Good day, and welcome to The Home Depot Q2 'fourteen Earnings Call. At this time, I'd like to turn the conference over to Ms. Diane Jayhoff, Vice President of Investor Relations. Please go ahead.
Thank you, Audra, and good morning to everyone. Joining us on our call today are Frank Blake, Chairman and CEO of The Home Depot Craig Meniere, President, U. S. Retail and Carol Tomei, Chief Financial 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. Now before I turn the call over to Frank, 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 our filings with the Securities and Exchange
Commission. Today's Thank goodness. Let me turn
the call over to Frank.
Thank you, Diane and good morning everyone. Sales for the Q2 were $23,800,000,000 up 5.7% from last year. Comp sales were positive 5.8% And our diluted earnings per share were 1 We saw broad based growth in the quarter across all of our geographies. All three of our U. S.
Divisions posted mid Single digit comps with the variance of performance within 100 basis points of each other. We're pleased with these results Since we were anniversarying double digit comps in the Q2 of last year, every region positively comped as 38 of our top 40 markets. Our Mexican business positively comped for the quarter, making it 43 quarters in a row of positive comps. And our Canadian business continues to perform well with positive comps for the 11th consecutive quarter. Our dotcom business had sales growth of over 38%.
This was a slight deceleration from the Q1, but it was well ahead of our plan. This quarter, our sales comparison included the full rollout of buy online ship to store, which we launched last year. While our year got off to a slow start because of the late spring, we ended the first half with sales in line with our original expectations. We believe the housing market remains a modest tailwind for our business. We had growth in transactions and ticket for both the quarter and the Both our consumer and pro businesses grew.
Our installation services business, which is high ticket and tends to be These results support the view of a continuing recovery in the U. S. Home improvement market. Consensus GDP forecast call for modest growth for the year. And though the housing data is mixed, we believe home price appreciation It's an important positive for our business.
Price appreciation isn't setting the pace of last year, but it's still going in a positive direction consistent with our expectations at the start of the year. As Carol will detail, we are reaffirming our sales guidance and increasing our earnings per share guidance for year to reflect our outperformance this quarter and our outlook for the remainder of the year. Let me close by thanking our associates for their Hard work and dedication. A successful spring season for us requires flexibility in a difficult environment Our associates met the balance. This half over 97% of our stores qualified for success sharing our profit sharing program for our hourly associates.
We're proud of this result and hope to do even better in the second half. With that, let me turn the call over to Craig.
Thanks, Frank, and good morning, everyone. We're pleased with our results in the second quarter and saw continued strength in the core of the store in maintenance Our online business continued to show strong growth and our pro and service businesses had another quarter of solid performance. We also experienced a rebound in our seasonal businesses as spring broke across the country. I would like to thank our store associates as well as our inventory planning replenishment and supply chain teams who responded to the surge in seasonal Sales. Because of them, we were able to deliver a great quarter and we had some of our highest customer service scores in history for the 2nd quarter.
This is particularly notable given the fact that we had a record number of customer transactions. From a geographic perspective, all 3 U. S. Divisions had positive comps and beat their sales plan. All departments had positive comps for the quarter.
The departments that outperformed the company's average comp were tools, millwork, outdoor garden, electrical and kitchens. Baths, decor, plumbing, hardware, paint, building materials, indoor garden, Flooring, lighting and lumber were at or below the company average, all at mid single digit comps. The core of the store Tools, power tool accessories, water heaters and light bulbs all had double digit comps. Pro heavy categories Like windows, concrete, insulation, pressure treated wood, studs, fasteners, pipe and fitting and gypsum Had comps above the company average. Seasonal outdoor categories regained strength in the quarter.
We lost some sales in Grills, seed, soils, mulch and live goods in non drought affected areas more than made up for the loss. Tile and hardwood all had comps above the company average. Appliances also had Another quarter of outperformance, posting double digit comps. Total company transactions grew by 4.1% For the quarter, while comp ticket increased 1.7%. Our average ticket increase was negatively impacted by commodity price deflation mainly from lumber and copper.
The total impact to ticket growth from commodity price deflation Was approximately negative ten basis points. Transactions for tickets under $50 Representing approximately 20% of our U. S. Sales, up 3.1% for the 2nd quarter. Transactions for tickets over $900 also representing approximately 20% of our U.
S. Sales were 8.4% in the 2nd quarter. The drivers behind the increase in big ticket purchases were appliances, Windows, Water Heaters, Wood and Laminate Flooring. Our pro business was strong across the country. Total pro sales grew at approximately the company average, but sales from our high spend pro customers, which We define as those who spend more than $10,000 a year with us grew above the company average for the 10th quarter in a row.
