Good day, everyone, and welcome to today's Home Depot Quarter 1 2014 Earnings Call. Today's conference is being recorded. Please note that any prompts entered before this time may not have registered in our system. Beginning today's discussion is Ms. Diane Dayhoff, Vice President, Investor Relations.
Please go ahead.
Thank you, Levi, 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 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. And as a reminder, we would appreciate it if at 770-384-2387. 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 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 measurements. Reconciliation of these measurements is provided on our website. Now let me turn the call over to Frank
Thank you, Diane, and good morning, everyone. Sales for the Q1 were $19,700,000,000 up 2.9% from last Comp sales were positive 2.6 percent and our diluted earnings per share were 1 dollars Our U. S. Stores had a positive comp of 3.3%. Our sales for the quarter were below our expectations.
In 2013, we experienced a delayed spring in the U. S. And Canada and we expected more normal weather for this spring. Instead, much of the U. S.
And Canada had an even colder spring and this had a significant impact on our sales. In previous years, we've talked about the bathtub effect that weather can have on our spring seasonal business, where weak sales in the Q1 are counterbalanced by We expect the same effect to be true this year. As we look at the performance of Our business in the Q1, the strength in the areas of the country where more normal weather existed supports this outlook. In the U. S, as Craig will discuss, our Northern division, our largest division, negatively comped, driven by weakness in seasonal and outdoor categories.
But in our Southern and Western divisions, we not only positive comped, but we actually did better than we expected. There's been a fair amount of discussion about the fact that many indicators in the housing market have softened over the last several months, leading to the question of whether this indicates That the housing recovery has run out of steam. As we parse the data from our own business, that is not what we see. The core categories in the store remain strong. Pro sales continued to grow.
Our services business grew High single digits in the quarter and we had another quarter of big ticket growth. And our fundamental view on the recovery in the home improvement market has not changed. We didn't expect the recovery in 2014 to be as dramatic as last year's, but we continue to believe that home price appreciation, Our Canadian business posted a positive comp in local currency for the quarter. In Mexico, Our team posted their 42nd consecutive quarter of positive comps. They also inaugurated an online e commerce site, interconnected retail and the opportunities it creates for us are now becoming apparent throughout North America, Canada, Mexico as well as the U.
S. And we are pleased that as we invest in this area, we are seeing a positive response from our customers as indicated by improving customer satisfaction surveys and by our sales results. Our dotcom business had sales growth of almost 40% for the quarter. We are consistently seeing over 3,000,000 visits per day and our conversion rate continues to increase. Also our dotcom presence was a contributing factor to our transaction growth.
As Carol will detail, we are reaffirming our sales guidance and increasing our earnings per share guidance for the year to reflect the benefit associated with the sale of a portion of our equity position in HD Supply. Let me close by thanking our associates for their hard work And dedication with a special thank you to all of our associates who have helped communities in need throughout the country as they deal with floods, tornadoes and fires. Based on this quarter's results over 90% of our stores would be eligible for Success Sharing, our profit sharing program for our hourly associates. We're proud of this result and look forward to improve on it in the second quarter. With that, let me turn the call over to Craig.
Thanks, Frank, and good morning, everyone. The extreme winter weather we experienced across much of the Midwest and Northern parts of the country had a negative effect on our sales. However, in areas not affected by the weather, we were pleased with our performance in the Q1 as we saw continued strength across the store. From a geographic perspective, 15 of our 19 U. S.
Regions posted positive comps. The regions with negative comps were Heavily impacted by weather and included New England and the Mid Atlantic. New York and New Jersey were also negative due to weather. Further, these two regions were up against tough comparisons given last year's strong repair sales from Hurricane Sandy, which contributed about $145,000,000 to sales in the Q1 of 2013. In the Western and Southern divisions, Flooring, indoor garden and paint were positive, but below the company average, while outdoor garden and lumber were negative.
The core of the store continued to perform well as we saw strength in maintenance and repair categories across the country, including the Northern division. HVAC, light bulbs, insulation, cleaning, pipe and fittings, hand tools, safety and security, Water heaters, fasteners, caulk and air circulation all had comps above the company average. Outdoor project categories were pressured from the weather and we saw comp sales below the company average in roofing, chemicals, lawnmowers, soils and mulches and live goods. As we saw last year, the majority of these projects will likely be deferred to the 2nd quarter. On the other hand, our customers continued to complete projects inside the home.
