Good day, and welcome to The Home Depot Q1 2016 earnings call. Today's conference is being recorded. If you would like to ask a question during today's call, please press the star key, followed by the digit 1 on your touch-tone phone. At this time, I would like to turn the conference over to Ms. Diane Dayhoff, Vice President, Investor Relations. Please go ahead.
Thank you, 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 Tomé, Chief Financial Officer and Executive Vice President, Corporate Services. Following our prepared remarks, the call will be open for analysts' 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 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 may also include certain non-GAAP measurements. Reconciliation of these measurements is provided on our website. Now, let me turn the call over to Craig.
Thank you, Diane, and good morning, everyone. Sales for the first quarter were $22.8 billion, up 9% from last year. Comp sales were up 6.5% from last year, and our U.S. stores had a positive comp of 7.4%. Diluted earnings per share were $1.44 in the first quarter. We were pleased with the start of the year. In the U.S., all three of our divisions posted positive comps in the first quarter, led by our Southern division. All 19 U.S. regions and top 40 markets saw single to low double-digit comps in the quarter. Internationally, our Mexican and Canadian businesses had another quarter of solid performance. Mexico reported positive double-digit comps in local currency, making it the 50th consecutive quarter of positive comp growth. Our Canadian business also posted mid-single digit comps in local currency for a total of 18 consecutive quarters of positive comp growth.
While weather had somewhat of a positive impact on our business and certainly drove variability in demand, the first quarter was not an early spring story. It was an execution in the core of the store story. We continue to see broad-based growth across our store as both ticket and transactions grew in the quarter. All of our merchandising departments posted positive comps, and we saw a healthy balance of growth among both our pro and DIY categories, with pro outpacing our DIY business in the U.S. As Ted will detail, our customers continue to respond positively to our deep assortment of trusted brands, as we are the product authority for both our pro and DIY customers. The Interline integration is progressing nicely.
We continue to move forward on a number of exciting sales-driving initiatives. We have outlined a path to truly realize the value of the Interline acquisition and the total pro opportunity over the next 18 to 24 months. We also continue to believe that blending the physical and digital channels into a seamless customer experience, which we call interconnected retail, provides a unique opportunity for us to expose the power of The Home Depot. This has been and will continue to be one of the central tenets of our company's strategy. We will remain committed to the investments in our interconnected capabilities. For the quarter, online traffic growth was double digits. Our online sales grew 21.5%. Investing in interconnected capabilities goes beyond our dot-com business, as we are also continuing to further invest to more effectively meet customers' demands for increased fulfillment options.
The rollout of COM, our new customer order management system, is on track to be fully deployed in our U.S. stores before year-end. Following behind the COM rollout is the implementation of BODFS, or buy online, deliver from store. In certain markets where BODFS has been introduced, the demand has been much stronger than we anticipated. This is a good problem to have. It is challenging delivery capacity, which we're working to address. We still expect BODFS to be fully rolled out by the end of the fiscal year. For the spring season, we have focused on further connecting our in-store and online experiences. We offered a more expanded assortment of spring seasonal products online. We also leveraged our digital assets to more effectively target customers with a personalized message pertaining to relevant products and special buys.
Additionally, we used digital media to highlight local in-store assortments to drive footsteps to our stores. To ensure our stores were properly staffed for the busy spring selling season, we hired over 80,000 associates to meet the demand of these increased footsteps. We continue to see great productivity from our supply chain. The flexibility and nimbleness of our supply chain was especially evident, excuse me, in the quarter as we navigated spiky demand without sacrificing in-stock levels. We continue to see dividends from investments made in our supply chain, in our in-stocks, inventory productivity, logistics costs, and service to our stores and customers. Our BOSS via RDC capability, which enables us to fulfill buy online, ship to store orders through our RDC network, leverages both our inventory and our fulfillment channels.
The cost savings of this initiative have been above our expectations, and both our ship times and customer satisfaction scores continue to improve. We have made great strides with our supply chain over the past several years, and we continue to optimize our network with initiatives like Supply Chain Sync. While Sync is in its early days of a multi-year rollout, we are pleased with our initial results. Though it is early in the year, our view of the macro environment remains consistent. We believe that housing data indicates continued tailwinds for our business. As Carol will detail, because of our outperformance in the first quarter versus our plan, we are increasing our sales and earnings per share guidance for the year. We now expect fiscal 2016 sales growth of approximately 6.3% and diluted earnings per share of $6.27.
Today, we have over 400,000 associates. I want to close by thanking them for their hard work and dedication to our customers. In addition to serving our customers in our stores, through Team Depot, our associate-led volunteer force, our associates donated their personal time to complete more than 1,000 projects in service to our local communities over the past 12 months. With that, let me turn the call over to Ted.
