Good day. Welcome to The Home Depot Q1 2015 earnings call. Today's conference is being recorded. If you would like to ask a question during today's call, please press the star key followed by the digit 1 on your touch-tone phone. At this time, I'd like to turn the conference over to Ms. Diane Dayhoff, Vice President, Investor Relations. Please go ahead.
Thank you, Audra. Good morning to everyone. Joining us on our call today are Craig Menear, Chairman, CEO, and President, Ted Decker, Executive Vice President 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, those factors identified in the release and in our filings with the Securities and Exchange Commission. Today's presentations may also include certain non-GAAP measures. Reconciliation of these measurements is provided on our website. Let me turn the call over to Craig.
Thank you, Diane. Good morning, everyone. Sales for the first quarter were $20.9 billion. Total sales and comp sales were up 6.1% from last year. Diluted earnings per share were $1.21 in the first quarter. Our U.S. stores had a positive comp of 7.1%. We were pleased with the start of the year. We saw a more normal spring across much of the country in the first quarter. All three of our U.S. divisions posted mid-single digit comps or higher. Our Western division was our best performing division, with strength in key markets including San Francisco, Sacramento, Colorado, and Seattle. All 19 of our U.S. regions saw positive comp growth in the quarter. Both tickets and transactions grew during the quarter, with particular strength in transaction growth. While our seasonal businesses were strong in the quarter, core categories also contributed to our performance.
As Ted will detail, we were pleased with the growth in our pro categories, and our installation service business saw sales growth above the company average in the first quarter, with strength in countertops, windows, and water heaters. On the international front, both our Mexican and Canadian businesses exceeded our expectations in the quarter. Ricardo and his team in Mexico posted double-digit comps in local currency, making it 46 consecutive quarters of positive comps. Bill and the Canadian team posted comps in local currency above the company average, making it 14 consecutive quarters of positive comps. Operationally, in the quarter, we hired over 75,000 associates to ramp up for our spring season. Flexibility is required to be successful in spring, our associates and store operators were able to do just that.
They efficiently managed the freight flow within the store while maintaining focus on providing strong customer service in the aisle. Our second-generation FIRST Phone enabled us to expedite the checkout process for customers during peak traffic periods. We had the highest first-quarter transactions in company history, at the same time, saw our Net Promoter Scores improve during the quarter. As I mentioned on last quarter's call, we expected a challenging transportation environment in the first quarter due to the West Coast ports. While this proved to be true and created some pressure on in-stock rates, our supply chain team worked vigorously and creatively to mitigate this condition. The situation is improving, and we'll continue to work to recover our in-stock levels. The retail environment continues to evolve, blending the digital and physical worlds together, we at the same time are building out our interconnected capabilities.
For the spring season, we worked to further connect our in-store and online experiences. From a marketing approach, we leveraged our digital marketing capabilities to more effectively target customers with relevant products and special buys. We not only offered more spring season product online, but also leveraged digital media channels to highlight local in-store assortments and create footsteps to our stores. In the store, our mobile app helped customers identify product locations with our enhanced product locator. We are also interconnecting our distribution networks to more effectively meet the customer's demand for fulfillment options. We have begun to roll out the capability to flow buy online, ship to store orders through our rapid deployment centers, or RDCs, creating a more efficient flow to the stores.
For the quarter, our online sales grew almost 30%, with our digital properties being our virtual storefront, we were pleased with online traffic growing double-digits in the quarter as well. We'll continue to invest in mobile, search, and creating a frictionless transaction across the different channels. While it's early in the year, our view of the macro environment has not changed much. The U.S. GDP growth was below consensus estimates for the first quarter, housing data remains positive and supportive of the housing recovery. The growth that we see in our business also supports the view of a continued recovery in the U.S. housing market. As Carol will detail, because of our outperformance in the first quarter relative to our plan, we are increasing our sales and our earnings per share guidance for the year.
We now expect fiscal 2015 sales growth of approximately 4.2%-4.8%, and project diluted earnings per share of $5.24-$5.27. We remain focused on investing in our business and our associates, as well as taking care of our customers. I'd like to thank our associates for their hard work and dedication. Based on this quarter's results, 93% 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 first quarter, as we saw continued strength across the store. Sales were aided by a more normal spring and great events, including our annual Spring Black Friday. The departments that outperformed the company's average comp were tools, indoor garden, outdoor garden, decor, lighting, plumbing, and appliances. Kitchen and bath, lumber, hardware, millwork, building materials, paint, flooring, and electrical were all positive, but below the company average. Pro heavy categories continue to show great strength, as we saw double-digit comps in siding, power tools, commercial lighting, fencing, and power tool accessories. In addition, pressure treated decking, compressors, windows, tile setting materials, concrete, boards, insulation, and fasteners all had comps above the company average.