In Simple Decor, bath lighting and hard surface flooring had strong Sales that were driven by tile, laminate, setting materials, faucets and bath fixtures. Total comp transactions grew by 2 0.1% for the quarter, while average ticket increased 0.6%. Our average ticket increase This was negatively impacted by commodity price deflation, mainly from lumber and copper. The total impact to ticket growth from commodity price Inflation was approximately negative 30 basis points. Despite the softness in Outdoor Garden, transactions For tickets under $50 representing approximately 20% of our U.
S. Sales were up 1.6% for the Q1. Transactions for tickets over $900 also representing approximately 20% of our U. S. Sales were up 2.5% in the Q1.
The drivers behind the increase in big ticket purchases were HVAC, Pro Sales and Appliances. Our pro customer continues to recover and we saw broad based strength in areas that were not affected by weather. Total pro sales grew at the company average, but sales from our larger pro customers, which we defined as those who Spend more than $10,000 a year with us grew more than twice the company average. Our Pro Extra loyalty program continues to gain traction And we now signed up over 1,500,000 pros. The goal of the program is to make our pro customers' jobs easier and it provides them targeted offers, e receipts and discounted business services.
Our tool rental and service businesses also performed well During the quarter, posting comps well above the company average. In services, bath, HVAC and window installations were the main drivers of sales during the quarter. We continue to invest in our stores for both our Customers and our associates, and we are pleased that we are alive in our first store with our new customer order management system or COM. This system is designed for greater visibility and execution of special orders by our associates and experience for our customers. We are planning for the system to be rolled out to all U.
S. Stores by the end of the year. Now let me turn our attention to merchandising activities in the Q2. We have an incredible lineup of great values and special buys for our Memorial Day, Father's Day and 4th July events. We continue to bring new and innovative products to market.
For example, we're expanding our offering of LED light bulbs from Cree with an additional 10 SKUs, including 100 watt equivalent and three way bulbs. New and Lawn Care from Toro is the first ever gas powered mower that can be folded and stored upright in your garage using 70% less space with virtually no fear of oil or gas leaks. For our professional customers, we're introducing a brand new Glidden Pro paint program at outstanding value. The lineup offers 4 different types of paint with both the features and price that our pros are looking for. I'm also pleased to announce that we are adding KitchenAid to our appliance assortment and it will be available in select execution in the stores will generate a lot of excitement in the Q2.
And with that,
I'd like to turn the call over to Carol.
Thank you, Craig, and hello, everyone. In the Q1, sales were $19,700,000,000 a 2.9% increase from last year. Our total company comps or same store sales were positive 2.6% for the quarter with positive comps of 2 point 2% in February, 3.8% in March and 2% in April. Versus last year, a stronger U. S.
Dollar Negatively impacted total company comps by approximately 70 basis points. Comps for U. S. Stores were positive 3.3 For the quarter, with positive comps of 2.8% in February, 4.6% in March and 2.8% in April. March April comps were impacted by the timing of Easter.
On a like for like basis, April comps would have been 200 basis points higher. Our total company gross margin was 35% for the quarter, an increase of 5 basis points from last year. Our gross margin expansion was driven primarily by a lower penetration of lower margin categories like Lumber and Outdoor Garden. One other comment on gross margin. The harsh winter weather placed a number of challenges on our supply The team did a great job of managing these challenges and at the same time continue to build out our direct fulfillment capabilities.
While some companies experienced deleverage from their supply chain costs in the Q1, we did not. For fiscal 2014, we continue to expect our gross margin rate to be about the same as what we reported in fiscal 2013. In the Q1, operating expense as a percent of sales decreased by 57 basis points to 23.4%. Our expense Leverage reflects the impact of positive comp sales growth as well as a reduction in certain other expense items Like management bonuses. For the year, we are expecting our expenses to grow at approximately 33% of our sales growth rate.
Moving to interest and investment income. At the end of fiscal 15,250,000 shares of HD Supply common stock or about 8% of outstanding shares. Our initial investment was worth $325,000,000 but we impaired and wrote off the carrying value several years ago. In April, HD Supply completed a secondary offering and we participated by exercising our piggyback rights. As a result, in the Q1, we recognized a gain on sale of $97,000,000 which is reflected in interest and investment income.
The net after tax gain was $61,000,000 or $0.04 of diluted earnings per share. Following the sale, our equity state And HD Supply is now approximately 12,400,000 shares or 6.3% of outstanding shares. Our income tax provision rate was 36.9 percent in the Q1 and we expect our income tax provision rate to be approximately 37% for the year. Our diluted earnings per share for the Q1 were $1 an increase of 20.5% from last year. Our diluted earnings per share for the Q1 included a $0.04 benefit from the gain on sale of HD Supply share.
