Good day, and welcome to The Home Depot Q1 2016 Earnings Call. Today's conference is being recorded. Stone 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. Earnings. 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 analysts' questions. Earnings.
Questions will be limited to analysts and investors. And as a reminder, we would appreciate it if the participants would limit themselves to Earnings. Now before I turn the call over to Craig, let me remind you that today's press release and the presentations made by 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, Earnings Call. Sales for the Q1 were $22,800,000,000 up 9% from last year. Comp earnings call. Sales were up 6.5 percent from last year, and our U. S.
Stores had a positive comp of 7.4%. Diluted per share were $1.44 in the 1st quarter. We were pleased with the start of the year. In the U. S, Earnings Call.
All three of our divisions posted positive comps in the Q1 led by our Southern division. And all nineteen Comps in local currency, making it the 50th consecutive quarter of positive comp growth. Our Canadian business Earnings Conference. Also posted mid single digit comps in local currency for a total of 18 consecutive quarters of positive comp growth. Well, weather had somewhat of a positive impact on our business and certainly drove variability in demand.
Store Story. We continue to see broad based growth across our store as both ticket and transactions Group 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, Earnings.
Our customers continue to respond positively to our deep assortment of trusted brands as we are the product Earnings. We continue to move forward on a number of exciting sales driving initiatives and we have outlined a path earnings call to truly realize the value of the Interline acquisition and the total pro opportunity over the next 18 to 24 months. Earnings. 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 tenants of our company's strategy, and we will remain committed to the investments in our interconnected capabilities.
For the quarter, online traffic growth was double digits and our online sales Grew 21.5 percent. Investing in interconnected capabilities goes beyond our dot COMP Business as we are also continuing to further invest to more effectively meet customers' demands for increased fulfillment options. The rollout of Calm, our new customer order management system, is on track to be fully deployed in our U. S. Stores before year end.
Following behind the comm rollout is the implementation of botvist or buy online, deliver from store. Earnings. In certain markets where bottlers has been introduced, the demand has been much stronger than we anticipated. This is a good problem to have, earnings call. But it is challenging delivery capacity, which we're working to address.
We still expect Bobfest to be fully rolled out by the end of the
and Services.
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 use digital media to Properly staffed for the busy spring selling season, we hired over 80,000 associates to meet the demand of these increased foot The 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 Earnings. Our 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 multiyear rollout, earnings call. 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 point Earnings Call for their hard work and dedication to our customers. In addition to serving our customers in our stores through Team
Earnings Conference Call, 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. And with that, let me turn the call over to Ted.
Thanks, Craig, and good morning, everyone. We had a strong Q1 driven by continued strength across the store, Earnings, particularly with our pro customer. An unseasonally warm February was followed by a more normal, but wetter March April. Call. While weather positively impacted our sales performance in the Q1, spring has not yet arrived in many of our markets.
Segment was approximately 15 basis points. Transactions for tickets under $50 representing approximately 20 percent of our U. S. Sales were up 2.7% in the 1st quarter. Transactions for tickets over $900 also representing Approximately 20% of our U.
S. Sales were up 9.5% in the Q1. The drivers behind the increase in big ticket purchases The average comp were appliances, tools, building materials, lumber, lighting, hardware, millwork and decor. Earnings. Electrical, paint, flooring, indoor garden, kitchen and bath, plumbing and outdoor garden had positive Earnings Conference, but were below the company average.
Pro Heavy categories continue to show great strength as we saw double digit 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, power tool accessories, hand tools and wiring devices at double digit comps in the quarter. Decor categories, including garage organization, laminate flooring, Earnings. Landscape lighting, vinyl plank and wood flooring had comps above the company average. Our store associates did a great job executing our 8th annual spring Black Friday event and creating excitement in our stores.
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 categories for us. Our pros recognize our brand advantage and 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. And Marketing.
We maintain our best in class creative, and we are also optimizing our ad effectiveness with targeted digital marketing. We remain focused on leveraging Earnings. We have seen great results. Since 2010,
earnings call.
Our return on advertising spend has nearly doubled.
