Good day, ladies and gentlemen. Welcome to the Home Depot Third Quarter 2016 Earnings Conference Call. Today's call is being recorded. 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 Decker, EVP of Merchandising and Carol Tomei, Chief Financial Officer and Executive Vice President, Corporate Services. Following our prepared remarks, the call will be open for analyst questions. 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 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. We had a strong quarter for both sales and earnings as we continue to see strength across our business. Sales for the Q3 were $23,200,000,000 up 6.1% from last year. Comp sales were up 5.5 percent from last year and our U. S.
Stores had a positive comp of 5.9%. Diluted earnings per share were $1.60 in the 3rd quarter, up 18.5% versus last year. In the U. S, all three of our divisions posted positive comps in the 3rd quarter led by our Southern division. All our regions positively comped except one region in the North.
In New England, we had a small negative comp due primarily to Internationally, our Mexican and Canadian businesses had another quarter of solid performance. Mexico and Canada reported comps in local currency, marking 52 20 consecutive quarters of positive comp growth, respectively. As Ted will detail, we saw balanced growth from both ticket and transactions. All of our merchandising departments posted positive comps and we saw a healthy balance of growth among both our pro and DIY customers With Pro sales growing faster than DIY sales in the quarter. Our Pro business continues to be driven by a strong Offering of brands that pros demand, consistent product innovation, as well as enhanced delivery and credit offerings to help them more In the Q3, we anniversaried the acquisition of Interline and are proud of the team's efforts in the 1st year.
The Interline integration continues to progress as we work to execute against the business use cases to leverage Interline's capabilities. We are excited about the opportunity Interline provides us to expand our share of wallet with customers. Percent and represented 5.6 percent of overall sales. Over 40% of our online orders are picked up in the store, which we view as a positive sign of our physical stores' continued relevance with our customers. This quarter, we rolled out a complete homedepot.com redesign.
Content was enhanced to display in full screen, optimizing our desktop center or DFC in the U. S. With this distribution infrastructure in place, Our 3 DFCs, but we have been able to reduce delivery cost and improve overall customer experience. We continue to invest in our supply chain transformation by optimizing our network through initiatives like supply chain sync. This quarter, we began the rollout of CINC to our Northern division and we continue to onboard new suppliers in the Southern and Western divisions.
As you know, this is a multi year, multi phased endeavor, but we are pleased with our progress thus far. I am reinvesting the customer experience. Our efforts to drive operational excellence in freight handling in the stores are doing just that, Reducing both time and footsteps needed to move freight end to end or from truck to shelf Experience is through initiatives like Calm and Botvist. As you will recall, Calm is our new customer order management system that was fully deployed last quarter in all U. S.
Stores. And Botfist or buy online, deliver from store remains on track to be rolled out by the end of the fiscal year. In the 1600 plus stores where we have bought this, Our on time delivery service is now exceeding our target and we have seen double digit increase in the number of deliveries. We are pleased with the positive customer response to this enhanced delivery option. Turning to the macro environment, we believe home price appreciation, housing turnover, household formation and the aging housing stock in the U.
S. Continue to support growth in our business. As Carol will detail, we are reaffirming our sales growth and lifting our earnings per share growth guidance for the year. Let me close by thanking our 400,000 plus associates For their hard work, dedication and commitment to our customers. I would like to give a special thanks to all the associates and suppliers who have worked to help the communities impacted by Hurricane Matthew and the flooding in Louisiana.
They have worked Tirelessly under difficult circumstances, often in the face of disruption in their own lives caused by these storms. Service to our communities is a core part of The Home Depot culture, and we're very proud of their efforts. And with that, let me turn the call over to Ted.
Thanks, Craig, and good morning, everyone. We were pleased with our results in the Q3. We saw strength across the store, balanced between the pro and DIY customer, as well as continued growth in our online business. All of our merchandising departments posted positive comps, led by appliances, which had double digit comps in the quarter. Lumber, tools, outdoor garden, indoor garden, lighting, decor In flooring, we're above the company's average comp.
Plumbing, hardware, building materials, kitchen and bath, millwork, electrical In paint, we're positive but below the company average. We continue to see balanced growth between transactions and average ticket in the quarter. Total comp transactions increased 2.4% while comp average ticket grew 3.1%. Our average ticket increase was slightly impacted by commodity price inflation, mainly from lumber and building materials. The total impact to ticket growth Commodity price inflation was approximately 35 basis points.
In addition, our average ticket growth was negatively impacted by approximately 33 basis primarily due to a weaker Mexican peso. Looking at big ticket sales in the 3rd quarter, Transactions over $900 which represent approximately 20% of our U. S. Sales were up 11.3%. Drivers behind the increase in big ticket purchases were appliances, flooring and roofing.