During the Q1, we did not open any new stores. We ended the quarter with 2,263 stores and selling square footage of $236,000,000 Total sales per square foot for the Q1 were $3.34 up 1.8% from last year. Now turning to the balance sheet. At the end of the quarter, inventory was 12 point $3,000,000,000 up approximately $518,000,000 from a year ago. Inventory turns were 4.4 times flat to last year.
We ended the quarter with $42,600,000,000 in assets, including $2,500,000,000 in cash. In the Q1, we repurchased $1,250,000,000 or approximately For the remainder of the year, we intend to repurchase approximately $3,750,000,000 of outstanding stock Using excess cash, bringing total 2014 share repurchases to $5,000,000,000 Computed on the average of beginning and ending long term debt and Equity for the trailing 4 quarters. Return on invested capital was 21.2%, 3.50 basis points higher in the Q1 of fiscal 2013. When we booked our 2014 sales plan, it was based On U. S.
GDP growth forecast of approximately 3% and about 200 basis points of growth coming from continued recovery in the housing market. It also assumes that we would have a normal winter and that commodity prices would remain fairly stable. So what's changed? Well, we didn't have a normal winter. But as Craig detailed, we believe that most of the sales lost to snow on the ground in the Q1 will be realized in the 2nd quarter.
While U. S. GDP growth in the Q1 was weak, consensus forecasts for the year are still in the 3% Housing statistics are not as robust as they were last year, but they aren't materially different and the assumptions we used to build our plan. Finally, while we experienced commodity price deflation in the Q1, Commodity prices appear to be stabilizing. As we look at our U.
S. Comp performance in the Q1, We estimate that the harsh winter weather negatively impacted our comp sales by about 100 basis points and that commodity deflation Negatively impacted our comp sales by about 30 basis points. Additionally, as Craig mentioned, in the first quarter, we Had $145,000,000 of sales pressure coming from Superstorm Sandy sales last year. Considering these factors, the run rate for our U. S.
Business in the Q1 was in line with our expectations. Further, May sales are robust. So today, we are reaffirming the sales guidance we laid out on our 4th quarter earnings call, and we expect fiscal 2014 sales to increase by approximately 4.8% with positive comps of approximately 4.6%. For earnings per share, remember that we guide off of GAAP. We are lifting fiscal 2014 diluted earnings per share growth guidance to reflect the gain on sale of HU Supply stock and now expect diluted earnings per share to grow by approximately 17.6 percent to $4.42 We thank you for your participation in today's call.
And Levi, we're now ready for questions.
And we'll go to our first question from Dennis McGill with Zelman and Associates. Please go ahead.
Carol, I think you got some people excited with that word robust.
Good morning, Dennis.
Good morning. I guess the Question is
just maybe elaborate on that if you can, especially I'm sure the question will be asked against the tough comps from last year, which I think were among the strongest of the entire year and how you think about maybe where you're seeing that category wise?
Well, you're right. We're up against very tough comps. Our comp in May last year was Double digits, but we're very pleased with our results thus far. And maybe Craig, you want to give a little color?
Yes. We continue to see strength across the store as we did in the quarter. And as the weather improves, we're seeing an improvement obviously in our seasonal businesses and exterior categories.
Okay. And then secondarily, on the inventory side, I think with that being up, maybe this ties into the trend. But how would you Describe the what you'd expect for inventory turns and inventory through the year and maybe just address anywhere where there's elevated inventory relative
Inventory is up year on year about a little over 500,000,000 That's really a reflection of the sales environment in Q1. We're starting to see the inventory come down in line with the robust sales that we're seeing in May. We would expect to have inventory turn year over year improvement by the end of the year.
Okay, great. Thank you.
And we'll go to our next question from Brian Nagel with Oppenheimer.
Hi, good morning.
Good morning.
I too wanted to just quickly address the recent sales commentary. So obviously robust is a strong word here and markets reacting favorably to that. But as you look at As the weather is turning here and maybe more of a qualitative type question, but as the weather is turning, how would you characterize the products that Consumers are buying now. Is there are you seeing clear evidence that there's a lot of repair type items you're buying and then maybe The typical spring type products are still to come or is there just a start now is a catch up to spring?
Yes. We are Obviously, the spring categories begin to take off. We know that landscape products Need to be replaced. We're seeing sales improve in those areas. We know that in the harsh winter areas, for example, concrete cracked.
So we're seeing Sales in categories like concrete as a result of the repairs needed. Same thing in gutters.
