day, ladies and gentlemen, and welcome to The
Home Depot Q3 2017 Earnings Conference Call. Today's conference is being recorded. On your telephone keypad. At this time, I'd like to turn the conference over to Ms. Diane Dayhoff, Vice President, Investor Relations.
Please go ahead, ma'am.
Thank you, Catherine, and good morning to everyone. Joining us on our call today are Craig Meniere, Chairman, CEO and President Ted and Company Executive Vice President, Corporate Services. Following our prepared
Earnings Conference. The call will
be open for analyst questions. Questions will be limited to analysts and investors. 17 Earnings. Now before I turn the call over to Craig, let me remind you Today's press release and the presentations made by our executives include forward looking statements as defined in the Private Securities Litigation Reform Act of 1995. Earnings.
These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in the release and in our filings with the Securities and Exchange Commission. Today's presentations will also include certain non GAAP measures. Reconciliation of these measures is provided on our website. Now, let me turn the call over to Craig.
Thank you, Diane, and good morning, everyone. Sales for the Q3 were $25,000,000,000 up 8.1% from last year. Comp sales were 7.9% from last year and our U. S. Stores had a positive comp of 7.7%.
Diluted earnings per share were 1 point 84 17 percent versus last year. I'm incredibly proud of our performance given that this quarter was one marked by an unprecedented number
of natural disasters.
From
hurricanes and flooding to earthquakes and wildfires, our thoughts and prayers continue to be with all of our associates and communities who are directly impacted. As they always do, our associates and suppliers did an incredible job supporting those in the past of these natural disasters. They worked tirelessly and under difficult circumstances to get product where it needed to be, often as they too face disruption in their own lives.
Though our store teams work tirelessly Please reopen stores as
quick as possible in the wake of these events. Several of our stores, particularly in the areas like Puerto Rico, St. Thomas and St. Croix were forced to remain closed for an extended period of time. Our solid performance in the quarter was driven by and outstanding execution across the entire organization.
Though our results were not solely due to storm related activities. We saw broad based growth across our geographies. Every region posted positive comps in the quarter, But the storms did impact the variability Call in Canada posted another quarter of positive comps on local currency. As Ted will detail, both and transactions grew in the quarter as we saw growth not only in storm related product categories, but in core categories as well. We saw a healthy balance of growth from both our pro and DIY categories with pro sales once again outpacing DIY sales in quarter.
We believe that the work we're doing to enhance the service capabilities for the unique needs of the Pro customer continues to resonate. Our interconnected strategy continues to drive sales both in stores and online earnings as online sales grew approximately 19% in the quarter, now representing approximately 6.2% of our total sales with approximately 45%
of
our online U. S. Orders being picked up in our stores. And should a customer need to return an item purchased online for another item, our conveniently located stores are there for them with 85% of our online order returns being completed in store. For fulfillment options beyond the store, We continue to see great results with our store delivery, which grows every week.
We are also currently piloting other delivery options, which we'll talk to you about in more detail at our investor conference in December. The flexibility of our supply chain is And while our supply chain did a fantastic job keeping impacted stores in stock, they did so while continuing to support the business and non disaster impacted areas
as well. So while this was
a unique quarter for us, I am encouraged by the underlying health of the core business. From a macro perspective, we continue to see positive signs in the housing data, which we believe serves as a tailwind for our business. Earnings. With the storms, we are increasing our sales and earnings per share guidance for the year.
I want to close by thanking
all of our associates, call. Especially our store associates for their hard work and continued dedication to our customers and communities. We are very proud of their efforts. And with that, let me turn the call over to Jed.
Thanks, Craig, and good morning, everyone. We had a great Q3 driven by strength in our core business. We also saw incremental demand stemming from natural Disasters during the quarter. I'd like to thank our cross functional teams and supplier partners for their efforts in mobilizing our response. Earnings.
These efforts allowed us to get product to our communities in the time of need. We have 5 departments record double digit comps in the quarter. This included lumber, appliances, electrical, indoor garden and tools. Building materials and flooring were also above the company's average comp. Decor, hardware, paint, millwork, plumbing, kitchen, bath and outdoor garden were positive, but below the company average.
Driven by price deflation, Lighting was slightly negative. In the Q3, we saw growth in both ticket and Transactions. Comp average ticket increased 5.1% and comp transactions increased 2.7%. Commodity price inflation in lumber, building materials and copper positively impacted average ticket growth by approximately 105 basis points. Foreign exchange rates also positively impacted average ticket growth by approximately 41 basis points.
