Good day, everyone. Welcome to The Home Depot Q3 2015 earnings call. Today's conference is being recorded. If you'd 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'd like to turn the conference over to Ms. Diane Dayhoff, Vice President, Investor Relations. Please go ahead, ma'am.
Thank you, Alan, 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 analyst questions. Questions will be limited to analysts and investors. 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. 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. Let me turn the call over to Craig.
Thank you, Diane, and good morning, everyone. Sales for the third quarter were $21.8 billion, up 6.4% from last year. Comp sales were 5.1% from last year, and our U.S. stores had a positive comp of 7.3%. Diluted earnings per share were $1.35 in the third quarter. In the third quarter, as we saw in the second quarter, we had a broad-based growth across our geographies. All three of our U.S. divisions recorded mid to high single-digit comps. Every region posted positive comps in the quarter, as did all of our top 40 markets. Year-over-year, the variability in performance across our regions has narrowed considerably. On the international front, our Canadian business posted positive comps in local currency, making it 16 consecutive quarters of positive comps. In addition, our Mexican business had another quarter of solid performance, with positive double-digit comps in local currency.
This makes 48 quarters in a row or 12 years of positive comp growth for our Mexican business. We saw growth in ticket transactions and average basket size in the third quarter, and we were particularly pleased with the strong transaction growth as each month in the quarter had positive comp transactions. We view our growth in transactions as a positive sign of our continued relevance with our customers. As Ted Decker will detail, we continue to see strength across our store. All of our merchandising departments posted positive comps, and we saw a healthy balance of growth among both our pro and DIY categories. Our pro business continues to be driven by a strong offering of brands that pros demand, consistent product innovation, as well as services that help them increase their business.
During the quarter, we completed the acquisition of Interline Brands, a leading national distributor of maintenance, repair, and operations or MRO products. This acquisition builds on our existing capabilities to serve our pro customers. Interline gives us a national presence in the MRO market, which will allow us to expand our share of wallet with our collective customers. We are diligently working our integration plans and are excited about the opportunities that we see ahead. The retail environment has been and is changing. Our customers, both pro and DIY, are changing the way they shop for our products and services. Our goal is to provide our customers with the convenient and fulfillment options they require. Whether they buy products online through a personal computer, a tablet, or their mobile phone, we are enabling them to pick up product in our stores or have products shipped to their home.
We're investing in making the process easier and frictionless. We continue to see healthy sales from our digital business. Online sales grew approximately 25% in the third quarter and represent approximately 5.1% of overall sales. About 42% of all online orders are picked up in our conveniently located stores. We rolled out Mexico's digital commerce site during the first half of the year, and although we are just getting started, we're seeing great results. In Canada, we re-platformed our website, which went live earlier this month. Back in the U.S., we opened our third online customer contact center in Tempe, Arizona. All of this is a further sign of our commitment to interconnected retail in our geographies. We continue to focus and invest in our supply chain to drive productivity and to deliver a better customer experience.
As our customers are transacting more frequently through our online channels, we have invested in creating the right fulfillment options to support that growing business. During the third quarter, we opened and began shipping from our third new direct fulfillment center in Troy Township, Ohio. With these three direct fulfillment centers, we now have the capability to reach 90% of our U.S. customers in two business days or less with parcel shipping. As you know, we have been piloting our new order alignment system, which we call COM, as well as Buy Online, Deliver from Store, or BODFS. We're really pleased with the results of the COM pilot, and we've laid out a rollout plan for 2016. The BODFS rollout will follow COM. In the 108 stores where we have BODFS, our on-time delivery service is now exceeding our target. BODFS will also be rolled out in 2016.
Turning to the macro environment, while 2015 consensus U.S. GDP growth projections have moderated, we continue to see positive signs in the housing data with home price appreciation and housing turnover being key drivers of growth for our business. As Carol will detail, we are guiding our fiscal 2015 sales to grow by approximately 5.7%, with comps of approximately 4.9%. This is after the effects of a stronger U.S. dollar. Year-to-date, due to a stronger U.S. dollar, our sales growth has been negatively impacted by over $1 billion. We believe that the U.S. dollar will remain strong through the fourth quarter. We are guiding fiscal 2015 diluted earnings per share to be $5.36, an increase of approximately 14% versus fiscal 2014. Let me close by thanking our associates for their hard work, dedication, and commitment to our customers.
Based on this quarter's results, 99% of our stores would be eligible for Success Sharing, our profit-sharing program for our hourly associates. With that, let me turn the call over to Ted.