Okay. And then a follow-up question, a comment or a question with Frank your opening comments about The overall housing environment, there's a lot being talked or written about now just about slower housing turn and maybe some of the reasons behind that are supply driven. But Do you see as you look at the Home Depot business, do you think slower housing turn right now is a significant drag upon the business? Or are there factors more than
Brian, we believe as we set out before that home price appreciation It is one of the important drivers of our business that as homeowners get more comfortable that the Spend on their houses that they'll be able to recoup that investment, that that's a big tailwind for us and we've continued home price appreciation even during some softening of other housing indicators. That's not to say that the other indicators aren't important to us. Housing turnover, existing housing turnover obviously does drive sales for us, But it's always worth remembering that that's a relatively small percentage of the overall homeowners. It's around between 4% to 6% depending on the year.
And to put it in perspective, housing turnover is at 4% of units today and that's what we use when we build our plan.
Well, thank you very much.
Thanks, Brian.
And we'll go to our next question from Chris Horvers with JPMorgan. Please go ahead.
Thanks. Good morning. So I'll try to sharpen the robust pencil point as well. So As you think about May is sort of the bounce in the landscape business is actually the comparison in April May were pretty similar overall last year. So does that Acceleration mean more than sequential I.
E. Is it accelerating on a year the outdoor business out accelerating on a year over year basis May relative to April?
April? It does. And I'm when I answer your question positively, I'm referring to the adjusted April, Which was a little over 4%. So May is higher than the adjusted April.
Perfect. And then as you think about Sort of the underlying tenor of the business, the Pro was in line overall, obviously stronger in the West. Do you think that the weather did have an impact on the pro business during the quarter in the Northern divisions? And is that sort of seeing a similar bounce as you look at May?
Yes. Chris, you could see that in our numbers that there's a difference with the Pro in the South and West Versus the North, I don't know Marvin, you might want to comment on that.
Yes. Chris, I think that's exactly right. Craig mentioned that Our large pro which we define as spending in excess of 10,000 plus per year was very strong In the quarter, we actually saw some strength in the Northern division, specifically the Midwest and Central part of that region. So we're excited about the You know we've put a lot of emphasis on service in the store. We have outside sales reps that are managing those larger accounts and We're seeing a lot of positive growth and we're excited about initiatives like Pro Extra, which is our loyalty program, which we have 1,500,000 pros signed up.
So we're excited that We have a lot of work to do, but we have good momentum going.
And then the final question in terms of the commentary around the deflation in the quarter. Do you think that do you expect that Flatten out for the rest of the year? Or do you will that what's the shape of that curve look like going forward?
Well, The good news is that lumber has actually anniversaried and is now ahead of last year. Structural panel is down, but it's heading in the right direction. Copper yesterday was up. So it's our point of view that it will normalize and flatten out.
Perfect. Thanks very much. Welcome.
And we'll go to our next question from Matthew Fassler with Goldman Sachs. Please go ahead.
Thanks a lot and good morning. My first question relates to the sequential sales trends in the South and West in the Q1 Relative to the Q4 presumably those are regions that weren't really impacted by the inclement weather. You should tell us if there was some impact perhaps from the drought out on the West Coast. How did the comp trend in Q1 compare to
what you'd seen in Q4 in
the second half of last
I got to pull up from memory where we were. What I would Tell you Matt is that as I said in the commentary that both the South and the West were ahead of what we had planned for On a sequential comp basis.
Got it. And then I would
also note That was even with some weakness in the garden areas because of we Well, and also in Texas, we had slower spring. So that was true even with that. So slight it went down slightly from Q4, but again ahead of our expectations.
Got it.
And then my second question I think is for Craig. Flooring is a category that you cited is tracking I believe a bit below Positive but a bit below the chain average and that's a business that I guess is indoor driven and I wouldn't be Sure, if there's a weather impact. So can you talk about what's going on in that category please?
Yes. The what we saw was softness in the Soft side of flooring, it's really difficult to lay carpet when you have snow in the driveway because generally as they come in and do those projects, That carpet gets laid out and cut in the customer's driveway. So we saw it there, but we were very pleased with the hard surface flooring sales.
Got it. Thank you so much.
And we'll go to our next question from Budd Bugatch with Raymond James. Please go ahead.
Good morning and thank you for answering my question and taking my question. You talked about the dotcom being up 40% year over year. I don't remember if you gave us our comp store sales impact Carol if you might do
Yes. I'd be happy to give you just a little bit more color on dotcom sales. The sales growth for dotcom year on year was $232,000,000 now making up 4.2 percent of our total penetration. And for the U. S, the comp contribution is a little over 100
Okay. And was there much difference regionally? Could you see that could you see any weather impact on that?