Big ticket sales in the Q3 were transactions over $900 which represent approximately 22% of our U. S. Sales were up 12.1%. The increase in big ticket sales was driven in part by strength in appliances, vinyl plank flooring, special order carpet in several pro heavy categories. Transactions for tickets under $50 which make up approximately 16% of our UF sales grew by 1.8% in the quarter.
In the Q3, we saw strong sales with both our do it yourself and Professional Customers. Sales to our professional customers grew double digits in the quarter with similar growth rates in both our high spend and low spend pros. Pro heavy categories such as lumber, wire, insulation, gypsum and hand tools all had double digit growth quarter. Storm related categories also saw significant growth with double digit comps in generators, wet and Drive X, Tarps and Lattice. In response to the storms, our merchandising execution, field merchandising and supply chain teams Looking beyond the store related demand, we continue to see momentum in our
core business.
Markets remain strong with healthy growth in both ticket and transactions. During the quarter, we hosted several events that helped drive traffic and We were pleased with our annual Halloween, Harvest and Labor Day events, which recorded strong growth year over year. Now let me turn our attention to the Q4. In our constant pursuit of being the product authority in home improvement, We continue to focus on bringing new and innovative products to market that save our customers both time and money. The DEWALT Flexvolt Cordless Air Compressor offers all the convenience and portability of cordless and allows for customers to continue using the pneumatic tools they already own.
Each battery charge provides our customers the power and run time completed a variety of projects. This new DEWALT flexible cordless air compressor is a big box exclusive to The Home Depot. Earnings. Adding to our incredible lineup of professional grade power tools, we are excited to introduce a new product lineup from Makita that offers an even more powerful cordless solution for multitude of tools. The new Makita LXT product line offers 36 volt power with fresh line of the preset, circular and miter saws as well as grinders.
With these tools, our pros will be able to tackle any job faster and with up to 50% more run time. This new and advanced lineup of power tools is also a big box exclusive to The Home Depot. With fall coming to an end and winter season rapidly approaching, our associates are preparing for another and exciting events. In the Q4, we will host our Black Friday and holiday events along with our best gift center ever. Our gift center will consist of incredible values and products from the best brands such as Milwaukee, DeWalt, and Ryobi, Makita, Diablo and Husky, just to name a few.
With that, I'd like to turn the call over to Carol.
Thank you, Ted, and good morning, everyone. Before I discuss our Q3 results in detail, I would like to take a minute to touch on the impact of the and 3 hurricanes that affected our business in the quarter. First, we saw increased demand as customers prepared for and started to recover from these events. We also experienced store and DC closings. Call.
In fact, we had 2 36 stores closed for some period during the quarter. We estimate that Call. The hurricane related sales positively impacted total company comp sales growth by approximately $282,000,000 in the quarter. These sales were lower margin categories like plywood and generators, and we had additional supply chain costs. So our gross margin on the hurricane related sales was considerably less than our company average.
Finally, we experienced roughly 1 $104,000,000 of hurricane related expense in the quarter for items like people costs, increased security in our affected stores and storm damage. So while our year over year sales growth was positively impacted by the hurricanes, our operating profit was negatively segment. In the Q3, total sales were $25,000,000,000 an increase of 8.1 percent versus last year, a weaker U. S. Dollar positively impacted total sales growth by approximately $102,000,000 or 0.4%.
Our total company comps or same store sales were positive 7.9% for the quarter with positive comps of 7.7 percent in August, 9% in September and 7.2% in October. Earnings. Comps for U. S. Stores were positive 7.7% for the quarter, with positive comps of 7.3% in August, 8.8% in September and 7% in October.
In the 3rd quarter, Our gross margin was 34.6%, a decline of 17 basis points from last year. While there were many factors that drove our gross margin performance in the quarter, we can isolate the year over year change to the impact of the hurricane related sale. In the Q3, operating expense as a percent of sales decreased by 54 basis points to 19.9%. As I previously mentioned, during the quarter, we had approximately $104,000,000 hurricane related expenses. Backing out the sales and expenses associated with the hurricane, our operating expense as a percent of sales was better than our plan.
Our operating margin for the Q3 was 14.7%, call, an increase of 36 basis points from last year. Interest and other expense for the Q3 grew by $11,000,000 to $247,000,000 reflecting a higher long term debt balance versus last year, offset somewhat by higher interest income. In the Q3, our effective tax rate was 36.9% compared to 36 point 2 percent in the Q3 of fiscal 2016. Our diluted earnings per share for the Q3 were $1.84 earnings call, an increase of 15% from last year. Now moving on to some additional highlights.
During the quarter, we opened 1 new store in Mexico for an ending store count of 2,283. Total sales per square foot for the 3rd quarter were were $412 up 7.9 percent from last year. Turning to the balance sheet. At the end of the quarter, merchandise inventories were $13,400,000,000 up $178,000,000 from last year and inventory turns were 5.2x, up 2 tenths from last year. In the 3rd quarter, We repurchased approximately $2,100,000,000 or 12,300,000 shares of our outstanding Call.
