who does the do you do still TPL or what do you do on that for the home delivery and appliance?
Yes. On the appliance delivery, that will fit in team. To the MBO network, the market delivery operations network, about 100 of those is what I described. Important to note that Those will be stockless. They will not carry inventory.
We don't plan to change our inventory model for appliances. Chief Executive Officer. We really like the process of taking appliances directly from the manufacturer to our delivery hubs and straight to the customer without ever owning that inventory. Chief Executive Officer, and we want to preserve that in the process. We want to use those market delivery operations to merge other products, other big and bulky products that Right.
Well, with appliances onto those. So that's how we expect to do that.
Chief Financial Officer.
Hi, Brandon Fletcher with Bernstein. My questions are on service, probably for Ann Marie and then Bill. Totally like the idea of Getting to a universal associate, obviously, there's a portion of part timers that need to be up to speed relatively quickly. But I wanted to be sure that Your longer tenured associates were still a part of that investment plan to be sure that service level differentiation was still there. And if any of the Meniere.
And then for Bill, the notion of as your competition gets deeper into MRR, maybe closer Fastenal and Grainger's kind of business. Are there investments you're making to where the quality of that advice for a professional Is getting stronger and better going forward to lock in the differentiation. Thanks.
Let me start, Bill. Yes, absolutely. Our knowledgeable associates are key to driving the in store experience for us. And I wanted to think about the investments in the Universal Associates is getting our systems, the work that we have to do with our systems to be very easy for any single associate. And then invest in that time and knowledge that we have, The time that will be freed up into gaining knowledge for our associates.
So this is not about trying to shrink the knowledge of our associates. Team. What we're trying to do is that the systems they use is to use less time there that they can engage in the overall experience. I talked about 1,700,000 years of experience. That comes in very handy when we're thinking about complex projects, which is where our customers engage and when you if you have something that happened in Plumbing last night.
So absolutely, we are going to continue to make sure that investment Baer, for the experience.
Then on the MRO side, the biggest move that we made was to Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief
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Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, There's a different level of support required for a trades versus a multifamily operator versus institutional And a different level of product expertise and service that goes with that. So making sure that we have crew professionals that have That product and that business operations knowledge can provide the right level of support. And then second is making sure that we've got our accounts Assigned to the right level of support within that portfolio. So you have some high touch, very complex customers Chief Executive Officer, that needs that level of expertise. You also have some more simplified businesses that could be supported with inside sales teams, Chief Executive Officer, which is a lower cost to serve, but really the way that they preferred to be engaged and managed.
And then I think the B2B website that we're building out We'll go a long way to helping us serve some of those simpler accounts that really primarily want to transact online. They just want a very simple, easy method of placing orders and making sure that they've got guaranteed great delivery. So this is all about optimizing the portfolio, assigning customers the right level of service and then making sure that we've got the right level of support at every one of those engagement
points with our customers. Chief Executive Officer. If I could make one follow on comment to our tenured associates in the store that have deep knowledge. Anne and her leadership team have a program that is a coach program inside of our stores. And it's so much fun to actually be in the stores and walk and talk associates who have actually take on the coaching responsibility and really feel an obligation to help our newer associates come up to speed.
That is just a great program that drives a nice sense of pride with our tenured associates and Really leverages their knowledge and capability in the store. It's fun to watch.
Chief Financial Officer. Thanks. Chris Horvers, JPMorgan. So I wanted to talk about how you think about advertising dollar spend. Do you see it as a point of leverage our deleverage going forward.
As you think about pushing into home decor, Wayfair spends $600,000,000 in advertising that's Chief Executive Officer, our Chief
Executive Officer, our Chief Executive
Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, Chief Financial Officer. How do you think about that dollar spend, the leverage and do you shift more towards that category?
Chief Executive Officer. I mean, I'll start and pass it to Kevin. My first comment would be, I'm incredibly proud of the team and what they've been able to do to drive real efficiency out of the dollars that we spend. Chief Financial Officer. And I think that our overall performance kind of demonstrates that, but
No, and thank you for that. But certainly, it's Just not the amount of the spend, it's the efficacy of it and how surgically we can get the right messages to the customer, whether it's the pro example I gave you or the consumer. And Chief. And we're pleased with our spend level. We're very pleased with the productivity we're getting.
But I also think to Ted's point is the customer is giving us license to just expose them to a couple of other aisles that we can build out digitally. So they're on our site. We're helping them build their room. We just need to help them finish Chief. So we have already got the visitor.