Outdoor project categories were also strong during the quarter, as we had double-digit comp sales in lawnmowers, chemicals, outdoor power equipment, planters, lawn accessories, and grills. The core of the store continued to perform well across the country, as we saw strength in maintenance and repair categories. Water heaters, cleaning, hand tools, air circulation, wiring devices, adhesives, and light bulbs all had comps above the company average. In decor categories, vanities, special order cabinets, ceiling fans, bath fixtures, decorative lighting, and tile also had comps above the company average. Our seventh annual Spring Black Friday delivered strong sales as the stores drove excitement around special buys that were well received by our customers. Comps in gardening tools, soils and mulch, watering, live goods, and patio were all above the company average. We continue to work to mitigate the effects of the drought in California using our planning and assortment tools.
We're featuring more water-saving products and landscape options like moisture control, soils and mulches, drip irrigation systems, and drought-resistant plants like succulents. In addition, our stores in California are holding clinics to educate customers on these products and how to reduce water usage. As a result, both the indoor and outdoor garden departments in the Western Division posted comps above the company average. Total comp transactions grew by 4.4% for the quarter, while comp average ticket increased 1.7%. Our average ticket increase was negatively impacted by commodity price deflation, mainly from copper. The total impact to ticket growth from commodity price deflation was approximately negative 15 basis points. Tickets for transactions under $50, representing approximately 20% of our U.S. sales, were up 3.2% in the first quarter. Transactions for tickets over $900, also representing approximately 20% of our U.S. sales, were up 6.8% in the first quarter.
The drivers behind the increase in big-ticket purchases were riding lawnmowers, water heaters, appliances, windows, and sheds. Let me turn our attention to the second quarter. We continue to be the leader in the marketplace for innovation and value that save our customers both time and money. Nowhere is this more apparent than in the exciting lineup of new products for our pro customers. We are pleased to introduce a new lineup of DEWALT and Makita pneumatic nailers, both exclusively sold at The Home Depot. These are strong national brands that our pro customers know and trust. The new DEWALT nailers are compact, lightweight, and feature innovative TruSight nose technology that allows for faster and more accurate nail placement, saving our pros time on the job site. Utilizing our field merchants and our planning and assortment tools, we constantly refine our assortment.
Some product categories are sourced nationally and some are sourced regionally. Based on customer preference and the output of our tools, we recently refined our assortment in roofing. We added an assortment of Owens Corning shingle products in select areas of the United States, including California, where they are one of the top professional shingle brands. Pros are increasingly shifting to cordless platforms that offer the power and runtime of gas. New from Echo is a 58-volt lithium-ion battery platform featuring a string trimmer, hedge trimmer, blower, chainsaw, and lawnmower. These tools feature a brushless motor for superior power and performance that rival, and in some cases surpass, their corded and gas-powered counterparts. In addition to all the great new products, we're excited about our upcoming events.
The outdoor season is upon us. We will help our customers enjoy it with an incredible lineup of great values and special buys for our Thrill of the Grill, Memorial Day, Father's Day, and Fourth of July events. With that, I'd like to turn the call over to Carol.
Thank you, Ted. Hello, everyone. Before we discuss our first quarter results, I want to call out a change in our accounting policy for certain shipping and handling costs related to store deliveries and online sales. In order to better align our costs across all selling channels, these shipping and handling costs are now included in cost of sales, whereas they were previously included in operating expenses. We changed the policy this year. Accordingly, have reclassified 2013 and 2014 results. The impact of the reclassification in the first quarter of 2014 was an increase of $128 million to cost of sales and a corresponding decrease of $128 million to operating expenses. For fiscal 2014, the impact of the reclassification was an increase of $565 million to cost of sales and a corresponding decrease of $565 million to operating expenses.
The reclassification has no effect on operating income or to net earnings. With that, let's move on to our first quarter results. In the first quarter, sales were $20.9 billion, a 6.1% increase from last year. Versus last year, a stronger U.S. dollar negatively impacted total sales growth by approximately $234 million, or 1.2%. Our total company comp or same-store sales were positive 6.1% for the quarter, with positive comps of 4.1% in February, 6.8% in March, and 6.8% in April. Comps for U.S. stores were positive 7.1% for the quarter, with positive comps of 5% in February, 7.8% in March, and 7.9% in April. Our total company gross margin was 34.4% for the quarter, an increase of four basis points from last year. In the first quarter, we had 21 basis points of gross margin expansion in our supply chain, driven by lower fuel costs and increased productivity.
This expansion was offset by a change in the mix of products sold and slightly higher shrink than one year ago. For fiscal 2015, we continue to expect our gross margin rate to be about the same as what we reported in fiscal 2014, which, after applying the change in our accounting policy, was 34.1%. In the first quarter, operating expense as a percent of sales decreased by 83 basis points to 21.9%. Our expense leverage reflects the impact of positive comp sales growth. Total expenses were $15 million over our plan in the quarter, due to $7 million of net expenses incurred as part of our data breach and higher late season snow removal costs. Given our strong sales performance, however, we leveraged expenses to plan. For the year, we are now expecting our expenses to grow at approximately 35% of our sales growth rate.