This included 5,600,000 shares on the open market and 6,700,000 shares repurchased through an accelerated share repurchase or ASR program. For the shares repurchased under the ASR program, This is an initial calculation. The final number of shares repurchased will be determined upon completion of the ASR in the 4th quarter. For fiscal 2017, we are now targeting share repurchases of $8,000,000,000 of which $2,100,000,000 will occur in the 4th quarter. During the quarter, we took advantage of an attractive interest rate environment and raised $1,000,000,000 of long term debt, earnings, of which $500,000,000 was used to repay debt that came due in September.
Computed on the average of beginning and ending long term debt and Equity for the trailing 12 months. Return on invested capital was approximately 32.5%, 3.40 basis points higher and the Q3 of fiscal 2016. Turning to our outlook for the remainder of the year, we continue to see underlining strength and momentum in our core business. The macro environment remains supportive and we believe housing is a tailwind for our business. In addition, we expect the hurricane recovery efforts to continue across a number of our markets.
As a result, today we are lifting our fiscal 2017 sales and earnings per share growth guidance. We now expect fiscal 2017 sales to increase by approximately 6.3 percent with positive comps of 6.5%. We now expect our fiscal 2017 gross margin to decline by approximately 12 basis points. For the year and reflecting the expense impact of the hurricane, we now expect our expenses to grow at approximately 55% of our sales growth rates. And finally for the year, we expect our effective tax rate to be approximately 36.3%.
Earnings per share. Remember that we guide off of GAAP. For fiscal 2017, we now expect diluted earnings per share increase by approximately 14% to $7.36 We look forward to talking with you at our Investor Conference on December 6 in Boston, where we will give you an update on our key strategic initiatives and our long term financial targets. We thank you for your participation in today's call. And Catherine, we are now ready for questions.
Thank
you. We'll first go to Michael Lasser with UBS.
Good morning. Thanks a lot for taking my question. Good morning. So how long do you expect the Hurricane related spending to impact your sales results. And how is the trajectory going to look?
Is it initially the greatest Right around the event and then it tails off over time or will it be pretty consistent over the course earnings of the period that you expect to have an impact?
Michael, we certainly expect, as Carol called out, to see continued sales increase from the hurricane as we move into 2018. It will be Pretty much in the first half, I think.
Yes. So we have a
lot of experience with hurricanes, and we see that Hurricane Harvey was much like the Baton Rouge flooding last year. Hurricane Irma is much like Superstorm Sandy, although on a smaller scale. And Hurricane Maria, well, it's much like Katrina, although on a smaller scale. And what our past experience tells us is that the hurricane related sales tend to be the highest in the quarter immediately following the quarter in which the hurricanes occurred. Call.
And then they tail off over time. As Craig said, we would expect that them to tail off throughout 2018. For the purposes of building our forecast and guidance today, we have hedged back some of the anticipated hurricane related sales in the 4th quarter because it's the Q4 and anything can happen with weather. I will tell you based on the 1st 2 weeks of our sales in November, Our forecast would appear to be conservative, but it's a good thing to put together a conservative forecast. When we look at the year on year impact, We would expect, as Craig mentioned, that there would be no comp divot next year as a result of the hurricane.
We would have the same amount of hurricane sales in and 2018 as we had in 2017.
Carol, do you want to explicitly tell us what Was that a first in related spending that you expected for the Q4?
I would not like to specifically tell you that.
Okay. I thought that was correct. And then I forget if it was Craig or Ted. 1 of you gave us a little tease about the analyst meeting and talking about new delivery options that you are Piloting. If you were to go free shipping on some dollar threshold across earnings.
All of your online SKUs, how margin dilutive would that be to your overall P and L? It looks like you've got out of your top 100 50,000 items right now, you've got about 6,800 that would qualify for free shipping. So what if you went kind of across the board, how margins dilute to that?
Earnings. Michael, today we offer free shipping in any order over $45 So the majority of everything we ship today is fall under free shipping.
Earnings call. Our next question comes from Charles Groom with Gordon Haskett.
Hi. Thanks. Good morning. I'm just wondering if you guys could speak to the quarterly progression of sales, excluding the hurricane impact, throughout the, Not only in the U. S, but worldwide.
Well, we didn't go back and recalculate the comp, but just let me tell you The impact of the hurricane related sales and then you can do the math. We anticipate we project not project, but we have seen that the hurricane related sales in August were about $10,000,000 October, we're about $120,000,000 Okay.