We've already got the traffic. We just need to push them over a couple of aisles that previously weren't discovered by the customer.
Do you think it's a leverage or as you think about the plan, is it are you leveraging advertising or is it more growing in line with sales? And I think you
can probably think of it as maybe slightly under sales growth. I mean, there'll be Chief Financial Officer. An increase, but not at the rate of sales growth at all. We spend about 955,000,000
Chief Financial Officer.
And then my follow-up is, I know you haven't given 2018 guidance, but any comments around the cadence of sales and also the gross margin change?
The cadence for 2018.
Over the 3 year plan.
Yes. Yes. And when we give our 20 Chief Guidance. That will give you a clear understanding of
how we're thinking about that. Good try.
Thank you.
Chief Financial Officer. Hi, thank you. Kate McShane from Citi Research. My question is more on the online business. I wondered if you could quantify the size of the online business that you expect by 2020.
And when thinking about the 45% that are picking up in store, Chief Financial Officer. How do you expect that to change with some of the supply chain investments that you're making and what kind of impact would that have on mix overall,
Chief Financial Officer,
margin mix.
Yes, I'll take the first part. So we have about 6.4% penetration of online sales today and Importantly, we don't chase a penetration number. We don't have a specific goal there. We're very, very focused on chasing the customer experience and what they're signaling with us. So we're going to let that flow as it needs to and we have categories that are
very, very actively engaged online, pros looking at inventory
levels, pros looking at Exactly transact online, but we want to chase that customer from an experience perspective. So we don't have a specific 2020 target. Chief Executive Officer. And then the second part of that was On
pickup in store, and I guess what I'd say on that, that 45% roughly that's Picked up in store from the online business. About half of that isn't product that's stocked in the store, it's actually shipped to the store. So we actually are using the upstream supply chain to move that product very efficiently to the store. That might come from a vendor to our RDC, our rapid deployment center that serves stores with other products. It might come from our direct fulfillment center into our RDC, which is the most path to get product to our stores and it's very efficient for our customers.
So that 45%, I don't we'll follow the customer there, but it's Chief Executive Officer. Great for our customers. It's great for us because it leverages a very efficient supply chain to get that product there.
And I would add too, Mark. So Chief Financial Officer. When we think about BOS, so half of that is that, that may also be a part of a project, right? So I'm doing a project, I have 5 items, but I want that vanity online. So it's more convenient for me to ship to the store and then aggregate the other pieces.
So you'll continue to see checkout buy online ship to store, where it is today. Go Gordon. Thank you.
Way in the back, guys. It's Joe Feldman, Telsey Advisory Group. Two questions. One, wanted to ask about the Pro. It's around 40% of Chief Financial Officer.
Now, another similar to Kate's question, where do you think that will be in 2020? Is that are you trying to push towards 50% or something like that?
Chief Financial Officer.
So I'll
take it for a shot at that. We're going to let the customer take us where it goes. Chief Executive Officer. We're really focused on growing both sides of the business. They're both critically important to us.
We are focused on Chief Executive Officer, both increasing the number of pros that are shopping our stores and we're seeing great success in increasing our share of wallet or the expense the spend of our existing Chief Financial Officer, we're focused on execution, look at both customer segments and really try to grow both at the same time. I'd be thrilled
if it was 40% 5 years from now, because that says we've grown the DIY business at the pace of Pro, which would be awesome.
Chief Financial Officer. And then the follow-up actually from Mark. You made a comment about appliances and I think you outsourced appliance delivery To a 3rd party, is that something that might change in the future that you'd want to bring in house? Is that a risk that you guys Home Depot has You know being exposed there? We expect to continue to evolve our appliance delivery offerings up in Canada.
Chief Financial Officer.
Canada has actually taken direct control of the appliance delivery there, working directly with the 3rd party delivery companies that deliver the Chief Financial Officer. We're not saying we'll get into the appliance delivery business in terms of private fleet and managing that ourselves, but we will take a more direct relationship in managing the customer experience and managing the providers who provide that customer experience. Chief
Executive Officer.
Hi, it's Greg Malek with MoffettNathanson. I had a quick question for Carol and then my proper question. Carol, that Comp of the 4.5% to 6%, is that more ticket presumably now than traffic or is it still a fifty-fifty mix?
Chief Financial Officer.
The way we build our model is fifty-fifty.
Still fifty-fifty. Okay. So then the real questions, you've mentioned the windfall from taxes. I'll sneak in one that way, Carol. Archar.