Our services business also had another great quarter, posting comps over twice the company average. And services, solar, Window, HVAC and countertop installations were the main sales drivers during the quarter. We continue to drive efficiency through multiple initiatives. While in the early days, our new merchandising tools are starting to deliver benefits. For example, we can use clustering to better Quarter.
We have also changed the way we communicate with our customers and have shifted our approach to support a more targeted Personalized messaging to become more relevant to the customer. As a result, cost attributable to traditional print advertising Have been reduced by over 60% since 2010 and have been shifted to a more efficient digital delivery method. Now let me turn our attention to the merchandising and operational activities in the 3rd quarter. We continue to drive leadership in LED technology and are excited about the launch of our new light bulb reset that will expand our presence We're also introducing new products for the connected home including garage door openers, thermostats, water heaters and light bulbs. In addition to these new products, we have an incredible lineup of great values and special buys for our Labor Day and fall cleanup events.
Finally, we continue to enhance the customer service experience in our stores and provide our associates the tools In the second half of twenty fourteen, we are introducing the next generation of our first which is an associate and customer service tool. It will allow for Internet access to assist with questions and online orders And we'll be equipped to complete the checkout process in aisle for our customers. These exciting products, events and tools will allow our associates And before I turn the call over to Carol, I would like to congratulate Ted Decker, who was recently promoted To Executive Vice President of Merchandising, Ted brings a wealth of knowledge and Home Depot experience to this role. And with that, I'd like to turn the call over to Carol.
Thank you, Craig, and hello, everyone. In the 2nd quarter, sales were $23,800,000,000 a 5.7% increase from Our total company comps or same store sales were positive 5.8% for the quarter, With positive comps of 6% in May, 4.4% in June and 6.8% In July versus last year, a stronger U. S. Dollar negatively impacted total company comps by approximately 50 basis points. Comps for U.
S. Stores were positive 6.4% for the quarter, with positive comps of 6.6% in May, 5% in June and 7.3% in July. We were particularly pleased with our U. S. Comp performance, Given that last year, we posted an 11.4% positive comp in the 2nd quarter.
Our total company gross margin was 34.3 percent for the quarter, a decline of 1 basis points from last year. We saw a considerable amount of movement in our gross margin during the quarter as explained by the following factors. First, we experienced 16 basis points of gross margin expansion due primarily to Higher levels of co op and rebate and a modest positive impact from sales mix changes. This gross margin For the 1st 6 months of the year, our gross margin was essentially flat from the prior year. And for fiscal 2014, we expect our gross margin rate to be up a few basis points from what we reported in fiscal 2013.
In the 2nd quarter, Operating expense as a percent of sales decreased by 109 basis points to 19.8%. While our expense leverage reflects the impact of positive comp sales growth, we also experienced lower expenses year over year In several areas, including workers' compensation. Further, management bonus expense was $66,000,000 less than last Given relative year over year performance. Based on our year to date experience and our outlook for the balance of the year, We are now projecting our fiscal 2014 expenses to be lower than what we thought at the beginning of the year. As a result, we are projecting our fiscal 2014 expenses to grow at approximately 23% of our sales growth rate.
We would Our expense growth ratio to be higher than our guidance in the 3rd quarter and closer to our guidance in the 4th quarter given year over year comparisons. Interest and other expense for the 2nd quarter was $191,000,000 a $19,000,000 or 11% standing debt by $4,000,000,000 including $2,000,000,000 of long term debt issued in June of this year. 2nd, interest and investment income increased by $15,000,000 in the quarter, reflecting an additional gain on sale of HD Supply This brings the total pretax gain on sale of HD Supply common stock to $112,000,000 or approximately $0.05 of earnings per diluted share for the 1st 6 months of fiscal 2014, of which $0.04 was recognized in the Q1 and $0.01 was recognized in the 2nd quarter. We now own approximately 11,800,000 shares or 6% of HD Supply outstanding shares. Our income tax provision rate was 37.1 percent in the 2nd quarter, and we expect our income tax rate to be approximately 37% for the year.
Net earnings for the 2nd quarter were $2,100,000,000 the highest quarterly net earnings in our company's history. Diluted earnings per share for the Q2 were $1.52 an increase of 22.6% from last year. During the Q2, we opened 1 new store in Mexico for an ending store count of 2,264. At the end of the Q2, selling square footage was $236,000,000 and total sales per square foot were $404 up 5.5 percent from last year. Now turning to the balance sheet.