Yes, we could do the math there. Great. And then when you look ahead and try to quantify the impact of the top line, Just wondering, when you think about the gross margin profile of these sales going forward, how do you how Historically, how has it played out? Obviously, here in the Q3, they were significantly lower than you would typically see, but how do they progress going forward?
Earnings. When you think about the kind of prep sales, if you will, that largely happens as you move into a Store. You're selling things like plywood and generators, which are very low margin rate goods. As you move past that and get into cleanup and recovery, you then begin to see a more normalized mix of sale Across the business and it depends again on the type of storm that it is. And that has a tendency to be more normalized margin earnings business.
Okay. Thanks
very much and good luck.
Sure. Thanks.
Thank you. We'll now hear from Dan Bender with Jefferies.
Thanks. Good morning. You talked
a little bit about product innovation, specifically the battery technology. Connected home has also been an emerging category. It seems like a natural fit for a few different retailers out there. 1 has been particularly aggressive. I'm just curious if you could give us Some thoughts on where Home Depot is how Home Depot is positioned to benefit from that?
Yes, Dan, it's Ted. I think we're very well positioned. We have quite a bit of product that's selling very nicely with strong growth year over year. Most excited right now about some of the new thermostat product coming out from Nest. We have great innovation earnings.
We've been partnering with Ring for some time. They've given us a number of launch exclusives as well as Nuance product exclusives. I think that speaks to their confidence in Home Depot's ability to bring that type of product to market and sell it. But we're experimenting with how How we display the product, as you know, we're working warehouse. So how to get that product aggregated in a series of bays with different merchandising approaches is something we're working on and happy with the number of different formats we're utilizing right now.
Great. And then as for my follow-up question, separate topic on credit. I know you don't own your credit portfolio. But just wondering if you could provide us with some color on how that portfolio is doing, if there's an increase in lending or willingness to lend, delinquencies, write offs, things of that nature.
Thanks very much. So you're right, we don't own our credit portfolio, but we do have visibility into the portfolio. It's a very healthy portfolio with an average net receivable of $12,600,000,000 As we look inside the portfolio, we see that as performing nicely. Our loss rates are up slightly year on year, but they're considerably under the historical average. And earnings.
Historical average, just to put it in perspective, is 4.3%. In terms of approvals for customers Applying for our private label credit card, we see on the consumer side that 73% of all applications are being approved with a cycle of around $750,000,000 so we write a pretty high quality here. On the pro side, 72% of all applications are being approved. And for the PRO, that line is around $6700 So hopefully that's helpful.
Yes. Thank you very much.
And we'll continue on to Simeon Gutman with Morgan Stanley.
Good morning. Nice quarter. Can I ask if can you diagnose the health of the do it yourself versus the do it for me customer, If you're seeing any changes in frequency or ticket? And I ask because there's a lot of focus on the ticket and traffic breakdown as if there's something to be gleaned about the cycle based on how the customer segments are behaving?
We actually see growth across both the Pro categories, the do it for me categories and the DIY categories. And we've seen a sequential improvement in the call. Quarter over quarter, tickets below $50 which have a tendency to lean more towards DIY as well. Earnings. And the large ticket growth continues as a result of strong pro business and categories like appliances and roofing and Flooring.
So not really seeing anything that has us concerned at all about the DIY business.
Or do it more?
Right. No.
No, either one.
Okay. And my follow-up, just two parts. First, if we get a cold winter this year, does that represent a tough compare in any way since we've had a couple of warm winters? And does it change any complexion of margin for the next couple of quarters? And then the follow-up or the second part was just can you comment on the online sales?
It looks Like the trajectory slowed, I'm curious why?
In terms of the weather, if you will, What happened is some categories will do better in cold weather, other categories will not. So we've had the benefit of
project business
Through warm winters, but then that actually puts pressure on your categories Cold weather type things like heaters and so on. So, it's really a balancing act if one offsets the other.
And that's why we tend to look at our business on the half and not the quarters because there always are these weather related year over year compares and we have this bathtub effect that we've talked to you about in the first half that always occurs. On the margin, the margin is what the margin is based on where the sales are, but no real pressure coming out of it.
We're actually pleased with our growth online. Kevin is here. I'll let him comment.
Yes. We saw real strength and our flooring business, our blinds and window coverings businesses, our bath business. And as Carol mentioned, we had a number of stores that had days they were closed due to the hurricane impacts and that actually affected some of our online penetration in those stores, but that was really the only thing that caused a blip in the quarter for us.
The The sales growth was $243,000,000 year on year, so we were pleased with that. And just to put the store closings into perspective, They were quoted as cumulative 809 days, which is the same as having 2.2 stores closed for entire year.
