Good day, everyone. Welcome to the Home Depot Q3 2015 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Ms. Diane Dayhoff, Vice President, Investor Relations.
Please go ahead, ma'am.
Thank you, Alan, and good morning to everyone. Joining us on our call today are Craig Meniere, Chairman, CEO and President is Ted Decker, EVP of Merchandising and Carol Tamay, Chief Financial Officer and Executive Vice President, Corporate Services. Is open. Following our prepared remarks, the call will be open for analyst questions. Questions will be limited to analysts and investors.
Is open. And as a reminder, we would appreciate it if the participants would limit themselves to one question with one follow-up, please. If we are unable to get to is available. During the call, please call our Investor Relations department at 770-384-2387. Is now available.
Now before I turn the call over to Craig, let me remind you that today's press release and the presentations made by our executives include forward looking statements is available as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks is being recorded and recorded. These risks and uncertainties
include, but are not limited to,
the factors identified in the release is available. Please 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.
Is now available. Thank you, Diane, and good morning, everyone. Sales for the Q3 were 21,800,000,000 is up 6.4% from last year. Comp sales were 5.1% from last year and our U. S.
Stores had a positive comp is open. Of 7.3%. Diluted earnings per share were $1.35 in the 3rd quarter. In the 3rd quarter, as we saw in is in the Q2. We had a broad based growth across our geographies.
All three of our U. S. Divisions recorded mid to high single digit comps. Is Every region posted positive comps in the quarter as did all of our top 40 markets. Is Year over year, the variability in performance across our regions has narrowed considerably.
On the international front, our Canadian business posted is 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 is a great day to day. 12 years of positive comp growth for our Mexican business. We saw growth in ticket is transactions and average basket size in the 3rd quarter, and we are particularly pleased with the strong transaction growth as each month in the quarter had is positive comp transactions.
We view our growth in transactions as a positive sign of our continued relevance with our customers. Is being recorded. As Ted 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. Is being recorded.
Our pro business continues to be driven by a strong offering of brands that pros demand, consistent product innovation is available as well as services that help them increase their business. During the quarter, we completed the acquisition of Interline Brands, is a leading national distributor of maintenance, repair and operations or MRO products. This acquisition builds on our is available for our customers. Interline gives us a national presence in the MRO market, is available, which will allow us to expand our share of wallet with our collective customers. We are diligently working our integration plans is and are excited about the opportunities that we see ahead.
The retail environment has been and is changing. Is being recorded. Our customers, both pro and DIY, are changing the way they shop for our products and services. Is being recorded. Our goal is to provide our customers with the convenient and fulfillment options they require.
Whether they buy products on is 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. Is being recorded. We're investing in making the process easier and frictionless. We continue to see healthy sales from our digital business. Is available.
Online sales grew approximately 25% in the 3rd quarter and represent approximately 5.1% of overall sales is And about 42% of all online orders are picked up in our conveniently located stores. Is We rolled out Mexico's digital commerce site during the first half of the year. And although we are just getting started, we are seeing great results. Is In Canada, we replatformed our website, which went live earlier this month. And back in the U.
S,
is open. We opened our 3rd
online customer contact center in Tempe, Arizona. All this is a further sign of our commitment is to be connected to the retail and our geographies. We continue to focus and invest in our supply chain to drive productivity and to deliver is a customer experience. As our customers are transacting more frequently through our online channels, we have invested in creating the right is available to support that growing business. During the Q3, we opened and began shipping from our 3rd new direct fulfillment is in Troy Township, Ohio.
With these 3 direct fulfillment centers, we now have the capability to reach 90% of our U. S. Customers is in 2 business days or less with parcel shipping. As you know, we have been piloting our new order alignment system, which we call COM, is available on the call as well as buy online deliver from store or bodfest. We're really pleased with the results of the compilot, is And we've laid out a rollout plan for 2016.
The Bodfus rollout will follow comp. Is In the 108 stores where we have bodhis, our on time delivery service is now exceeding our target. Is available on our website. This will also be rolled out in 2016. Turning to the macro environment.
Is While 2015 consensus U. S. GDP growth projections have moderated, we continue to see positive signs in the housing data
is recorded with home
price appreciation and housing turnover being key drivers of growth for our business. As Carol will detail, is We are guiding our fiscal 2015 sales to grow by approximately 5.7% with comps of is approximately 4.9%. This is after the effects of a stronger U. S. Dollar.