Once again, we saw strong outperformance in many pro heavy categories as pro sales grew faster than the company's average comp. This led to strong comps in commercial and industrial lighting, fencing, plywood, pressure treated decking and interior doors. At the same time, we also saw strength with the DIY customer as they undertook various projects around the house. This project business drove strong comps in special order carpet, tool storage, laminate flooring and vanities. Weather remained favorable throughout the quarter and extended the outdoor project selling season.
By leveraging forecast analytics, Strong supplier collaboration and our flexible supply chain, we were able to meet customer demand throughout the prolonged selling season. Categories such as lawnmowers, seed, planters, fertilizers and soils and mulch posted comps above the company average. As Craig mentioned, our vendor partners, supply chain and internal teams rallied to support our customers impacted by Hurricane Matthew and the flooding in Louisiana. Through strong collaboration, we were able to get product to our communities in their time of need. We estimate the impact of storm related sales in the quarter to be approximately $100,000,000 During the quarter, we held our annual Halloween, Harvest and Labor Day events.
These events were a huge success and increased both foot traffic in our stores And volume online, we experienced robust comps in decorative holiday, appliances and power tools. Turning to our interconnected business, we made significant changes to our online experiences in the Q3. We rolled out an updated hd.com site and redesigned our app, both without interruption. The update includes an expanded buy box, which now makes it easier for our customers Now let's turn our attention to the 4th quarter. Product innovation remains a key part of our strategy.
Adding to our broad lineup of professional grade power tools, We are excited to introduce 2 new breakthroughs. For Milwaukee, we are launching a 9 amp hour lithium battery. This battery pack delivers up to 5 times the runtime, 35% more power and runs 60% cooler than standard lithium battery packs, saving customers valuable time and money. The new battery is fully compatible with more than 100 Milwaukee M18 tools and provides the next big step toward complete corded replacement. This new and advanced battery is a big box exclusive to The Home Depot.
From Makita, we're excited to announce the new subcompact drill and impact driver. These revolutionary new tools are the smallest pro tools in the market Delivering 18 volt power. The electronically controlled brushless motor in these products enables them to run cooler and more efficiently, while at Same time matching the torque and RPMs needed to meet the demands of the pro customer. These products are another big box exclusive to The Home Depot. The winter season and cooler temperatures are rapidly approaching, and we have a great lineup of excellent values and special buys for our customers During our Black Friday, holiday and gift center events, one product to look for this holiday season is the exciting new Star Shower Motion Laser Light.
This new and improved laser light projector not only projects thousands of green and red stars for a festive display in the front But it also turns into a motion laser light show at the press of a button. This product is a channel exclusive to The Home Depot. Our upcoming events, new product launches and outstanding execution by our associates will help drive a great holiday season. With that, I'd like to turn the call over to Carol.
Thank you, Ted, and hello, everyone. In the 3rd quarter, sales were $23,200,000,000 A 6.1% increase from last year, driven primarily by positive cost sales as well as the impact of Interline Brands. Versus last year, foreign currency rates, primarily a weaker Mexican peso, negatively impacted total sales growth by approximately $76,000,000 or 0.35 percent. Our total company comps Same store sales were positive 5.5 percent for the quarter with positive comps of 3.8% in August, 6.5% in September and 6.1% in October. Comps for U.
S. Stores were positive 5.9% for Quarter with positive comps of 4.2% in August, 6.9% in September And 6.5% in October. One last comment on comps. While we are on a path to fully integrate Interline Brands, We aren't at a point where it makes sense to include its results in our comps and operational sales metrics. When the business becomes more integrated, We will include Interline's results in our operational metrics.
Our total company gross margin was 34.7% for the quarter, an increase of 6 basis points from last year. The change in our gross margin is explained largely by the following factors. First, as expected, we had 24 basis points of gross margin contraction due to the impact of Interline. 2nd, we had 13 basis points of gross margin expansion in our supply chain, driven primarily by increased productivity. And finally, we had 17 basis points of gross margin expansion arising from a change in the mix of products sold and Improvement in Inventory Shrinkage.
For fiscal 2016, we continue to expect our gross margin rate to be about the same as what we reported in fiscal 2015. In the Q3, operating expense as a percent of sales decreased by 62 basis points to 20.4%. In the quarter, we had some expenses that we did not plan for, including $23,000,000 of legal expenses related to our 2014 data breach and approximately $15,000,000 of Even with this unplanned expense pressure, we delivered total expenses under our plan. For the year, we expect our expenses to grow at approximately 32% of our fiscal 2016 sales growth rate. Our operating margin for the quarter was 14.3%, an increase of 68 basis points from last year.