Earnings. Right. Well, thank you.
Christopher Horvers with JPMorgan has our next question.
Thanks. Good morning.
Earnings. Good morning.
So I want to follow-up on the expenses. So it looks like ex the hurricane top line and bottom line SG and A impact, you grew SG and A to sales at about a 39% growth rate. Is that how do you think about that ratio as you look I know you typically sort of guide to 50 and there's always a kind of productivity opportunity at The Home Do you think that $50,000,000 still the right number? Or is $40,000,000 the right number? Do you see any upward pressure on your sort of marginal flow through around SG and A versus sales.
Well, let's just look at the Q4. And as you know, we don't guide on the Q4, but I'll give you some color in the Q4. The expense growth factor will in the Q4 will be similar to what we've guided for the entire year. And as you know, we've now lifted our guidance earnings. Such as the expense growth factor should be 55% for the entire year.
And you may say why is that? Well, a few reasons. One, we will have some ongoing hurricane related expense, not to the extent that we experienced in the Q3, but there are some natural disaster expense that's going to happen in the Q4. Earnings. We are significantly outperforming our plan, which is a good news story, and that means we're going to be paying more bonuses.
So we'll have more success sharing for our hourly associates, And we're delighted with that, but that will put some pressure on the expense growth factor in the Q4. And then there's just a little bit of currency nuance in all of this, Because when you have a weaker U. S. Dollar, your expenses outside the United States when you translate them back actually are a little bit higher than it would have earnings last year. So hopefully that helps guide what the 4th quarter would look like.
And then as you know, we've got our Investor Day coming up on December 6. And we're going to give new financial targets for 2020. So we'll grind you through everything on December 6.
I guess, but as you think about, Yes, it seems like if I look back in 2016, you grew, I think, 30% relative to sales. So Does that indicate any sort of upward pressure on incremental costs versus sales?
You recall at the beginning of the year, we said 50% was a good number to use and that included rising people costs. I mean, we're not alone. All retailers are faced with rising people costs. And we view our people as an investment. So we have some of that pressure.
But Chris, at the end of the day, earnings. The operating margin of this company wants to lift in a BAU basis. We will leverage expense in a BAU basis. And If you want to use 50% as a CAU number, that's a good number, GV.
Understood. And then, just curious about your crystal ball. You talked about No divot from the hurricanes as you look to next year. There is a bigger it seems like there's a bigger hurricane this year versus last year. So what gives you the confidence in saying that at this point?
I guess why not let the Street put the dividend In there, what are you seeing that would motivate you to guide that way this far out?
I mean, as we've shared, each storm is And the situation in Harvey is a much more protracted recovery because of the nature of the The chart being water based
and the
fact that there were a fair amount of folks that didn't have insurance because they didn't live in a 100 year floodplain. Unfortunately, they were in a They were in a 500 year floodplain. And so, we just think that that recovery is going to be protracted. And in a storm like that, you have to go in and basically people are ripping everything up down to the studs and starting over.
That's going to take a while
to recover.
We have I've got a 10 page deck that well, if you work for us, I'd tell you. Earnings call. If we look at Harvey as an example, it really looks so much like the Baton Rouge flooding, but it's 3.7 times bigger than the Baton Rouge. So we just modeled our experience in Baton Rouge, kind of multiplied it by 3.x to get the effect for this year and into next. There's actually a lot of science that went behind this expectation.
But I appreciate the suggestion that maybe we should
earnings.
So it's the first half versus back half twenty eighteen basically.
Guide. Exactly. Yes. We'll be good in the first half. There'll be
yes. Understood. Thank you very much.
Thank you. We'll continue on to Seth Sigman with Credit Suisse.
Thanks. Good morning and nice quarter.
I
want to follow-up on
the pro business. Nice to see that comps continue to grow in the double digit range. I realize it's tough to isolate, but as you think about some of the initiatives in place, whether it's credit or delivery or is starting to increase and what you think is really driving some of that traction? Thank you.
Seth, this is Bill Lenny. Really, I'd say that pro business is on a broad base of strength, whether it's a project business that continues to be strong, as well as a good balance between ticket and transaction. But we have done made some enhancements to our Pro MyView system in the store, which gives our passes or Pro account sales associates a better view into their customers and better insights on where to reach for category expansion and how to get a better engagement with our customers. I think the acquisition of Compact Power is another area where we can increase the engagement with our pros. And we know that the more that we get that multilevel engagement, whether it's online whether it's delivery, whether it's any one of our other services that we do increase the reach into the customer's wallet.
We do start See growth in the share of the customer's business. Then on top of that, we're also seeing an increase in the number of pros that are shopping our stores as well. So We've got solid performance against categories against SCC codes and increasing pro customer engagement.