Thanks, Craig, and good morning, everyone. We had a strong first quarter driven by continued strength across the store, particularly with our pro customer. An unseasonably warm February was followed by a more normal but wetter March and April. While weather positively impacted our sales performance in the first quarter, spring has not yet arrived in many of our markets. In the first quarter, total comp transactions grew by 4%, while comp average ticket increased 2.5%. Our average ticket increase was somewhat impacted by commodity price deflation, mainly from lumber and copper. The total impact to ticket growth from commodity price deflation was approximately 15 basis points. Transactions for tickets under $50, representing approximately 20% of our U.S. sales, were up 2.7% in the first quarter. Transactions for tickets over $900, also representing approximately 20% of our U.S. sales, were up 9.5% in the first quarter.
The drivers behind the increase in big-ticket purchases were appliances, roofing, sheds, and windows, all of which had double-digit comps. The departments that outperformed the company's average comp were appliances, tools, building materials, lumber, lighting, hardware, millwork, and decor. Electrical, paint, flooring, indoor garden, kitchen and bath, plumbing, and outdoor garden had positive comps but were below the company average. Pro heavy categories continue to show great strength as we saw double-digit comps in fencing, pressure-treated decking, boards, fasteners, doors, and conduit. In addition, the core of the store continued to perform well, and we saw strength in maintenance and repair categories across the country. Tool storage, commercial industrial lighting, portable power tool accessories, hand tools, and wiring devices had double-digit comps in the quarter. Decor categories, including garage organization, laminate flooring, landscape lighting, vinyl plank, and wood flooring, had comps above the company average.
Our store associates did a great job executing our eighth annual Spring Black Friday event and creating excitement in our stores. In particular, special buys around appliances, outdoor power, and hardscapes were well-received by our customers, resulting in double-digit comps in those categories. As Craig mentioned, The Home Depot is the product authority for both our professional and DIY customers. We have the deepest assortment of the leading programs in the marketplace. Many of these brands are billion-dollar categories for us. Our pros recognize our brand advantage. Pro sales outpaced the company average in the first quarter. We continue to use detailed analytics to help us balance the art and science of retail. We are also optimizing our ad effectiveness with targeted digital marketing.
We remain focused on leveraging customer data to build the right message at the right time for the right customer. As we have made strategic moves away from print and mass marketing to more targeted digital marketing, we have seen great results. Since 2010, our return on advertising spend has nearly doubled. Now let me turn our attention to the second quarter. We continue to be the leader in the marketplace for innovation and value that save our customers both time and money. To maintain the momentum in our double-digit comp in pneumatics category, we are introducing the new Milwaukee pneumatic framing nailer, which is the latest addition to the M18 FUEL lineup. This high-powered nailer delivers fasteners much faster than competing battery-powered nailers, saving our pros time on the job site. New from DeWalt is the 20-volt MAX brushless finish nailer.
This compact and lightweight finish nailer has innovative features, including depth adjustments and multifunctional LED lights to illuminate workpieces. These are great examples of innovative and exclusive products from trusted, best-in-class pro brands. For our DIY customers, we are excited about the new exclusive launch of Pergo Outlast Plus laminate flooring. This easy-to-install laminate is water-resistant and uses SpillProtect 24 technology, a proprietary coating that prevents water from seeping into the floor. Outlast Plus flooring allows customers to install laminate flooring in high-traffic and water-prone areas such as kitchens, bathrooms, and mudrooms. In addition to all the great new products, we are excited about our upcoming events. Our Thrill of the Grill, Memorial Day, Father's Day, and Fourth of July events are right around the corner. We have an incredible lineup of great values and special buys to help our customers enjoy this outdoor season to the fullest.
With that, I'd like to turn the call over to Carol.
Thank you, Ted, and good morning, everyone. In the first quarter, sales were $22.8 billion, a 9% increase from last year, driven primarily by positive comp sales, as well as the impact of Interline Brands. Versus last year, a stronger U.S. dollar negatively impacted total sales growth by approximately $196 million, or 0.9%. Our total company comps or same-store sales were positive 6.5% for the quarter, with positive comps of 10.2% in February, 6.7% in March, and 4.3% in April. Comps for U.S. stores were positive 7.4% for the quarter, with positive comps of 11.8% in February, 7.7% in March, and 4.6% in April. We estimate weather-driven demand positively impacted our U.S. sales growth by approximately $250 million. The variability in our comp sales performance during the quarter was due in large part to weather and to the timing of Easter this year versus last year.