Interest and other expense for the Q3 was $236,000,000 down $4,000,000 from last year. In the Q3, our effective tax rate was 36.2%. In fiscal 2016, we expect our income tax provision rate to be approximately 36.7 percent. Our diluted earnings per share for the Q3 were $1.60 an increase of 18.5 percent from last year. Now turning by $818,000,000 to $8,100,000,000 In the 3rd quarter, we repurchased $2,100,000,000 We're approximately 16,400,000 shares of outstanding stock, bringing our year to date share repurchases to approximately $4,600,000,000 Additionally, during the quarter, we took advantage of an attractive interest rate environment and raised $2,000,000,000 of We will now begin the Q1 of 2019.
We will now begin the Q1 of 2019. Thank you, carrying a coupon of 3.5%. We will use the proceeds of this debt issuance to repurchase outstanding shares, bringing our targeted fiscal 2016 share repurchases to $7,000,000,000 Accordingly, we We have a strong balance sheet of our balance sheet. We have a strong balance sheet. We have a strong balance sheet.
We have a strong balance sheet. We have a strong balance sheet. We have a strong balance sheet. We have a strong balance sheet. We have a strong balance sheet.
We have a strong balance sheet. We have a strong
balance sheet. We have
a strong balance sheet. 2 80 basis points higher than the Q3 of fiscal 2015. Moving to our guidance. We remain encouraged by the strength of our core business. Our outlook for the remainder of the year reflects modest GDP growth, Continued benefit from the U.
S. Housing market and candidly some market share gains. While we have tough 4th quarter comparisons, as Ted described, Today, we are reaffirming our sales growth guidance. For fiscal 2016, we Sales to grow by approximately 6.3 percent with comps of approximately 4.9%. Note that our sales forecast assumes foreign currency exchange rates as of the end of our fiscal Q3.
For earnings per share, we've tightened up our tax provision and outstanding share forecast and are lifting our guidance. We now expect fiscal 2016 diluted earnings per share to grow by approximately 15.9 percent to $6.33 So thank you for your participation in today's call. And Catherine, we are now ready for questions.
Thank you. We'll hear first from Michael Lasser with UBS.
Good morning. Thanks a lot for taking my question. Craig, the key question here is how do you comp the comp in the 4th quarter and the first quarter Given the very cooperative weather conditions that you saw last year, I know you briefly touched on that, but maybe you could provide a little bit more detail. Plus, What are you looking for to ensure that you don't misread the state of the cycle and either respond too quickly or too slowly to
So on the on how do we comp the comp, As I recall, this was the conversation we had going into fiscal 2016 coming out of last year. Quite honestly, I mean, that's the hard work that the team does immediately following the performance that we had last This year in the Q4, we are up against big numbers. U. S. Comp in the Q4 last year was 8.9%, but that's really the work the team Started doing immediately following the close of that quarter.
And so we feel confident in the Programs that the merchant teams have laid out, the support with the supply chain teams and then of course, Our store associates taking those programs and driving them. Quite honestly, that's our job. That's what we need to do.
And if I could just jump in. Carol here. Here we are in the middle of November and we are on track to deliver the sales that we just guided to.
And then, In terms of what we look at so that we don't miss anything, we've shared in the past, I think, that Yes, we're constantly watching ticket and transaction. And when you step away from the downturn in the mid-2000s, The previous downturn was 2,001 and we saw a decline in average ticket. That was a little bit of a leading indicator. Now you have to be careful because ticket can be affected by things like weather. So When you have big ticket sales, for example, in the first and second quarter on things like tractors, weather can impact So we do watch ticket carefully.
We balance that with transactions. What we're seeing in the business right now, we like a lot. We see a nice balance Between ticket and transactions.
And in fact, transactions accelerated through the quarter. Yes.
Throughout the quarter?
Yes.
And Carol, you mentioned that you anticipate some share gains in the 4th quarter. Historically, you really haven't factored share gains Into your longer term outlook, what's changing now that's given you the confidence to put that in there whereas you hadn't in the past?
Well, as we look at the environment, we see that there are shared donors in certain categories. Ted called out that appliances was a double digit comp for us in The 3rd quarter, it contributed 50 basis points of our overall growth in the quarter as for the year. And so as we look to the 4th quarter, it's always
Michael, we've obviously made a lot of investments Over the past few years to make sure we're positioned to be able to capture that.
Okay. If I could add one last one on the SG recognizing that you have one time items quarter in quarter out, good guys and not so good guys. Yet the SG and A has been growing 2% to 4% after being up at a much more moderate pace. I'm talking on a per square foot basis. So are we just at a point where the business requires a little bit more investment because you've had so many years of strong comps And so the flow through might not be as strong moving forward?