Year to date, is due
to a stronger U. S. Dollar, our sales growth has been negatively impacted by over $1,000,000,000 is We believe that the U. S. Dollar will remain strong through the Q4.
We are guiding fiscal 2015 diluted earnings per share to be 5 is $0.36 an increase of approximately 14% versus fiscal 2014. Is Let me close by thanking our associates for their hard work, dedication and commitment to our customers. Is available. Based on this quarter's results, 99% of our stores would be eligible for Success Sharing, our profit sharing program for our hourly associates. Is available.
And with that, let me turn the call over to Ted.
Thanks, Craig, and good morning, everyone. We were pleased with our performance in the 3rd quarter as sales exceeded expectations. We saw strength across the store as well as continued growth in our online business. Is open. All of our merchandising departments posted positive comps.
Appliances, tools, plumbing, decor, is being recorded. Lighting, hardware, building materials and indoor garden were above the company average. Outdoor garden, kitchen and bath, is available on the call. Electrical, millwork, flooring, lumber and paint were positive but below the company average. Is being recorded.
Pro heavy categories continue to show great strength, and we saw double digit comps in power tools, commercial lighting, HVAC, fencing and power tool is available for the Q3. Additionally, flooring tools and materials, siding, concrete, fasteners, roofing, builders hardware and compressors had is at the top of the list. The core of the store continued to perform well across the country as we saw strength is in the range of
10% and 10% and 10% and 15% and
15% and 15% and 15% and 15% and
15% and 15% and 15% and 15% and 15% and is recorded. All had double digit comps in the quarter. Wet drybacks, wiring devices, pipe and fittings and ladders is head comps above the company average. There is also strength in decor projects with comps above the company average in special order window coverings,
is available on our website, and we'll be conducting a few more questions.
Our Halloween and Harvest and Labor Day events provided great values and were well is received by our customers, resulting in double digit comps in decorative holiday, organization and appliances. Sales of grills, Soils and Bulches, 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. Is being recorded.
We updated our roofing clusters to tailor our roofing brands to specific markets and customers, and we introduced more high definition laminate shingles. Is This process yielded great results in the Q3. 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%, is a While comp ticket increased 0.9% for the quarter, our average ticket growth is a bit distorted due to the stronger U. S.
Dollar. Is in the U. S, our average ticket was up 2.6%. Finally, commodity price deflation in certain products is available. 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. Is open. Transactions for tickets under $50 representing approximately 20% of our U. S. Sales were up 3.6% for the 3rd quarter.
Is available for the Q3 of 2018. Transactions for tickets over $900 also representing approximately 20% of our U. S. Sales were up 7.8% in the 3rd quarter. The The drivers behind the increase in big ticket purchases were appliances, roofing and countertops.
Is now available.
Now let me turn our attention to the Q4.
We recently introduced the new Husky 100 platform of mechanics is available for our DIY and Pro customers. This new platform was designed with speed and access in mind. Is available for the Q3 of 2019. These tools feature a 100 position gear system that allows the tools to work in tight areas where normal mechanics tools cannot perform. Is available for the Q3.
This new family of tools is exclusive to The Home Depot and offers a lifetime guarantee. In the Q4, we are also pleased to introduce is a very exciting year for the year.
We are pleased
to announce that we have a very strong year for our pro customers. This easy to install fan is a very important part of our customer's valuable time. We have an outstanding offering of product in our gift centers for the holiday season is available in our best line of the Eden holiday decor. Our gift centers will feature an extensive assortment of hand empowered tools, including amazing values is from Milwaukee, Makita, DeWalt, Ryobi, Rigid and Diablo. The gift centers will also feature an impressive is a line up of tools and storage boxes from Husky.
In holiday decor, we have become a leading destination in the category, is being recorded both in store and through our expanded assortment online. We continue to focus on bringing innovative and exciting offers to our customers is being recorded 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 is a very strong quarter for the traditional DIY customer and our professional customer, including some amazing offers on appliance suites. Is being recorded.
With all of these exciting products, events and great in store execution, we look forward to driving a strong holiday season. Is being recorded. With that, I'd like to turn the call over to Carol.