What do you think competitors and vendors are going to be doing with the infusion, because presumably most of vendors and competitors are U. S. Focused businesses paying too high taxes. What are they going to do with the capital as you think about your plans? And I do want to ask Anne Marie because we've talked so much about it, but how does all the initiatives we're doing change the store labor model?
Are people going to be in the store just a lot less task and a lot more serving? Are they outside of the store? Just help us explain how that's going to really change in the next 3 years?
Chief Executive Officer.
I'll take the first part of that. I have no idea what our competitors are going to do, but I can tell you what I hope our suppliers do and I hope they reinvest That in R and D and innovation and continue to drive great innovation in the marketplace.
And I'll add on the labor model piece, Chief Executive Officer. We piloted a new labor model, and I want you to think about it more from an activity based standpoint, wherein we're allocating labor to team, exactly where the customers are. And so let me give you an example. In our stores today, if we sell a paintbrush or we mix Paint. We allocate the same number of hours, even though one activity may be much more than the other.
So our new labor model gives us the ability to really ensure that we have the right labor when the customer needs are there and that they were looking for. We have the dedicated amount of labor to make sure that happens. On the other piece, one of the reasons why I think it's so Chief Executive Officer, to speed on a very legacy based system. It's old. It was appropriate 5, 10 years ago.
However, Spending that time training is less time engaging the customer and understanding what the customer needs are. So not only are we focusing on the activity base from the labor checkpoint. We are ensuring that the tools and systems they use are so simple that they spend less time entering an order and more time engaging with the customer and making sure that they get everything they need from an experience standpoint.
Hi, Josh with Cyber, Morgan Stanley. Carol, a quick one for you. If comps were to exceed your plan, are you more inclined to pull forward some of the investments in the out years or let
There's a durability question to all of this. There's only so much that we can do in any one year. So if our comps are higher than our plan, Chief Financial Officer. You'll see some margin expansion and let me tell you why. 50% of our expenses are fixed and 50% of our expenses are variable.
Variable expenses grow at sales, but not at Chief Financial Officer, the same rate of growth. The expense growth factor for our variable expenses is about 30%. Chief Financial Officer. So in an environment where sales exceed our plan, we'll get some operating margin expansion off of that, which should be a good thing.
Chief Financial Officer. Thank you. John Baugh with Stifel. My question is a follow-up, I guess, for Anne Marie on the order up system. Could you just tell us Where we are with that implementation and the cost benefit from that you expect.
Thank you.
So I probably won't go into details as it relates to kind of the cost benefit. Our suite more in line with what are the types of productivity measures we get out of the order of system. So one of the things we do as a company, we go through a very agile process. And when I say agile process in development, it's very important because we look at the reasons or The complexity in our business today and try to solve the easiest one fast faster that impacts more associates and customers. And so we've gone through that process and something like order up release.
What that means, if you come in for an order, BOPIS order or BOSS order, it makes it quicker for us to just release order to a customer, talking about that 17% reduction in time. That's out in all our stores. Then we go through the next benefit Case, and say, where do we see the complexity and the benefit and how can we invest? And we may go down the sales process. And so at the end of the day, over the next several years, and I won't go by 18, 19 or 20, this will be rolled out across all our stores, And it gives us the ability where we're not leveraging just kitchen cabinets or millwork systems or Depot Direct system.
It's one system Chief Operating Officer Board, driving that level of productivity. But it's an agile process based on where we see the benefit case and how we can roll that out in our stores.
Chief Financial
Officer. Hi, it's Laura Champine from RoEquity Research. My question is for Anne Marie And it's about the incremental $2,600,000,000 to be spent on stores in the next 3 years. And it's 2 parts, but just about one slide.
Chief Financial Officer.
On the slide with the photo about digital wayfinding, what's the customer interface for that and what percentage of customers do you think Chief Executive Officer. And then second part, the modernizing the front of the store, I noticed a new black wall, but I can't imagine that's what modernizing means. So what is the tell me more about digital wayfinding and more about modernizing the front of the store?
Chief Financial Officer. So digitizing Wayfinder, it's on your phone today, right? So before you get to the store, if you want to see the quantity of products, whether we have it in stock or not, The aisle where that product is located, you're able to pull it up on your phone and then when you enter the store, you can navigate quickly to the store. Team. And you work with that not only from a digital standpoint or new wayfinding signs also link that process and journey, so the customers able to get to the product quicker and therefore exit the store.
On the front end, it's a couple of things. Not only are we investing in new monitors Chief Financial Officer, our key capabilities to make it quicker. We are also instituting in the entire front end new infrastructure, right, where the customer is able to get out of the store much faster. In addition to that, the systems are more flexible. Today, if you're in our stores, no matter what the volume is, you may have 4 self checkout pods.