Our total company gross margin was 34.2% for the quarter, a decrease of 13 basis points from last year. The change in our gross margin is explained largely by the following factors. First, as expected, we had 25 basis points of gross margin contraction due to the impact of Interline. Second, we had 12 basis points of gross margin expansion in our supply chain, driven by lower fuel costs and increased productivity. 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 first quarter, operating expense as a percent of sales decreased by 122 basis points to 20.7%. Our expense leverage reflects the impact of positive comp sales growth along with great expense control. For the year, we now expect our expenses to grow at approximately 35% of our sales growth rate.
Our operating margin for the quarter was 13.5%, an increase of 109 basis points from last year. Interest and other expense for the first quarter was $237 million, up $44 million from last year, due primarily to higher long-term debt balances. In the first quarter, our effective tax rate was 36.5%, compared to 34.3% in the first quarter of fiscal 2015. Recall that the effective tax rate in the first quarter of last year was favorably impacted by the settlement of a tax audit. For fiscal 2016, we expect our income tax provision rate to be approximately 37%. Our diluted earnings per share for the first quarter were $1.44, an increase of 19% from last year. Now, moving to some additional highlights.
During the first quarter, we opened one new store in Mexico, and we ended the quarter with a store count of 2,275 and selling square footage of 237 million. Total sales per square foot for the first quarter were $377, up 6.5% from last year. Now turning to the balance sheet. At the end of the quarter, inventory was $13.2 billion, up $913 million from last year, reflecting both the impact of Interline and the seasonality of our business. Inventory turns were 4.8 times, up one-tenth from the first quarter of last year. In the first quarter, we repurchased $1.25 billion, or approximately 9.45 million shares of outstanding stock. For the remainder of the fiscal year, we intend to repurchase approximately $3.75 billion of outstanding stock using excess cash, bringing total anticipated 2016 share repurchases to $5 billion.
Computed on the average of beginning and ending long-term debt and equity for the trailing four quarters, return on invested capital was 29.2%, 300 basis points higher than the first quarter of fiscal 2015. Turning our attention to the full year. While U.S. GDP forecasts have pulled back slightly since we built our 2016 sales plan, we continue to see strength in the housing market, with home price appreciation, housing turnover, and household formation trending where we thought they would. Sales in the first quarter exceeded our expectations, not just because of favorable weather, but because of higher demand for many of our core product categories. While we ordinarily don't raise our sales growth guidance so early in the year, we're going to roll forward some of our first quarter outperformance, giving the underlying strength of the business.
Further, the U.S. dollar has weakened such that the current spot rate of exchange is now in line with the FX rates we used to build our plan. Because of this, we are going to a single point estimate instead of a range for our 2016 guidance. From the high end of the guidance range we provided in February, today we are raising our sales and earnings per share growth guidance. We now expect our 2016 sales to grow by approximately 6.3%, with comps of approximately 4.9%. For earnings per share, remember that we guide off of GAAP. We now expect fiscal 2016 diluted earnings per share to grow approximately 14.8% to $6.27. We thank you for your participation in today's call. Derek, we are now ready for questions.
Absolutely. If you would like to ask a question, please signal by pressing *1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press *1 to ask a question. Our first question comes from Seth Sigman with Credit Suisse. Please go ahead.
All right. Thanks. Good morning. Nice quarter, guys.
Morning. Thank you.
In aggregate, it seems like weather did help the quarter. You talked about $250 million or so. Can you elaborate on where you saw that benefit and if that means you actually pulled some sales forward, or do you think that's just incremental?
Obviously, with a warm February, we had a great start to the year, and we saw outdoor project business in the north very strong. The $250 million that we've estimated, it's kind of hard to understand exactly how much of that is pulled forward, but that's what we're estimating is the demand that we saw from the weather benefit. We think there was $40 million or so of seasonal product pulled forward.
The rest of the outperformance was in building material categories like concrete and pressure-treated lumber, so on and so forth. That really is weather-driven demand.
Just to follow up there, does that $250 million consider that spring weather hasn't arrived in some markets as you alluded to? Would that be factored into that number?
That's right. We think we pulled forward true spring-related categories, $40 million-$50 million. As you know, I don't know where you're sitting, Seth, but as you know, in certain parts of the country, spring has not yet arrived. We're still anticipating a bang-up spring quarter.
Yep. Don't we know it. All right. Just one follow-up on the pro initiatives here, the extension of credit earlier in the quarter. Can you talk about how that's going and how incremental to the numbers this quarter that may have been?
Yes. We're very pleased with the new value proposition that we're offering on our private label card for our pros. You'll recall that we are now offering 60 days to pay, 365-day returns, and discounts at the fuel pump. What we're seeing with our pros is great receptivity. New accounts are ahead of our sales plan, which is great news. Seth, remember that we just rolled this out to all stores in January, there was no measurable impact to the top line because of this, but we anticipate that to come.