Our operating margin for the quarter was 12.4%. Interest and other expense for the first quarter was $193 million, up $102 million from last year, reflecting for the most part a pre-tax gain of $97 million on the sale of HD Supply common stock, which was not repeated this year. In the first quarter, our effective tax rate was 34.3% compared to 36.9% for the first quarter of fiscal 2014. The reduction in our first quarter 2015 effective tax rate was due primarily to the settlement of a tax audit. We now expect our income tax provision rate to be approximately 36.4% for the year. Our diluted earnings per share for the first quarter were $1.21, an increase of 21% from last year. Our diluted earnings per share for the first quarter included a $0.05 benefit related to the settlement of the tax audit I just mentioned.
Moving on to some additional highlights. During the first quarter, we opened one new store in Canada and ended the quarter with a store count of 2,270 and selling square footage of 236 million. Total sales per square foot for the first quarter were $354, up 5.9% from last year. At the end of the quarter, inventory was $12.3 billion, virtually flat to last year. But that's a bit distorted due to a stronger U.S. dollar. On a currency-neutral basis, inventory dollars were up approximately $124 million from last year. Inventory turns were 4.7 times, compared to 4.4 times in the first quarter of last year. Payables were up $331 million from last year, reflecting the seasonal nature of our business. Our payables were also distorted by the impact of a stronger U.S. dollar. On a currency-neutral basis, payables were up $416 million from the prior year.
In the first quarter, we repurchased $1,125,000,000, or approximately 9.9 million shares of outstanding stock. For the remainder of the fiscal year, we intend to repurchase approximately $3.4 billion of outstanding stock using excess cash, bringing total 2015 share repurchases to $4.5 billion. Computed on the average of beginning and ending long-term debt and equity for the trailing four quarters, return on invested capital was 26.1%, 490 basis points higher than the first quarter of fiscal 2014. When we built our 2015 sales plan, it was based on U.S. GDP growth forecasts of approximately 3% and about 150 basis points of growth coming from continued recovery in the housing market. While GDP was weaker than expected in the first quarter, housing data, namely home price appreciation and household formation, were a little ahead of the assumptions we used to build our plan. Even in the face of a stronger U.S.
dollar, our sales in the first quarter were better than our internal sales plan. Further, our earnings per share were stronger than our internal plan, reflecting a lower tax rate and more expense productivity than we anticipated. As a result, we are raising our sales and earnings per share growth guidance. On a currency-neutral basis, we now expect our 2015 sales to grow by approximately 4.8%, with comps of approximately 4.6%. If the U.S. dollar remains at current foreign exchange rates, we would expect our fiscal 2015 sales growth rate to be 4.2% and comps to be approximately 4%. For earnings per share, remember that we guide off of GAAP. On a currency-neutral basis, we now expect fiscal 2015 diluted earnings per share to grow by approximately 12% to $5.27.
If exchange rates remain where they are today, our projected fiscal 2015 diluted earnings per share would be approximately $5.24. We thank you for your participation in today's call. Audra, we are now ready for questions.
Thank you. We'll go first to Seth Basham at Wedbush Securities.
Good morning, thank you for taking my question.
Morning.
My question's around the big-ticket purchases by consumers. Can you talk in more detail about trends you're seeing there? Trends in big-ticket purchases not driven by the pro.
I would say, Seth, we're seeing really strength across many departments. Water heaters, appliances, our tools, riding mowers, walks, all of our outdoor garden categories, grills, et cetera, had just a terrific quarter. Those wouldn't be pro-focused items.
I might jump in and just give you some demographic information. As we look at our customer base, we're seeing some interesting trends. Since 2009, spending in high-income households has grown faster than low-income households, driven in part by higher-end homes recovering faster than lower-end homes. When we say higher-end homes, we are talking of homes of $200,000 and up. Interestingly, as we look at our consumer base, over 50% of our customers have homes of $200,000 or more, and you compare that to the national average, which is more like 40%. We think just the nature of our customer base is helping drive this big-ticket growth.
Seth, the other factor that I'd throw on that is our services business was strong again in this quarter, outpacing our company average, and the average ticket there is north of $1,500.
That's helpful. Just as a follow-up, does that imply, based on the data that you just talked about, that we're seeing a broadening recovery here with even lower-end and mid-income consumers doing more big-ticket discretionary projects?
I would say that, if you look at the strength both in the small ticket as well as the big ticket, we're seeing a broad sales pattern across the store and across the demographics.
Got it. Thank you very much.
We'll go next to Chris Horvers at JPMorgan.
Thanks. Good morning, everybody.
Good morning.
Good morning.
You mentioned that this was a normal spring. Do you think there was any pull forward from the second quarter in the spring business? Can you shed some metrics on a way to think about what the underlying trend in the business is and where we are in the cycle? Perhaps, what outdoor categories comped overall relative to what the comp in the core and the Pro was.