Thanks, Craig, good morning, everyone. We were pleased with our performance in the third quarter as sales exceeded expectations. We saw strength across the store as well as continued growth in our online business. All of our merchandising departments posted positive comps. Appliances, tools, plumbing, decor, lighting, hardware, building materials, and indoor garden were above the company average. Outdoor garden, kitchen and bath, electrical, millwork, flooring, lumber, and paint were positive, but below the company average. Pro heavy categories continue to show great strength, and we saw double-digit comps in power tools, commercial lighting, HVAC, fencing, and power tool accessories. Additionally, flooring tools and materials, siding, concrete, fasteners, roofing, builder's hardware, and compressors had comps above the company average. The core of the store continued to perform well across the country as we saw strength in maintenance and repair categories.
Watering, water heaters, ceiling fans, air circulation, hand tools, and generators all had double-digit comps in the quarter, while dry vacs, wiring devices, pipe and fittings, and ladders had comps above the company average. There was also strength in decor projects with comps above the company average in special order window coverings, vanities, in-stock kitchens, and fixtures. Our Halloween and Harvest and Labor Day events provided great values and were well received by our customers, resulting in double-digit comps in decorative holiday, organization, and appliances. Sales of grills, soils and mulches, pressure washers, and cleaning had comps above the company average. Using our assortment planning tools, our merchandising team constantly refines our assortments by bringing science to the art of merchandising. Recently, we leveraged these tools to better understand the customer preferences in roofing.
We updated our roofing clusters to tailor our roofing brands to specific markets and customers, and we introduced more high-definition laminate shingles. This process yielded great results in the third quarter. By providing the pro customer the right brand, assortment, and value, we drove double-digit comps in shingles. Total comp transactions grew by 4.3%, while comp ticket increased 0.9% for the quarter. Our average ticket growth is a bit distorted due to the stronger U.S. dollar. In the U.S., our average ticket was up 2.6%. Finally, commodity price deflation in certain products such as lumber negatively impacted our average ticket increase by about 40 basis points. While lumber prices are down, we were very pleased with unit growth. Transactions for tickets under $50, representing approximately 20% of our U.S. sales, were up 3.6% for the third quarter.
Transactions for tickets over $900, also representing approximately 20% of our U.S. sales, were up 7.8% in the third quarter. The drivers behind the increase in big-ticket purchases were appliances, roofing, and countertops. Now let me turn our attention to the fourth quarter. We recently introduced the new Husky 100-Position platform of mechanics tools for our DIY and pro customers. This new platform was designed with speed and access in mind. These tools feature a 100-position gear system that allows the tools to work in tight areas where normal mechanics tools cannot perform. This new family of tools is exclusive to The Home Depot and offers a lifetime guarantee. In the fourth quarter, we are also pleased to introduce six new models of NuTone in-vent bath and ventilation fans for our pro customers. This easy-to-install fan have new features that allow for room-side installation with no attic access required.
Easy installation saves our pro customers valuable time. We have an outstanding offering of product in our gift centers for the holiday season and our best lineup yet in holiday decor. Our gift centers will feature an extensive assortment of hand and power tools, including amazing values from Milwaukee, Makita, DeWalt, Ryobi, Ridgid, and Diablo. The gift centers will also feature an impressive lineup of tools and storage boxes from Husky. In holiday decor, we have become a leading destination in the category, both in-store and through our expanded assortment online. We continue to focus on bringing innovative and exciting offers to our customers throughout the holiday season. We are excited about our lineup of pre-lit and holiday lights. For Black Friday, we have fantastic special buys with extreme values for the traditional DIY customer and our professional customer, including some amazing offers on appliance suites.
With all of these exciting products, events, and great in-store execution, we look forward to driving a strong holiday season. With that, I'd like to turn the call over to Carol.
Thank you, Ted. Hello, everyone. Before I begin, I'd like to remind you that this is the first quarter where we are including Interline Brands in our financial results. While the acquisition closed in late August, our third quarter results include one month of Interline, as we are accounting for Interline one month in arrears. Finally, while Interline results are included in our consolidated financial statements, they are not yet included in certain operating metrics like comp sales per square foot, average ticket, or transaction. With that, in the third quarter, sales were $21.8 billion, a 6.4% increase from last year. Versus last year, a stronger U.S. dollar negatively impacted total sales growth by approximately $413 million, or 2%. Our total company comps or same-store sales were positive 5.1% for the quarter, with positive comps of 2.6% in August, 7.6% in September, and 5.2% in October.