Great. Thanks very much.
Yep.
Our next question comes from Simeon Gutman with Morgan Stanley.
Thanks. Good morning. Just want to clarify something. When we use the word pull forward, if we take the $40 million out, that's seasonal, just thinking about the other part that quote unquote was pulled forward, maybe other projects getting done a little earlier. Do we know if that's typically a one to three-month pull forward? These are projects that presumably could get done in other parts of the year. Where I'm going is trying to think about how that could impact the second quarter versus others later in the year.
Well, here's how we've looked at this. We think there was $250 million-ish of weather-driven demand. It's not all seasonal pull forward. This is just activity because of great weather earlier in the quarter. We're not rolling that forward because we anticipated that these were projects that would be completed later in the year and just got done earlier in the year. We're not rolling that forward. It will bleed into Q2, Q3, maybe even Q4.
Yeah. To your point, if somebody was doing a concrete project that maybe they had planned for the summer and they said, "Hey, look, the ground's not frozen in the north. I can do it now," and they do it's hard to tell which quarters it's come from, but it's certainly probably the next couple of quarters.
As we think about the shape of the year, and this might help modeling, we now think that the first quarter will be the highest comping quarter. As a result, the first half will be slightly higher than the back half of the year. If you look at the comps that we are projecting for Q2, Q3, and Q4, we expect them to be in the similar range, not a lot of difference in those comp numbers.
Okay, that's helpful. My follow-up on the online business, I think you mentioned growth of about 21.5%. Anything different about the pickup in store percentage that's changed? Your comment on the delivery strain, maybe from delivering from store. Is that because Home Depot is offering the customer the option of where they want the product from, or that's your systems that's choosing to deliver from store?
First of all, I'll comment on the percentage of pickup is around 40%, where the customer is choosing the option to pick up their items from homedepot.com in our stores. As it relates to the delivery, we had piloted the delivery program for a while. We saw mid-single digit growth in deliveries with the pilot. When we went into additional markets like Atlanta, for example, we saw a pretty substantial increase in the customer option to choose that delivery, and we're seeing double-digit growth in deliveries.
Okay, thanks.
Next, we'll hear from Michael Lasser with UBS.
Good morning. Thanks a lot for taking my question. Carol, as you mentioned, it's not typical for the company to raise its guidance after the first quarter, and you have seen strong first quarters in the past. What's different about what you're witnessing in the business right now to inspire so much confidence for you to move estimates higher?
It's really the strength across the store. As you know, when we build our sales plan, we use our directionally correct, but imperfect, sales forecasting model, which is an economic-driven model. We do not build market share gains into our forecast. As we look at the performance in the first quarter, clearly there was some share shift. Look at appliances. Ted called it out. Appliances contributed 50 basis points of our comp growth in the first quarter. We are confident with what we saw in the first quarter and what we're seeing early in May to roll forward the outperformance of the first quarter.
You mentioned GDP forecasts are a little lower. Housing's about where you thought it was. What's changed is you're gaining a little bit more market share than you originally thought?
We don't plan market share, as you know. We believe there were some share shifts, and that was confirmed by NAICS data that came out that showed that, from a census perspective anyway, we did grow share. The other thing that we must look at is housing and just some other things that are happening within the housing market that we haven't built into our plan but we find to be of interest. Here's a statistic. We've seen home equity values increase 94% since 2011. How is that possible? Because home prices are up 25% and people have been continuing to pay down their mortgages. There's a wealth effect that's occurring with homeowners.
This wealth effect, as we've talked at length, if you feel like your home is an investment and not an expense, you spend differently in your home, and you can see that in our big-ticket categories.
My follow-up question is on the expense outlook. You're now expecting expenses to grow at 35% of the rate of sale. Is that all due to what happened in the first quarter, or do you expect to see some expense good guys in the remainder of the year? Thank you so much.
Well, despite beating our sales plan considerably in the first quarter, our total expenses were actually $13 million under our plan. That was driven by lower utilities, as you would expect because of warmer weather in February. Also, we're not seeing the kind of pressure on medical as we had anticipated. Now for the full year, we anticipate that our expenses will be lower than our original plan, which is helping take our expense growth factor down from what we had said at 40% to now 35%.
Okay. Good luck with the rest of the spring.
Thank you.
Thank you.
Next we have Kate McShane with Citi.
Hi. Thanks for taking my questions. I wanted to follow up on the other question that was just asked, just given some of the earnings that we've seen so far for Q1, that the health of the U.S. consumer, I think, is being called into question somewhat. I wondered if you could, beyond, Carol, what you've already mentioned, just talk about the DIY business and if there's any read-through there to the overall take of the consumer, and just how much of the outperformance of pro versus DIY is driven versus maybe the housing statistics versus your initiatives.