Okay. Thank you for that. And then just as a follow-up, as you think about the housing outlook, one of the things we've observed is a pickup in homeownership among millennial consumers. If we assume that continues and it's going to become an increasingly important demographic for the business over time, can you just give us a sense of what you're seeing, If there's anything different in terms of behavior for that customer group and some of the things you're doing to try to target that customer base? Thank you.
Sure. We're actually not seeing a ton of difference. Obviously, if you think about new home ownership, Some of the things that happened early on in that is categories like paint, categories like outdoor where they're beautifying their home. Those are the simpler projects that begin and that kind of takes place no matter what age group is buying the home. We're very pleased with the trend.
This is something that we saw in our research that the millennials would in fact step into homeownership. It was just a delayed cycle and that is playing out. And we think that bodes well for the housing market going forward.
Also our research says that as Craig said, the types of projects that they're going to engage in are very similar to any new homeowner. And in research, we see that the millennial is showing an interest to be DIYers as well. So actually quite keen interest to do the projects themselves.
Great. Thank you very much.
Earnings. Thank
you. Our next question will come from Brian Nagel with Oppenheimer.
Hi, good morning. Nice quarter. Good morning. With regard to the hurricane sales, we've talked a lot about, And I know this might be a little near term in focus, but is there any way to measure clearly Home Depot stepped up nicely here in its efforts to help customers, but how your market share tracked in these events versus what you would normally consider market share trends in the business?
Earnings. We really have no way of knowing that. It's just the tapings It's unfolding right now.
We just don't have any way of knowing that.
Okay. That's fair. The second question
I had With regard to online, again, we called it out as a growing but still small portion of the earnings. As online continues to evolve, have you are there any surprises here with regard to maybe what your customers are buying online? And then also how should we think about just the investment needed to continue to support the online initiatives? Thanks.
As it relates to any surprise in the online, I think probably the thing I'd say there is we shared several years back Our bubble chart if you will in terms of how we thought the online business would play out by categories. And there was a group of businesses in the lower left of that chart that we I wouldn't have much influence. I think the thing that we've now realized is the shopping experience in almost every category
starts in the digital world. Earnings.
And it truly is an interconnected experience going forward. So we're paying attention to the digital representation across all of our business. As we go forward creating a interconnected guidance, if you will, the 1 Home Depot experience for each category. And that's probably the big, I'd say, learning from a few years back that we've had.
To build on that a bit, Craig, you mentioned our bubble chart, which is all our key categories and What is the intensity of inquiry online and then matched against the actual purchase behavior? And and earnings call. The purchases haven't changed that much. The large categories that were large 3 years ago are large today. So a lot of bath, a lot of lighting, A lot of power tools, etcetera.
Those continue to be big businesses. But some of the most Heavily engaged again as Craig said, we're not going to get a lot of purchasing online with pro commodity. We see the highest engagement Online is with our pros checking inventory levels and price. So again, a very interconnected shopping experience. They're still then going to the store, But they want to make sure everything is there for their project before they go to the store.
And so that means we have to continue to invest in the experience. And at our investor conference on December 6, we will lay out our investing plans.
So I look forward to that. Thank you very much.
Thank you.
Alan Ryskin with BTIG has our next question.
Thank you very much and congratulations on a great quarter. First question for Craig. Craig, you mentioned that the flexibility of your supply chain continues to be an asset benefiting you. Could you maybe just Provide a little bit more color on exactly what you are doing there in the sustainability of things?
Sure. And I also have My colleagues will be here too. He can jump in. But I'd say the investments that we made in creating the core components of our supply chain, our RDC, a rapid deployment network, has been a significant advantage in our ability to flow and point goods where it needs to be. And I think it all starts there.
And Mark, I don't know if you want to add on
earnings. Well, our focus continues to be on creating a fastest and most efficient supply chain in home improvement. And to do that, we're planning and collaborating much more with our vendors through our SINK initiative, using our truckload resources much more capably filling our trucks and building our productivity within the four walls of our distribution centers and really synchronizing the whole flow of the supply chain to achieve that. And we've had great results and working with our suppliers to make that happen.
I guess one thing that I'd have on that Alan is Ted called earnings. Our field merchandising team, they play a key role in these type of situations, call. Where they truly become the field general on the battlefield, if you will, in a sense call. And help direct and point the supply chain and the merchants' efforts. And that's a key component of what we do as well.
Okay. Thank you. And just a follow-up, if I may, for Carol. On your inventory is at $13,400,000,000 up about 1.3 percent substantially lower than your revenue growth. What effect from the hurricane, if any, was there on your inventory levels.
