Good day, everyone, and welcome to The Home Depot Q2 'seventeen Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Diane Dayhoff, Vice President, Investor Relations. Diane, please go ahead.
Thank you, Debbie, and good morning to everyone. Joining us on our call today are Craig Menear, Chairman, CEO and President Ted Decker, EVP of Merchandising and Carol Tamay, Chief Financial and Executive Vice President, Corporate Services. Following our prepared remarks, the call will be open for analyst questions. Questions will be limited to analysts and investors. And as a reminder, we would appreciate it if the participants would limit themselves to one question with one follow-up, please.
If we are unable to get to your question during the call, please call our Investor Relations department at 770-384-2387. Now before I turn the call over to Craig, let me remind you that today's press release and the presentations made by our executives include forward looking statements As defined in the Private Securities Litigation Reform Act of 1995, these statements are subject to risks and uncertainties that could cause actual results Now let me turn the call over to Craig.
Thank you, Diane, and good morning, everyone. We had a strong quarter, achieving A milestone of the highest quarterly sales and net earnings results in the company history. Sales for the 2nd Quarter were $28,100,000,000 up 6.2 percent from last year. Comp sales were up 6.3% from last year And our U. S.
Stores had a positive comp of 6.6%. Diluted earnings per share were $2.25 in the 2nd quarter, Up 14.2% versus last year. We continue to see broad based growth across the store and all geographies. In the U. S, all three of our divisions posted positive comps in the 2nd quarter, as did all of our 19 regions and top 40 markets.
Internationally, both Mexico and Canada posted another quarter of positive comps in local currency. Our solid performance was driven by the outstanding execution of our store and merchant teams, As Ted will detail, both ticket and transactions grew in the quarter and all of our merchandising departments posted positive comps. We saw a healthy balance of growth from both our pro and DIY categories with pro sales once again outpacing DIY sales We are focused on being a valued partner for our pros by offering solutions both in store and at the job site During the quarter, we closed on the acquisition of Compact Power Equipment, a leading national provider of equipment rental and maintenance services. Compact Power has provided larger jobsite equipment rentals at more than 1,000 Home Depot stores since 2009. The acquisition is yet another investment To enhance our portfolio of service offerings for our pro and though we have worked closely with the compact power team for many years, We are delighted to officially welcome them to the Home Depot family.
Our investment in Interline and the MRO customer is another avenue to better serve the needs of our pros. Use case 1, the rollout of Interline's catalog of products to Home Depot stores is now implemented And we are pleased with the early results. We also continue to roll out use case 2, which enables Though it is early days, we are seeing an incremental sales lift from accounts who have been given the swipe card. Our deeper level of engagement with the interline customers has helped to drive sales growth that outpaced the company average in the quarter And we remain very excited about the MRO opportunity going forward. Another growth engine for our business is our focus on interconnected retail.
Our dotcom business represented 6.4% of sales and grew approximately 23% in the quarter. Our digital team continues to invest in content, site improvement and better mobile experiences to take the friction out of the interconnected online, while our operations team remains focused on improving the interconnected experience in store. The result of these combined efforts is continued improvement in sales and customer satisfaction scores across both platforms. This is the power of interconnected retail. As you know, we look at productivity as a virtuous cycle here at The Home Depot and our efforts to We are pleased with the productivity in the business during the quarter as the end to end initiatives to improve freight handling in the store Continue to drive labor efficiency and optimize product flow from truck to shelf.
Beyond the four walls of our stores, we continue to drive productivity throughout our value chain with initiatives like supply chain sync. Sync is live in all of our RDCs. But as you know, this is a multi year, multi phased endeavor as we work to onboard Each of our suppliers flowing product through our RDCs. We continue to see great productivity our supply chain as our investment over the past several years is having a positive impact on logistics cost, inventory productivity and service to our stores and customers. Turning to the macro environment, We continue to see positive signs in the housing data, which we believe serve as a tailwind for our business.
As Carol will detail, Because of our outperformance in the first half versus our plan, we are increasing our sales and earnings per share guidance for the year. We now expect fiscal 2017 sales growth of approximately 5.3% and diluted earnings per share of The success of our spring selling season is the direct result of our 400,000 plus associates And their passion for our customers that extend well beyond serving them in our aisles. For example, this year we celebrated the 20th anniversary of Home Depot's in store kids workshops. Held in our stores on the 1st Saturday of every month, These workshops have become a source of empowerment, accomplishment and pride for millions of children and their families. We like to think that we are fostering the next generation of do it yourselfers with some of the most enthusiastic participants over the years, Even trading in their many aprons for larger ones by becoming associates in our stores themselves.