Well, if I could take you back to the beginning of the year, We said that our expenses would grow at 40% of our sales growth rate. We are now seeing that our expenses this year will grow at 32% of our sales growth rate. And what that means, year to date, our expenses have grown at 37.5 percent of our sales growth rate. So in the Q4, you should expect a lot of leverage on the SG and A line, principally because we have year over year expense items that we will not repeat in the Q4 of this year. Last year, we had performance of bonus, we had some store cleanup costs.
Those items will not repeat in the Q4 of this year, so expect good flow through. Longer term, as we've talked about, and we talked about this at the beginning of the year, because of items like rising people costs, and we're not alone, All companies are faced with rising people costs. Over the longer term, we would expect our expenses to grow at 50% And we're not providing guidance for 2017 today, but you would expect next year for us to come back and tell you it should be more in the 50%
Excellent. Thank you so much. Yes.
And we'll now hear from Seth Sigman with Credit Suisse.
Thanks and good morning. I just wanted to follow-up on the question about the cycle and the outlook for demand in the category. Can you give us a sense of what you're Seeing in terms of bigger ticket discretionary projects, are you seeing any sort of change in the types of projects consumers or pros are focused on? Is there anything that would indicate that we're maybe heading into a different part of the cycle?
When you look at the larger ticket Sales, it's coming, we believe, from multiple areas. It's coming from the strength in the Pro business. It's coming from our services business. It's coming from things like The appliance sales growth, so it's a broad aspect of drivers behind the ticket. And when you look at the Q3, actually, our transactions over $900 was the largest quarter growth of the year.
I think it's important to just step back and look at where we are in terms of the cycle and focus on home price appreciation because that's a big driver of our business. Since 2011, homeowners have seen a 95% increase in their home equity. That's come about because of rising prices as well as If you have a mortgage, you've been making mortgage payments since 2011. So homeowners really do view their home as an investment and not an expense. So the question is, okay, great.
Well, what does it mean for 2017 and beyond? While we see home prices have recovered in certain parts of the country,
there are other parts of the country where we are
still double digit down from To the country where we are still double digit down from peak, those areas include Chicago and Atlanta. So in terms of where we are for the You can't look at the averages because the averages will kill you. You have to look at the markets. And when you look at the market, we see real opportunity for continued improvement. There's a really interesting statistic that comes out of the Harvard Joint Center For Housing Studies and they call it the leading indicator of remodeling activity.
And this leading indicator of remodeling activity suggests continued growth throughout the 4th quarter throughout 2017. They don't produce the report past 2017, but their work suggests we will continue to grow. Okay.
Thanks for that. And then maybe a good follow-up here would be, you guys have rolled out a couple of key offerings to better serve the pro, including credit and advanced delivery options. I know it's very early, but I mean do you think that's playing a role in driving big ticket and the strength we saw this quarter? And do you think these options are driving in maybe a different customer or
I mean, as you said, we're still in the process of rolling out. It's early days. We have not Completed the rollout of BODFIS, our buy online, deliver from store, yet we're now up to about 1600 stores where we've launched the program. As I mentioned in my comments, we've seen double digit growth in deliveries. So certainly, we think that that is beginning to have a positive impact and making it easier for Our pro customers as well as our DIY customers to engage and shop with The Home Depot.
On the credit side, it's important to note that we have a little over 900 1,000 Pros that hold a private label credit card. We've converted over 20% of Those pros onto our new value prop. And for those who have converted, 64% of those are activating the new value prop. So we see growth in those accounts. And as we continue to convert and add new PROs into the program, we expect this to be a top line benefit.
Today, it's growing. It's not materially impacting the top line, but it's growing and we expect that to continue to grow over time.
That's great color. Thanks very much.
Yes. Thank you. Our next question will come from Christopher Horvers with JPMorgan.
Thanks. Good morning, everybody. Good morning. So I wanted to follow-up on the hurricane. The $100,000,000 of sales related to storms, is that hurricane and flooding combined?
And Just related to the hurricane, can you talk about how much the hurricane lifted the month of October in the U. S?
The number is both in total. Candidly, the flooding has been an impact throughout the entire quarter Yes. And a larger driver.
It was the biggest part of that $100,000,000 Interesting.
So the hurricane lift to October actually sounds like It was certainly if you're talking about 50 basis points for the quarter and most of that being related to flooding, then maybe 50, seventy basis points of lift to the month of October simply from the hurricane?
Not that much. No. Just the timing of the hurricane And where it hit, not that much. We saw significant sales coming out of the funding. In fact, I think you know, we had to shut down a store.