Thank you, Ted, and hello, everyone. Before I begin, I'd like to remind you that this is the Q1 where we are including Interline Brands in our financial results. While the acquisition closed in late August, is open. Our 3rd quarter results include 1 month of Interline as we are accounting for Interline 1 month in arrears. Is open.
Finally, while in line results are included in our consolidated financial statements, they are not yet included in certain operating metrics is a great slide comp sales, sales per square foot, average ticket or transaction. So with that, in the 3rd quarter, Sales were $21,800,000,000 a 6.4% increase from last year. Versus last year, a stronger U. S. Dollar negatively impacted total sales growth by approximately $413,000,000 or 2%.
Is. Our total company comps or same store sales were positive 5.1% for the quarter, with positive comps is up 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 is recorded and 7.1% in October.
Our monthly comp sales were a bit distorted by the timing of Labor Day this year versus last year. Is being recorded. 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 is 8.8% in September and 7.1% in October. Our total company gross margin was is 34.7 percent for the quarter, an increase of 34 basis points from last year.
Our gross margin expansion is explained by the following. Is being recorded. First, we had 24 basis points of gross margin expansion as we reached certain higher co op and rebate tiers and recognize that benefit in our cost of goods sold. 2nd, we had 15 basis points of gross margin expansion in our supply chain, is due primarily to lower fuel costs and a higher penetration of products flowing through our RDC network. And third, we had 5 basis
is a key point of gross margin expansion from lower shrink.
These three items drove gross margin expansion of 44 basis points, is expected to be offset by 10 basis points of gross margin contraction due to the impact of Interline. Is recorded. For fiscal 2015, we continue to expect our gross margin rate to be about the same as what we reported in fiscal 2014. Is being recorded. In the Q3, operating expense as a percent of sales decreased by 88 basis points to 21%.
Is being recorded. Total operating expenses were approximately $14,000,000 higher than our plan, driven by expenses related to our data breach. Is recorded. In the Q3, we incurred $20,000,000 of legal and litigation related expenses in connection with our data breach. Is open.
In the Q3, our expenses grew at approximately 33% of the rate of our sales growth, reflecting solid expense control and sales leverage. Is being recorded. For the year, we expect our expenses to grow at approximately 47% of our sales growth rate. Is recorded. Our operating margin for the quarter and for the 1st 9 months of fiscal 2015 was 13.7%.
Is being recorded. Interest and other expense for the Q3 was $240,000,000 up $127,000,000 from last year. Is being recorded. The year over year change reflects 2 items. First, interest and investment income decreased by $98,000,000 is as we lap last year's $100,000,000 gain on sale of HD Supply common stock.
Is 2nd, interest expense increased by $29,000,000 from last year, due primarily to higher long term debt balances. Is being recorded. In the Q3, our effective tax rate was 37.1%, and we expect our income tax rate to be approximately 36 is 0.5% for the year. Our diluted earnings per share for the 3rd quarter were $1.35 is an increase of 17.4 percent 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 Q3, we opened 3 new is open. For an ending store count of 2,273. Total sales For the Q3 were $3.66 up 5.3 percent from last year.
Now turning to the balance sheet. Is at the end of the quarter, inventory was $12,500,000,000 up $487,000,000 from last year.
Is open. On a currency neutral
basis, inventory dollars grew by $721,000,000 of which approximately $324,000,000 was the result of the Interline acquisition. Inventory turns were 5 times compared to 4.8 times last year. Is being recorded. Payables were up $339,000,000 from last year. On a currency neutral basis, payables were up 4 is $66,000,000 including $134,000,000 of interline payable.
Moving to our share repurchase program. In the is recorded. 3rd quarter, we received 1,300,000 shares related to the true up of an accelerated share repurchase is recorded for ASR program we initiated in the 2nd quarter. Additionally, in the Q3, we repurchased approximately $2,000,000,000 is recorded for $15,100,000 of outstanding share. This included 5,000,000 shares repurchased in the open market is being recorded and 10,100,000 shares repurchased through an ASR program.
For the shares repurchased under the is a 3rd quarter ASR program. This is an initial calculation. The final number of shares repurchased will be determined is upon completion of the ASR in the Q4. For the remainder of the year, we intend to repurchase approximately $2,000,000,000 of outstanding stock is for total fiscal 2015 share repurchases of approximately $7,000,000,000
is recorded.