Yeah, I'll let Carol provide. She has some details in terms of the numbers. When we look at this business as it's playing out this year, appears to be much more towards a 2010 type of scenario, which was a more normalized spring overall.
Here are some numbers. If we look at our garden department, our garden department in the U.S. made up 19% of our sales and 26% of our growth. If you compare that to last year, which wasn't a normal spring, our garden department made up about 18% of our sales, but only 4% of our growth. This ratio of 19% penetration and 26% of growth is more normal for us. We don't believe that we have pulled forward sales, nor do we believe we will lose sales or grow sales more than our plan in the second quarter.
You're one of the rare retailers that have reported an acceleration in comp in April. I think a lot of retailers are talking about weakness in April and essentially guiding down the second quarter. Can you shed some light on how you think about the second quarter and what the business is telling you so far in May? Thanks.
Yes, we haven't changed our outlook for the second quarter. In fact, we haven't changed our outlook for the year. If there's a bias in a forecast, we believe the bias is to the up. We are pleased with our performance in May.
Thanks very much.
We'll move next to Simeon Gutman at Morgan Stanley.
Thanks. Good morning. It's Simeon. How are you? Carol and Craig, you guys have done a nice job framing the outlook in terms of macro and housing, with the various phases, I think build-up and steady growth. I'm not sure if I'm naming them right. Not sure how, and if it's incorporated, but rising interest rates, inevitable over time, a lot of debate in terms of what we're going to see in terms of magnitude, but in general, it should imply an improving macro. I'm curious how rising rates are factored into your outlook and into that longer term, any considerations there?
Well, let's look at the affordability index, because that's a big impact to how people feel about their homes, what kind of homes they can afford, et cetera. The analysis would suggest that interest rates, and these would be mortgage interest rates, could rise 200 basis points, and the affordability index would still be north of 100%. Even in the face of potentially higher rates, and who knows when that might occur, but even in the face of potentially higher rates, we don't see any near-term pressure on our business. In fact, to your point, that could suggest a little inflation in the economy, and that would be a good thing.
Wouldn't be a bad thing.
Okay. My follow-up, you mentioned in the script, your AP ratio was up, I think 300 basis points, AP to inventory, year-over-year, which is quite solid. Can you talk about where it's coming from, and is anything changing in the way you're approaching the payables or your vendors in that regard?
No, this is just a function of purchases. We're buying up-
Spring
to support the sale. It's springtime, nothing has changed in our payable terms.
Okay, thanks.
We'll take our next question from Michael Lasser at UBS.
Good morning. Thanks a lot for taking my question. It's on the nature of the first quarter sales and how it relates to the rest of the year. If you look at the idiosyncrasies of the quarter, how is it different? If we look on a multi-year stack basis, not just last year, but for the last five years, the stack comps on a three- and four-year basis have been slower than you've seen for the rest of the year. I guess it's important because if we look what your outlook is implying, that it's a nice acceleration on that basis. Is there something different about the nature of demand as you move out of winter and into spring, aside from just the weather?
Yeah, I think, we always look at the half, first of all, because the quarters in the first half can play out very differently based on how the weather plays. You're right, when you look at multi-year stacks, the first quarter has had a tendency to be a softer multi-year because for the past several years, we've seen slower start to our spring selling season.
Other than weather, the only other anomaly I can think of was Superstorm Sandy.
Yeah
the impact that it had in terms of.
Right
creating a real variation in our stacked comps.
Yeah.
Those are really the drivers.
Okay. My second question is on the change to the accounting policy. Do you expect that to have any impact on your e-commerce sales, which continue to grow at a very impressive clip? For example, do you think that the behavior of some of your merchants will change as they're now going to be essentially expensed shipping charges? How will that manifest in the business? Thanks.
Well, this is all about driving interconnected retail at The Home Depot. Our core merchants are responsible for the sales and margin dollars of all online activity, all channels. They're really looking at two different P&Ls. To drive an interconnected experience and give them visibility of their comprehensive profitability and performance of their categories. Merchandising are very excited about this change to get aligned and have one P&L the whole business.
As Craig pointed out, our dotcom sales grew nearly 30%. In fact, they contributed 20% of our overall company growth in the first quarter, and we made the change at the beginning of the year.
Yeah. It's just important to be able to give our merchants common visibility and we manage our business on a portfolio approach. To be able to actually look at the businesses in a common way just gives them better information overall.
Okay. That helps. Thank you so much.
You bet.
We'll go next to Scott Mushkin at Wolfe Research.
Hey, good morning.
Good morning.
You've got a merchant now as a CEO, and I'm wondering what differences that makes throughout the organization when it comes to maybe pace of innovation on merchandising, speed to markets, and even risk, in terms of risk-taking on the merchandising front. Any perceptible differences there that we should expect?