And could you maybe just provide Carol some commentary on if those levels are satisfactory to you right now?
So the impact of the hurricane on the entire supply chain was enormous and the team did an awesome job of redirecting products to get it to our stores and our customers in need. In terms of our inventory levels, our inventory turnover, we're very pleased where we are. We've worked really hard to drive productivity and inventory. And that starts with the products that we source, The great associates who sell them and then how to load them through our supply chain. One of the initiatives that you could invest in in, call supply chain, we think, which lowers the variability and improves the predictability of orders.
One of the outcomes, desired outcomes with higher Inventory productivity and we're seeing that. So we're very happy, long winded answer to say we're happy with our inventory level.
Earnings.
And Matthew McQuintlock with Barclays. Please go ahead.
Earnings call. Carol, you said that you will leverage expenses. In the past, you've said that there's always a Natural tendency for your gross margin to want to lift, but you reinvest back in value. And I guess my question is, how do you think about your future growth algorithm coming from further reinvestments in value versus maybe investments in the store experience or investments in deliveries. How should we kind of segment the growth going forward from those 2 buckets?
Thank you.
Thank you for asking the question. We're devoting a good part of our Investor Day on December 6 to talk about the future and how we parse through that. There's a BAU point of view and then there will be an investing point of view and we'll share with you both to give you a real clear understanding of what we're going to be doing over the next several years. Earnings.
Okay. I'll look forward to that.
Sorry to kick the can down the road, but we've done an investment in just a few weeks.
Not trying to steal your thunder in any way. But if
I could ask
a follow-up then, just on Dan's question regarding Connected Home, earnings. On appliances specifically, how do you think about evolving the selling model of appliances as they become more connected and how to think about tying that into your broader
Well, we're very engaged. The product manufacturers are really coming up with some terrific innovation. We're working with them closely. We have a view into the pipeline of What's coming, we integrate then with other products in the store. As we've said before, we're very much an open source platform where any of our products can work with any other products through an agnostic hub.
So, yes, we think we're in a great spot where we've added a lot to our online collateral, to showcase all products, but in particular appliances, It's a category we've put a lot of effort into lots of photos and 360 degrees spin and features and measurements and how to when to get ready for installation, delivery model and Contacting the customer the day before and then hours before the actual installation. So it's all part of our and thinking and business model development for appliances.
Great. Thanks a lot and look forward to seeing everyone.
Thank
Kate Meehan with Citi.
For the Home Depot customer. How much do you think that is contributing to comp and how much do you think there's room to ramp that business up in a more meaningful way at the store level? I mean, first of all, we're Away at the Store level.
First of all, let me start with we're very excited about the Interline business and we We continue to work the integration of that business, and we're pleased overall with the direction and
results we're seeing in that. Bill, I'll let you in.
So, Kate, we really have 2 initiatives rolled out into the stores. The first one is Pro MRO, which gives The pro customer shopping in our stores access to the in line catalog and we're seeing that engagement in those sales ramp week over week and in a nice fashion rate on target where we would expect them to be key categories for engagement with the pros are running in plumbing, electrical, HVAC and hardware. So It's right down the center of that and the core of the business. Then the second initiative is our Pro purchase card, which I would really describe back onto their accounts. And we're seeing that adoption rate ramp back up.
We're off to late launch for that, but it's trending nicely and we're pleased with both initiatives. And then when we're together in December, we'll talk about some next steps and next phases.
It's hard to be given the size of our company. It's hard to See, that all those that have been flowing through on the top line in a measurable way right now, but the trend is right. The trend is positive and the opportunity set is big. As we've described, the addressable market in the MRO space is $50,000,000,000 and we're just scratching the surface there. So there's a lot of room to grow.
Thank you. And we'll continue on to Dennis McGill with Zelman and Associates.
Hi, good morning and thank you.
First question, I guess, Ted,
on the storm recovery, what you saw in October, I guess, maybe tail end of October into November, are there categories that you could call out as
Well, I think if you look at the categorization of the two storms, as Craig said, both are very similar in the preparation. You're doing Things like outdoor tools and chainsaws and debris removal. After that, the Flood in the more Houston market. There you're literally ripping The floor to the studs. So you have wiring and wiring devices in gypsum and mud and paint in flooring, quite a bit of flooring product, also cabinetry and appliances, etcetera.
With the storm in Florida that went up the coast, that's more exterior damage, say, roofing and gutters, of the storm much more out of Houston as we get into the interior fit finish of flooded out homes.