Now let me turn
our attention to the 2nd quarter. We Pneumatic's category. We are introducing the new Milwaukee Pneumatic Framing Nailer, which is the latest addition to the M18 fuel line This high powered nailer delivers fasteners much faster than competing battery powered nailers, saving our pros time on the job site. As 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 programs.
For our DIY customers, we are excited about earnings call. The new exclusive launch of Pergo Outlast Plus Laminate Flooring. This easy to install laminate is water resistant and uses Earnings. To install laminate flooring in high traffic in water prone areas such as kitchens, bathrooms and mud Earnings. In addition to all the great new products, we are excited about our upcoming events.
Our Thrill of the Grill, Memorial and the 4th July events are right around the corner, and we have an incredible lineup of great values and special buys to help our customers enjoy Earnings and Investor Relations. With that, I'd like to turn the call over to Carol.
Thank you, Ted, and good morning, everyone. In the Q1, sales were Call. $22,800,000,000 a 9% increase from last year, driven primarily by positive comp Earnings as well as the impact of Interline Brands. Versus last year, a stronger U. S.
Dollar negatively impacted total sales growth by approximately $196,000,000 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 Composite comps of 11.8% in February, 7.7% in March and 4 point 6% in April.
We estimate weather driven demand positively impacted our U. S. Sales growth by Monthly $250,000,000 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, Earnings Conference Call. As expected, we had 25 basis points of gross margin contraction due to the impact of Interline. 2nd, we had 12 basis earnings of gross margin expansion in our supply chain, driven by lower fuel costs and increased productivity. For 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 Q1, operating expense as a percent of sales decreased by 120 quarter.
2 basis points to 20.7 percent. Our expense leverage reflects the impact of positive comp sales growth earnings per share 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 Q1 was $237,000,000 earnings call, up $44,000,000 from last year due primarily to higher long term debt balances. In the first quarter, and Investor Relations.
Effective tax rate was 36.5 percent compared to 34.3% in the Q1 of fiscal 2015. Earnings Call that the effective tax rate in the Q1 of last year was favorably impacted by the settlement of a tax audit. For fiscal 20 Earnings. Our share for the Q1 were $1.44 an increase of 19% from last year. Now moving to some additional highlights.
Earnings. During the Q1, we opened 1 new store in Mexico, and we ended the quarter with a store count of 2,200 and 75 and selling square footage of $237,000,000 Total sales per square foot for the Q1 sheet. At the end of the quarter, inventory was $13,200,000,000 up $913,000,000 from last year, earnings call, reflecting both the impact of Interline and the seasonality of our business. Inventory turns were 4.8 times, earnings call, up 1 tenth from the Q1 of last year. In the Q1, we repurchased 1 $250,000,000 or approximately 9,450,000 shares of outstanding stock.
For the remainder of the fiscal year, Call. We intend to repurchase approximately $3,750,000,000 of outstanding stock using excess cash, bringing total anticipated twenty Earnings. 16 share repurchases to $5,000,000,000 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 Q1 Fiscal 2015. Now turning our attention to the full year.
While U. S. GDP forecasts earnings call. Have pulled back slightly since we built our 2016 sales plan. We continue to see strength in the market with home price appreciation, housing turnover and household formation trending where we thought they would.
Sales in the first quarter 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 Q1 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.
Earnings from the high end of the guidance range we provided in February. Today, we are raising our sales and earnings per share growth 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 earnings. We thank you for your participation in today's call.
And Derek, we are now ready for questions.
Absolutely.
Earnings. And our first question comes from Seth Sigman with Credit Suisse. Go ahead.
All right. Thanks. Good morning. Nice quarter, guys.
Good morning. Thank you.
So, in aggregate, it seems like weather did help the quarter. You talked about 2 $50,000,000 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?
So obviously, with a warm February, we had a great start to the year, and we saw outdoor project business in the North Call. Very, very strong. The $250,000,000 that we've estimated, Earnings. That is kind of hard to understand exactly how much of that is pull forward, but that's what we're estimating is earnings. The demand that we saw from the weather benefit, we think there was $40 ish million or so of seasonal product pull forward.
And And 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.
Earnings. And just a follow-up there, does that $250,000,000 consider that spring weather hasn't arrived in some markets as you alluded to? And Would that be factored into that number?