Scott, I would say that, first of all, we've been focused for a while now on trying to create excitement for our customers and our associates in the stores through product innovation. That will continue. It's something that's hugely important, not only to obviously our customers, but we know it's our job as a team to excite our associates, and we firmly believe that when we do excite our associates, they drive it in the marketplace better than anybody out there. That is our primary focus. I think what Ted actually brings to the party is he's taken it to a different level and looking at a much more end-to-end approach from supplier all the way through customer. I think that piece will be different than what actually I did when I sat in Ted's chair.
I can assure you that product will remain a focus for our company.
Let me ask a second question. I know your execution in the stores continues to be excellent. I am wondering if you can help us benchmark. You touch the customer in a number of different areas, stores, services, buy online, pickup in store, homedepot.com. Is there a way for you to handicap your voice of the customer feedback and grade each of those so we have a sense as to where your execution falls relative to the other businesses?
We actually do look at that under multiple facets, Marc Powers is here. I will let Marc speak to that.
We look at and survey our customers in many different ways through all the channels and pay very close attention to it, whether it be our voice of the customer inside the store. We also work with ForeSee to see how we are doing on our execution, on our buy online pickup in store or our buy online ship to store. We also have a VOC for our pro, how they are experiencing The Home Depot experiencing with our Pro Xtra program. Anywhere we are contacting and engaging our customer, we are asking them to provide us feedback on their experience, and we pay very close attention to it.
On a scale of one to 10, how do we rank in the store versus online versus buy online, pickup in store versus services?
I would say in all of those, they are trending up, continue to trend up, and we are very pleased with the progress we are making in all channels with our customer experience.
Very vague, thank you for that anyway.
We'll go next to Michael Baker at Deutsche Bank.
Thanks. A couple of questions on the Pro. Last quarter, you talked about a private label credit card, extending terms for the Pro customer, I meant to say. Can you discuss how that's going? I think you'd seen better items per basket for the Pro customer, which you saw as a positive sign. Can you discuss trends there?
On the private label pilot that we have been conducting, it's in about 260 stores. This is where we're offering terms as well as fuel reward points. We're very pleased with the results thus far, and we anticipate making a go, no-go decision soon. Everything got pushed back a bit because of the data breach. We hope to make a decision soon. On the Pro, I can just give one data point, and that is just looking at what we know. We look at managed accounts as well as sales on our commercial private label card. Both managed accounts and sales on our commercial private label card make up over 20% of our total sales. In the first quarter, we saw growth outperforming the average company growth. We were very pleased with the Pro in total.
Okay. Helpful. Great. Thanks. If I could ask another follow-up. I think last quarter you said you expect the first quarter comp to be the best of the year, I think because of the easier comparisons. Is that still the case in your outlook?
We still expect the first quarter to be the best quarter and that the halves to be similar.
Okay. I'm going to sneak in one more if I could. Sorry, everyone. I know that in your garden business, you actually do have some winter product in there, like, I think the ice pellets, the ice melting pellets and the like. How much of that really strong growth in garden was due to winter product and how much is due to what I would refer to as true spring products?
It's largely true spring. We had a particularly tough start in the Northeast in February with cold and ice, and certainly, we sold some ice melt. Really the warming trends in a much more normal spring across the whole country, it really was a true garden story.
Okay. Very helpful. Thank you.
We'll take our next question from Seth Sigman at Credit Suisse.
Great. Thanks very much. A question on the expense productivity. Carol, I think you said SG&A now expected to grow at 35% of sales growth, a little bit less than you had talked about previously, despite what seemed like a couple incremental costs in the first quarter. Can you talk about where some of those savings are coming from? Related, I think you said that the expense growth factor would be higher in the first half. Just what's the right way to be thinking about that as we move through this year?
Yes. Nothing has really changed on the expense front. As we called out, we had higher expenses in the first quarter than our plan. Why the expense growth factor is declining from our original guidance is all a factor of sales. We had a considerable beat to our plan in the first quarter, and we're rolling that forward for the full year. This company defines operating leverage. The more sales you get, the more leverage that you get. It's just a function of our new sales outlook. In terms of the expense growth factor broken down by half, we would expect the expense growth factor to be higher in the first half of the year than the second half of the year.
Okay, great. Just a specific category question related to the flooring business. Obviously, there's been a lot of noise in that category. What are you guys hearing from consumers, and are you making any changes to your assortment? I guess just in general, I know you have a number of different tests going on. Maybe you could just speak about the performance and what you're seeing there would be helpful.
I would start with just a comment that we're really not hearing much from consumers at all. I can let Ted explain growth in categories.
Yeah, certainly a lot of noise, nothing that we've been able to quantify in an impact in our business. Flooring did comp below the company average, but we're seeing nice trends there. In tile, it's really the story for us. Tile continues to perform very well. We did 600-odd stores where we put in the expanded hard set showroom, which is really about getting a lot more tile displayed and available for sale in bulk, and that continues to perform very well. It's all at the space optimization play to move into flooring categories where trends are seeing more in hard surface than carpet. We'll continue to look for those opportunities. We've been pleased with the results of those 600-odd stores.