Comps for U.S. stores were positive 7.3% for the quarter, with positive comps of 4.6% in August, 10.1% in September, and 7.1% in October. Our monthly comp sales were a bit distorted by the timing of Labor Day this year versus last year. In the U.S., if you assume Labor Day fell in the same fiscal month as last year, our comps were 6.9% in August, 7.8% in September, and 7.1% in October. Our total company gross margin was 34.7% for the quarter, an increase of 34 basis points from last year. Our gross margin expansion is explained by the following. First, we had 24 basis points of gross margin expansion as we reached certain higher co-op and rebate tiers and recognized that benefit in our Cost of Goods Sold.
Second, we had 15 basis points of gross margin expansion in our supply chain, due primarily to lower fuel costs and a higher penetration of product flowing through our RDC network. Third, we had five basis points of gross margin expansion from lower shrink. These three items drove gross margin expansion of 44 basis points, offset by 10 basis points of gross margin contraction due to the impact of Interline. For fiscal 2015, we continue to expect our gross margin rate to be about the same as what we reported in fiscal 2014. In the third quarter, operating expense as a percent of sales decreased by 88 basis points to 21%. Total operating expenses were approximately $14 million higher than our plan, driven by expenses related to our data breach. In the third quarter, we incurred $20 million of legal and litigation-related expenses in connection with our data breach.
In the third quarter, our expenses grew at approximately 33% of the rate of our sales growth, reflecting solid expense control and sales leverage. For the year, we expect our expenses to grow at approximately 47% of our sales growth rate. Our operating margin for the quarter and for the first nine months of fiscal 2015 was 13.7%. Interest and other expense for the third quarter was $240 million, up $127 million from last year. The year-over-year change reflects two items. First, interest and investment income decreased by $98 million as we lapped last year's $100 million gain on sale of HD Supply common stock. Second, interest expense increased by $29 million from last year, due primarily to higher long-term debt balances. In the third quarter, our effective tax rate was 37.1%, and we expect our income tax rate to be approximately 36.5% for the year.
Our diluted earnings per share for the third quarter were $1.35, an increase of 17.4% from last year. The strength of the U.S. dollar negatively impacted earnings per share growth by about $0.03 in the quarter. During the third quarter, we opened three new stores in Mexico for an ending store count of 2,273. Total sales per square foot for the third quarter were $366, up 5.3% from last year. Now turning to the balance sheet. At the end of the quarter, inventory was $12.5 billion, up $487 million from last year. On a currency-neutral basis, inventory dollars grew by $721 million, of which approximately $324 million was the result of the Interline acquisition. Inventory turns were five times, compared to 4.8 times last year. Payables were up $339 million from last year. On a currency-neutral basis, payables were up $466 million, including $134 million of Interline payables.
Moving to our share repurchase program. In the third quarter, we received 1.3 million shares related to the true-up of an accelerated share repurchase or ASR program we initiated in the second quarter. Additionally, in the third quarter, we repurchased approximately $2 billion, or 15.1 million of outstanding shares. This included 5 million shares repurchased in the open market and 10.1 million shares repurchased through an ASR program. For the shares repurchased under the third quarter ASR program, this is an initial calculation. The final number of shares repurchased will be determined upon completion of the ASR in the fourth quarter. For the remainder of the year, we intend to repurchase approximately $2 billion of outstanding stock for total fiscal 2015 share repurchases of approximately $7 billion. During the quarter, we raised $1.5 billion of senior notes to finance the Interline acquisition.
We now have $20.9 billion of long-term debt, of which $3 billion comes due on March 1st, 2016. We plan to refinance that debt prior to it coming due. Computed on the average of beginning and ending long-term debt and equity for the trailing four quarters, return on invested capital was 26.2%, 400 basis points higher than the third quarter of fiscal 2014. Now, moving to our guidance. Because we are 9 months through the year, and because we don't think the U.S. dollar is going to weaken, we are providing a point estimate for our sales, comp sales, and diluted earnings per share growth guidance. We now believe that fiscal 2015 sales will grow by approximately 5.7%, with comps of approximately 4.9%.
Our sales and earnings per share growth guidance is higher than the low end of our previous guidance, as it includes our third quarter outperformance and continued momentum in the U.S. Our guidance also assumes foreign exchange rates remain at current levels through the fourth quarter. We estimate a stronger U.S. dollar will impact our total sales growth for the year by approximately $1.4 billion. For earnings per share, remember that we guide off of GAAP. For fiscal 2015, we project our diluted earnings per share to grow approximately 14% to $5.36. This earnings per share guidance assumes foreign exchange rates remain at current levels through the fourth quarter and includes our intent to repurchase approximately $2 billion in additional shares in the quarter.
We look forward to talking with you at our investor conference on December 8th, where we will update you on key strategic initiatives and lay out our new three-year financial targets. We thank you for your participation in today's call. Alan, we're now ready for questions.