Kate, I would say that when you look at the strength of the business, it really comes across the board. We're really pleased with the mix of both transactions and ticket growth that we had. That's something we look for in terms of balance in the business. We see the consumer continuing to engage in big-ticket sales with transactions above $900, growing at 9.5% in the quarter. While our pro business was strong, and we're pleased to see that, we were also very pleased to see the growth in our DIY business. The balance is what really is what we're striving to achieve, and we're seeing that balance across the store.
Again, I go back to the housing data. The housing data suggests that homeowners feel like they have more value than they did before. Look at negative equity. Homes with negative equity have dropped from 22% at the beginning of 2012 to now 8.5%.
Thank you. That's very helpful. Then my second follow-up question is slightly unrelated. I know you spent some time in the prepared comments talking about buy online, ship from store, which I think you're rolling out by the end of the year. Just wondering if we could have more detail in terms of how much of your merchandise that program will address. Is it going to be eligible for everything that's online and in the store? How will we expect that to work by the end of the year?
It pretty much is almost everything we sell, whether it's online or in store, will be eligible for delivery. We'll leverage the supply chain network that we've built out to do that in the most cost-effective way, using our RDCs as flow-through points for product that will come from our distribution points that a customer chooses to have delivered. Definitely a broad approach to the assortment that we carry.
Thank you.
Scott Mushkin with Wolfe Research, your line is open.
Thanks, guys. Thanks for taking my questions. I just wanted to go back to the buy online and deliver from store economics, just trying to understand it a little bit more. Our research suggests that particularly millennials really want to do that. They don't really necessarily want to pick up in store. I was just wondering, looking at the uptake is exceeding expectations, what are the margins attached to that business?
First of all, I would say that in our business, we have a lot of project business. We have a lot of things that are big and bulky. I think that's why, in many ways, we're seeing a significant portion of our customers choose to pick up their product in store and then potentially have it delivered from store. We also have pros who are interested in having the product delivered from store to their job sites. It saves them time. It saves their runners from having to come in to the stores overall. Candidly, we've been doing delivery from store for quite some time.
Yes, we have.
For years. That's just part of the overall operating cost of doing the business. We approach that on a day in, day out basis as part of operating the business, and our value proposition for the customer across product takes that into account.
refresh my memory, do you guys charge for that, or is that not charged for?
Yes, we do
when we deliver? Okay.
we charge for it, and there's options for tighter windows where there's a premium paid.
Okay, perfect.
I wanted to go into the credit changes extending from 30 to 60 days and just try to understand a little bit more the credit limits attached. I know you guys, I think, are using a bank to help you with that. What are your upper credit limits, and is there thought of expanding that out and maybe just a little tutorial on that? That would be great. That's my last question. Thanks.
Sure. Our private label credit card is underwritten by a third party. I'll give you averages, and then talk to you about outliers. For our commercial customers, these would be our pros. The average line of credit is $6,600, which seems to adequately meet their needs, but we do have some higher spend pros. The third-party underwriter will extend larger lines, and we have six-figure lines to many of our customers who ask for those lines. Furthermore, if there's a situation where the credit lines tighten up a bit, we have a second look program with another third-party provider that will take a second look at the request and up the line of credit. We have a number of tools in our toolkit to adequately provide the financing requirements of our pros.
The biggest tool is moving to 60 days because if you think about it, we're providing working capital support for them. They're going to get paid by their customers before they have to pay us back.
You said, I think you said there's some six figures out there. With the mix of the business, are you anticipating that $6,600 I think that you referenced going up meaningfully, and would you guys ever think of taking some of this on your own balance sheet or no?
We'll let the customer take us where they take us. We want to grow the pro, and if they need more credit, we're happy to support them in that effort. In terms of taking it onto our balance sheet, we love the arrangement that we have with our third-party underwriter today.
Perfect. Thanks, guys. Thanks for taking my questions.
Yeah.
Moving on, we'll next hear from Chris Horvers with JPMorgan.
Thanks. Good morning, everybody.
Morning.
Wanted to, just at the risk of being a dead horse, so to speak, follow up on California and oil markets. We've seen someone like Costco seeing some variability in California and they sell a lot of food, so it was a bit surprising to us. Are you seeing anything different in those markets that alerts you or causes any concern?
No. Overall, we're really not and the area that we watch most closely is Texas. We have 178 stores in Texas. Texas actually outperformed the company average in the quarter. I think all major markets in Texas performed well. Texas clearly has diversified their economy more so over the past few years, which I think is a benefit. Clearly in Western Canada, we saw some pressure
As you might imagine, not quite as diversified environment there. We haven't really seen any major shift.