That's right. We think we pulled forward true spring related categories $40,000,000 to $50,000,000 And as you know, I don't know where you're sitting, Seth, call. But as you know, in certain parts of the country, spring has not yet arrived. So we're still anticipating a bang up spring quarter.
Yes. Don't we know it. All right. And then 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 Call that we are now offering 60 days to pay, 3 65 day returns and discounts at the fuel earnings. What we're seeing with our PROs is great receptivity, new accounts are ahead of our sales plan, which is great news. But Seth, remember that we just rolled this out to all stores in January.
So there was no measurable impact to the top line because of this, but we anticipate
earnings. Our next question comes from Simeon Gutman with Morgan Stanley.
Thanks. Good morning. I just want to clarify something. When we use the word pull forward And if we take the $40,000,000 out that's seasonal, just thinking about the other part that was pulled forward, maybe other projects getting done a little earlier. Do we know if that's typically a 1 to 3 month pull forward?
I mean, this is these are projects that presumably And where I'm going is trying to think about how that could impact the Q2 versus others later in the year?
Well, here This is how we've looked at this. We think there was $250,000,000 ish of weather driven demand. It's not all earnings call. This is just activity because of great weather earlier in the quarter. And we're not rolling that forward because we anticipated that these were projects Call.
That would be completed later in the year and just got done earlier in the year. So we're not rolling that forward. It will bleed into Q2, Q3, earnings call. Maybe even Q4.
Yes. To your point, I mean, if somebody was doing a concrete project that maybe they had planned for the summer And they said, hey, look, the ground is not frozen in the north. I can do it now, and they do it. That's it's hard to tell which quarters it's come from, but it's
earnings call. So as we think about the shape of the year and this might help modeling, we now think that the Q1 will be the highest comping quarter. Call. As a result, the first half will be slightly higher than the back half of the year. And 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.
Call. Okay. That's helpful. My follow-up on the online business, I think you mentioned growth of about 21.5%. Anything different about the 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?
So first of all, I'll comment to pick up our their items from homedepot.com in our stores. And as it relates to the delivery, Yes. We have piloted the delivery program for a while. We saw kind of mid single digit growth Earnings. With the pilot, when we went into additional markets, 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 Q1, and you have seen strong first quarters in the past. So what's different about what you're witnessing
Earnings. It's really the strength across Earnings Call. And 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 Q1, earnings.
Clearly, there was some share shift. Look at appliances. Ted called it out. Appliances contributed 50 basis points of Earnings. So we are confident with what we saw in the Q1 and what we're seeing early in May to roll forward the outperformance of the first
So you mentioned GDP forecasts are a little lower, housing is about where you thought it was. So what's Changes, you're gaining a little bit more market share than you originally thought?
We don't plan market share as you know. So there we believe there were some share shifts and that was Earnings. Formed by NYX data that came out that show that we can 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.
Earnings call. We've seen home equity values increase 94% since 2011. How How is that possible? Because home prices are up 25% and people have been continuing to pay down their mortgages. So there's earnings call.
And not an expense, you spend differently in your home and you can see that in our big ticket categories.
And then my follow-up question is on the expense outlook. You're now expecting expenses to grow 35% at the rate of sales. Is that all due to what Call. Happened in the Q1? Or do you expect to see some expense good guys in the remainder of the year?
Yes. Well, Call. Despite getting our sales plan considerably in the Q1, our total expenses were actually $13,000,000 under our plan. That was was driven by lower utilities as you would expect because of warmer weather in February, but also we're not seeing the kind of pressure on medical as we had earnings. We'll be taking our expense growth factor down from what we had said at 40% to now 35%.
Okay. Good luck with rest of the spring.
Thank you.
Thank you.
And 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 earnings that we've seen so far for Q1 that the health of the U. S. Consumer I think is being called earnings question somewhat. So I wondered if you could beyond, Carol, what you've already mentioned, just talk about the Earnings.
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 of pro versus DIY is driven versus maybe the housing statistics versus your initiatives.
Okay. 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 In terms of balance in the business, we see the consumer continuing to engage in big ticket sales with transactions above 900 Earnings. Growing at 9.5% in the quarter.