Thank you, ma'am. As a reminder, if you'd like to ask a question, please signal by pressing *1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We'll take our first question from Simeon Gutman with Morgan Stanley.
Thanks. Good morning. Nice quarter. First question on the gross margin drivers, I guess, for Carol or Craig. Can you talk about the sustainability of some of the, I don't know if they're one-time items. The supply chain piece could be more sustainable. Some of the lower acquisition costs, I don't know if that's one time or there should be some recurring element to them.
Well, we're very pleased with our gross margin performance in the quarter. Starting with the benefits that we saw from co-op and rebate. This was effectively reaching higher purchasing tiers in certain categories like roofing. As Ted described, we just had an outstanding roofing business. As we look into the fourth quarter, roofing can be impacted by weather, of course, but we would envision that that performance would continue. Supply chain, we would expect to have continuing benefits from our supply chain as our RDC network continues to mature. I will say, however, as you're building your model for the fourth quarter, we do expect year-over-year for our gross margin to be down. Why? Because we will be selling a lot of lower-margin goods, as Ted described in his remarks.
Got it. Okay. One follow-up on expenses. The business did a great job once again, and you held the line despite some of the increased volumes. Can you talk about how much is it the economic model that exists in stores versus things that are behind the scenes that we don't see, like some corporate or indirect savings that you continue to realize?
Well, thank you. We were pleased with our expense leverage in the third quarter. Marc Powers and his team do an awesome job of making sure that our stores are staffed to meet the needs of our customers. Our Voice of Customer results have never been higher, while also driving productivity within the hourly sales force. Hourly payroll leveraged 41 basis points in the quarter. It's more than just payroll. Mark, again, and his team, have invested in new technology to lower the cost of heating and cooling our stores, and utilities were down year-on-year and drove six basis points of benefit in the quarter. While we had breach expense in the quarter, we had $8 million less breach expense this year than last year, so that was another driver of expense. For us, productivity is a virtuous cycle, and you see that in the third quarter results.
Okay, thanks.
Next, we'll go to Christopher Horvers with JPMorgan.
Thanks. Good morning. Just a quick follow-up on the gross margin. Is the other piece around the fourth quarter because of Interline will be a 30 basis point headwind versus the 10 in the third quarter?
Yes. Thank you for mentioning that. We will have three months of operations at Interline in the third quarter. The Interline gross margin, as you probably have seen by looking at their public financial information, their gross margin is lower than ours. That will be an impact to year-on-year performance. I will also comment, however, that Interline's operating expenses as a % of sales are lower than ours. We won't have an expense pressure from Interline in the fourth quarter.
Understood. Craig, you mentioned a comment about the narrowing of the performance gap across geographies. Some thoughts on what you're seeing there. What geographies are, I guess, are catching up to the average? Any comments on the Houston market and any other commentary you want to add there would be great. Thanks.
Yeah. I'll start with Texas. We have roughly 178 stores in Texas. We look at all the major markets in Texas, they actually performed above the company average in total. The narrowing of variability by markets, the spread was roughly 6.5% in 2015 compared to 10.4% in 2014. We're very pleased as we work to continue to focus on high and narrow variability and drive performance up across the geographies.
Okay. I guess a question on everybody's favorite topic, which is weather. How should we think about El Niño and how it could impact your business over the next couple of quarters? Does it pull forward demand into 4Q? I think I recall in 1Q12, people could do roofs in the Northeast in January because it was so warm. On the other hand, you have a big home heating and snow removal exposure in 4Q. How do you think it plays out? Does it neutralize? Does it pull forward and so forth?
It really depends on, obviously, how this plays out. It could potentially play to a warmer northern, which means we might have a year where we have more outdoor project business running deeper into the season. The potential offset to that is a much cooler, wetter southern situation. It really depends on how this plays. We'll be in position, as we always are, to try to make sure we take advantage of whatever categories will be the drivers in the different geographies. With any luck, it brings rain to California, which is desperately needed.
Understood. Thanks very much.
Yep.
Next, we'll go to Seth Sigman with Credit Suisse.
Thanks. Hey, guys. Good morning.
Good morning.
Just a follow-up on the gross margin outlook. You discussed the mix impact and the Interline impact. Just wondering if you could talk a little bit about the promotional activity that you're seeing in the industry and whether there's any meaningful change heading into the holiday in some of the more relevant categories, like appliances.
Yeah, this is Ted. We're essentially the same year-over-year in our promotional cadence, so there won't be a net impact from promotions.