At the end of the quarter, inventory was $11,700,000,000 and inventory turns were 4.9x, flat to last year. We ended the quarter with $43,500,000,000 in assets, including $4,200,000,000 in cash and cash equivalents. Moving to our share repurchase program. In the 2nd quarter, we repurchased $2,250,000,000 or 23,100,000 of our outstanding shares. This included 6,200,000 shares repurchased in the open market and 16,900,000 shares repurchased through an accelerated share repurchase for ASR program.
For the shares repurchased under the 2nd quarter ASR program, this is an initial calculation. The final number of shares repurchased will be determined upon completion of the ASR in the Q3. For the remainder of the year, we intend to repurchase approximately 3 $5,000,000,000 of outstanding stock using excess cash and the proceeds from $2,000,000,000 of long term debt issued in June. For total fiscal 2014 share repurchases of $7,000,000,000 Computed on the average of beginning and ending long term debt For the trailing 4 quarters, return on invested capital was 21.9%, 280 basis points Higher than the Q2 of fiscal 2013. Moving to our guidance.
There are mixed signals in the housing data, But our planning assumptions remain intact. As we look to the back half of the year, we believe we will continue to report solid sales gains, And the sales plan we laid out at the beginning of the year is well within sight. Today, we are reaffirming our sales growth guidance for the year of approximately 4.8 percent and comp sales growth of approximately 4.6%. We expect the rate of comp growth for the back half of the year to be about 80 basis points higher than the rate of comp growth we experienced in the first For earnings per share, remember that we guide off of GAAP. We are lifting fiscal 2014 diluted earnings per share growth guidance by $0.10 and now expect fiscal 2014 diluted earnings per share to increase approximately 20.2 percent to $4.52 Our updated earnings per share guidance reflects our 2nd quarter performance as well as the impact of raising our 2014 share repurchase target from what had been $5,000,000,000 to now $7,000,000,000 So we thank you for your participation in today's call.
And Audra, we are now ready for questions. Thank
you. We'll go first to Aaron Robinson at Wolfe Research.
Hi. This is Chris Bottiglieri on for Aram.
Good morning, Chris.
Hi, good morning. Just want to ask a question about if you could Your decision making process that you're using to deploy and optimize space in your stores. Specifically, we're wondering like we've seen you reset patio, flooring, cabinets. Like what are the other glaring opportunities? What figures internally tell you that space allocation is making a difference?
And lastly, if you were to change the allocation overnight, Mike, what do you think the ultimate potential could be in terms of sales per square foot or anything else you could tell us? Thank you.
So Chris, from a space allocation standpoint, we obviously use both our financial systems as well as Our planogram software systems to be able to make decisions on the productivity of space. The investments we've made in Our merchandising tools are there to allow for our merchants to make assortment decisions that improve the productivity of obviously the space that we dedicate to our assortments. You have seen us make trade offs As you pointed out in terms of allocation shifts within Patio in this case as we've seen customers gravitate To the online space and the ability to customize their own product through the offerings that we have digitally That would be much more difficult to execute in a store environment or in spaces Like kitchens where the customer shopping pattern has changed in terms of how they begin to shop for kitchens And we could take some space out of kitchens for example and either apply that to an expansion of our assortment in appliances or for that matter our hard surface flooring. So those are the type of trade offs that we'll make on a consistent basis And look for opportunities to continue to drive productivity overall in our store, but for our sales in total.
And to your question as to how high is up, well, that's for us to figure out. But if we just look at appliances, for example, we have our expanded assortment Over 800 of our stores were rolling to another 183 stores and appliances contributed 50 basis points of our comp growth in the 2nd quarter.
That's great. Thank you very much.
We'll go next to Dan Minder at Jefferies.
Hi, Good morning. Congratulations on a great quarter.
Thank you. Thank you.
My question was I had 2 questions. 1 around Just the momentum you're seeing at the end of the quarter, anything that you would attribute to that? Any promotional events? And has that continued into Q3?
So when we look at the quarter and through the months, Very, very pleased, Stan, with the breadth of growth, if you will, across the store. Probably one of the tightest quarters in terms of when we look at all of our departments, the lowest comping department was north of 4% and the spread was pretty narrow. So we're very, very pleased with the productivity across all of our merchandising departments and also across all of our geographies.
And as we look into our performance for August, you may recall that last year, our comp in August was 8.7%. So we're up against our hardest comparison, And we are very pleased with our sales performance.