So we have Kevin Kevin is our President of our Online Business. Kevin, if you want to respond to that.
Yes. Thanks, Budd. Very, very little difference Regionally, of course, we saw in the South and West a bigger pickup of seasonally related categories. And certainly in the North, people weren't buying a lot of patio sets And lawnmowers, but not as big of a regional difference as you would see in the physical stores.
Okay. And my second question really goes to gross margin. I think your guidance for the year is flat gross margin. I think we stated that this morning. You had up 5 basis points, but you had some challenges in the Q1 that you referred to from the weather.
So maybe that gross margin is going to be a little bit better than you originally thought?
Well, Budd, we plan for our gross margin to be down in the Q1 because we thought we would have a higher penetration of lumber and garden than we So we were pleased with the performance, of course, but it was really a function of sales. So as you think about the Q2 then, as we recover in those categories, You should plan on the gross margin in the Q2 to be down year on year. For the full year, we expect the margin to be flat.
Okay. As always Carol, thank you very much for that color. Good luck on the quarter and the rest of the year.
Thank you.
Thanks Budd.
And we'll go to our next question from David Schick with Stifel.
Hi, good morning and thanks for taking my question as well. Question is on the SG and A side, Really impressive controls with the business being slower. Just if you could take us through the mechanisms that were at work there and how we should think about Those that work over the balance of the year.
Well, thank you. A few things about the Expense performance in the Q1. We called out lower expense items and one big one would be management bonuses. A year ago, we were accruing bonuses with a beat to plan. We're now accruing that we will make And that delta is about $27,000,000 So that was one of the ways that we drove expense leverage, just a function of last year we were beating, this year we think we'll make our plan.
We did and Margaret did an excellent job and Craig managing payroll in the stores in a very difficult environment as you can appreciate. We did leverage hourly payroll as we expected in the stores. We looked at expense items And where we could push some expense into the Q2, we did. For example, advertising was under our plan, Because we thought why advertise into a snowstorm. So we pushed some of that spending into the 2nd quarter.
For the Full year, we expect our expenses to grow at about 33% of our sales growth rate. As you're building your model, expect the first This is a function of year over year items and for the full year growth of 33% of sales growth.
Thank you.
You're welcome.
And we'll go to our next question from a raham rubenson with Wolfe Research.
Hey, good morning. Thanks for taking the call. Two things. Hoping first you can add some clarity on how we should interpret spring Black Friday promotions. I know in the past the industry has kind of moved more to everyday low price.
What's the internal debate about whether or not we're moving away from that Margin and how should we think about that?
So as it relates to spring Black Friday or any of our key Activities heavily centered around special buys. That's kind of been a strategy that our company has had from its inception to go out, Work deals with our suppliers, drive productivity in their factories. We get a savings. We pass that savings along to the customer.
So not
a real big change.
Okay. So that's not kind of a slippery slope that we're starting to climb on to?
No. No.
And if you could talk
a little bit about space allocation in the stores now that you're realizing online can be a great place. I know your patio furniture is one area where you guys have pushed Kind of a showroom type of philosophy, what other areas of the store are you kind of deploying the showroom philosophy? Where are you surprised that customers are taking product with? And where Can you steer them towards that more showroom mentality? And how much space might that ultimately be able to free up in your store?
Actually, I'd start with we've added space to our appliance business. That was a result of a change in how the customer begins the purchase process in kitchens, We're leveraging digital technology to do research upfront. So in many of the spaces where we expanded our appliance Showroom, we actually took that from our kitchen showroom business. As you referenced In patio, we see strong sales transitioning to the customer looking for choice online. So we obviously are using that To expand as well, we also are working pilots in lighting to have a similar type
And just the last thing, is there a way to use technology like big LED screens or something like that instead of these large Vignettes, whether it's for kitchens and lighting and things like that to save space and maybe just use kind of an interactive display and then I'll leave you be.
What I would say there is we have put an appliance kiosk, a larger screen into our stores. What we have found is that it is a great selling tool for our associates and for the customer to be able to do Our experience has been that now a lot of engagement with the customer by themselves, more of an assisted sale.
So, Aram, in total, 4.50 additional stores this year will have some sort of an appliance change made to them, either more square footage Or another kiosk. So yes, technology is a way that we can help drive sales.
Thank you, guys.
Welcome.