We lost the store. Part of those storm related expenses I called out on the SG and A line is because we had to basically liquidate the inventory, clean up the store and get it back open, which we did do, which is very
Yes, the flooding happened at the end of Q2. So the flooding impact was the entire quarter It was a much bigger impact. Obviously, the hurricane was in October.
Understood. And then one of the Questions that we're getting is how you're thinking about or what's implied by the 4th in the 4th quarter related to annual guidance. I think some of the more skeptical investors out there are saying, hey, look, Home Depot is sort of implying EPS and comps Below where the street is sitting for the Q4, so can you talk about how you thought about approaching the guidance on the year and then how you thought about addressing those questions to investors?
I think the easiest way to think about this This is on a 2 year stack basis. So the implied comp for the Q4 is a little over 3%. If you look at the Your stack for the first half of twenty sixteen, the 2 year stack comp is 10.6%. If you look at the 2 year stack comp for Q3, it's 10.6%. If you look then at the forecasted 2 year stack comp For Q4, it's over 10%.
So skepticism abound, but we feel very comfortable with the guidance that we give based on this 2 year stack. Perfect. Thank you very much.
Thank you. Our next question comes from Scott Mushkin with Wolfe Research.
Thanks guys. Sorry about that. Thanks for taking my questions. So I just wanted to poke a little bit more about thinking about the environment going forward. Obviously, we had a big election and the market's taken off.
But as we think about your business, obviously, Pro is growing pretty fast, but we have SG and A may be growing about 50% of sales, I think is what's been said. So as we kind of think of the construct of 'seventeen and beyond, and knowing that there's a lot of dry powder in the housing market, how do you guys think about your growth rate As we move out of the Q4, which has got a lot of noise and go into 2017 2018, do you
think we're at the end
of the cycle or could this cycle be a lot different?
I mean, first comment I'd make, obviously, we're not prepared to talk about 2017. We'll do that on our next call. But What I would say is, if you look at the drivers of growth, we don't see significant change in the drivers of growth. We've had foundational GDP growth. We've had in housing, home value appreciation, Housing turnover, new household formation and then layer on top of that, 65% of the housing stock in the U.
S. Is now In excess of 30 years old. All of those are drivers of business for us. There's nothing that would indicate That we see that those would change. And as Carol said, there's varying degrees of recovery amongst Different parts of the country.
So we don't see anything on the horizon at this stage that would say anything should change in terms of the growth
And if you recall the investor conference we had in December of last year, we set forth a sales target of $101,000,000,000 An operating margin target of 14.5 percent by 2018. As we sit here today, nothing has taken us off of that target.
I guess I was even thinking the more bullish side. I mean, could we the recovery, we've called it a zombie economy, gross session, we've had a lot of different words we've used for it. Is it conceivable, as you look at your business over the last 3 or 4 years that it's been obviously very good, but a better environment, a better macro environment could drive growth Higher? And have you guys thought about that?
I mean, that's I mean, it's possible, but we're focused On the numbers that Carol just shared that we laid out in our investor conference, that's roughly $12 plus 1,000,000,000 worth of growth We're now in 2018 from where we started this year and that's the equivalent of opening 357 new Home Depot stores, which we won't do. So that's no small hill and we're focused on achieving those numbers.
The cool thing is, Scott, we've got a supply chain, We've got a staffing model we can adopt or change to adjust to whatever demand is coming our way. And then just
one thank you
for that. And just one clarification, was the pro growth sequentially, is it sequentially speeding up? And then I'll yield. Thank you.
The progress was higher than the DIY growth in the 3rd quarter, but the sequential comment had to do with transactions, not customer
And we'll go to Simone Goodman with Morgan Stanley.
Thanks. Good morning. Following up on Some commentary, Craig, you were making about big ticket. So we know it was very strong and I think you called out appliances, flooring and roofing And that you always try to gauge the balance of it. I guess for those categories to have been strong in Q3, how should we gauge the sustainability of those?
I mean appliances Seems to be in the share gaining category. It's been good for a while. It's probably a big 4th quarter category. Is flooring and roofing more weather dependent Or is that more seasonal or is it lasting?
Well, roofing obviously can be seasonal depending on what If you get ice and snow, you're not really repairing. You might repair, but you won't replace a roof. Flooring is less seasonal overall.
Okay. And then, as a follow-up, I guess, To thinking about, I think Carol, you talked about looking at individual markets that there's still some room to go. Can you distill a little further, you gave us geographic Can you talk about any performance? I don't know if it's oil markets, rural markets, any disparities on a regional level sort of beneath the geographic
Well, in certain geographies like Texas, where you may say how The sales performing there, we see double digit comps in parts of Texas. So Texas is doing very well. I will tell you our stores in North Dakota Our negative talking, 2 stores in North Dakota. So that's not a surprise to us. It doesn't matter to the overall company, but that's not a surprise.