Okay, that's helpful. And then Carol, on the holiday side, that's been an area in the Q4 last several years where you've been able generate some solid upside and you talked about maybe being conservative on the hurricane side of things. How would you frame the holiday side within the forecast and any additional color you can provide on what might be different this year or exciting this year that would create another lift on top of last year's
Well, we plan to comp last year's out the 10 year results and we're going to do that maybe we have a conservative forecast. Call. Maybe even a bit better.
We're pleased with the early results.
Sure. The 1st 2 weeks of November have started off very strong.
All right. Thanks. Good luck, guys.
Thank you.
Thank you.
Thank you. Scott Mushkin with Wolfe Research. Please go ahead.
Hey, guys. Thanks for taking my questions. So I just wanted to I mean, after that last comment about how strong things are in November, I just wanted to know, Outside of the hurricane areas, did you guys want to give us a U. S. Comp?
I I think we'll do that, but But I can tell you this. Our business, if you look at the business in areas not affected by hurricanes, I mean, we're actually very pleased with the business, both from a transaction standpoint, ticket growth standpoint, earnings growth in key categories across
the business.
We see strength across the store and across geographies
as we said in our earlier earnings. As we said in our earlier comments,
so we're very pleased with the trends in the business right now.
And And would you be comfortable calling it sequential strength?
Yes. And if you look at it as well on a 2 year stack basis, sure.
Okay. Then the one thing We had a lot of questions. The one thing that hasn't been talked about and we get a lot of questions on is tax policy. Obviously, with the rollout of the House Plan. We saw a little step back in some of the home related hard lining names.
And I just wondered if you guys had a thought, as we go into 'eighteen about tax Policy. Where we are in the cycle generally, that's the kind of question we get to and if you have any fears as we move into 'eighteen that we could actually
earnings. So on a broad basis, I'd say we're very supportive of tax report that would fuel the economy and create jobs. And so that's something that we hope we see take place here. And I think there's obviously a lot going on between the House and the Senate. We'll see where this all falls out.
As it relates to some of the pieces that are being discussed individually and how that impacts housing, Candidly, we don't subscribe to the fact that we believe the mortgage interest deduction elimination earnings would have much of an impact. I mean, we just don't think it has much. And in large part because the majority of households We didn't have an impact from what's described today, but it's pretty early to tell. We don't know what's going to be passed.
It's early days. Our research shows that earnings. Only 22% of tax filers actually use the deduction. And then of the people who have mortgages, only earnings. 5% have mortgages in excess of $500,000 And then if you have to think about what is the impact to those who actually have mortgages in excess of $500,000 who might itemizing these deductions.
It's really based on their marginal tax bracket. And the way to think about it, it would be the cost of their mortgage. And with mortgage rates so low, it's not a material impact. In fact, we know that for every 25 basis points mortgage rate. It's $40 a month.
So you can do the math. You can come up with your own impact, but we just don't as we stand here today, don't think there will be a material impact. Earnings. As we think about housing broadly and fears of slowdown, we don't see that for 2018, 2019 2020 for a number of reasons. We've talked about an aging housing stock, home household deformation and home price appreciation.
And you may say, well, home prices are really hot, haven't they fully recovered, you know, peaks to trough. Well, yes, they have. But on an inflation basis, they're still down double digit. And when you think about the wealth effect that's been created with higher home crisis, it's About 122 percent increase in equity or about $64,000 per home and that's translating into spending in the home and the forecast for home price appreciation next quarter. Sure.
It's very good. So we don't the rumors of our impending slowdown, we don't see because we look at the underlying data and then we look at what
earnings. Our final question will come from Matt Fassler with Goldman Sachs.
Thank you so much for fitting me in. Good morning. Two kind of cleanup questions on a couple of tactical items. First of all, obviously, it's a tough quarter to discern the significance of moves in individual line items. But if you could talk about how you think the storm impacted your traffic numbers versus your ticket numbers during the quarter?
So again, when Matt, when we look at the business across regions and look Yes, non storm areas versus storm areas. The data around Tickets and transactions is actually pretty comparable. And we didn't see a dramatic departure. Obviously, Houston, that market is up and up significantly. But when you look at regions, which are give or take 100 stores.
We don't see a big departure in the numbers, storm versus non storm.
And then secondly, we didn't talk much about the promotional environment. Obviously, the gross margin ex the impact of the storms look very clean. Your appliance business was quite strong and you didn't seem to pay a price for that. Anything noteworthy in the market, particularly relative to the first half of the year.
Now we see a pretty similar promotional cadence that Most people's Black Friday ads are out and it's pretty much right on last year, so maintaining the current promotional environment.
That's helpful. Thank you so much, guys.
Yes.
Well, thank you all for joining us today, and we look forward to meeting with you at our Investor Conference in Boston on December 6.
Thank you. Ladies and gentlemen, once again, that does conclude today's conference. Thank you