I want to close by thanking all of our associates for their hard work and continued dedication to our customers As they once again successfully navigated the increased demands associated with our busiest selling season. Based on the first half results, approximately 99% of our stores qualified for success sharing, our profit sharing program for our hourly associates. We are very proud of their efforts. And with that, let me turn the call over to Ted.
We had a great second quarter, driven by strength with both our pro and do it yourself customers. In addition, our online business continued its momentum as online sales grew approximately 23% versus last year. We saw broad based growth across the store as all of our merchandising departments posted positive comps. Lumber, electrical, tools and flooring had double digit comps in the quarter. Building materials, appliances, indoor garden and decor In the second quarter, total comp transactions grew by 2.6% and comp average ticket increased 3.6%.
Commodity price inflation in lumber, building materials and copper positively impacted average ticket growth by approximately 68 basis points. During the quarter, we held a Memorial Day, Father's Day and red, white and blue events. These events drove excitement in our stores for both Approximately 22% of our U. S. Sales were up 12.4%.
A few drivers behind the increase in big ticket purchases were appliances, flooring and certain pro heavy categories. Transactions for tickets under $50 which now make up approximately 16% of our U. S. Sales grew by 1.5% in the quarter, reflecting among other things, the return of our outdoor garden business in certain parts of the country. In the Q2, Pro sales outpaced the company average, driven by both our high spend and low spend Pros.
We saw strong comps across several lumber and building material categories as well as categories like pipe and fittings, power tools and wire. Sales to our DIY customers also showed strength in the quarter with flooring, storage and organization and patio all outperforming the company We strive to balance the art and science of retail as part of our core merchandising strategy. For example, we are using data to help our merchandising execution team or MET execute more effectively. MET services the bays in our stores with primary responsibility for planogram integrity and shelf presentation. Currently, each bay is serviced based on overall store volume.
We are initiating unique service rotations based on category specific sales and transactions. Bet associates will receive individualized and optimized work assignments through their first phones. This allows for the most efficient use tasking hours and focuses base service where customers shop most. Looking ahead, we will continue to build capabilities We strive to be the product authority in home improvement by providing our customers with the best brands at the best value. Our assortment includes many exclusive brands and we are excited to be expanding our launch of PPG branded products, a brand that has been trusted by pros for 100 years.
This quarter, we are introducing PPG Timeless Paint. This new product guarantees one coat coverage is available in both interior and exterior paint. PPG's world class coating technology improves durability, Saving our customers time and money. Product innovation is also at the forefront of our retail strategy. Flooring, both hard and soft, has been an excellent growth driver for our business this year, and we continue to see great innovation within the category.
New to our assortment is an improved vinyl plank flooring from Lifeproof. This innovative product features a highly engineered Closed cell phone PVC core that delivers rigidity and strength, yet is lightweight and easy to handle and install. It is also 100% waterproof and scratch resistant and is available in over 40 patterns. This new life proof vinyl flooring is exclusive to The Home Depot. We are excited about our upcoming Labor Day, fall cleanup and Halloween harvest events in the Q3.
As always, we will be offering a variety of special buys and value throughout the store and online to help kick off the fall season. With that, I'd like to turn the call over to Carol.
Thank you, Ted, and good morning, everyone. In the second quarter, sales were $28,100,000,000 a 6.2% increase from last year. Our total company comps or same store sales were positive 6.3% for the quarter, With positive comps of 5.8% in May, 5.9% in June and 7.2% in July. Comps for U. S.
Stores were positive 6.6 percent for the quarter with positive comps up 6.6% in May, 6.2% in June and 7% in July. Versus last year, a stronger U. S. Dollar negatively impacted total sales growth by approximately $64,000,000 or 0.2%. In the 2nd quarter, Our gross margin was 33.7%, a decline of 6 basis points from last year.
The year over year change in our gross margin is explained largely by the following factors. First, we had 9 basis points of gross margin expansion in our supply chain, driven primarily by increased productivity. 2nd, we had approximately 8 basis points of gross margin contraction due to a change in the mix of products sold. And finally, we have 7 basis points of gross margin contraction due to higher shrink than 1 year ago. In the 2nd quarter, operating expense as a percent of sales decreased by 44 basis points to 17.8%.