Okay, thanks. As you look at the pro side of the business, very strong trends there. Wondering if you could update us on the $6,600 average pro spend that you've seen historically. Obviously, that captures a wide spectrum, with some customers spending a lot more. When you guys dig into the data, where are you seeing the growth? Is it from existing big spenders within that, or is it just kind of broad-based across the group?
Yeah. We haven't seen a meaningful change in the total average customer spend. We are seeing that growth come from our larger pro customers, and we've seen that trend for the past several quarters now.
If we look at our managed accounts, and those would be large spend pros, they grew faster than the company average in the third quarter.
Okay, great. Thank you.
Next, we'll go to Dan Binder with Jefferies.
Hi, good morning. Thanks.
Good morning.
Ted, I was hoping maybe you could just maybe talk a little bit more about your initiatives on merchandising by store. You've given us some examples in the past. I think water heaters this quarter. You talked about roofing. Can you give us a little bit of color on where we are? If it was a nine-inning game, are we still in the early innings or middle innings?
I would say it's always hard to put it into innings. I would say our tools are maturing nicely. Those are mid-innings for sure. Then the merchant's utilization and the whole change management and speed of how we review categories and ultimately get the refreshed product set in the store is our new focus area. We're aiming to increase the speed of transitions of product in the store. That's in earlier innings, but in terms of the tools, we're getting pretty well developed there.
Dan, at our investor conference in early December, Ted will go into more detail here.
Yep.
Okay. Carol, I don't think anybody asked yet. Just relative to your fourth quarter plan, how are you feeling about things to date?
There's a lot of momentum in the U.S.
Okay. Do you think weather had helped you at all just in the third quarter?
Yeah. As we talked earlier, weather is a factor in our business, whether it is in a particular category. Clearly, with warmer weather, you're not selling a lot of the winter categories right now. Time will come on that. You do get an advantage in outdoor projects when the weather stays better.
Great. Good job. Thanks.
Thank you.
Next, we'll go to Brian Nagel with Oppenheimer.
Hi. Good morning.
Good morning.
Congratulations on a very nice quarter.
Thank you.
The question I had, I guess it's mostly for Carol, Ted maybe too. We talked about before, just kind of an update, given a lot of the headlines we're seeing from other retailers and data in general. What you're seeing with respect to wages and any potential pressures upon The Home Depot model from higher wages in your system.
We, like every other company, are looking at what's happening with the wage market. In parts of the country where there's high employment and there's wage pressure, we adjust. We are able to work through that through the great productivity model that we have in our stores.
Yeah. We'll continue to adjust market by market as we see the dynamics of each market unfold.
That's very helpful. I know it's early, and I'm sure you'll discuss this a lot more at your December meeting. Any initial thoughts on Interline now that the transaction is closed? Any kind of initial findings or thinking about how this is going to meld into The Home Depot model?
Well, we're in the very early stages of integration. We're working through that. We're excited about the opportunity. We know that there is an overlap with our vendor community. We will get synergies from that and are beginning to get synergies already. We also know that we've taken our first actions on a little bit of the reorganization of folks where we have duplicate efforts that we don't need going forward. We're in the early stages. We're excited about the opportunities that we see.
If I could just add a comment from the macro perspective, we saw household formation up 1.1 billion households formed in the third quarter. Many of those households moving into multifamily units. The Interline acquisition gives us a great selling vehicle to serve that new household, if you will.
Got it. Thank you, congrats again.
Thank you.
Next, we'll go to Aram Rubinson with Wolfe Research.
Hey, everybody. Good morning. Thanks for letting me ask the question. Your company has gone through a history of acquisitions where the pendulum has swung one way and then the other. You were doing a whole lot of acquisitions in the early 2000s, of course, you just shut it down. Now you're swinging back the other way. I'm trying to figure out where that pendulum feels comfortable organizationally. Is it halfway in between where you had been, or are you preferring to stay towards the conservative side?
No. What we've said, Aram, is that we will look at acquisitions where it gives us the ability to gain capabilities that we might not want to go build ourselves. If you think about some of the acquisitions that we've done, the BlackLocus acquisition gave us a data science capability that's being leveraged by our merchants for assortment and price. If you think about the Crown Bolt acquisition, that was basically a company that was built for us, that we sold when we sold AC Supply. We got it back. That gives us different distribution capabilities for small packaged goods in our stores. The Interline acquisition gives us the capability to better serve our pro customer through things like open account, through 93 points of distribution where we can deliver same day, next day. This is all about how do we actually get capabilities.
Beyond that, really not looking for acquisitions.
Right. You might think, well, do you need to buy a marketplace? No, we can build that. Do you need to buy a services company? No, we have one. Those are capabilities that we don't need to acquire.