During the quarter, we raised $1,500,000,000 of senior notes to finance the Interline acquisition. We now have $20,900,000,000 of long term debt, is, of which $3,000,000,000 comes due on March 1, 2016. We plan to refinance that debt is being recorded prior to it coming due. Computed on the average of beginning and ending long term debt and equity for the trailing 4 quarters, is recorded for 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, is recorded. We are providing a point estimate for our sales, comp sales and diluted earnings per share growth guidance. Is now open. We now believe that fiscal 2015 sales will grow by approximately 5.7% with comps of approximately 4.9 is available.
Our sales and earnings per share growth guidance is higher than the low end of our previous guidance is available as it includes our 3rd quarter outperformance and continued momentum in the U. S. Is available. Our guidance also assumes foreign exchange rates remain at current levels through the Q4. We estimate a stronger U.
S. Dollar will impact our total sales growth is recorded
for the year
by approximately $1,400,000,000 For earnings per share, remember that we guide off of is now. For fiscal 2015, we project our diluted earnings per share to grow approximately 14% to $5.36 is being recorded. This earnings per share guidance assumes foreign exchange rates remain at current levels through the Q4 and includes our intent to repurchased approximately $2,000,000,000 in additional shares in the quarter. So we look forward to talking with you at our Investor Conference on December 8, is now available, where we will update you on key strategic initiatives and lay out our new 3 year financial targets.
Is open.
So we thank you for your participation in today's call. And Alan, we're now ready for questions.
Thank you, ma'am. Will take our first question from Simeon Gutman with Morgan Stanley.
Thanks. Good morning. Nice quarter. First question on the gross margin drivers, is open. 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 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 that.
Is open.
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. Is This was effectively reaching higher purchasing tiers in certain categories like roofing. And as Ted described, we just had an outstanding roofing business. Is As we look into the 4th quarter, looking can be impacted by weather, of course, but we would envision that performance would continue. Supply chain, we would expect to have continuing benefits from our supply chain as our RDC network continues is expected to mature.
I will say, however, as you're building your model for the Q4, we do expect year on year for our gross margin to be down. Is Why? Because we will be selling a lot of lower margin goods as Ted described in his remarks.
Is Got it. Okay. And then one follow-up on expenses. The business did a great job once again and you held the line despite some of the increased volumes.
Is open. 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 is Like some corporate or indirect savings that you continue to realize?
Well, thank you. We were pleased with our expense leverage in the Q3. Mark Powers and his is a great day. Our voice of customers results have never been is higher, while also driving productivity within the hourly sales force. So hourly payroll leveraged 41 basis is 8 points in the quarter.
But 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 6 basis points of benefit in the quarter. Is. Well, we had breach expense in the quarter. We had $8,000,000 less breach expense this year than last year.
So that was another driver of is open. For us, productivity is a virtuous cycle, and you see that in the 3rd quarter results.
Okay, thanks.
Is now open. 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 is in the 3rd quarter because of interline will be a 30 basis point headwind versus the 10 in the 3rd quarter.
Yes. Thank Thank you for mentioning that. We will have 3 months of operations of Interline in the Q3. The Interline gross margin, as you probably have seen by looking at their public is available. Their gross margin is lower than ours, so that will be an impact to year on year performance.
I will also comment, is However, that Interline's operating expenses as a percent of sales are lower than ours. So we won't have an expense pressure from Interline in the Q4.
Is open.
Understood. And then on the Craig, you mentioned a comment about the narrowing of the performance gap is open to the call for questions. Some thoughts on what you're seeing there. What geographies are, I guess, are catching up to the average? Is available.
Any comments on the Houston market and any other commentary you want to add there would be great. Thanks.
Yes. Let me I'll start with Texas. We have roughly 178 stores in Texas. We look at all the major markets in Texas and they actually performed above the company average in total. Is The narrowing of variability by markets, it was roughly the spread was roughly 6.5% in 2015 compared to 10 point is 4% in 2014.
So we're very, very pleased as we work to continue to focus on High and narrow variability and dry performance up across the geographies.