In the quarter, our expenses were $20,000,000 over our plan due primarily to a true up of our bonus accrual. Even so, Our operating expenses as a percent of sales were better than our plan due to our strong sales performance. One last comment on expenses. As we told you last quarter, we expect our expense growth factor For the Q2 grew by $21,000,000 to $249,000,000 chiefly due to the impact of adding $4,000,000,000 0.6% compared to 37% in the Q2 of fiscal 2016, reflecting the benefit of a new stock compensation accounting standard that we adopted at the beginning of the year. Our diluted earnings per share for the 2nd quarter were $2.25 an increase of 14.2% from last year.
Moving on to some additional highlights. In the 1st 6 months of the year, we opened 4 new stores, including 3 in the U. S. And 1 in Mexico. We have not opened a new store in the United States since 2013.
Our new U. S. Stores still open voids and we are pleased with our initial sales performance. Total sales per square foot for the 2nd quarter were $4.64 up 5.9 from last year. Turning to the balance sheet.
At the end of the quarter, merchandise inventories were $12,900,000,000 up $545,000,000 from last year and inventory turns were 5.3x, up 1 tenth from last In the Q2, we repurchased $2,600,000,000 or approximately 17,300,000 shares of outstanding stock, bringing our year to date share repurchases to approximately $3,900,000,000 Additionally, during the quarter, we took advantage of an attractive interest rate environment and raised $2,000,000,000 of incremental long term debt. We will use the proceeds of this debt issuance to repurchase outstanding shares, increasing our 2017 share repurchase target For the trailing 12 months, return on invested capital was approximately 32%, 300 basis points higher In the Q2 of fiscal 2016. Year to date, our sales and earnings per share have exceeded our expectations. Turning to our outlook for the remainder of the year. We expect to see continued growth in the repair and remodel market As the Quest has experienced solid wage growth, faster home price appreciation and the reemergence of first time homebuyer.
As a result, we are lifting our fiscal 2017 sales and earnings per share growth guidance to reflect our first half performance and our confidence In addition, as Craig mentioned, we recently completed the acquisition of Compact Power Equipment impact to our sales or earnings per share forecast, but it will slightly affect our gross margin and expense structure. We now expect the full 2017 sales to increase by approximately 5.3% with positive comps of 5.5%. While this suggests our second half comps will be slightly lower than our first half comps, Our sales guidance is based on our planned foreign exchange rates for the back half of the year. Given the recent performance of the U. S.
Dollar, There could be some upside to our sales forecast. At the beginning of the year, we expected our fiscal 2017 gross margin to decline by 15 basis points from what we reported in fiscal 2016. Reflecting the impact of Compact Power, Finally, for the year, we expect our effective tax rate to be approximately 36.3%. For earnings per share, remember that we guide off GAAP. For fiscal 2017, we now expect diluted earnings per share to increase by approximately 13% to $7.29 Our updated earnings per share guidance reflects the points I just mentioned,
We'll go first today to Simeon Gutman with Morgan Stanley.
Thanks. Good morning. Quick question, I guess, on the recovery. The longer the recovery persists, it's just natural. It seems like the market's There's eventually going to be a shooter drop.
How do you get comfortable with the tenor of the recovery? Clearly, the business is performing great. And if there are yellow flags, how do you know what you're looking for?
I mean, I'd say, assuming that we've had obviously And it has been clearly Driven from housing, which has been a steady but slow recovery in the market. We continually look at months of supply. There's 4.3 months of supply in the market of housing availability against a historical norm of 6. That clearly is helping to drive improvement in home value appreciation. But housing starts haven't returned to their norm yet Either.
The only thing that's kind of running at historical averages is housing turnover. So we see this Housing favorability continuing as we look forward. And I think the watch out for us is, You wouldn't want to see affordability become an issue, but that at this point doesn't seem to be a concern for us at all.
As we look at the affordability index, it stands at 153%. So long ways to go before that would be a watch out for us. And recovery is a difficult thing to put your arms around. But if you look at simply PFRI dollars, they've only recovered 70% of the loss. So if you put that into baseball terms, I guess that's about the 6th inning.
The other thing that's really interesting to us is the age of the housing We've talked to you a lot about 66% of the housing stock being older than 30 years. Well, did you know that 51% of the house's stock is older than 4. And as houses age, will they need more repair?