Great. My second question if I could was just around the SG and A. The lower Incentive comp was detailed. I was wondering if you could give us any color around the workers' comp impact to the quarter?
Sure. I'd be happy to. We've really worked Marvin and team have done a marvelous job of working on really making our stores a place where we have fewer injuries, So our workers' compensation expense was $42,000,000 down year on year.
Great. Thank you.
We'll go next to Simeon Gutman at Morgan Stanley.
Good morning. This is Joshua Cyber on for Simeon. Congratulations on a great quarter. So outside of the lowers workers comp, you guys posted nearly flat SG dollar growth versus nearly 6% sales growth. Just outside of the workers' comp, do you guys attribute that expense control to anything else?
There were a few other items I would call out, a legal settlement that we had last year of $23,000,000 that didn't repeat this year. But broadly speaking, we have A productivity cycle that drives our economic engine and we have a laser focus on just making sure that we've got Outstanding expense control and you can see that in the results. Okay.
And if you don't mind if I sneak one more in. Just curious how Have customers responded to a dedicated space for online orders? Have you guys seen a pickup in the pro business because of this?
We've roughly about a 3rd of our online transactions culminate in a store. And that is split across both consumer and pro.
Okay. Thank you very much.
We'll move next to Kate McShane at Citi Research.
For Q2, we assume that some of the comp benefit was from storm related damage sales. Do you expect to You'll see some impacts from this in Q3.
The overall storm comp From a year ago as you move into Q3 is very, very small. We've pretty much cycled through it as we come off of Q2.
Are you referring Kate to the damage from the winter that we had?
Yes. Damage from the winter. It's hard
to be honest to tease that In the numbers, I mean what you saw was a very strong recovery of our outdoor garden business, but We're not able to pinpoint what percent of that came from storm damage.
And to Craig's comment about the storms that were anniversarying From Superstorm Sandy, this might be helpful to you. If you look at our 6 month comp in the United States, it's a 5% comp. We had about 50 basis points of pressure in that comp coming from the Superstorm Sandy overlap. And to Craig's point, we will be through that beginning in Q3. That's very helpful.
Thank you.
We'll go next to Brian Nagel at Oppenheimer.
Hi, good morning. Good morning. Congratulations on another very nice quarter.
Thank you.
Thank you.
The question I had, you called out big ticket as a driver here and I think response to one of the other questions you mentioned appliances. But the question I have is maybe give us a little more color around either the ongoing strength Seeing the appliance category or if you're seeing big ticket of another nature start to inflect higher here at this point in the cycle?
We were very pleased, Brian, with our performance in appliances, double digit comp growth, as Carol mentioned, 50 basis points of overall comp Contribution. And that's a result of obviously the expanded assortments and the expanded showroom. We also believe we're delivering great value in our events that we put into play But also in big ticket, we've seen a nice recovery in the millwork business As customers clearly feel better about investing in their homes, we've had an outstanding Product in terms of our expansion and use of tools to put our new water heater program in place As well as growth within our flooring business led by wood and laminate with the investments that we've made into our Hard set program there. Roughly, we began the year with about 2 25 stores with an expanded assortment. By the end of this year, we'll have 600 with an expanded presence there.
So it's more than just appliances that we're seeing. And as our large pro continues Recover are pros driving a larger ticket than the consumer basket on a consistent basis.
I might also just call out services because they had such a terrific quarter. The comp twice the company average and the average ticket within our services business is $1500
Very helpful. And then just a quick follow-up, market share, any color you can give us there on the heels of it showing in sales?
Well, our area Brian is really hard. I mean we look at 3rd party Reports on market share, government reports on market share, what our vendors say about market share and they would say it's going in the right direction.
Thank you. Congrats again.
Thank you.
We'll take our next question from Christopher Horvers at JPMorgan.
Hi. This is actually Mark Beckett on for Chris. Congrats on the great quarter.
Thank you.
First question, just trying
to get a sense we previously talked about the potential bathtub effect and Bad tub effect and impact from weather and seasonal versus what's going on in the core of the store. Is it possible to put A number of comp benefits that you think you captured just in terms of share shift in volume from Q1 to Q2? And then if you could give a little bit more Detail on the core trends of the business. Thanks.
Sure. I mean this is imperfect, but directionally correct. So in the United States, we reported a comp of 6.4% in the 2nd quarter. We know we had 20 basis points of pressure anniversarying Superstorm Sandy sales, and we think we got about 150 basis points of benefit from this seasonal business. So that would suggest then the run rate for the business is about 5%.