Got it. Thanks very much.
We'll go next to Brian Nagel at Oppenheimer.
Hi, good morning.
Morning.
Morning.
Congrats on another nice quarter.
Thank you.
Couple questions. First off, with respect to buybacks, if you look at the stock you bought back here in Q1 and then the guidance, seems like you're basically tracking along with your plan. As we think about the balance of the year, is there any reason to believe or any shift in thinking with regard to taking on extra debt to buy back additional shares?
Brian, our adjusted debt to EBITDA ratio stands a little under 1.8 times. You know our target is not to exceed two times. We have the capacity right now to borrow about $3 billion to take us back up to target. It is not our intention to let our adjusted debt to EBITDA ratio decline, as it will with more earnings. It's not our intention to let it decline, and as you've seen us act in the prior couple of years, we've taken advantage of market opportunities to bring in some incremental debt and use that for share repurchases. Nothing to announce today, but it certainly is not our intention to let the ratio decline.
Our board has authorized an $18 billion buyback program through 2017.
Got it. It's very helpful. To set my follow-up question, I guess I'll bounce this one. Looking at your market model, I think you guys do a very good job of framing how The Home Depot's business is tracking along the lines of the macroeconomy. What we've seen lately is, I think, improving housing turn, even with some of the data we got this morning. As you look at your business and the drivers behind that business, are you starting to see a benefit of maybe a modestly more robust sales environment for homes helping The Home Depot?
Certainly, the housing trends that we see in the market are positive and, as Carol called out, in some cases above our assumptions overall. Certainly, when home values go up, it gives customer confidence to drive into the project business. When we see home turnover, that generally drives activity as well.
Right. Home price appreciation is a big driver. Home prices are up 5% year-over-year. That's higher than our plan. The other driver is household formation, and it looks like there'll be 1 million households formed this year, which would be awesome. In fact, I am always fascinated by this statistic. If you look at people between the ages 18 and 34, nearly a third of them are at home with their parents. If they were all to leave their home nest, like my nephew just did, thank goodness. That's 4 million households that would be created. I'm just really excited about what the future may be for our business.
Yeah.
Thank you very much.
We'll take our next question from Jaime Katz at Morningstar.
Good morning. Last quarter, you guys commented on using merchandise planning tools to improve a number of different categories across the store. I'm curious if there were any incremental lessons learned about how to improve the operating margin line across the board.
I think one of the principal lessons we're learning is that you're never done on the journey of continuing to optimize your assortments and your space. We used to have resets and PLRs and line reviews as an event, and it would be every one year, every two years, every three years, and then you wouldn't pay particularly as much attention to that category. What we're doing now is building the tools so you can have a much more fluid review process and constantly be optimizing your assortments. That notion of never really being done and building tools that are flexible enough and easy enough to use to have a continuous productivity and improvement loop is one of the key things I'm discovering.
The most important piece of that is that starts with sales. It's all about driving the productivity in sales, which then delivers the gross margin dollars.
Okay, do you have any additional commentary on the tightness in credit availability? I think last quarter you commented that it was still very tight. Has there been any movement in the data that you guys have seen?
There's slight movement. It seems to be thawing slowly, like a glacier melt, but slowly. Interestingly, the number of mortgages that are being underwritten by FHA, these are insured mortgages, is up year-over-year. That's actually pretty encouraging because it means first-time homeowners are finding a way to get into a home. This is slow.
Okay. Thank you.
Thank you.
We'll go next to Dan Binder at Jefferies.
Hi, good morning. It's Dan Binder.
Morning.
I had a few questions. I know you've commented on your gross margin outlook for the year. Just longer term before the reclassification, you had a 35% longer-term gross margin outlook. Has that changed as a result? Are we looking now at something closer to this 34.1% or 2% with the reclassification?
Dan, we would say 34 is the new 35. We do have an investor conference coming up at the end of this year, we'll give you a longer-term outlook on all of our margins.
Okay. My second question was on the Pro. Just in prior conversations, you've talked about different initiatives there. I'm just curious where we are on the scheduling systems I think you wanted to put in place to improve on the delivery windows.
Yeah. On the delivery, we are still in pilot on that delivery program. It is about being able to more consistently drive delivery in narrower windows, as well as better utilization of our assets. Mark Holifield is here if you want a conditional comment.
Yeah. We've got the program in pilot in a couple of markets, we're learning how this works and working through the details so that we can provide the customer a flawless experience. We're offering two-hour windows, four-hour windows, then next day, or just all-day delivery windows. The pilot's going well. We're taking the learnings and continuing to improve the process.
Just lastly on the deflation, you mentioned a little bit here in Q1, is there an expectation that will increase in Q2 in terms of the pressure on the comps?
We're not forecasting an improvement. We know against commodities, copper prices, and lumber prices are down meaningfully on next year, and we're anticipating this staying as is for now.