No, actually in California, the Governor Brown just released some water restrictions.
Yeah, which is great.
It'll be good for our garden business. Our California business is doing quite well. We did have a pop-up store in North Dakota. We popped it up during the height of the fracking days. Chris, we're popping that store down.
It's a big pop-up.
Yeah. That's about the only impact, really.
Right.
Yeah.
Understood. Can you talk about any research that you've done around millennials and household formation? Are they coming to form households now? Do you think they'll act like Gen X did before them? How do you think it impacts the long-term outlook of the box and the online business?
We actually have done a fair amount of research here. It was part of our strategic planning last summer, where we had several groups of millennials actually work on what The Home Depot looks like eight to 10 years out as well. What our research tells us is that basically this is a delayed cycle, that the millennial generation has many of the same desires that generations prior to them have. We're seeing as household formation goes up, roughly a third or so of those formations are happening with millennials at the tail end of that age group. It appears there's about a six-year delayed cycle here. Our research indicates that in many ways, they'll act the same as previous generations.
Yeah. The average age of new home buyers last year was 33 years old.
Yeah.
That is the edge of the millennials. That is another proof point that at some point they want to own a home.
Yep. One last just clarification question. Was there any impact in the monthly because of the Easter shift?
Yeah. If we look at how we reported comps, and I am talking to the U.S. now, March was reported at 7.7. If you shift it for like-for-like for April, that comp would've been a 9.2. April was reported at 4.6. It would've been like-for-like 3.6.
Understood. Thanks very much.
Yep.
Yep.
Our next question comes from Matthew McClintock with Barclays.
Hi. Yes. Good morning, everyone.
Morning.
I was wondering if we could ask a question on appliances. Thinking about the longer-term opportunity within that category, particularly now that you're seeing other channels of retail that are maybe more challenged right now, the department stores, et cetera, looking at that as also a new growth opportunity. Can you maybe just update us on your thoughts and maybe how those thoughts have changed now that you're seeing more competition in that category?
Well, we haven't seen the impact of any increased competition. Our appliance business was extremely strong again in the first quarter. In fact, it accelerated as we exited the quarter. We've been leaning into that space, as you know, and we're going to expand the appliance square footage in another 100-odd stores again this year. We're very happy with the results. In fact, certain markets that some competitors entered the space, we saw significantly higher performance than the rest of the country.
Perfect. Thank you very much.
Next question in the queue, we have Brian Nagel with Oppenheimer.
Hi. Good morning.
Morning.
Congratulations on a nice quarter.
Thank you.
My first question, with market share, anything as you look at the data to suggest, it may be comment on market share one way or the other, and particularly with what seemed to be somewhat of a volatile weather through the period, did that impact market share trends at your chain within the channel through the quarter?
I don't think we really have any way of knowing if the weather really impacted share. We're really focused on making sure that we're driving everyday great value for our customers and trying to bring innovative products that solve problems for them. Ted, I don't know if you have any additional comments.
No. Again, where the weather has been normal or in fact good, our seasonal businesses, so the whole store has been performing, and then the things that tied more heavily to the consumer in outdoor garden, that has been extremely strong where we have good weather. Don't know yet if we would've taken any share there. Right now, April in the north and even now, a day like today with a lot of rain, again, we don't see great consumer outside sales, but again, you don't know the relative performance at this point.
Got it. That's helpful. Then the second question I have, and I guess bigger picture in nature, but one of the questions I get a lot from our clients is, here's The Home Depot has put up great numbers now for a while. How much longer does this persist? I know in analysis that you have talked about it at your analyst meetings and such, is just to look at the productivity of the store, particularly by category. I guess, maybe just a quick update there. As you look around the store and relative to historic peak levels, if you will, where are still the biggest opportunities in the categories to drive increased productivity from here?
I would say that as we look at the business, first of all, my starting comment would be, we're playing in a $550 billion market all in now with the addition of Interline and playing in the MRO space for multifamily hospitality and institutional.
We own less than 20% of that in total. We think there's lots of opportunity to grow. We have several initiatives underway, I have both Ann-Marie and Mark Holifield are here. I'll let them comment, but several initiatives underway to drive productivity as we move forward, and coordinated effort between our supply chain and our store operations team.
This is Mark Holifield. We're very pleased with the Supply Chain Sync initiative. We've got that rolled pretty much in the southern tier of RDCs with a good deal of our dollar flow on that. One of the things that's going along with sync is the floor load process, where we're loading product onto the floor, where previously it was loaded on pallets, and that's driving tremendous productivity, just filling trucks much more full as they depart for stores. Still rolling that out. Still lots of opportunity there.