Excellent. And then just trying to tease out expectations for Q3 and Q4 a little bit more. Previously you've articulated Comps being in a pretty narrow range with Q4 comps slightly ahead of Q2. But given the large outperformance in the second
A higher comp quarter than Q3, but slightly under what we reported for Q2.
Great. And then one other question. The comp and the EDI just rolled out last quarter. I was wondering if you can give Update in some of the early results and progress that you're seeing there.
We're very early on in the rollout of the program, but it is going It's to special order programs, consumers being able to get that update in terms of the status of their order Based on how they want to receive it, whether that be text or e mail. So it will drive an efficiency in Communication and it will drive greater visibility also for our merchants in terms of overall performance On special orders, so very pleased with the current status of how that's rolling out. Early days still.
Excellent. Thank you.
Welcome. And we'll go next to Scot Ciccarelli at Royal Bank of Canada.
Hey, guys. Hi. Understanding that certain expenses, Carol, like you kind of pointed out, shrink and workers' comp, etcetera, will bounce around. Is there a structural limit to your EBIT margins? And maybe a better way to say it is, is there a point where your historical 20 bps of EBIT margin expansion per point of comp starts to break down.
Well, Scott, as you've seen, we continue to outperform our expectations on on expense productivity. At the beginning of the year, we said our expenses would grow at 33% of our sales growth We're now updating the guidance to 23% of our sales growth rate. But that's really because of what we have seen terms of lower casualty reserves coming off of these great programs in workers' comp. As we would look to 2015 and beyond, It's our point of view today that expenses would grow more on that 33% of sales growth rate. It doesn't mean that we won't continue to focus on productivity because we will.
But I would think for modeling purposes that's the number that I would use.
Got you. And then, Carol, you talked about some Mixed signals in the housing market and I know we've seen existing home sales a little bit softer than I guess what a lot of us would have expected. I guess maybe the question is what parts of the market are you kind of most bullish about? And then what parts are you maybe most concerned about at this stage?
Well, as we look at the housing indicators, there are 3 that we pay attention to most closely. That would be turnover, which is about 4% of units. Home price appreciation, slower than some people had hoped, but in line with our expectations for the year, we project home prices to be up around 5% or 6%, and that's how they're trending. Household formation at 500,000 households It's certainly below what all of us would like to see. We used that number when we built our plan, but clearly, we'd like to see that improve Because there's something like a third of the people who are aged 18 to 36 living at home with their parents, Something's got to move.
And as so to your question, what are you most concerned about? Well, it's mortgage financing availability. There's been some modest There was a survey of senior loan officers, 70% of them said that underwriting standards haven't changed. Well, that's better than last quarter where it was about 74% of them said that underwriting standards hadn't changed. But something's got to move on mortgage financing So for us, we continue to pay real close attention to that.
Got you. Thanks a lot guys.
Yes. We'll go next to David Schick at Stifel.
Hi. Good morning and congrats on a very impressive quarter. Two things. So first, you mentioned that you changed the communicate or you've been changing communication with customers, making it more personalized. Any color you can give on results you're seeing real time from that whether it's a program that you turn on specific program Turn on or a part of the store, so any of the efficacy of that?
And then second, sort of relatedly, you've mentioned the Larger pro customers growing faster than pro overall, which I think you said pro overall was in line with the average. Is the large pro growth just Due to the difference in the health of those customers or is it something you're doing specifically in targeting the larger pros and work you're doing with them? Thank you.
On the I'll take the digital marketing and ask Marvin to talk about the Pro. On the digital marketing, this has been something that we have Transitioning for a number of years now and driving trying to drive to greater And I think specifically you have to look at the overall results of the business and we believe that This shift in how we've approached communicating to customer is a piece of what's been driving our results over the past Couple of years. And so I don't think it's we don't focus on it necessarily category specific. We have Programs across the store that we utilize the digital approach with to really Communicate with our customers virtually in every category.
Here's an interesting data point. Print will be less than
David regarding the Pro, we've been on this journey for quite a while. And when we look at the larger Pro Craig mentioned That their performance outpaced the total company. And we think it's a couple of things. Number 1, as Carol mentioned, Just access to capital. And we think that these individuals because they have larger businesses just have a greater means To borrow and to grow their business, we also believe that the emphasis we placed on an outside selling force the last couple of years and we have Approximately 200 plus individuals that work outside of the store and their primary responsibility is to go out and make sales calls on job sites, Business locations and really sell The Home Depot as a value proposition to these larger customers.