And we'll go to our next question from Greg Melich with ISI Group. Please go ahead.
Hi, thanks. I want to follow-up on the appliance point and another question. Given the added storage that you have in appliances, I know that the jumbo set helped last year. Can you help us with how much it helped comp or ticket this year?
For the total company, it contributed about 10 basis points of comp growth.
Hey, a lot less. Okay. Great. And then I think the second question was more of a technical one, Carol. If the 4th quarter has an extra week, How come the SG and A doesn't grow as much in that quarter?
It's just year over year expense items.
So it's just sort of the year end of the year stuff coming together. It's just you expect less than the Q4.
Exactly.
Okay. I did want to ask Craig one thing. You This customer order management system. They're finally rolling out. Could you just explain that from a customer perspective What's different about that when I come in and what your early results have shown?
Well, we've just begun the pilot in the first store. But what we're trying to do is give greater visibility to the consumer and our associates to special orders throughout The process, so when they actually place an order to understand the status of that order, where it is in the Process of manufacturing and then obviously arrival to our stores and we want to be able to give that visibility to our associates in the store, so they can better answer questions as well for our consumers during that process. And it's a coordinating effort that drives back into our manufacturers, our suppliers,
And if I could just pile on, each store is like a brain. And we had the Customer order will be central to the store. So if you shopped in a store in Manhattan and then were visiting a store in Chicago, you couldn't see your order in Chicago. But now because we have a common order management, you'll be able to see the order wherever you shop. So that's good for the customer and good for the
Greg, this is Marvin. In the past, your greatest visibility was a phone call to an associate in the store for status update. And we want to give the information to the customer at their convenience mobile device, PC, text, A lot of customers to choose how they want to receive that information.
And Greg, this is Matt Carey. I would also add that believe it or not a lot of these orders used to be faxed to the vendors. And obviously, a lot of opportunity for air. So We've eliminated those faxes, put it on EDI and really kind of started to streamline how those orders flow.
And if I could ask, how many of your vendors are actually able to handle this and work with you on it right now?
Is it a majority?
It is. All of our large suppliers have that capability and we're working with some of our smaller suppliers to bring them up.
Yes. If the All suppliers don't have it directly. They'll go through a band. So it will be EDI 100% when we're done.
That's great. Good luck. Thank you.
And we'll go to our next question from David Strasser with Janney Capital Markets. Please go ahead.
Thank you very much. I had two questions. The first one, In the Q1, you saw the big ticket decelerate. I mean, obviously, I'm sure some of it had to do with weather. When you can you quantify How much of that deceleration came from weather?
And then as things kind of rebounded again in May, if you saw that number bounce the big ticket the bigger ticket bounce Along with the rest of the business back into sort of the range of the 5% plus that you've been seeing in the last couple of quarters?
David, it's a little difficult to quantify the weather impact, but what I can tell you is categories like roofing, categories like riders, which are significant drivers to the larger ticket were clearly softer in the Q1. We can assume that that's weather related.
I mean, do you think that the numbers are holding up Relatively like if you if there was any sort of sense of normalization as you looked at May, I guess, did those bigger ticket things bounce back So did the live stuff in the rest of lawn and garden?
We haven't parsed the data in that kind of detail, But we will now. And we'll talk to you about it at the end
of the quarter.
All right. Thanks. One other follow-up question. As you look at May and the robust sales that you So how do you guys adjust the infrastructure of the business to be able to activate that? The difficulties of weak bad weather, good weather, bad weather, good weather, how do you adjust that delivery systems and your systems and your ability To deliver to the customer both inventory in stocks and deliveries and everything in such a sort of volatile environment, I
David, just two comments on that. You hit 2 big points of variability in our business Our labor force and our supply chain and then also our vendor responsiveness And what you saw in the Q1 of this year as well as the Q1 and Q2 last year was the ability of our teams to be very flexible in terms of responding both to Lower demand and significantly increased demand. And we have Mark Holyfield here, who leads our supply chain effort. Mark,
Supply chain perspective with transportation rates and the weather led to a lot of issues there. But the RDC network Really gives us the capability to respond along with our stocking DC. So the team worked very hard and used the infrastructure that we've built, which is quite flexible, and we were able to respond to the weather. David, the only thing I will add in the stores is that we partner very closely with the supply chain. As you know, our Payroll model is activity based.
And so we flex up and flex down based on our forecasted sales. It's a challenge When you are forecasting or planning sales to be higher than the weather is permitting, but very proud of the stores, very proud of our payroll management Team here at the store support center. It's a coordinated effort. And again, as Carol mentioned, we leverage payroll by Approximately 34 basis points for the quarter. We're very committed to managing the business well and we're committed to doing that while So great partnership with supply chain.