Okay. And then, is open. I guess, question on everybody's favorite topic, which is weather. How should we think about El Nino 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 1Q 'twelve, people could do roofs is in the Northeast in January because it was so warm. But on the other hand, you have a big home heating and snow removal exposure in 4Q. Is in queue. So 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 is running deeper into the season. The potential offset to that is a much cooler, wetter is Southern situation. So it really depends on how this plays. We'll be in position, as we always are to is Make sure we take advantage of whatever categories will be the drivers in the different geographies.
And then with any luck, is open. It brings rain to California, which is desperately needed.
Understood. Thanks very much.
Is being recorded. 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.
Yes, 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. Is and then 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. Is 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 is seeing big spenders within that or is it just kind of broad based across the group?
Yes, we haven't seen a meaningful
is a range 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.
Is So if we
look at our managed accounts and those would be large spend pros, they grew faster than the average in the Q3.
Okay, great. Thank you.
Is now open. Next we'll go to Dan Binder with Jefferies.
Hi, good morning. Thanks. Good morning. Ted,
is. 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 is Asset and water heaters this quarter. You talked about roofing. Can you give us a little bit of color on where we are? And if it was a 9 inning game, are we still in the early innings is
Well, I would say it's always hard to put it in the innings. Is open. I would say our tools are maturing nicely. Those are mid innings for sure. Is And then the merchants' utilization and the whole change management and speed of how we review categories and ultimately get the refreshed product set in the store is is our new focus area, and we're aiming to increase the speed of transitions of product in the store, is And that's in earlier innings, but in terms of the tools, we're getting pretty well developed there.
And Dan, at our investor conference in early December, Ted will go is And some more detail here. Okay.
Carol, I don't think anybody asked yet, but just relative to your Q4 plan, how is 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 will end the Q3.
Yes. I mean, weather is as we talked earlier, weather is a factor in is a very important question.
Our business, whether it is in a particular
category, clearly, with is Warmer weather, you're not selling a lot of the winter categories right now, but time will come on that. Is And so you do get an advantage in outdoor projects, when the weather stays better.
Great, great job. Thanks.
Thank you.
Is open. Next, we'll go to Brian Nagel with Oppenheimer.
Hi, good morning.
Good morning.
Congratulations on a very nice quarter.
Thank you.
The is Question I had, and I guess it's mostly for Carol, Ted maybe too. We talked about before, but just kind of an update given a lot of the headlines we're seeing from other retailers And data in general, but what you're seeing with respect to wages and maybe some pressure any potential pressures upon The Home Depot model from higher wages is recorded in your
system. We like every other company are looking at what's happening with the wage market. And in parts of the country where there is high employment and there is wage is We adjust, but we are able to work through that through the great productivity model that we have in our stores.
Is open.
Yes. We will continue to adjust market by market as we see the dynamics of each market unfold.
Is open. Okay.
That's very helpful. And then any I know it's early and I'm sure you'll discuss this more in your a lot more at your December meeting, but is 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, I
is I mean, we're in
the very early stages of integration, and we're working through that. We're excited about the opportunity. Is open. We know that there is an overlap with our vendor community, and we will get synergies from that and are beginning to get is Synergies already. We also know that we've taken our first actions on kind of a little bit of the reorganization of folks where we have is duplicate efforts that we don't need going forward.
So we're in the early stages, but we're excited about the opportunities that we see.
Is. If I could just add a comment from the macro perspective, we saw household formation up 1,000,000,000 households formed in the 3rd quarter. Is Many of those households moving into multifamily units. The Interline acquisition gives us a great selling vehicle to serve that new is Household, if you will.
Got it. Thank you and congrats again.
Thank you.
Is open. Next, we'll go to Aram Rubinson with Wolfe Research.
Hey, everybody. Good morning. Thanks for letting me ask the question. Is 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 and of course is just kind of 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, is that we will look at acquisitions where it gives us the ability to gain capabilities that is being recorded. We might not want to go build ourselves. And so if you think about some of the acquisitions that we've done, the Black Locust acquisition gave us is a data science capability that's being leveraged by our merchants, for assortment and price. If you think about the Crombold acquisition, that was basically a company that was built for us, is That we sold when we sold HD Supply.