But on balance, as Greg pointed out, we've got good growth across the country with opportunities for more growth.
And the way you look at like pent up demand, you've talked you've shown us categories that have not reached their full potential. If you look at your markets That way, can you share any color about the number of our markets where we don't think either the housing market or our business has gotten back to, Let's say some normalized demand level or has potential to keep going?
Yes, we do look at it that way. And as we look peak to trough,
we've got
some markets that have not fully recovered.
Okay. Thanks.
Thank you. We'll now hear from Matt Fassler with Goldman Sachs.
Thanks a
lot and good morning, Kiiv. First question should be a fairly simple one. You gave us the comp for the big ticket bucket. Can you give us the small ticket and then we can
The under 50%, Matt, was a 1.6% comp.
Got it. Understood. And then secondly, you talked about share gains. You spoke about particularly categories like appliances, which are more DIY focused, can you give us a sense of the pace of share gains that you're seeing in pro and perhaps on the categories that might be standing out from that And your sense, I guess, as part of that as to how the pro market looks today from a growth perspective relative to DIY?
I would say that the Pro is very strong. One thing we saw this quarter is we've always talked about the high spend Pro and the low spend Pro. The low spend pro comp was on par with the high spend pro. So that's nice to see And as we look across departments, virtually every department had higher pro spend comp Then consumer. So the pro is strong across the business.
We continue to be extremely pleased with Our lumber and building material business, our tool business in particular, just continues to accelerate And we're taking meaningful share in the Tools business.
And presumably, we can tie to some degree that migration to Pro with the overall
We'll continue on to Dan Bender with Jefferies.
Thanks. A few questions. First on August, it stood out as sort of a Softer month, was that was there anything in particular that you would highlight there?
It was extremely warm month.
Okay. And then in the appliance business, it looked like the industry as well as you were a little bit more aggressive year over year. I suspect it may be in part to what you highlighted earlier just in terms of wanting to take share. But I was curious in what your feelings were about the health of the appliance industry Given what we've heard from vendors and what you're seeing in your own business, is it taking higher promotions to drive that comp?
Our promotional cadence is almost identical to last year and we see the Strength in our portfolio across all of our brands and very, very strong across the board.
And then lastly on holiday, the holiday business, every year that business seems to get bigger. And I was just curious how you've ordered for this year, is it up are orders up double digit? What are you expecting in terms of its contribution to the Q4?
Well, it's a big business and a growing business. It's still for the quarter, not a determinative business for us. But yes, We bought into that. That's part of our growth in inventory, and we're expecting another great holiday season. I'd say also on the back of our Halloween and Harvest, we bought into that as well this past year.
We're extremely pleased with the performance of that Deco Holiday segment and looking forward to an equally strong Christmas period as well.
Great. Thanks.
And Mike Baker with Deutsche Bank has our next question.
Thanks. So I just wanted to follow-up on the Pro and can you estimate for us
What do you
think your share of the pro business is compared to your share of DIY? And eventually, what do you think you could Gain in terms of share for the pro business?
So share around the pro is a little bit elusive. But Again, we try to triangulate on the number. I think what we've looked at is we're playing now in a $550,000,000,000 market with the addition of MRO for hospitality, institutional and multifamily. We think total share For The Home Depot, it plays somewhere in the 15% range, inclusive of all of Pro and DIY and services. And we believe that our DIY share is sitting somewhere in the neighborhood of 27% to 28%.
Okay. And so we'd back into pro being about 10% given the penetration of your business out
of our 10% or 12%, give or take, yes.
Okay. Thank you. And then, a couple of other follow ups. Promotional, Cadence, you said you were relatively similar, but what have you seen from any of your competitors and particularly on appliances? One of the big vendors had pretty strong appliance units, but very low dollars because of mix and pricing.
So Wondering if you're seeing any of your competitors be irrational because that's something that I think has impacted you guys in the past when some competitors got
a little irrational with appliances. Well, I would say appliance is included, but our entire Q4 cadence is Identical. I can't think of anything that were meaningfully different from Q4 of last year. I would say broadly across the business in portfolio and categories, we are focused on offering an everyday low price to
Right. So that's your offering. You're not seeing anything irrational from competitors, I
guess, is the question.
No, I mean, yes, look, time to time folks run promotions that try to drive their business. It's just Sure of the business these days. And we're going to we see that with the competition, but we're going to Work hard to try to remain focused on our everyday value for our customer.
Okay, great. Thanks for the color. Yes.
Thank you. We'll continue on to Dennis McGill with Zelman and Associates.