It's more spent. Okay, that's helpful. My follow-up is on e commerce and I'm sure this will be topical. I just want to ask one angle of it. So in using the power tool category as an analog for how to think of appliances, the pushback that we've been getting is that, look, Home Depot has done a great job in power tools, But they have a lot of exclusive brands and labels, which is different than appliances.
And ultimately, appliances will be harder to control given some of the large national brands. Can you share some thoughts on that comment?
Look, what I would say is, we have a lot of categories of goods in our stores, over 200 plus And we compete with lots of folks across all of those categories. And candidly by category, the strategy is different because the categories are different. And so our job is to create the strategies that allow us to be the customers' advocate for value across the categories
We'll go next to Michael Lasser with UBS.
Good I have two questions on market share. First, it looks like your total sales increased slightly less than the category according to the Census Bureau. So where do you think you might have lost some share to during the quarter? And then I have a follow-up on that.
Actually based on the NYX 441, it actually looks We gained share in the quarter. We don't believe we lost share in the quarter.
No, we're up 20 basis points.
Yes, 20 basis points year over year.
Do you think other 20 bps to 28.12. Right.
Okay. And then the second part of the question is on The e commerce channel within home improvement overall, do you think that you're gaining share within that Within the category and what rate of growth do you think the home improvement category is growing online?
So we actually have an interconnected retail approach and our customers are blending the physical and the digital world together and we look at share in totality as it relates to Home Depot's gain in the market against what the market is growing.
And we're pleased with the share gains. It's important to remember that over 43% of our Online transactions are picked up inside of a store. This is 1 Home Depot, not an online or in store business, but it's 1 Home Depot.
We'll go next to Dan Binder with Jefferies.
Thank you. As you just mentioned, different strategies for different categories online. Obviously, appliances have been in the news recently. I know you do some of your appliance business online. I was wondering if you could just talk a little bit about the complexity of that transaction, how the customer is Shopping it in the store even if they're ordering it online and where you think your competitive advantages are if you started to see that category become more online and other competitors?
And look, if you look at the interconnected experience, Candidly for appliances or lots of other categories. In many, many categories, the shopping starts in the digital world even though it might finish in the physical world or in some cases actually finish in the digital world as well. It is truly a blended experience today where the customer the front door of our store is no longer at the front door of our physical store for many, many product categories. The customer starts digitally looking at product, doing research And then in many cases, particularly in large ticket, they come in and they actually want to talk to one of our associates before they make a purchase. But we clearly in big ticket categories, we sell both in the physical and the digital world.
And
If I could just ask one other question related to delivery. Can you give us an update on how many of the stores are able to deliver to the
Yes, we've actually rolled out the delivery program at the end of fiscal 2016. Mark Hollifel is here. I'll let
And we offer the 2 and 4 hour window options at all of them at this point.
And Mark, it's true we've seen sequential growth in our delivery business every week in the quarter. So our customers are responding very well to this offer.
Very healthy growth.
We'll take our next question from Christopher Horvers with JPMorgan.
Can you talk about, Carl, last quarter you talked about Pro being up 2x DIY. Did that trend continue? And can you talk about the growth that you're seeing in the pro versus DIY? What does that make you all think about what's going on in the market now and in terms of the duration of growth going forward.
Sure. So yes, our PROs grew twice as fast than the DIY actually expanded that gap a bit in the second And Chris, I can recall talking to you last August about our sales and our Pros going out on vacation. Based on what we're seeing in the stores today, our pros are not on vacation. The stores are busy and our sales are quite good.
Nice. And then I think one of the questions that was asked on our last CISA, I thought it was really interesting and wanted to put out there. You have companies like Wayfair spending a lot in advertising and Amazon's reported to be more interested in the category. So obviously, as you saw, these companies get rewarded with sales growth and not necessarily profitability clear in Amazon's last report. So do you think that given this increased interest in greater advertising spend, do you need to flex some muscles here and Maybe deleverage advertising a little bit to defend the Home Depot brand in the home related categories?
Chris, I'd say one of the things, I'm very proud of the team. They have worked really hard over the past several years To drive dramatic improvement in terms of the effectiveness of our marketing dollars to reach a customer In a space where they have a high level of interest. So we have been on a path to balance Our approach in terms of marketing, both in traditional media and in digital media, And the team has been able to drive incredibly effective returns on our marketing spend.
We spent more in digital in the Q2 than we did TV and radio combined. So it's doing an awesome job of getting more eyeballs, higher return on that spend.