We got it back. That gives us different distribution capabilities is available for small packaged goods in our stores. The Interline acquisition gives us the capability to better serve our is Through customer through things like open account, through 93 points of distribution where we can deliver same day, next is today. So this is all about how do we actually get capabilities. Beyond that, is really not looking for acquisitions.
Right. So you might think, well, do you need to buy a marketplace? No, we can build that. Do you need to buy a services is open. No, we have one.
So those are capabilities that we don't need to acquire.
Thanks. And then just a follow-up.
Is open. I know that in order to prepare for
the future, you've kind of migrated some categories out of the store at the margin, patios, grills, etcetera, figuring you can sell that online and devote is another 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?
Is I would say on that, we already have a model that leverages, a nice interconnected complement of is being recorded. So we're leveraging an interconnected model from the day we developed our appliance model.
Is open. Okay.
Already showrooming then. Well, thank you, and good luck this quarter.
Thank you.
Is being
recorded. Next, we'll go to Jamie Katz with Morningstar.
Good morning. Thanks for taking my questions. I'm curious if you guys could comment is On capital allocation policy and outside of share repurchases, what other opportunities you guys are seeing to is To deploy capital and maybe to focus on either a product or merchandising innovation in light of the fact that, shares have run up is open pretty robustly over the last few years.
We have a disciplined and balanced approach when it comes to capital allocation. The first use of is available
for the
Q3 of 2019.
This year, we'll spend
about $1,600,000,000 in capital back in the business, is supporting our growth. We then take our excess cash and first pay 50% of our earnings in a dividend. And the way that works is at the end of the year, we'll look at how much we've is earned. We will cut it in half and that will be the new dividend. If there were to ever to be an earnings disruption, we wouldn't cut the dividend.
Is We would just earn back into that 50% payout. And then excess cash is used to repurchase shares. We think that's the best is Exact of cash rather than leaving it on the balance sheet, which would be value diluting to our shareholders. We do have an adjusted debt to EBITDAR target is 2x. We're at that ratio right now.
So we have used the financial leverage judiciously, both to support acquisitions as well as to buy back our shares. Is being recorded. As it relates to valuation of our share price, we do have a point of view. We're not at that intrinsic value. So is to outperform and that intrinsic value continues to increase.
Okay. And then I think you made some additional commentary on spend for the data breach. Do you guys see those is Expenses wrapping up over the next quarter or 2 or is it still sort of to be determined?
Well, is There are ongoing legal fees as well as litigation activities. We've estimated another $5,000,000 of expense in the 4th quarter, is But there could be more. None of that 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 is in the Q2.
Okay. Thank you very much.
And bigger than a bread box is not a financial term, but you know
is being recorded.
Now we'll go to Seth Basham with Wedbush Securities.
Good morning and thank you for taking my question.
Is good
morning. My first question is around the consumers' behavior in the store in terms of trading up. Are you seeing more activity of consumers trading up to is 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, in 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 is a sense of how much better the pros comping relative to the DIY customer and whether or not that gap has increased or decreased over the last few quarters?
Is I mean our large spend pro, as Carol mentioned earlier, is actually comping above the company average, and that's been a driver certainly is And our Pro Recovery. And that hasn't changed dramatically in the last few quarters. It's been pretty consistent.
Is Got it. And as you look forward, when you think about all the services and brands you're offering in the Pro and the macro environment, You think that type of gap can persist or would you expect it to increase?
I mean, we would certainly expect it to continue.
Is Got it. Okay. Thank you very much.
And moving on, we'll go to Mike Baker with is your bank.
Hi, thanks guys. A couple of questions. 1, the industry data that a lot of us look at the NAICS data has been very is a viable indicator for your comps historically, although the last couple of quarters you guys have far outpaced that is data at really an accelerating pace.
Do you
see that as taking incremental market share? And if so, where do you think you're taking it from?
Is Well, if I could
just jump in on the market share, the census data, the NYX-four forty one would suggest that we have grown markets there.
Is Yes. And
again, we compete with a lot of folks across is Each of our product categories, it varies widely by product category. Whether that's other big box, whether it's is wholesale distributors, whether it's digital competitors. So we are very focused is a category by category as to where are the largest opportunities to grow our business and take share.
And that share on a rolling 12 to September was 56 basis points
up.