Thanks. Just to follow up, I know that in order to prepare for the future, you've migrated some categories out of the store at the margin, patios, grills, et cetera, figuring you can sell that online and devote other space to some other new categories. Where does appliances fit into that mix in terms of migrating them out of the store versus in the store?
I would say on that, we already have a model that leverages a nice interconnected complement of displaying the product in the store, but then delivering direct from our manufacturer's warehouses. We're leveraging an interconnected model from the day we developed our appliance model.
Okay. Already showrooming then. Well, thank you, and good luck this quarter.
Thank you.
Next, we'll go to Jaime Katz from Morningstar.
Good morning. Thanks for taking my questions.
Sure.
I'm curious if you guys could comment on capital allocation policy and outside of share repurchases, what other opportunities you guys are seeing to deploy capital and maybe to focus on either product or merchandising innovation in light of the fact that shares have run up pretty robustly over the last few years.
We have a disciplined and balanced approach when it comes to capital allocation. The first use of cash is to invest it back in the business. This year, we'll spend about $1.6 billion on capital back in the business supporting our growth. The way that works is, at the end of the year, we'll look at how much we've earned. We will cut it in half, and that will be the new dividend. If there were ever to be an earnings disruption, we wouldn't cut the dividend. We would just earn back into that 50% payout. Then excess cash is used to repurchase shares. We think that's the best use of excess cash rather than leaving it on the balance sheet, which would be value diluting to our shareholders.
We do have an adjusted debt to EBITDA target of 2x. We're at that ratio right now. We have used the financial leverage judiciously, both to support acquisitions as well as to buy back our shares. As it relates to valuation of our share price, we do have a point of view. We're not at that intrinsic value, so as we continue to outperform, that intrinsic value continues to increase.
Okay. Then I think you made some additional commentary on spend for the data breach. Do you guys see those expenses wrapping up over the next quarter or two, or is it still to be determined?
Well, there are ongoing legal fees as well as litigation activities. We've estimated another $5 million of expense in the fourth quarter, there could be more. None of it would be bigger than a bread box. It's all manageable. The biggest numbers that we had were the numbers that we settled on with the payment card networks in the second quarter.
Okay. Thank you very much.
Bigger than a bread box is not a financial term, you know what I mean.
Now we'll go to Seth Basham with Wedbush Securities.
Good morning, and thank you for taking my question.
Morning.
My first question is around the consumer's behavior in the store in terms of trading up. Are you seeing more activity of consumers trading up to premium products?
I wouldn't say it's any more dramatic than we've talked about before, but we do look at sales by price point. Again, this quarter, we had a progression of higher comps as you went up price points in an assortment.
Got it. That's helpful color. As it relates to the Pro, can you give us a sense of how much better the Pro is comping relative to the DIY customer and whether or not that gap has increased or decreased over the last few quarters?
I mean, our large spend Pro, as Carol mentioned earlier, is actually comping above the company average. That's been a driver, certainly, in our Pro recovery. That hasn't changed dramatically in the last few quarters. It's been pretty consistent.
Got it. As you look forward, when you think about all the services and brands you're offering in the Pro and the macro environment, do you think that type of gap can persist, or would you expect it to increase?
I mean, we would certainly expect it to continue.
Got it. Okay. Thank you very much.
Moving on, we'll go to Michael Baker with Deutsche Bank.
Hi. Thanks, guys. A couple of questions. One, the industry data that a lot of us look at, the NAICS data, has been a very reliable indicator for your comps historically. Although the last couple of quarters, you guys have far outpaced that data at really an accelerating pace. Do you see that as taking incremental market share? If so, where do you think you're taking it from?
Well-
If I could just jump in on the market share. The census data, the NAICS 4441, would suggest that we have grown market share.
Correct. Yeah. Again, we compete with a lot of folks across each of our product categories, and it varies widely by product category. Whether that's other big box, whether it's wholesale distributors, whether it's digital competitors. We're very focused category by category as to where are the largest opportunities to grow our business and take share.
That share on a rolling 12 to September was 56 basis points up.
Got it. Understood. One more question I wanted to ask, just on the really strong comp last year. Can you remind us if weather did play an impact on that? What I'm getting at is the really harsh winter up here in the Northeast. How much did that help, or perhaps did it hurt the comp last year, and how should we think about that as we cycle against it? For instance, roofing. Everyone I know up here in Boston had a leak in their roof. I assume your roofing business is still being helped by what happened last winter.