We think that that's Gaining traction. But also we think a lot of these smaller PROs in the depths of the housing recession really exited the business and started to work for some So we think it's a combination of just the broader economy, but also some of the efforts we place on attracting these customers and kind of Providing them with a better understanding of the value proposition of The Home Depot.
Thanks.
And we'll take our next question from Matthew Fassler at Goldman Sachs.
Thanks a lot. Good morning. My primary question relates to the role of credit are the days in the store and what kind of response you're seeing from your 3rd party provider on the private label credit side?
Yes, we're very pleased with what we're seeing within our private label portfolio. The penetration increased by 57 basis points to 23.2 percent of total sales on our private label card. And as you would imagine, Matt, because we use our card as Financing tool and not a discounting tool. We see sales on that card for the larger ticket purchases. The portfolio itself is very healthy, and that's good news too.
So on the approval rates, we've seen our consumer approval It's up 182 basis points year on year with an average line of about $5,800 And on the pro side, the approval rates are up about 140 basis points, now almost 72% of all pros who are applying for credit are getting approved with an average line of around $6,900
Can you remind us Carol on sort of the direction of some of those numbers, the penetration, the approval rates, etcetera, of those moving up into the rig continuously? And did any kind of a step change here in the second quarter?
They're moving up continuously. It's a slow steady move if you will. No step change.
Got it. And then just a very quick follow-up. I know weather has come up a couple of times. So if you take a step back from sort of the seasonal spillover and the 100 The basis points that you mentioned, looking at a couple of companies that retailers that are the most weather sensitive, some of them were of the view The weight of weather on the business extended beyond some of the core seasonal categories and lasted a bit deeper into the season I. E.
Perhaps into your 2nd And only would have really fully abated kind of in the June, July timeframe. Do you guys share that point of view? Or do you feel like the impact of weather is more limited and more We're directed to some of the categories that you specified.
We didn't see it, Matt. I mean, you can see with our numbers. We really didn't see that.
Got it. Thanks so much.
And next we'll go to Peter Benedict of Robert Baird.
Hi, guys. Thanks for taking the question. My question is really around your efforts to drive increased pro loyalty with Pro Extra and some of the CRM Can you help us maybe frame the opportunity you see on that front? I think in the past you guys have spoken to your average pro doing around 6,000 And spend a year, help us understand what percentage of their wallet you think that is? And where do you think you can take that reasonably
Peter, this is Marvin. On the percent of wallet, that's a tough one. That's a tough data point But what we can tell you is that we're excited about Pro Extra. We have approximately 1,700,000 members signed up. We increased that by over 200 This quarter and that's been 2 consecutive quarters we signed up in excess of 200,000 new members.
And as a reminder, I mean this is just a unique A play for us to create a program where customers can sign up and leverage the buying scale of The Home Depot to take on some opportunities in their business that they can't afford things like satellite roofing for a small roofer. If you're small and independent So really expense that you can't take on. We can allow them to kind of pick it back up. So we've also rolled out recently Things like credit protection against any type of fraud. We have discounted background checks.
So you name it, we have quite a few things. Even this week, if you want to sign up, we have a great offer, 25% off special order inside cabinets and countertops for pros in this program that's going on this week, so we have unique offers exclusively for these pros, so that they can take advantage of some of the great benefits of shopping at The Home Depot. Very, very early In this program, we're working with Matt Kowery's IT team to make this a more robust program and we're excited about the possibility.
Peter, this is just math. But if we had either a 5% increase in our ticket or 3 more transactions Per pro per year, it's a $1,200,000,000 opportunity.
That's terrific. Thanks. Thanks, Carol. Thank you, Marvin, Carol, just to follow-up on one thing you mentioned in your prepared remarks, the transportation costs being ahead. When you've heard that from some other folks, Can you maybe drill down a little bit more detail why are transportation costs up for you guys?
I'd love to have Mark Holyfield address that.
Yes. Hey, Peter. Mark Hollifield. We were pleased with the responsiveness of the supply chain overall during the quarter. It was pretty challenging with the rebound in seasonal weather.
But unfortunately, we did have to spend more to move our freight. The primary drivers of that really are what's happening on the rails with declining Service there year over year, some of the new drivers of service regulations causing some driver shortage issues. And then we saw freight Market imbalances brought on by diversion of cargoes from the West Coast.
Okay, perfect. Thank you very much guys.
We'll go next to Greg Melich at ISI Group.
Hi, thanks. You mentioned the dot Comm growth still very strong. Could you tell us what percentage of sales are made up in the quarter? And do you think that growth you're getting there, is it all additive or is some of it cannibalistic from traffic you would have added anyway to the stores.