Yes, our overall advertising spend is up lower single digits. But as we've essentially made the more significant pivot Digital marketing, it's over half our marketing right now. That's a medium that you can get good insight on the return on Spend and Craig as Craig said, the team has just done a great job continuing to increase the return on that spend, so leveraging that low single to a much more productive return on overall ad spend.
Like I'm sure you do a lot of key search terms and so forth there. Is that becoming more expensive to you as Wayfair and Amazon focus more on the category?
I mean, It varies by category by day, candidly.
We'll go next to Brian Nagel with Oppenheimer.
So my first question, I guess just follow-up on some of the other e commerce type questions, but maybe to exactly what Chris was saying just a minute ago. The other e tailers or online only chance if it may at least indicate some interest gain to this category. But from your vantage point, are you seeing anything to suggest that Anyone's coming out with a much, much more price aggressive effort and one that you would have to match or you're choosing to match?
I mean, Brian, we've invested obviously in tools and capabilities to inform our merchants In terms of the overall competitive position in the marketplace, both in the digital and the physical world, and this Quite candidly, it's been something that the company has been focused on since its inception in terms of Making sure that we are driving value. Core belief that I have is, as merchants, we are the customers' advocate for value, period. And that's the job of The Home Depot and The Home Depot merchandising team every single day. So we must stay focused On a competitive offering and quite candidly value is defined by what the customer is willing to pay for.
Got it.
My follow-up question, I mean shifting gears a bit. Flooring, think you called that as another bright spot. Again, from a competitive standpoint, there's been there's other companies now that are pushing into the flooring category from more of a specialty perspective. Overall, what are you seeing as far as I guess, how would you characterize the consumer demand in the category? And then are you seeing anything from
As Craig said, it's a great point. We competed over 2 In 20 categories, flooring is a very big category and there are actually a lot of competitors have been and will be. We see consumer demand very strong and the consumer is responding to the Home Depot value proposition. Exclusive launches at the Home Depot and we've worked very hard on our in store selling model And Anne and her team are just doing a great job communicating that value to the customer in both our hard and soft flooring And they're both doing extremely well as I called out double digit comps for the category.
We'll go next to Kate McShane with Citi Research.
Good morning. Thanks for taking my question.
Good morning.
I was curious about your comment with regards to the reemergence of the first time homebuyers. Is this the first time you're seeing this and if this were emerging, would this be enough to offset any slowing of price appreciation if it were to occur?
It was really interesting to see what happened with the first time homebuyers in the second quarter. The highest number of first time Homebuyers since 2005, about 424,000 first time homebuyers, making up 38% of all homebuyers and up 11 So that's good news. Why? Because first time homebuyers tend to buy homes that need repair and remodel. So as we see and we anticipated this happening with millennials coming into an age where they start to form families, children pets or whatever their family unit might look like, they're moving into homes, which bodes very well for us.
And to your point, it extends the recovery.
That's great. Thank you. And then Ted had mentioned the 3 events you conducted during the quarter. Just wondered if that differed in any way versus last And does that help explain from the acceleration into July?
They were similar events in duration as last year, Kate.
We'll go next to Matt Fassler with Goldman Sachs.
Thanks a lot and good morning. Good morning. My question relates to your discussion of Sales trends by ticket, can you just remind us whether that's store only or whether that's inclusive of online? And then I have a quick follow-up.
Yes, it's all in.
It's all in.
Right. I guess is there anything about
the way consumers are shopping based Some project or basket that would change the composition of that sales performance By ticket, just thinking about the outsized extended outsized growth of the big ticket piece and the fact that the smaller ticket piece It's been growing at a slower rate for kind of an equally consistent period of time.
So the biggest driver behind that has been the recovery of our Pro Customer and the growth that we've had in categories like appliances and flooring, those are Big ticket purchases in and of themselves, so appliances is clearly much larger than our average ticket. A flooring job is significantly larger than our average ticket and our pro customer spends dramatically more than the average DIY So those have clearly helped to drive the growth in tickets above $900 And then we did see the recovery in the smaller ticket, Matt, as a result of the Garden business coming back to a more normal state in the second quarter.
We'll go next to Dennis McGill with Zelman and Associates.
One more question just going back to appliances and online. I think you said 6% of sales are online now for the total store. Can you just maybe just frame appliances relative to that number and just give a little bit more detail on how you mentioned, Craig, the Buying experience in some cases starting digitally and ending digitally, what percentage of those big ticket transactions and appliances are executed online? Just to kind of give some frame of reference to the category as a whole already being an online category.