Sure. I think that's the key is that based on the weather, and we did have impacts from weather last year, it then impacts categories differently from a timing standpoint. As you mentioned, tough winter last year in the Northeast. Certainly, as you get into the spring, you see people making repairs on things like roofing, and in some cases, a lot of live goods needed to be repaired as well. That obviously is offset by categories. If it's a warm winter, you're doing outside projects, and nobody was doing that last year. Those are the dynamics, category by category that are affecting our business, particularly as it relates to start of spring and then through the tail end of the winter season.
The good news is that over time, weather normalizes.
Yeah.
If you look at our U.S. comp on a two-year stack basis, we've seen acceleration from Q1 to Q2 to Q3, and now with the guidance that we've just given you, that's acceleration into Q4 as well.
Understood. Okay. Yeah, we all learned the term ice dam and roof rake up here in New England last year.
It was a tough winter.
It was a tough winter.
Thanks.
Next, we'll go to Matthew Fassler with Goldman Sachs.
Thanks a lot. Good morning.
Morning.
My first question relates to big-ticket projects, which continue at a very nice clip. Anything in the business that gives you a leading indicator as to project-oriented business, whether it's people looking for bids, taking samples, et cetera, on some of the more project-oriented categories?
No, I think, as Ted mentioned, while we had pressure from deflation in lumber, we were very pleased with our unit productivity and pleased with what we saw in our pro business. As we said, the larger spend pro is leading the pace there and above the company average. Those lean to bigger ticket projects, the building materials business, bigger ticket projects. We're very encouraged by that spend with the customer. Likewise, you look at categories like appliances, that's a big-ticket spend as well. We don't really see a slowdown, if you will, in big ticket.
Sure.
Matt, if I can add from a macro perspective.
Sure.
If you look at home equity lines of credit, they're down 29% from the peak. 17 million home equity lines have been granted this year, and 28% of the banks who are underwriting those lines of credit are stating that their underwriting is starting to ease a bit. Think about how people use their home equity lines. It typically goes into a bigger project, like a kitchen remodel or that sort of thing. It's a bit encouraging as we think about Q4 and beyond.
Thank you. A quick follow-up. Craig, you spoke earlier about the reality that retail is changing, consumers are shopping differently, and your online business continues to grow nicely. That's still only 5% of the mix. How do you guys think about the long-run operating margin implications of this? You think about the amazing flow through you've had, the very modest expense growth relative to sales. I know that this will move pretty slowly for you, just because of the role in the business, even as it grows rapidly. I'm not sure if it's possible to think about the incremental margin on a transaction delivered versus picked up in the store or shopped without any e-commerce intervention.
As you look out the next two or three years, and you might tackle this a bit in early December, how do you think about the role of omnichannel in impacting your financial model?
The way we look at it, quite candidly, is as one business and in an interconnected approach. A couple of things. One, we shared with you that we did what we called COGS A. We looked at normalizing how we account for things in both channels so that our merchants have a common view of all costs and expenses. Then, as I mentioned earlier, 42% of our online orders are picked up in our stores. It's very much a blended mix, and we look at it as a blended mix. We see it more the same going forward. We'll provide a little bit more outlook as we go into our December investor conference in terms of how the business is coming together by channel, but certainly view it as one Home Depot for the customer.
Thank you.
We'll go to Kate McShane with Citi. Ms. McShane, your line's open. Please go ahead.
I'm sorry. Thank you. Good morning.
Morning.
I was wondering if I could follow up on the e-commerce questions. With the opening of the third fulfillment center, how do you view the actual store as a fulfillment center? Are you looking to use anything like Instacart or Google Express as a way to further your omnichannel experience?
I mean, I'll just say, we do a lot of deliveries from store today. Mark Holifield is here. I'll let him comment on this.
Yeah. Our stores have been a base for delivery for quite some time, where we take orders in the store and deliver them. This Buy Online, Deliver From Store initiative that we have rolling in 108 stores now, we'll roll out in 2016, allows us to take orders online, drop them to the store, and use those same delivery assets to get to our customers. We continue to stay abreast of the various offerings in the marketplace. We think the most important thing for us to focus on right now is our Deliver From Store initiative, utilizing the assets that we have in place now.
Okay. If I can just follow up on that question. Have you seen any meaningful change in the consumer behavior with regards to, again, mobile shopping or shopping through the website sequentially? A meaningful change from Q2 into Q3.
No, not really. We've grown pretty comparably quarter-to-quarter.
Thank you.
Next, we'll go to Michael Lasser with UBS.
Good morning. Thanks a lot for taking my question. We've seen the spread between your same-store sales and the category expand for a couple of quarters now. Can you tie your share gains to specific categories that you've invested in? Do you think it's coming from the expense of some competitors who are experiencing turbulence as a result of self-inflicted wounds? Alternatively, could we just be at the point in the cycle where the incremental consumer who's coming into the home improvement market is more compelled to go to the big box home center channel?