So while our pro business was strong and we're pleased to see that, balance is what really is what we're striving to achieve and we're seeing that balance across the store.
And again, I go back to the housing data. The housing data suggests earnings call. That homeowners still 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%.
Earnings. Thank you. That's very helpful. And then my second follow-up question is slightly unrelated. I know you spent some time in the prepared comments talking about Earnings 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 program. 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 earnings. Excuse me, how will we expect that to work by the end of the year?
It pretty much is almost everything we sell, whether it's earnings call. Online or in store will be eligible for delivery, and we'll leverage the supply chain network that we've built out to do that in and 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 Earnings. So definitely a broad approach to the assortment that we carry.
Earnings.
Thank you.
And Scott Mushkin with Wolfe Research, your line is open.
Thanks guys. Thanks for taking questions. So I just wanted to go back to the buy online and deliver from store economics, trying to 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.
And I was just Looking at the uptake 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. Earnings. And so 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 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. And then candidly, we've been doing delivery from store for quite some time for years. Approach that on a day in day out basis as part of operating the business and earnings call. Our value proposition for the customer across product takes that into account.
So I mean, refresh my memory, do you guys charge for that or is that not charge for us. Yes, we do. Okay.
Yes, we charge more and there's options for tighter windows where there's a premium paid.
Okay, Perfect. And then 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 a thought of expanding that out and maybe just a little tutorial on that, that would be great. And that's my last question.
Sure. So our private label credit earnings. 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 Earnings. So the 3rd party underwriter will extend larger lines and we have 6 figure lines to many of our customers who ask for those lines.
Furthermore, if there is a situation where the credit lines tighten up a bit, we have a second look program with another 3rd person provider that will take a second look at the request and up the line of credit. So 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.
And so you said I think you said there's some 6 I mean, do you with the mix of the business, are you anticipating that $6,600 I think that you referenced going up meaningfully? And is there would you guys ever think Taking some of this on your own balance sheet or no?
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 earnings call. In terms of taking it onto our balance sheet, we love the arrangement that we have with our 3rd party underwriter today.
Earnings call. And moving on, we'll next hear from Chris Horvers with JPMorgan.
Thanks. Good morning, everybody. Good morning. So Earnings. 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 You've seen 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 Earnings Call. All major markets in Texas performed well. Texas clearly has diversified their economy Call. 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.
So we haven't really Earnings.
No. And actually in California, the Governor Brown just released some water restrictions.
Yes, which is great.
Our Garden business. So 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 Billing impact really.
Yes. Understood. And can you talk about any research that you've done around millennials and household Are they coming to form households now? Do you think they'll act like Gen X did before them? And how do you think Earnings.
And it impacts the long term outlook of the box and the online business?
We actually have done a fair amount of research here and it was part of our strategic planning last summer, where we had several groups of millennials actually work on what Home Depot looks like 8 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 Call. Roughly a third or so of those formations are happening with millennials at the Earnings Call. It appears there's about a 6 year delayed cycle here, but our research indicates that in many ways The same as previous generations.
Yes. The average age of new home buyers last year was 33 years old. That's the edge of the millennial. So that is another proof point that At some point, they want to own a home.
Yes. And then one last, just clarification question. Was there any impact in the monthly because of the Easter shift?
Point 7. If you shifted for like for like for April, that comp would have been a 9.2. April was reported at 4.6. It would have been like for like 3.6.
Understood. Thanks very much.
Our next question comes from Matt McClintock with Barclays.
Hi, yes. Good morning, everyone. Good 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 earnings.
Other channels of retail that are maybe more challenged right now, the department stores, etcetera, looking at that as also a new growth opportunity. Can you maybe just update us on your thoughts and maybe how that's those thoughts have changed now that you're seeing more competition in that category?
Well, we haven't seen the earnings call. And we're going to expand the appliance square footage in another 100 odd stores again this year. So 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 earnings
conference. Perfect. Thank you very much.
And next question in Q. We have Brian Nagel with Oppenheimer.
Hi, good morning.
Good morning.
Congratulations on a nice quarter.
Thank you.
So my first question with market share, anything as you look at the data to suggest Maybe 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.