We don't break that data out. I mean for competitive reasons, we would not share that data. Thanks.
Okay. I won't count that as my question. So my first We'll shift to non online. When you look at outdoor garden, I guess for the first half of the year, it's a below average category. So I guess The weather comps year over year didn't really get the typical bathtub effect.
Carol, when you look at the back half of the year, do you expect that some of that could come back and the year would balance out or is that loss demand at this point?
Some of the softness was and softness is relative because the Category grew, soils and mulch. And Ted, I wouldn't think we'd get much of that back.
No, I think some of the uptick we saw in July was that Certainly colder and wetter early and it was really wet into June. So some late garden, but I think We've seen that and it just isn't that big until you get into fall and then hopefully you'll get a seed season and some planting season.
Okay. And then second question, just as it relates to inventory, Carol, how would you characterize inventory in the channel today when you adjust Same store and the acquisitions and so forth as far as what a supplier might be facing with projects, I think, and so forth. Is Is there less inventory throughout the channel today? And if so, can you quantify that in any way?
We're growing inventory to support ourselves. We also want to drive productivity, as Craig called out in his remarks. And so we're always going to look to improve the velocity of our inventory turn. But my goodness gracious, As Craig always says, customer service starts with in stock. You got to have what the customers want and certainly we will do that working with our supplier partners.
So the inventory I think turns that you had framed earlier being up a little bit, is that a same store representation?
That is a One Home Depot representation, includes inventory in our stores and in our distribution centers.
Yes. I mean total inventory is up $545,000,000 in the quarter.
We'll go next to Alan Ryskin with BTIG Corporation.
Thank you very much for taking my question. Carol, you mentioned that the expense factor in the second half should be lower than in the first half. Given the fact that typically 2nd half revenues in aggregate are less than the first half and you said that you forecasted comps to be a little bit lower in the second half versus the first half. Is the reason for a lower expense factor in the second half entirely due to compact power or
are there other things going on there?
Let me give you a little bit more color on our expenses if I could please. As you know, we stepped up our capital spending program this year, taking our total spending up to $2,000,000,000 including $350,000,000 of capital To invest in our stores, certain of our stores are getting new wave binding packages, new flooring, new lighting, new Restrooms, new break rooms, so on and so forth. That capital comes with an expense. Now we didn't plan for the so if I look at our expense performance in the Q2, while it was planned, expenses related to our Store investment, which would include all write offs with old fixtures and reset expense and that sort of thing. Year on year, it was up $19,000,000 So it was pretty lumpy in the second quarter.
That won't be as lumpy in the back half of the year and that's really the driver of the expense growth factor first half versus to the second half.
Okay. Thank you very much. Appreciate that. And then a follow-up. With respect to compact power, Either Craig or Carol, could you maybe just talk about the margin structure for that business?
Would it be correct to assume that it's A lower gross margin as well as lower SG and A business and what effect on a full time basis to EBIT margins does the acquisition of Compact Power in and of itself have?
Yes, happy to talk about it. 1st, the Compact Power, the revenues for Compact Power are recognized on a net and not a gross basis. So you have gross margin associated with that business. It's highly margin accretive. And Alan, that's one reason why our gross margin guidance The year has changed from what has been down 15 basis points to now down 10 basis points.
Because the revenues are recognized on a net basis and because there are expenses in compact power, it puts some pressure on our expense growth factor For the year, we had guided that expenses would grow at 43% of our sales growth. We're now suggesting 46% of our sales growth. That's because there are no revenues. We will record on a net basis, but there are expenses. If you look at the EBIT of Compact Power, It's very accretive.
In the back half of the year, this is a small business, strategically very important. But in the back half of the year, Compact Power should contribute A penny of EPS accretion.
Okay. Thank you very much, Carol. Welcome.
We'll go next to Scot Ciccarelli with RBC Capital Markets.
Carol, you've already highlighted how the housing stock in the U. S. Continues to age and obviously that's been a pretty big theme for you over the last call it 2 years or so. Do you happen to I know it's something you guys have been looking at for a while. So do you happen to have any analytics around the home improvement spending Maybe by vintage or do you know if there's an average percentage spend relative to an average home price?
Yes, a couple of data points. Home was built before 1980. The average annual home improvement spend is $3,500 a year. Homes built after 2,000, the average Annual home improvement spend is $1500 a year. So there's a pretty nice delta as the homes age.