Okay, thanks.
We'll go next to Matt Fassler at Goldman Sachs.
Thanks a lot, good morning.
Morning.
My first question actually relates to the accounting change. If you think about the SG&A that you had previously or the expenses you had previously allocated to SG&A, those numbers were growing with your online sales, which were growing at a pretty rapid pace. If you look at the numbers in 2014 versus 2013, for example, it seemed to be a decent piece of your SG&A growth. Is the accounting change influencing the ratio of expense dollar growth to sales dollar growth that you're thinking about either for this year or on a go-forward basis?
Matt, it is not. When we put forward guidance at the beginning of the year, I looked at it both pre what we call COGS alignment and post-COGS alignment, just to make sure I wasn't going to give you some distortion on the guidance. It has no impact at all.
Got it. Thank you. You mentioned the port situation, clearly, you put up very good numbers, despite some pressure from it. Can you talk about the categories where you think you saw impact and if it's feasible or material to quantify what it might have done to your inventory numbers, your in-stock, your sales, et cetera? Any quantification would be very helpful.
Sure. Mark, do you want to?
Sure. Yeah, Matt, as we mentioned last quarter, the West Coast ports have been a very challenging situation for us. The team here has done a great job in terms of working together to mitigate the issues there. Having said that, we have had negative impact on our in-stocks, particularly for our direct import items. We've also seen some hits to our fill rates from vendors, and that has led to lower in-stock than we would like to see. Our inventory probably is a little lower than we would like it to be, given where it's at. That inventory is coming, and it's recovering as the port has gotten a lot better.
Do you want me to quantify this for you?
Yeah.
The impact to in-stocks was about 20 basis points.
That's it. Got it.
Yeah. It's very hard to measure sales impact because what our store Associates do, and they do a beautiful job of this, if you come into the store and you can't find what you're looking for, our store Associate's going to take you to something else.
Our best thinking is $60 million-ish.
Great. Thank you so much, guys.
At the most.
Appreciate it.
We'll move next to Scot Ciccarelli at RBC Capital Markets.
Good morning, guys. The first quarter kind of continues a trend that we've seen in terms of a lot of sales breadth across categories and geographies. I guess what I'm wondering is, of the 7% of the stores that did not qualify for Success Sharing or profit sharing, is there any common denominator there, whether it's geography or pro or DIY mix or something you can put your finger on?
It's weather, plain and simple. If you look at the areas in New England, very late start to the spring selling season.
Gotcha. Okay. The second question kind of related to the geography is, we have started to hear some sporadic data points from various retailers in terms of some weakness where they're operating in energy-impacted markets. Have you seen that play through, whether it's in some of the Texas markets, some of the Midwestern markets, where obviously there's been a big oil patch kind of retraction?
We have 178 stores in the state of Texas. We've seen no visible impact whatsoever in that state at this point. Matter of fact, all our major markets in that state posted mid-single-digit comps. It's something that we're keeping our eyes on very closely, and we'll adjust accordingly if need be, but have not seen it at this point.
Excellent. Thanks a lot, guys.
We'll go next to Dennis McGill at Zelman & Associates.
Hi, good morning. Thanks.
Morning.
Carol, just a quick one on the guidance. Can you just tell us what you're assuming for the domestic side on same store sales for the year?
We don't break out comp guidance by U.S. versus total. No.
Okay. Separately, on the inventory side, it seems to when you adjust for FX, the turns are very strong.
Yes
quarter over quarter. Can you maybe just talk to where you are in the process of taking inventory out of the channel and where you expect the cash flow and the inventory management to be this year?
We want to do this the right way. We don't want to do it by going out of stock. This year, in fact, our targeted turns are 4.8 times. If you'll recall, a few years ago, we thought we'd get to five times by the end of this year. We're not going to get there because we want to do it the right way. The good news is that we've got a number of initiatives underway that once they are fully employed, I think the five times turn will be something considerably higher.
Right.
That won't be in 2015, there's more to come on the inventory story at The Home Depot.
Can you put any context around where you're seeing the best management today as far as categories go?
On inventory?
Yeah.
You mean on the inventory turns within categories?
Yeah, just on the management side. Are there certain categories where you're seeing more opportunity than others?
Yeah, I think when we actually go through our Product Line Reviews process, this is something that we incorporate into those reviews. The merchants are looking at not only how they can drive more top-line sales and productivity out of the product categories as well, but they're looking at how they optimize inventory productivity and first and foremost, in-stock within that. We've seen improvement in categories that we've actually run through our model.
Okay. Thank you.
We'll take our next question from Greg Melich at Evercore ISI.
Hi, thanks. I actually still have a couple questions. The ticket decelerated, it seems, to 1.7% growth. Was that a U.S. or a global figure? Help us understand the deceleration, especially given the success in large tickets.
Yes, the ticket we called out was a total company ticket. FX impacted ticket by $0.58 year-over-year. That's a pretty big drag.
Yeah.