Is Got it. Understood. One more question I wanted to ask. Just on the really strong comp last year, Could you remind us if weather did play an impact on that? And what I'm getting at is a really harsh winter up here in the Northeast.
Is How much did that help or perhaps it hurt the comp last year and how should we think about that as we cycle against it? For is Just roofing. Everyone I know up here in Boston had a leak in the roof. I assume your roofing business is still being helped by what happened last winter.
Is open. Sure. And I think that's the key is that based on the weather, and we did have impacts from weather last year, it then impacts is These categories differently from a timing standpoint. So as you mentioned, tough winter last year in the Northeast. Certainly, as you get into the is Spring, you see people making repairs on things like roofing and then in some cases, a lot of live goods needed to be repaired as well.
Is But then that obviously is offset by categories. If it's a warm winter, nobody is doing is. Yes, you're doing all type projects and nobody was doing that last year. So those are the dynamics category by category that affect our business, is 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. And if you look at our U. Is U. S. Comp on a 2 year stack basis.
We've seen acceleration from Q1 to Q2, Q2 to Q3. And And now with the guidance that we've just given you, that's acceleration into Q4 as well.
Understood. Okay. Yes, we all learned the term ice dam and roof rake is Apparent in 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 and good morning. Good
is Saks.
Thanks a lot and good morning. Good morning. My first question relates to big ticket projects, which continue at a very nice clip. Is Anything of a business that gives you a leading indicator as to project oriented business, whether it's people looking for bids, taking samples, is set around some of the more project oriented categories.
No, I think as Ted mentioned, while we had pressure from is Deflation in lumber, we are very pleased with our unit productivity and pleased with what we saw in our pro business. And as we is I said the largest PennPRO is leading the pace there and above the company average. That clearly is Those lean to bigger ticket projects, the building materials business, bigger ticket projects. Is So we're very encouraged by that spend with the customer. And then likewise, is open.
You look at categories like appliances, that's a big ticket spend as well. So we don't really see
is a slowdown, if you will, in big ticket.
And Matt, if I can add from a macro perspective.
If you
look at home equity lines of credit, they're down 20 8% from the peak, but 17,000,000 home equity lines have been planted this year and 28% of the banks who are underwriting those is The lines of credit are stating that their underwriting is starting to ease a bit. So think about how people use their home equity lines, it typically goes into a bigger project is It's like a kitchen remodel or that sort of thing. So it's a bit encouraging as we think about Q4
and beyond.
Thank you. And then a quick follow-up. Craig, you you spoke earlier about the reality that retail is changing, consumers are shopping differently and your online business continues to grow nicely, there's still only 5% is under the mix. How do you guys think about the long run operating margin implications of this? And you think is about the amazing flow that 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 is rapidly and I'm not sure if it's possible to think about the incremental margin on a transaction delivered versus picked up in the store is Or shop without any e commerce intervention. But as you look out the next 2 or 3 years, and you might tackle this a bit in early December, is How do you think about the role of omni channel on your financial and impacting your financial model?
So the way we look at it, quite candidly is is open. As one business and an interconnected approach, couple of things. 1, is We shared with you that we did what we called COGS A. So we looked at normalizing how we account for things is is issued earlier, 42% of our online orders are picked up in our stores. So it's a very much a is a blended mix, and we look at it as a blended mix.
And so we see it is More of the same going forward. And we'll probably we'll provide a little bit more outlook is being recorded. As we go into our December investor conference in terms of how the business is coming together is By channel, but certainly view it as one Home Depot for the customer.
Thank you. Is now open.
Now we'll go to Kate McShane with Citi.
Is Ms. McShane. Your line is open. Please go ahead. I'm sorry.
Thank you. Good morning.
Good morning.
I'm wondering if I could follow-up on is The e commerce questions. With the opening of the 3rd fulfillment center, how do you view the actual store as a fulfillment is And are you looking to use anything like Instacart or Google Express as a way to further your omnichannel experience?
Is I mean, I'll just say that we do a lot of deliveries from store today, but Mark Holifield is here, I'll let him comment on this.
Yes, our
is 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 that we have rolling in 108 stores now and will roll out in 2016 allows us to take orders online, drop them to is in place for 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. Is open. 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.
Is open.