The other interesting data points We haven't proven this analytically in our own research, but I'll share it with you anyway because I think it's very interesting. We look at John Burns Real Estate Consulting Group a lot. They've got some really And they say that for every percentage point improvement in real wages and real wages are up this year after inflation 2.2%. They say for every percentage point increase, there's a 1% increase in the repair and remodel spend. Interesting, we haven't proven that, but it stands to reason, you've got more money in your pocket, you're going to spend some more money on your home.
Yes, that makes a ton of sense. And then just a quick follow-up. You also mentioned how first time home buying is finally starting to accelerate. Again, that should be good for duration. But Just based on historical purchase patterns, would you expect that to impact your small ticket performance?
Presumably, There's a little a lot more kind of nickel dime type projects that are probably done, but I don't know if that's true or not.
I wouldn't think No, because when they're going into the homes, they need to repaint them and paint is not just a bucket of gallon of paint, but it's the tape and tarps and all the other stuff that goes
Like that would be under $50 but yes, you're which we like, they're going to fill their basket. Yes.
Right. So no real change in the cadence between big ticket and small ticket as you wind up getting more first time home buying?
I don't
think so.
We'll go next to Keith Hughes with SunTrust.
Thank you. You mentioned several times
earlier in the call that your Pro is up well in excess of the DIY. Can you give us any insight on Product categories that did particularly well with the Pro in the quarter?
Well, certainly, our building Material categories did very well. Our electrical did very well. Tools, Consumers love our power tools, but the pros are really the heavy users of that. Lumber is Very strong lumber prices are near or at all time highs, but our unit productivity is The commodity prices we know will go up and down. We watch the units very carefully in lumber and building materials and those have been very strong as well.
You had mentioned earlier in the call, in the introduction about new Pro Paint initiative. Is that an area, does that rank among your Tops in terms of growth for the pro?
Yes, the propane initiative that we have with each of Behr And PPG has been very successful. I'd say overall, we're pleased with our growth in our paint business. I'd say we're holding share, if not gaining a little bit of share in paint, but our Pro paint initiative in particular Is multiples higher growth than our DIY paint business.
Okay. Thank you.
We'll go next to Scott Mushkin with Wolfe Research.
So I guess I wanted to take a step back and ask a broader question, lots been asked on the call. I mean as you guys look at your business, because obviously just performing Obviously, a big tailwind from what's going on macro, but also a lot of the great things you guys are doing. What do you worry about?
And one is, we're investing in the One Home Depot experience. That's how the customer views us, Not exactly how we were built, so we have to do some things to get there completely. And you worry about the ability to execute on that Fast enough and the change management that comes along with that. 2nd worry, I'd say is the customer and the associate Experience in our high volume stores. Clearly, with the growth that we have had, That puts pressure on in those stores disproportionately.
And so we're going to have to invest to solve that situation. And we're working to put that in place, but those are certainly two worries that we have in the business.
All right. That's really good insight. And I was just wondering if you could talk about kind of how things are going so far this quarter. I mean, after we had the sales numbers out today, they were good. And we've experienced sometimes a 3rd quarter low because DYI is not as strong as pro.
I just want to any thoughts as we look at the 3rd quarter, anything we should consider?
Scott, as we mentioned just a little bit earlier, we are quite pleased with our sales in August thus far.
All right, perfect guys. Thanks very much.
We'll take our next question from Matthew McClintock with Barclays.
It's been a little over a quarter since you've now had access to interline inventory in your stores. And I was wondering, conceptually, how should we think about the benefit from that access, building and having an impact on your sales. How do you build awareness of that? Is that really what We're waiting on to see an acceleration in the business from that or just how to think about that benefit layering in over the coming years? Thanks.
I'll start and Bill is here who runs our Pro and Services business. But as I call out my comments, We are actually very pleased with the use case 1 and use case 2 response from our customers. And with that, As well as the effort of the team at Interline. Interline actually grew above the company average growth in the quarter.
So, yes, just Craig, thanks. A quick comment. We're now live in 19 58 stores. So, we basically have finished the rollout. We have 1500 stores that have access to Interline's products next day and an additional 4 58 stores that are a 2 day Delivery.
And we're seeing great activity on a broad base of goods, primarily servicing the trades from plumbing, electrical hardware, Also strengthen the HVAC business. So it's doing a nice job of extending our product reach, giving us access to deeper inventories For pros that are coming in and looking for project based purchases. And overall, average ticket on par, Wrapping up sequentially week over week and pleased with the progress on the MRO business.