Yeah, in conjunction with that, there's tremendous opportunity in the back end of the store. As Mark talked about Project Sync, we also focus on getting this product to the shelf. As we manage the flow of product in the stores, we then really engineer the back end to create a better streamlined process to get the product on the shelves much quicker as well. A ton of opportunity there. In addition, we have talked about buy online, deliver from the store. We've also talked about Buy Online, Ship to Store. All those are convenient experiences for the customer, and we want to make sure that we lean in and ensure that we organize our labor around where the customer is going and create an efficient and effective process for them.
If I could jump in, there's sales productivity opportunities, too. As Craig said, huge market to play in, lots of room for growth. If you think about it from peak to trough, we still haven't fully recovered some of our categories. When I look at productivity still to be recovered, special order kitchens, millwork, some of our building materials categories still have room to recover from the peak.
Yeah. The building material categories in lumber, millwork, those were still, as Carol said, off our 2006 peak as we exited last year. It was nice to see those were some of our strongest departments in the first quarter here in 2016. It's nice to see larger project business underway.
Well, thank you. Very helpful.
Our next question comes from Peter Benedict with Robert W. Baird.
Oh, hey, guys. Thanks for taking the question. In the past, you've spoken to, I think it's roughly 25% of your sales mix being in a bucket that you've considered at risk of online competition. Obviously, that's a big topic right now. Is that still the right way to think about it? Can you give us any color maybe on how the products in that bucket have performed relative to the rest of the box, or how you've been merchandising against that bucket?
Yeah, I would say in general, still a good way to think about it. If you think about those things that carry the highest level of risk would be those that are small package, reasonably high value, easy to ship product. You think about categories like power tools, faucets, and so on. As Ted called out, we had a tremendous quarter as it related to tool sales. Quite candidly, we're seeing both channels grow in these categories that represent that 25%. We're staying very focused on driving great value for our customer every day.
Okay, good. That's helpful. Carol, maybe just on leverage. Is there a scenario where you would be comfortable revisiting that 2x leverage guardrail? What would need to happen for you to even consider something like that?
Peter, as you know, our targeted adjusted debt to EBITDA ratio is 2. We're slightly under that. We're about 1.9 today. We like that 2 as a guardrail. It provides financial flexibility, but more importantly, just we can sleep at night because we don't have too much leverage as a company, we like it. It's not our goal to let that leverage ratio decline, and it will as we earn more. As you've seen us in the past, as the leverage point gets to a certain inflection point and if interest rates are attractive, so on and so forth, we will raise incremental debt and use that debt to support our share repurchase program.
Okay. Fair enough. Thanks so much.
Next, we'll hear from Dan Binder with Jefferies. Please go ahead.
Thank you. If we look at the comp store sales for the quarter, there was a little bit of deceleration, which I suspect was weather related. I was just curious if you could comment on whether May has picked back up or seeing trends similar to April.
Yes, as I said earlier, one reason that we're confident with our ability to lift the sales for the year is what we're seeing in May.
Okay. Good enough. Then on the pro business, I know you said it was above the company average, there's somewhat of an estimate in there, but just curious, is the gap between the DIY and the pro business widening, stable, or narrowing?
Not dramatically different. It was slightly stronger in the first quarter. I think we saw more outdoor project business, which can have a tendency to be pro related if you're doing things like concrete.
Then lastly, on the overtime proposal that's out there being reviewed, can you just comment on how The Home Depot would be able to digest it if it becomes law?
I mean, we look at all factors when we put together our plans. Clearly, we were aware that this was possible to come. That's factored into our guidance.
Great. Thank you.
Jaime Katz with Morningstar, your line is open.
Thanks. I'm curious about lending standards. You guys have mentioned them in the past, and I'm wondering if there have been any changes, particularly if you have them by any sort of demographic. There have been a few articles out recently saying that millennials have had a more difficult time accessing the credit markets.
You can look at it through two lenses. First is just call it consumer credit, which may come through a bank card or, in our case, through a private label card. We see consumer credit asks being approved 71% of the time. That's a pretty good approval rate. I will tell you, the FICO is pretty high. It's over 700. That's a pretty good approval rate. It also speaks to the type of customers who are shopping inside of our store. The approval rates for our Pro cards or Pro applicants is about the same. It gets approved about 70% of the time. You need to look at lending standards and for mortgages, lending standards are changing ever so slowly. It's like a glacier melting. You can appreciate why, because financial institutions have higher capital ratios.
It's very hard to make a buck in this low interest rate environment. You can understand why it's slow to move. We've factored that in as we think about where our business may go. If there were to be easing on underwriting standards for mortgages, that would be good news because the affordability index, if you can get a mortgage, the affordability index is something like 170. That's awesome. If you can get approved, you can afford it.