We have to be nimble and we're pleased with the performance so far.
Thank you very much. Appreciate it.
And we'll go to our next question from Michael Lasser with UBS. Please go ahead.
Good morning. Thanks a lot
for taking my question. Two questions actually. First, we can see the relationship between home improvement comps and housing turnover. But I guess when you look at it and parse it more on a category level, What categories and what product areas have exhibited the tightest relationship with that metric in the past? So is it flooring?
Is it appliances? What typically are consumers doing when they're moving into a home or moving out of And the obvious question is, will that allow us to give to observe those areas and See some sense if the sector is going to become re coupled with that metric over the next couple of quarters.
Michael, one comment I'd make It depends a bit on the nature of the turnover. So if you go back to 2,000 5 in 2006. One of the categories that was really a hallmark of turns And sales were special order kitchens. People would buy homes, they'd invest in the kitchen, they'd do upgrades and then they'd turn the home. That's actually the category for us that got hit the hardest over the housing Don't expect with the housing turnover that we think is going to grow as we go Through this recovery, don't expect to get that same kind of response on turnover.
Expect more the upgrades And you've got to make sure the infrastructure of your home is right. You may paint. You may do some gardening. So I think it's going to be different As we go through this housing recovery than what we saw at the height of the housing market. And I don't know Carol or Greg if you want to add some commentary to that.
We agree, of course, and also suggest that we should look at home price appreciation harder than we do Turnover, because turnover is only 4% of units. Home price appreciation really impacts the way people spend money in their on their homes. We saw last year, if you think about pricing along a good, better, best premium array, we saw growth in premium price Categories in every quarter of last year and that continued into the Q1 of this year.
Okay. That's helpful. And Frank, just a follow-up on some of your comments. There's probably no other senior executives In the country, we've got a better vantage point in the what's happening in just the housing market based on what you've seen in your stores and your conversations with your vendor partners. Do you have a working hypothesis on why turnover has slowed?
Well, I'd say first look for the Obvious explanations first. And the obvious explanation is mortgage rate increases. And you could look mortgage rates Took a pretty significant jump up in the summer of 2013 and you saw a not surprising response To that in the housing market, I would say and just to emphasize Carol's point, I would say actually the surprising part has been how Strong housing price appreciation is notwithstanding that. So the way we look at it, obviously, we think The mortgage rate increases had some pressure on housing turnover. Credit availability is still a bit of an issue.
It's good. The recent announcements From the government on how they're approaching Fannie and Freddie are interesting and may be helpful there. But between mortgage rates And credit constraints, we think that that is what's put a bit of a damper on some of the variables in the housing market.
Okay. Let me ask one final question on the e commerce business. Nearly 40% growth in the Q1, another Good outcome, albeit a little slower than the nearly 50% growth that you saw in the Q4 of last year. Is it becoming harder to sustain the growth as the business becomes a bigger piece of the total? Or is there some other dynamic that's going on there to explain the slight deceleration.
Thank you very much.
Well, I would say first of all our dotcom Grew faster than what we planned. So we were very pleased by this. Remember, we are anniversarying the launch of buy online, ship to So we had expected the growth rates to slow down. It was better than we thought. And in fact, if you look at the $232,000,000 of growth that we saw in the first Quarter, almost $100,000,000 of that came from BOSS related sales.
So this is a business that's growthy. It's a business that we continue to invest into Because it's part of our interconnected retail strategy.
Great. Thank you very much.
And we'll take our next question from Eric Bosshard with Cleveland Research Group. Please go ahead.
Hi, good morning. Good morning.
You talked about the Pro loyalty effort and I know there's a couple of other things you're piloting within Pro. I wonder if you could talk a little bit about that and How you might think that would start to show up in the numbers as we work our way through 2014?
So Eric, this is Marvin. I'll give you an overview of the program. We call it Pro Extra. And as Craig mentioned, we've signed up roughly 1,500,000 pros. It's a very basic program.
We're trying Three things. We want to make sure that we get our pros signed up so we can give them some exclusive offers, things like e receipts which will give them a more seamless return process. You know pros tend to buy more than they need when they're working on projects and jobs and we want to make sure that that Returns process is seamless and easy. We give them this kind of business tool. As an example, if you're a roofer, it's very difficult for you to get a to get satellite imaging.