And then Carol, if I could have a follow-up just And I'm sorry if I missed this, but the 7 basis points of pressure from higher shrink, I have to ask about it because it almost offset the benefit from the supply Could you just talk about what you're seeing there? What's driving that? Thanks.
Yes. As you know, there are many drivers of shrink, including higher theft and changes operational processes and new systems. We have a cross functional team that is addressing this. We're hearing from other retailers that that does up But we're really focused on what have we changed inside of our stores that perhaps caused some of this. And in fact, the cross functional team has identified a few defects That we are correcting and we will continue to work on this going forward.
Thank you very much for the color.
We'll go next to Peter Benedict with Robert Baird.
Hey, guys. Thanks for taking the question. 1st was just on kind of labor market and wages and availability workers. I mean, what are you guys seeing on that front, whether it be with the seasonal folks That you hire or some of the specialty or full time folks? That's my first question.
Sure. So Peter, we hired Seasonally this year, over 90,000 people. And one of the great things that happened in this season was we enhanced our application process through improved mobile experience and actually doubled our applicant pool. So we're very pleased With that, it was a better experience for the applicants themselves and was pretty effective on our end as well. We are certainly seeing wage pressure and that Varies market by market, but that's something that we anticipated and planned for and it's actually built into our guidance for 2017.
Okay. Thank you. And then, Charles, just curious on the FX, just to make sure we understood you correctly, your guidance right now still assumes, I I think it was a $250,000,000 headwind from FX for the year. Is that right?
Well, in the back half, it's actually $250,000,000 That's right. So if you were to add that back, you would calculate the The comps to be about the same as what we reported in the first half.
Okay. And then last one, if I could, just sneak 1 in. The store refreshes You alluded to remind us how many you're getting done this year, how many you think you could maybe do in 2018? And Craig, anything specific? I mean, you talked about Trying to alleviate some of the customer experience and associates experience friction that may occur in these high volume stores.
In particular that you're focused on that you're seeing some improvement from as you kind of work to reengineer the stores a little bit? Thank you.
Sure. The first part of the question in terms of how many this year, approximately 500 stores We'll get the updates that Carol referenced earlier as it relates to the signage, navigational signage, lighting, floor, break rooms, restroom and so on. And then in the high volume stores, we have to work to continue to improve the experience for the customer On the front end, in particular, and get the customer through the registers with greater Speed and then likewise, those stores feel more pressure from BOPIS and BOSS pickup and we're working to solve for them as well. And that will be a different scenario by different type of stores, but those are the areas of focus.
And Peter, we've got an investor conference in December, so we'll lay out our plans for 2018 and beyond at that conference.
We'll take our last question today from Seth
Obviously, they've been underperforming for some time. Do you think that you're still gaining market share in some of the small ticket categories?
Yes, I would. I mean, the small ticket is healthy. We talked about the transactions being up 1.5%, but that also comes with a strong positive comp associated with those transactions. And the mix of the business, we used to talk about Under $50,000,000 being 20 odd percent and over $900,000,000 being 20 odd percent and that dynamic shifted As the customer has responded, we think largely to the product and the innovation in the store. And Again, if we look at this every single week where the sales coming from in the assortment and we continue to see the customer respond to the respond to the innovation and buy up the continuum on the assortment.
An example of that would be in soils and mulch So we talked about Garden coming later, which it did, and we had a fine Guard business in the Q2, but we were a little less promotional on commodity mulch Because what we find is the customer is buying heavily into the organics. We have a number of exclusives in organics With Kellogg's and Doctor. Earth's and some of the Scotts Miracle Gro product and customers are happily trading up and we're talking 2 and sometimes 3 and Four times the cost for a bag of organic mulch over commodity mulch. So we look at it very carefully because it's a natural and fair question, but we continue to be comfortable with what the dynamic is of the ticket growth. We look again that it's exclusively this year product mix And then the effect of commodity prices in lumber and building materials.
There's been no price impact on our AUR.
That's helpful. And given that theme of this call, as we think about the e commerce impact of some of these smaller ticket categories, you feel like you guys are better or less well positioned to gain share in some of these smaller ticket categories As a result of what's happening with the online channel?
I mean, we feel very comfortable that we compete across all segments of the line structure, Opening price point, mid price point, upper price point across channels.
Excellent. Thanks a lot guys.
Well, thank you everyone for joining us today and we look forward to talking to you next quarter.