Yes. Dotcom sales made up 4 point 2% of our total sales at the end of the second quarter. That's up 100 basis points from a penetration perspective year on year. Hard to Quarter was $144,000,000
Great. And then to follow-up, you mentioned Carol, I think in gross margin drivers, there were We hit some break points and got vendor rebates. Would you expect to continue to have that level of benefit in the second half? And then also what specifically caused the drag on shrink?
Sure. So to the impact of higher co op and rebate in the second quarter, That was really a timing matter. If we look at where our purchases were in the Q1 versus Q2, it's just a timing matter. Let me give you a better data point. If you look at the impacts of co op and rebate for the first half, it was a 3 basis point benefit.
Now in terms of shrink, you may recall last year, we had 10 basis points of benefit from shrink in the 2nd quarter, and that reversed itself this quarter. There are 3 drivers of shrink: theft, operational processes and system inaccuracies. As you know, we've put a lot of change into Our stores, a lot of new processes and systems, buy online, ship to store, buy online, pickup in store, buy online, return to store and the list goes on. It's not uncommon when you have change inside of the stores to see both shrink and swell, and that's what we We've got a team that's working on this and this will be an issue that goes away over time. Just got to work through it.
Yes. And Greg, this is Marvin. We're very confident in the processes and programs we have in place. We have one of the best analytical focuses on shrink reduction that I've seen of any retail and it's a And it's a cross functional effort with the merchants, with the internal audit group, with IT and operations. So to Carol's point, there's a lot of ins and We've had unprecedented process changes and systems changes the last 3 years, but we're very confident and comfortable with our focus and we
Our next question comes from Michael Lasser at UBS.
Good morning. Thanks a lot for taking
my question. I wanted to ask about the connection Between the outdoor categories in the 2nd and third quarter, is there any possibility that given the extended season where it was cool in July and you reported a really strong comp during that month that that could draw away Some potential sales from the fall because consumers may have done been able to do projects like exterior paint in the summer where they may have been Waiting for the fall or alternatively they maintain their lawn and garden much further into the season this year and so they may have a little less cleanup And they might have in the past.
No. We really don't see it that way Michael. If you think about kind of typical Projects that customers do spring and then in the fall, they're very different. So in the spring, you're actually getting your beds And stuff ready to plant for the spring season. That then transitions to a whole new planting cycle in the fall and the absolute best Time to plant any kind of shrubs and trees and so on is in the fall time frame so that you're moving away from the heat.
I don't think that changes. Fall Going to happen. I do think we benefited from the fact that it did not move from winter to 95 degree Heat straight out of the blocks. That helped us in terms of people maintaining their yards through the summertime, but don't see that as a drag in
Okay. My second question is on some of the merchandising Activities that you did with the clustering and the tools and you cited the example of water heaters. How if you could size the percentage of your sales that have now been touched by The increased analytics and more sophisticated analytics that you're using to give us a sense of what The future opportunity might be?
We're very early on. We've just begun on the new tool enhancements To begin to review categories, in this process, we typically review roughly a third of our categories Per year, so you're in the early innings of a 3 year cycle first go around and then we'll learn from that process as well.
And on water heaters, do you think do you describe a big portion of the out comp outperformance to some of the activities that were done?
Definitely. We definitely did a much better job of utilizing our clustering capability and identifying the opportunities where we could put a more productive
And we'll go next to Dennis McGill at Zelman and Associates.
Good morning and congratulations. As you look at the comp in June domestically at least, the comp in June versus July, that acceleration, was that Also across the store kind of consistent with the message for the quarter where there wasn't a whole lot of variance across categories?
Yes, it's pretty consistent.
Okay. And then Carol with respect to appliances, the strong growth this quarter, if I'm not mistaken, the year ago appliance growth was maybe the best of the year Very robust and just curious what you're looking for in the back half of the year as far as benefit from comp or the ability for comps
Our expectations for the appliances in the back half of the year are contained in the guidance we just shared with you.
Okay. Well, since I didn't get that one, I'll ask another one. On the outdoor garden, any specific numbers that you can put behind that as far as how far above average it was?
It was more than 100 basis points.
More than 100 basis points.
Yes. Okay. Perfect. Thanks again.
We'll go next to Jamie Katz at Morningstar Equity Research. Good morning. Thanks for taking my questions. I'm curious about your outlook for capital allocation strategy. Is there still some free cash flow to be spent longer term?