The U.S. ticket would have been two three?
Yes.
Even in that U.S., there seemed to be a deceleration. Was there something working behind that? A mix of product?
It's the impact of our garden business being more normal-
Yeah
than what it was a year ago.
Okay, that makes sense. Then my follow-up was, I guess, a little bit bigger picture. I think in the prepared comments, you guys mentioned that you had the most transactions ever, in the first quarter. I guess if you think about that longer term, do you think you need to add capacity in any way? Maybe not footage, but more fulfillment centers. How do you think about that, Craig, longer term in terms of allocating capital, and being able to serve all the customers rightly?
In most cases, we're still operating a single shift, if you will, through our distribution network. We have the ability to add a lot of capacity through the asset base we own.
Yeah. It's Mark Holifield here. We don't have any development plans right now on further distribution centers. For the core side of the business, we have been, of course, improving our direct fulfillment capabilities, and we will be bringing on the new direct fulfillment center in Troy, Ohio in the second part of this year.
Thanks.
We'll go next to Jessica Mace at Nomura Securities.
Hi. Good morning.
Good morning.
I had a follow-up question on the market model, and just on the above-plan sales with below-consensus GDP. I was wondering if there's anything you can point to outside of the better housing metrics and the weather that accounted for the bridge to that performance, perhaps in the competitive environment or market share shifts.
Well, it's very difficult for us to get a good measure on market share. If you look at the census data, which is a good proxy for it, census data showed us growing our market share somewhere around 10 basis points-
Yeah
to over 27%.
Right.
Okay, great. Then, also with the strong sales results, I think last quarter you mentioned that there were 16 of your 40 categories which were still below peak, and just wondering if this strong top-line momentum has taken any of those 16 categories out of the below-peak status.
Not yet.
Not yet.
Working on it.
All right. Thank you so much for taking the questions.
Thank you.
You bet.
We'll go next to Peter Keith at Piper Jaffray.
Hey, thank you very much. Good quarter.
Thank you.
As kind of a follow-up to Jessica Mace's question, I'm just wondering about this overall retail wallet share shift that seems to be occurring. Obviously, home price appreciation helping, but you guys are comping high single digit in $900 mowers and water heaters. I guess I'm wondering if you have a view on why the consumer seems to be allocating so much money to your industry relative to other parts of retail right now.
I would say that's a tough one to call out. There is the theory of the case that in some cases, there was a delayed spend, clearly during the economic downturn, and people focused strictly on maintenance of their homes. If you recall, our maintenance categories were strong throughout the economic downturn. When a home moves to a positive growth in terms of value, what was once an expense now becomes potentially an investment.
It's pretty easy if you look at your own personal balance sheet. It's easy to put a value on your home. It's easy to put a value on your stock investments or your bond investments, or even just the cash that you have in the bank account. Harder to put value on soft goods, harder to put value on other consumables. That could be one reason if you think about wealth creation, putting money into where you want to create wealth.
Yeah.
Okay. Well, that's helpful. I guess lastly, or maybe on a related note, I'm curious on the use of HELOCs, if you guys are seeing any evidence that there's more borrowing with HELOCs, which in turn is coming into your stores.
We're not current on the HELOC activity. Can't help you there.
Yeah.
Okay, good enough. Thank you very much.
Yep.
Thank you.
Operator, we have time for one more question.
We'll take that question from Eric Bosshard at Cleveland Research.
Good morning.
Good morning.
Just curious for Ted or Craig, as you think about mix and promotion and brand, what trends you're seeing and what you're doing either proactively or reactively in those areas in merchandising.
Eric, I'm sorry, I didn't catch the first comment.
Sure. Within product mix and with promotional-
Mix
activities. With brands.
Well, I don't think the general promotional activity in the marketplace in the first quarter, I'd say, was similar. We didn't really change our cadence, but we did in the events we did with things like the Spring Black Friday. On mix, we've seen the consumers, we've talked about this before, where we track all sales by various price points, we saw yet another quarter of where the consumer is buying up the continuum, and we are seeing higher comps in each price gradient as you go up the mix from OPP to good or best premium products. On brands, the consumer always is looking for value, the right product at the detail. I think we have a great mix of the right brands and our own private label product as well to satisfy that customer.
Eric, I'd say one other comment as it relates to the mix is with much of the country seeing a much more normal kind of spring, obviously, just outdoor projects in general were stronger in the first quarter than they were a year ago.
Okay. Then within brands and the strategy on private label, I know historically you've been sell the customer what they want. Is there anything that you're seeing different within there from the consumer or anything that you're intentionally focused on in regards to the private label or direct import penetration relative to national brands?
No. We still don't have a specific target on a private label penetration. We're over 15%. Again, we're letting the consumer choose the value proposition they want.
Great. Thank you.
All right.
Well, thank you everyone for joining us today, and we look forward to speaking with you at our next quarterly earnings call.
That does conclude today's conference. Again, thank you for your participation.