Do you want to start, Ted?
Yeah.
Yeah. I would start on the investment piece first. Absolutely, we see terrific productivity in the areas that we have invested in. From what we can track, we believe we're taking share in these areas, and I'd highlight three. One would be with lithium-ion battery technology and power tools and now migrating to outdoor power. We have an extremely robust lineup of brands and product and values in power tools and believe we're taking meaningful share there. LED in light bulbs and now increasingly integrated into light fixtures, where we've been very aggressive following the development of that technology. I believe we're partnered with some of the best folks in the industry, and our light bulb and now, again, integrated fixtures with LED are very strong, and we believe we're taking share. Then in appliances, certainly.
We've been expanding square footage for some time now, investing into floor space and adding some additional brands to our portfolio there. We saw double-digit comps in appliances yet again this quarter and believe we're taking share in appliances.
To your question about where are we on the cycle, we're doing a lot of work in this regard, trying to come up with our own point of view. One thing we've learned, looking at data coming out of the Joint Center for Housing Studies of Harvard University, as well as John Burns Real Estate Consulting, is that homes that are older than 45 years tend to have higher repairs. In fact, the amount of money spent on repairs on those older homes is 5.6% higher than the amount of money paid to repair a home that's about 20, 24 years old. There are 40 million homes in the U.S. that are older than 40 years. As the housing stock ages, it just bodes very well for big-box home improvement retailers to sell to those customers who need to make repairs in their homes.
Carol, do you have any insight into whether someone who lives in an older home would have a greater propensity to go to a big-box store versus some other retailer, like a specialty player?
Don't have that kind of insight. We'll continue to study.
What I would say on that is the merchants will continue to focus on products that make it easier for our pros as well as our consumers to be able to do those kind of projects.
Okay. Craig, you've been very careful on the call to categorize your large pro-spending customers as outperforming the overall business. What about the pro business in totality versus the rest of the business?
Our pro business in total is good, whether it's the, as Carol mentioned, managed accounts, whether it's our consumer credit card data that shows or our pro credit card data that shows. We've lost some visibility in the small pro with our data breach that we're working to regain. That's probably why we don't talk as much about our smaller pro. All of the data points that we have indicate that our pro business is very solid, and we're pleased with the results, whether that's within categories or whether that's at customer data that we have specifically.
Yeah. To put some numbers behind it, if you just look at pro sales on our private label credit card as well as managed accounts, we know those sales.
Right.
They make up 20% of our sales in the third quarter, they grew faster than the company.
My last question is, you fully anniversary the data breach from a year ago. As you look back now, do you think that the breach had any impact on traffic to the stores in light of how strong traffic was for this period?
It's really hard to tell. Clearly, if you think back a year ago on our call, we talked about the fact that we were pleased that each month had positive transaction growth despite the breach. We again saw positive transaction growth, as Carol mentioned just a minute ago. When you look at a two-year stack comp basis, we've seen progression in two-year comps quarter after quarter after quarter, and we anticipate that we'll be able to do that again this quarter. It's really difficult to get at that number. The only other thing that I can tell you is, as we said last year, we know that there are customers who were upset based on the emails that we got. There had to be some impact. It's just really hard to quantify.
Understood. Thank you so much, and have a good holiday.
Thank you.
Yeah, you too.
Alan, we have time for one more question.
Okay. We'll take our last question from Scot Ciccarelli with RBC Capital Markets.
Hey, guys. How are you.
Great.
Great.
I believe you guys saw a bit of a slowdown in some of the energy-heavy markets in Canada, maybe nine months, 12 months ago or so, after energy prices turned down. I guess the question is, are you surprised you haven't seen more of an impact in some of the energy-heavy markets in the U.S., what would those differences be?
It's something that we were watching very carefully and certainly thought we might see some impact. Candidly, Texas would be the biggest market that would have those kind of impacts, we really haven't seen it at all. As I mentioned earlier, all of our major markets in Texas actually outperformed the company average comps, we've seen strength across the store.
Interesting. I guess the last question, since it's the last call or last question on the board here. Carol, any update on the extended terms test for the pro customer? I thought we were expected to hear something about that sometime in the fall timeframe.
You're going to hear all about it on December eighth.
Gotcha. All right. Thanks a lot, guys.
Thank you.
Thank you.
Thank you for joining us today. We look forward to speaking with you at our Investors and Analysts Conference next month.
That does conclude today's call. We thank everyone again for their participation.