Hi, good morning. Thank you. Just Carol, one question on the inventory side. I think obviously last quarter you mentioned some error in the algorithm and just curious if you could update us there as far as where you guys are on the in stock. And then more broadly, just how you're thinking about inventory management now and in the future?
You've heard a lot of suppliers talk about inventory adjustments to big customers. And Curious if you feel that to be somewhat tied to the just the end market of point of sale or if that's more strategy on the distribution side?
Well, I'll talk about some of the inventory findings. First, our in stock rates are a tick higher than they were year on year. That's exactly where we want We bought in for the season, so our inventory is healthy. We are ready for the season. The quality of inventory has never It's been better.
If I look at clearance and active, evolocity, we're at the lowest level in the 21 years that I've been here. So never better in terms of quality. And in terms of
Yes. We're pleased with the results of the supply chain thing. Certainly pleased right now with the state of our inventory. As Carol outlined, A tick higher than last year, well prepared for Q4, and we've increased our JLQs for our pro customers a bit. In terms of sync, we continue to roll that out.
The way to think about that, our RDC network handles about half of our cost of goods sold. We're live in 2 thirds of our RDCs at this point with about 2 thirds of the COGS, the cost of goods sold dollar volume through there. We will be rolling to the North RDCs here as we go through the next several months, and that will complete the rollout in terms of the RDCs, and then we'll
I think the most important thing as it relates to inventory, obviously, we look
And then second question, just as it relates to both Canada and Mexico, I guess, kind of different impacts Going on, but hoping you can maybe speak to the fundamental backdrop in Canada with housing market looking a little bit weaker there, just what you're And as far as your performance, whether that's share gain or maybe we shouldn't be worried about some of the housing metrics. And then in Mexico, under the new administration, any thoughts as how It could impact your business with policy or immigration reform, etcetera.
Well, let me start with Mexico. I mean, obviously, there have been Changes in Mexico over the years. We've been able to drive an unbelievable performance in Mexico Through all those changes and we continue to see us doing that, we're very pleased with our business in Mexico. As it relates to Canada, clearly, what you've seen in Canada or what we've experienced is in The province of Alberta, into Saskatchewan, we're more dependent upon energy. Clearly, we've seen pressure there that we haven't seen in the balance of the country.
But the team has worked Hard to offset that pressure and grow the business overall. And we're very pleased with our business And the team has done an amazing job to offset that pressure in the West.
Thank you, guys. Good luck.
Thank you.
Brian Nagel with Oppenheimer, please go ahead.
Hi, good morning. Thanks for taking my questions.
Good morning.
First question, and this I know this is really big picture and early, but With the change in administration here in the United States, any initial thoughts as to how you're thinking at Home Depot, how the shifting political landscape
I mean, our thoughts are our job is to stay focused on our customer To make sure that we're driving the most convenient interconnected experience leveraging all the asset base that we have And that we're driving value through our for our customers through great values and through great innovation. That is our sole focus. It's what we're all about. It's what we need to stay in tune with, So that we stay relevant to our customers.
Okay. I appreciate that. And then secondly, on the I know there's been other questions on appliances as well, but my question here is, it seems as though just watching a wide number of large number of retailers that More and more chains of various sizes are pushing into this business. So with that, I guess I'm asking, are you seeing Increased competition from other retailers pushing to the business. And if so, what form is that taking?
And if you had to change or you consider changing How you go to market and appliances as a result of that?
I mean, just yes, there are obviously more folks Jumping into this business. But again, as Ted described, we have a very strong appliance business. We're gaining Share in the category, we like our model.
Yes, we've not seen an impact from new entrants And we don't envision any change to our go to market strategy on appliances.
Thank
you. Scott Ciccarelli with RBC Capital Markets. Please go ahead.
Good morning, guys. Carol, I want to go back to one of your earlier comments regarding market by market differences. Yes, we know that some markets haven't necessarily recovered from a home price But we actually have seen pretty rapid home price appreciation in other markets. And at least in pockets, we're starting to hear about some pricing pressure in some of those. So I guess the question is, are there some high, let's call it home appreciation markets where you're starting to see any
Yes. So I actually looked at that this morning. I went to the San Francisco Bay Area and I went to Seattle Because those are two markets where you've seen real home price appreciation. And I'd like to see, are we seeing a slowdown in big ticket or anything that would cause us to be concerned? And we don't see anything at this point.
Got you. Okay. And then just quickly shifting to gross margin. I know you previously talked about gross margin expansion in the back half of this year. Maybe I just had the cadence a bit wrong, but I guess I would have Did some modest expansion in 3Q.
Was there anything else that may have impacted the gross margin That you didn't already cite and has your outlook for 4Q changed at all?