Can you guys offer any commentary on any lessons you may have learned so far from Interline Brands or shared best practices you've adopted into The Home Depot model?
I think, lessons learned would be that our anticipation that we have a customer who has common need across both businesses would be a clear learning. The desire for the customer, whether it's an Interline customer, to fill in and shop at The Home Depot and/or customers who are shopping in The Home Depot to have a desire to buy through Interline is there. We're pleased with the start. Bill, I don't know if you have any other comments to add.
Jaime, Bill Lennie. I think Craig's exactly right. We're encouraged by the customer feedback and the advantages they see when we combine Interline and Home Depot. The second thing that we're pleased with is the collaboration we're seeing within our outside sales organizations and our ability to join forces and sell across end markets.
Thank you.
Next we have Michael Baker with Deutsche Bank.
Thanks. Just one or two, maybe even three follow-ups. One, just to be clear on the guidance, are you raising the full year guidance because of currency being less burdensome and what you saw in the first quarter? Are you also changing and, I guess, raising the second, third, or fourth quarter guidance, or is all the increase just because of what we saw in the first quarter and currency?
Mike, the increase is solely related to the outperformance we saw in the U.S. The reason that we are no longer providing a range is that the exchange rates that we use for our plan are now about the same as the current spot rate. No need to provide a range. We're just rolling forward outperformance, except for weather-driven demand. We're rolling over the rest of the outperformance.
Okay, no real change in how you would have thought about the second, third, and fourth quarter.
That's right.
Okay. Thank you. Two others. One, Easter. If I understand it, so Easter hurt March, helped April. I guess that's because the store, people don't really shop on Easter, I would have thought that would have been outweighed by people shopping before Easter to do some outdoor projects. I guess that's not the case. Easter hurts March, and it helped April, the shift?
That's correct.
Did I understand that correctly?
Easter is not a big selling day for The Home Depot.
Right. Again, the sales around Easter don't offset that, I suppose?
No.
No, they don't.
You lose a weekend, effectively.
It's a weekend in spring.
Okay.
Again, it didn't impact the quarter.
Right. Understood. One last, this is maybe a bigger picture question, it sounds like you think some of the housing trends are favorable, and we agree with that. One thing I think you look at as an important metric, and we agree again, is home price appreciation. Home prices are now pretty close to where they were in 2006, if we think of that as the peak year. How do you think about that? Are we concerned that there'll be less home price appreciation and therefore less of a driver to your business?
I think the way we look at it the important factor is when home values are positive, it's a good thing for our business. Clearly, the customer needed to recover the value of their homes. We've seen that recovery obviously take place and improve for a large portion of customers. As long as home values stay positive, it's a good thing. I mean, for years and years, home values grew on average in the low single digit 1%, 2%, 3%.
In your view, just as we are now back towards peak, your view is that that home price appreciation can continue?
We factor that into our longer-term forecast. This year, we believe home prices will be up around 5%. Important to note that it's not fully recovered even with that 5%, it's certainly different in different parts of the country. We think 5% this year, we think next year maybe 3%, the year on after that, 2%. It continues, to Craig's point, because there's just ongoing home price appreciation.
Okay. Thank you. Great call. I really appreciate the time.
Yeah.
Thank you.
Derek, we have time for one more question.
Absolutely. Our last question for today comes from Dennis McGill with Zelman & Associates.
Hi, good morning. Thank you. Just a couple of quick ones. Carol, on the cash flow, can you just refresh how we should think about cash flow drop down for the year and working capital as you work through the year?
Yeah. We think we'll generate around $10 billion of cash from the business this year. That includes a slight improvement in working capital, principally in inventory turnover. We're planning to take our inventory turnover up by a tenth in 2016.
Okay. The share transactions that's greater than 900, I think you've talked about that as around 20% of late. Where did that peak out in the last cycle?
Where did it peak out, in 2006?
Yeah. Just as a sign of sort of big ticket share.
I don't know. We're going to have to go look at it. I'm not even sure we did that barbell analysis back in 2006.
No, I don't know that we did in 2006. I can tell you that for the last seven or eight, maybe seven years, it's been pretty comparable to that. I think the other factor to consider is when we look at 2006 and look at kind of peak performance, in our own minds, we're not sure what the peak really was because in 2006, we actually had negative transactions. We were firing customers. We assume we didn't actually peak in 2006 the way we should have.
Okay. That's fair. Thank you, guys.
Yep.
Yep.
Well, thank you for joining us on our call today. We look forward to discussing our second quarter earnings results in August.
That does conclude today's conference call. We appreciate your participation.