Okay. And if I can just follow-up on that question. Have you seen any meaningful change in the consumer behavior is With regards to, again, mobile shopping or shopping through the website sequentially, so a meaningful change from Q2 into
is Q3. No, not really. We've grown pretty comparably quarter to quarter.
Is open. Thank you.
Next, we'll go to Michael Lasser with UBS.
Is 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.
Is open. So can you tie your
share gains to specific categories that you've invested in? Or do you think it's is coming from the expense of some competitors who are experiencing turbulence as a result of self inflicted wounds is Or alternatively, could we just be at the point in the cycle where the incremental consumer who's coming in To the home improvement market is more compelled to go to the big box home center channel.
Is open. Yes. I would start on the investment piece first. Absolutely, we see terrific is a very important topic. Productivity in the areas that we have invested in from what we can track.
We believe we're taking share in these areas, and is I'd highlight 3. 1 would be, with lithium ion battery technology and power tools and now is a very strong quarter. We have an extremely robust lineup of brands and product is in values in power tools and believe we're taking meaningful share there. LED is in light bulbs and now increasingly integrated into light fixtures. We've been very aggressive following the development Of that technology, we 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. And then in appliances, certainly, we've been expanding square footage for is being recorded. And time now investing into floor space and adding some additional brands to our portfolio there. We saw is double digit comps in appliances yet again this quarter and believe we're taking share in appliances.
And to your question about where are we on the cycle, we're doing a lot of is working 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 Harvard Joint is open. And for housing studies as well as John Burns Real Estate Advising Firm, is that homes that are older than 45 years tend to be is being recorded. And in fact, the amount of money spent on repairs in those older homes is 5.6% is higher than the amount of money paid to repair a home that's about 20, 24 years old. There are 40,000,000 homes in the United States that are older than 40 years.
Is So 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 is in our homes.
Cowen, do you have any insight into whether someone who lives in older home would have a greater propensity to go to is a big box store versus some other retailer like a specialty player?
Is We don't have that kind of insight, but we'll continue to study.
And what I would say on that is the merchants will continue to focus on is Products that make it easier for our pros as well as our consumers to be able to do those kind of projects.
Is open.
Okay. And Craig, you've been very careful on the call to categorize your large is pro spending customers as outperforming the overall business. What about the pro business in totality versus the rest of the business?
Is I mean 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 is Our pro credit card data that shows, we've lost some visibility in the small pro with our data breach is That we're working to regain. So that's probably why we don't talk as much about our smaller Pro. But 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 it's is That customer data that we have specifically. Yes.
To put some numbers behind it, if you just look at pro sales on our private label credit card is As well as managed accounts, we know those sales. They make up 20% of our sales in the Q3 and they grew faster than the
company. Is and
my last question is you fully anniversaried the data breach from a year ago. Do you think and as you look back now, do you think is that the breach had any impact on traffic to the stores in light of how strong traffic was for this period?
It's really, really hard is available. Clearly, if you think back a year ago on our call, we talked about the fact that we were pleased that each is Carol mentioned just a minute ago, when you look at a 2 year stack comp basis, we've seen progression in 2 year comps is quarter after quarter after quarter, and we anticipate that we'll be able to do that again this quarter. Is So 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 is Customers who were upset based on the emails that we got. So there had to be some impact.
It's just really hard to quantify.
Is under the line of David. Thank you.
You too.
Alan, we have time for one more question.
Okay. Then we'll take our last question from Scot Ciccarelli with RBC Capital Markets.
Hey, guys. How are you?
Great.
I believe you guys Saw a bit of a slowdown in some of the energy heavy markets in Canada, maybe 9 months, 12 months ago or so, is After energy prices turned down. So 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? And what would those differences is
being recorded.
It's something that we were watching very, very carefully is And certainly thought we might see some impact, but candidly, And Texas would be the biggest market that would have those kind of impacts. We really haven't seen it at all. Is As I mentioned earlier, all of our major markets in Texas actually outperformed the company average comps, is And we've seen strength across the store.
Interesting.
And then is 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 is About that sometime in the fall timeframe.
You're
going to hear all about it on December 8.
Got you. All
right. Thanks a lot, guys. Thank you. Thank you.
Is open. Thank you for joining us today, and we look forward to speaking with you at our Investors and
Analyst Conference next month.
And that does conclude today's call. We thank everyone again