Yes. I don't think we really have any way of knowing if earnings call. The weather really impacted share. I mean we're really focused on making sure that we're driving everyday Earnings. Great value for our customers and trying to bring innovative products that solve problems for them.
Call. Ted, I don't know if you have any additional comments, but
no. Again, where the weather has Earnings. And then the things that tied more heavily to the consumer in outdoor garden, that has been extremely call. Strong where we have good weather. So don't know yet if we would have taken any share there.
And then right now, April in the north earnings. 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. And 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, Earnings. Now here's Home Depot has put up great numbers now for a while. I mean, how much longer does this persist?
And I know in analysis, you have talked about it as your analyst and such, just to look at the productivity of the store, particularly by category. So I guess maybe just a quick update there. As you look around the store and relative earnings. Historic peak levels, if you will. Where are the still the biggest opportunities in the categories to drive increased productivity from here?
So I would say that as we look at the business, first of all, my starting comment would be we're planning a 5 $50,000,000,000 market all in now with the addition of Interline and Plane in the MRO space for multifamily hospitality and institutional. And we own less than 20% of that in total. So we think there's lots of opportunity to grow. We have several initiatives underway. I have both Anne Marie and Mark Hollyfield 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 Earnings team.
Yes, we're very pleased with this is Mark Hollifield. 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 Earnings. One of the things that's going along with zinc is the floor load process, where we're loading product onto the floor where previously it was loaded on pallets earnings. And that's driving tremendous productivity just filling trucks much more full as they depart for stores.
So still rolling Earnings. So still lots of opportunity there.
Yes. And in conjunction with
that, there's tremendous opportunity in the back end of the store. So as Mark talked earnings call. We also focus on getting this product to the shelf. And as we manage the flow of product in the Earnings Conference. We then really engineered the back end to create a better streamlined process to get the product on the shelf much quicker as well.
So a ton of opportunity there. And in addition, we have talked about buy online, deliver from store. We've also talked about buy online, ship to store. And all those are convenient Experiences for the customer, and we want to make sure that we lean in and ensure that we organize or labor around where the
Earnings. And if I could jump in, there's sales productivity opportunities too. As Craig said, Huge market to play and lots of room for growth. But if you think about it from peak to trough, we still haven't fully recovered some of our categories. So when I look at productivity still to be Earnings Conference.
Special work, kitchens, millwork, some of our building materials categories still have room to recover from the peak.
Yes. The building material categories in lumber, millwork. Those were still, as Carol said, off Our 6 peak as we exited last year and it was nice to see those were some of our strongest Earnings and Company's
earnings call. Good day
and welcome to The Home Depot Q1 2016 Earnings and Company's earnings call. So it's nice to see larger project business
Our next question comes from Peter Benedict with Robert Baird.
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? And can you give us any color maybe on how the products And that bucket has performed relative to the rest of the box or how you've been merchandising against that bucket?
Yes. I would say in general, Call. 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. So you You think about categories like power tools, faucets and so on.
As Ted called out, we had a earnings 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
Okay, good. That's helpful. And then, Carol, maybe just on leverage, Is there a scenario where you would be comfortable revisiting that 2 times leverage guardrail? What would need to happen for you to even consider something like that?
Earnings. Peter, as you know, our targeted adjusted debt to EBITDAR ratio is 2. We're slightly under that. We're about 1.9 today. We like that 2 Earnings.
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 and so we like it. And now it's not our goal to let that leverage ratio decline and it will as we earn Earnings Call. So 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 you said debt to support our share repurchase program.
Okay, fair enough. Thanks so much.
Earnings. And next we'll hear from Dan Bender with Jefferies. Please go ahead.
Thank you. If we look at the comp store sales through 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 earnings. Okay, good enough. And then on the probe business, I know you said it earnings.
It was above the company average and there's somewhat of an estimate in there. But just curious, is the gap between the DIY and the Pro business widening, stable or
Earnings. Not dramatically different. It was slightly stronger in the Q1. I think we saw more outdoor project business, which earnings. Can have a tendency to be pro related if you're doing things like concrete.
And then Earnings. Lastly, on the overtime proposal that's out there being reviewed, can you just comment on how Home Depot would be able to digest it if it becomes law?