And I'm wondering if you guys think about either raising the dividend or Paying down some of the higher rate debt. And after that maybe a little bit more color on Mexico and Canada
Yes. From a capital allocation philosophical perspective, the first piece of cash is to invest it back in the business. And this year, we have a capital plan of $1,500,000,000 and we're committed to that plan. Interestingly, we are tilting our investments more towards Connected Retail and Technology as we continue to try to meet the needs of our changing customer. The next use of capital is for our dividend.
We have a 50% payout target, which means at the end of every year, we will look back to see what we earned. We will cut it in half and that will be the new dividend. If we were ever to have an earnings disruption, it wouldn't be our plan to cut the dividend. We would just earn back into that 50%. Longer term, is 50% the right target?
Perhaps it should be higher, but right now we're at a 50% target. And then we use excess cash to buy back our shares. We We'll use debt capital to buy back our shares if we think it's value creating. As you saw, we raised $2,000,000,000 in June of this year. The after tax cost of that debt was 2%.
The yield on our stock was 2.3%. So we thought that was a great trade. And we will continue to look for opportunities like that. And Jamie on your question on Canada and Mexico, as I indicated, we're very pleased with the results in both countries. Canada
Very strong comps. Mexico is doing very well and it's been doing very well for many, many years. The only Interesting curiosity on the results in the quarter was that they were impacted by the World Cup. We could actually see the dividend sales
We'll move next to Mike Baker at Deutsche Bank.
Hi. Just wanted to follow-up. So on the appliances, so you said The jumbo set is in 800 stores. It's going to be in another 183 by year end. Can you just sort of remind us where it was a year ago, where it began the year, those types of Measurements so we can sort of get a sense as to the year over year change in the number of stores that that's being put into.
Well, Michael, first, when I said the expanded assortment of appliances, we have jumbo, we have jumbo lights, we have big books, we have various themes of the merchandising display within our stores. So I just wanted to make that clarification. A year ago, we were probably 250 stores less than where we are today. Yes.
Okay. And so that's the type of where did you end the year
or start this year?
Do you want about 2 50 stores left?
Yes. We can I'll get back to
the exact store count. Sorry, I don't have it with us.
Okay. Fair enough. One more then if I could. SG and A in the back half, I mean are there any other so will incentive comps continue to be a A benefit to you and are there any things like that legal settlement that we should know about that occurred in the back half of last year that wasn't necessarily called out on the call last
No. I think what I've said in my prepared remarks is that our total expenses we now forecast will be under our plan year on year And that's because of really for the most part lower casualty reserves.
Right. Okay. Understood. Thank you.
We'll go next to Keith Hughes at SunTrust.
Thank you. Switching back to the services Businesses have done so well in the quarter. Give us a feel for how big of the business that is now and specifically which services are doing well of like?
So roughly about 4% of our total sales comes from our services businesses today. So a lot around both maintenance and repair as well as the millwork space. Okay. Thank you.
And Audra, we have time for one more question.
And we'll take that question from Eric Bosshard at Cleveland Research Company.
Thanks. You commented that the first half in total 1Q plus 2Q
was similar. The first half in total 1Q plus 2Q was similar to what you had thought it might be coming into the year. But it Seems like July August are probably better or perhaps materially better than you might have thought coming into the year. And it doesn't sound like it's weather or seasonal, but could you just give us again the insights into what's driving the business in July August despite The macro housing indicators not being as great as one might have hoped.
I mean, Eric, it's really it's strength across the store. As I mentioned, we've seen pretty tight performance with the lowest Apartment B north of a 4 comp, we've seen strength across maintenance and repair. We've seen strength across Decor Businesses and clearly we had the rebound in our seasonal businesses as well. When you've got the pro reengaged, they shop across our store. And It's great to see customers investing in their homes and it's great to see them doing Projects, as Carol mentioned, in our services business, that's a big ticket spend.
It's $1500 plus on average. So we're very, very pleased with the kind of the breadth, if you will, of the performance both from A category standpoint as well as a geographic standpoint.
When you look at that and think about planning The back half of the year either in terms of inventory or promotion or mix or even expanding categories, any Influence on how you're managing the business in light of what you're seeing?
Honestly, the plans for the back half of the year have been put in place months ago. We always Would tweak and make adjustments, but the heart of what we've got planned was committed many moons ago.
I mean our Because we have
to make those buys well in it.
Right. Yes. Great. Thank you.
Well, thank you all for joining us today. We look forward to joining you on our next quarterly earnings call.
And that does conclude today's