Chief Executive Officer. Now with the flexibility of our front end, we can change our equipment and take that to 6 checkout pod if necessary. And then we can pull it back to 4 based on the customer flow patterns. Last but not least, we team. And the lockers give our customers the ability to walk into our stores, pick up their product, right, scan their phone, get the product out of the locker and if they want to leave the store Chief Financial Officer.
So it's not just about the front end in infrastructure, it's also about capabilities and driving a high level of convenience for the customer as well.
And do you mind if I pile on just for a moment? Because when we go into a store, when you are going to a store that's untouched, you're going to see a very different store. Because when the signing package goes in, we also polish the floors, we add in bay lighting, we redo the break rooms and the restrooms. The restrooms for our pros actually is the place they come to for a break, isn't it? Yes.
So there's a lot more to it and talked about the kind
of sexy fun up.
But there's a lot more going on in the store to really make that store relevant, absolutely.
And digital price signs as well, we're Chief. Starting to work, so not at the wayfinding, but actually in our appliance area, we're starting to roll out digital Chief Financial Officer, which takes out a tremendous amount of labor to change pricing on appliances.
So the only quick 2 follow-up I have is on the digital wayfinding, what's been the uptake so far of customers using that and how is that expected to change?
Yes, I'll take that. So really, whether you're on a PC or mobile, on mobile web and a browser or in our app, when you're looking at a product in Home Depot, if it's stocked Chief Executive Officer, you'll see an Island Bay location and you can click through and get that mobile map or see where it is in the store. So really every product view that we have is fully enriched with the location, right. And then on the app and the mobile web, we literally have Thousands of customers that use that daily. So it's our stores are big and sometimes scary to shop for our customers and it's one of the best Chief Financial Officer.
Thank you for helping me find that product.
Chairman. Hi. Mike Ware, Precision Investment Management. A question for Carol. Carol, you had a slide up in your 2015 Analyst Day where you Showed various merchandise categories, how far below kind of prior peak levels they were.
And you mentioned it again today, you have a number of categories That are well below peak levels. Could you just kind of update us what those categories are today? And if there's any if you look at those categories, there's a particular theme that you could point to, Chief Executive Officer, to account for them being so far lagging the overall business. Thanks.
So the amount of dollars Trinity is a $1,000,000,000 that has not yet fully recovered and it's in a number of categories, but it's centered in special order kitchens and millwork. As we think about our reset activity inside of our stores over the next 3 years, we will be allocating capital into those two areas because we think that will be one enabler of Chief Financial Officer.
So we have time for one more question.
Hi, Dennis McGill, it's Zelman. Thanks for taking the last one. Carol, sorry to go back to tax reform, not knowing if this is actually going to get done, but you made the comment that you would spend anything incremental. But at the same time, The supply chain initiatives, the in store investments, it sounds like it'd be hard to pull that forward without being disruptive to the business. So it doesn't sound like it would be there.
Can you just talk about how much would be in the business separate from these initiatives and then how much would be share repurchases or at least how you would think about that?
Chief Executive
Officer. It really all depends on if it happens and when it happens and how we would spend it. Cash is fungible. Right now, we're thinking it might not happen until 20 'nineteen. So obviously, we're using internally generated cash in 2018 to invest in the business and return capital to our shareholders.
If it were to happen in 2019, we might use the tax cash tax savings to invest in the business and then you've generated cash to buy back shares. It's all fungible. The point is, we're going to generate a lot. We may get tax reform and we will use it. We will invest back in the business and we will return it to our shareholders.
And then just related, is there any repatriation Opportunity as well on that.
There certainly is. We have about $3,500,000,000 of cash outside of the United States, and I would very much love to get that cash back here Chief Financial Officer in a tax affordable way. Right now, we're still working through what it looks like because it's not clear based on what they are talking about in conference. But we're hoping that there's a good outcome here, and if there is, we will bring it back.
Chief Executive Officer. Well, thank you. And this concludes our question and answer period. I would like to thank our presenters today, Craig, Anne Marie, Ted, Kevin, Bill, Mark and Carol. And many thanks to the Investor Relations team, Kathy, Lindsay, Tim, Sean, Luke and Elizabeth.
Thanks to Christy and the corporate events team, the merchants for the product demonstrations, Wendy, Mike, Fred and the Dillon team, and to all of our Boston based volunteers. This concludes our presentation. Let's go to lunch.