No. We were very pleased with our gross margin performance in the 3rd We expanded by 6 basis points and based on the guidance I've given you, you should expect similar expansion in the 4th quarter.
Roger that. All right. Thanks, guys.
Seth Basham with Wedbush Securities. Please go ahead.
Thanks a lot and good morning. My question is around trade up and trade down. Have you guys seen any trends in consumers trading up to more expensive products within a line or trading down for that matter?
That's something we watch and have We've given color on previously and we see a similar trend where our comps are strong across The value line with higher comps in the higher price point goods. And we think that It's a lot driven by innovation and just the fabulous product that we're bringing to the market. Yes.
If you think about the 2 Products and power tools that Ted called out in his comments, those are unbelievable innovations That clearly helped drive ticket within the category and expansion of benefits for the customer.
Got it. And in terms of big projects that consumers are doing, are we seeing bigger tickets associated with those projects as they
You can look at our services business and our services business up year on year. We exited a few businesses at At the end of last year, if you ignore the businesses that you exited, our services business, which has an average ticket north of $1,000 grew faster than the company average in the 3rd quarter.
Great. Thank you very much.
Our next question comes from Greg Melich with Evercore ISI.
Great. I have few questions. I think one is just a follow-up Carol on Interline and that last comment. So If we look at Interline, could you give us the impact on SG and A in the quarter and also just how that business is going? Presumably, it's also growing faster than the company average?
So, Interline contributed $300,000,000 of growth year on year. The gross margin obviously was impacted the gross margin. And in terms of EPS, we generated a couple of pennies of EPS off of the line in the quarter.
And What did it do into SG and A?
It was pressure. It was in the overall guidance that we gave.
Okay. So we'll back into that. And the EPS Slightly accretive. Yes, about
$0.02 Thanks. $0.02
And then, my real question sort of ties back to SG and A. I think you mentioned that Given rising wage pressures and other costs that we should go forward thinking about 50% growth of sales Into 2017, perhaps beyond. How should we think of that? Is it simply if sales are growing 5% that we should assume SG and A dollars grow 2.5 or is there like a baseline that it grows and then it's 50% of a comp above that? Am I thinking about it too much?
You're thinking about it too much because our largest expenses payroll and we have an activity based model. And So we have so much opportunity to adjust the payroll staffing in our side of our stores. So just use 50%. Will it be perfect? No, but it's good enough for modeling purposes.
Okay. And so that's more of just letting us know that the Q4 where SG and A really isn't going to grow.
Right. That's
a comparison issue. We shouldn't use that as a new trend.
Exactly.
Got it. And then last if I can sneak 1 in. The pro side of the business, if we were to disaggregate it and think about I think in the beginning, Craig, you mentioned a few different things. The new credit offer was last, but delivery was focused. Could you give us any highlights there like Carol you did on the credit as to how the delivery take up is doing and how you see the customer changing as they do that?
Again, we're now rolled out with a new delivery program in about 1600 stores. We think roughly 50% of that is incremental sales growth. But clearly, some customers are taking up on the offer Yes, that might have picked it up before as well. We anticipated that that would happen.
Great. And how many of your PROs do you think have used it?
That I don't know.
Okay. Thanks. Good luck.
Thank you.
We have time for one more question, Catherine.
Yes, ma'am. We'll go to Peter Keith with Piper Jaffray.
Hey, thanks everyone and great quarter.
Thank you.
I was curious on the recent step up in mortgage rates the last couple of days, if you have any thought on how that may or May not impact your business and maybe even make some comparisons back to 2013 when we saw another sharp rate increase.
Yes. So we look at the affordability index, which is over 150%. That's good news. And then we went back and looked at, okay, Historical percentages of household income used for mortgage payments. If you look at the years 1995 through 2000, 22% of homeowners' income was used for their mortgage payment.
It's down now to about 14%. Interest rates could go up to 7% and no one is suggesting that will happen. But interest rates could go up to 7% and we would be back So we've got a long way to go before there's any impact, we think, to our business from rising interest rate.
Okay, that's interesting. Thank you. And maybe last for me, it's interesting that mix was a gross margin positive. I guess We're not used to seeing that in your business. Could you talk about what happened there?
And is that something that we might see going forward?
Well, we had higher penetration of certain categories that had higher margins, not because our retails went up, but because we took cost out. I think we've talked to you in the past that we've stood up our cost out team It works with our merchants. We really do try to drive productivity in our cost of goods sold. So it was that dynamic of a higher penetration in categories with cost out that
Well, thank you everyone today for joining us. We look forward to talking with you on February for our 4th quarter earnings call. Talk to you then.
Thank you. Once again, ladies and gentlemen, that does conclude today's conference call. Thank you all again for your participation.