Earnings call. 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.
And Jamie Katz with Morningstar, Bar. 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, I've had more difficult time accessing the credit markets.
Well, you can look at it through 2 lenses. 1st is just, earnings call it consumer credit, which may come through bank card or in our case through a private label card. We see consumer credit asks being approved 71% of the time. So that's a pretty good approval rate. Now I will tell you the FICO is pretty high.
It's 700. But that's a pretty good approval. It also speaks to the type of customers who are shopping inside of our store. And the approval rates for our Earnings and for mortgages and lending standards are changing ever so slowly. It's like a glacier Earnings.
And 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. So you can understand earnings call. Why it's slow to move, but we've factored that in as we think about where our business may go. And if there were to be easing Earnings.
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. So if you can get approved, you can afford it.
Okay. And then 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?
Well, I think lessons Learn would be that our anticipation that we have a customer who has common need across both businesses would be Earnings. 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 in a line is there. We're pleased with the start, Bill. I don't know if you have any other comments there. Jamie, Bill Lenny.
Just Craig is exactly right. We're encouraged by The customer feedback and the advantages they see when we combine InnoLine and Home Depot. And then the second thing that we're pleased with is the collaboration we're seeing with and our ability to join forces and sell across the end markets.
Thank you.
And next we have Mike Baker with Deutsche Bank.
Thanks. Just 1 or 2, maybe even 3 follow ups. 1, Earnings. 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 Q1? 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 United States. About the same as the current spot rate. So no need to provide a range, but we're just rolling forward outperformance except for weather Driven Demand. We're rolling over the rest of the outperformance.
Okay. So no real change in how you would have thought about the second, third Earnings Q4.
That's right.
Okay. Thank you. 2 others. 1, Easter, so if I understand it, so Easter hurt March, Helped April, I guess that's because the store, people don't really shop on Easter, but I would have thought that would have been outweighed by people shopping before Easter to do some outdoor Earnings. But I guess that's not the case.
Easter hurts March and it helped April to shift.
Did I
understand that correctly?
Easter is Not a big selling day for The Home Depot. Right.
But again, the sales around Easter don't offset that, I suppose?
No. No, they don't. Earnings.
You lose a weekend effectively.
It's a weekend in spring.
Yes, mom. Okay.
But again, it didn't impact the quarter.
Right. Understood. And then one last, this is maybe a bigger picture question, but 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 that is Home price appreciation. But home prices are now pretty close to where they were in 2,000 and 6, if we think of that as the peak year.
So do you think how do you think about that? Are we concerned that to be less home price appreciation and then Therefore, less of a driver to your business?
I think the way we look at it and the important We've seen that recovery obviously take place and improve for a large portion of customers. But as long as home values stay positive, it's a good thing. I mean for years years, home values grew on average Earnings. In the low single digit, 1%, 2%, 3%.
And your view just so as we are now Back towards peak, your view is that home price appreciation can continue?
We factor that into our longer term Forecast. Now this year, we believe home prices will be up around 5%. It's important to note that it's not fully recovered even with that 5%, and it's certainly different in earnings. So we think 5% this year and then we think next year maybe 3%, the year on after that 2%. So it continues to Craig's point because earnings.
There's just ongoing home price appreciation.
Okay. Thank you. Great color. Really appreciate the time.
Thank you.
Derek, we have time for one more
question. Absolutely. Our last question for today comes from Dennis McGill with Zelman and 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 work through the
year. Yes. So we think we'll generate around $10,000,000,000 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 10th in 2016.
Okay.
And then the share transaction, It's greater than 900,000,000 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?
Yes. 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
Call. I don't know that we did in 2006. I can tell you that for the last 7 or 8, maybe 7 years, it's been pretty comparable to that. And I think the other Earnings. To consider is when we look at 2,006 and look at kind of peak performance, in our And so we don't know that we actually we assume we didn't actually peak in 2,006 the way we should have.
Okay. That's Call.
Thank you, guys.
Thank you.
Yes. Well, thank you for joining us on our call today and we look forward to discussing our 2nd quarter earning results in August.
Earnings. And that does conclude today's conference call. We appreciate your participation.