If you sign on to Pro Extra, we give you discounted fees for that because we have a company Contract. We also give them discounts on things like background checks. So just business tools to help them to run a better business and opportunity to Tie in to things that they can't afford as a small business person and also exclusive offers. If you sign up, we work with Craig and its merchandising team. And we have exclusive offers that we will make available only to pros that are in this club, in this Loyalty Program.
We've seen very positive results. We've seen frequency in shopping increase. We've seen Ticket increase in size of a basket increase is very early. So we're not proclaiming victory. We just think we're on to something that we can build on and we're looking forward to
Perfect. And then secondly in terms of promotions, I know you commented earlier about spring Black Friday, but they should think about the delayed spring, how you're thinking about managing promotions and managing inventory Inflow and out from here and what risk or challenge that might create to gross margins as we work our way through 2Q.
Eric, obviously, we establish our event cadence and work our special buys long in advance. And those are set and ready to go for the Q2. We're very Comfortable with our inventory positions in terms of beginning the quarter and We feel we'll come out. As Carol mentioned, we're already seeing the inventory come down at this point as we've seen The pickup in the business is a result of improved weather.
Great. Thank you.
And we'll go to our next question from Dan Binder with Jefferies Company.
Hi, it's Dan Binder. I have just a couple of questions for you. First, as you kind of look at your crystal ball over the balance of the year, You're seeing this bounce back in Q2 early on. As you think about the quarterly cadence, would you expect Q2 to be your best quarter or Q4 given the easy comparison, any thoughts on How evenly spread or unevenly spread the business might look?
Well, our forecast is that Q4 would Stronger than Q2, but let me just say that the band Q2, Q3, Q4 is pretty narrow.
Okay. And then, I know in the past when you've had flexibility to take the buyback up, you have taken on some debt. Just curious, I know you outlined your plan for the balance of the year. Does that mean that you've eliminated the possibility of doing more? Or is it just Too early to
say. Well, Dan, as you know, we have an adjusted debt to EBITDAR target, if you will, of 2 times. Today, the ratio stands at 1.8 times. It is not our intent to let that ratio continue to decline, which it will as we continue to earn unless we borrow back up. So certainly haven't taken anything off the table.
As you recall, last year, We said at the beginning of the year we'd do $4,500,000,000 of share repurchases. We ended up doing $8,500,000,000 Right.
And then finally, just on Just curious what drove the decision behind selling a part of the stake versus the whole stake?
We had piggyback rights, so we followed along With the selling shareholders on a pro rata basis and it was really it's a passive investment for us. So it made a lot of sense. If the selling shareholders go back to the market, again, we'll follow along in a pro rata basis and just liquidate our position in an orderly fashion.
Great. Thank you.
You're welcome.
And we'll go to our next question from Scot Ciccarelli with RBC Capital Markets. Please go
ahead. Good morning, guys. Two questions. First, given the correlation of your sales trends and home price changes, Have you seen any change in sales trends in areas where home price gains may have slowed a bit?
Well, we look at Phoenix, for example, because there's been a slowdown in home price appreciation in Phoenix. And no, I'm not seeing anything materially changed.
Okay. So how do you explain that just given the correlation that we've seen? As long as we're kind of moving and staying in positive territory, people are more willing to spend? Is that Right way to kind of interpret
it? That's what we it's part of the overall recovery.
Okay. And then second, how are you guys thinking The damage that's likely been done to housing infrastructure in a lot of these weather affected markets. In other words, when you think about kind of your 2Q outlook, Are you simply thinking about your preplanned promos and outdoor gardening kind of spring like product categories or are you also factoring in any kind of increase from extra repair work to housing infrastructure? Because I would suspect that could be a driver In the near to midterm as well.
There is certainly landscape repair that has We know that there's a roof patch that will take place in certain areas based on ice damage. So we've tried to look at in general what's the planning for the seasonal categories, how does that Fit in and then look at categories that you would think naturally would potentially rise like gutters and So on and appropriately adjust our inventory to capture those sales.
Scott, this is Marvin. We have a roofing, siding With those services business and the only thing I piggyback on to Fred's comments is we have to staff up. So as we forecast Increased activity, we just have to make sure we're staffed so that we can meet the demands of the customers and we'll see where we land from a revenue standpoint at the end of the quarter.
Got it. All right. Thanks a lot guys.
And we'll go to our next question from Peter Benedict with Robert Baird.
Hey, thanks guys. Just one question for Craig. Just on the Windows business, you talked about Windows installation being strong. Can you give us some perspective on that business where that sits today versus maybe the historical cycle? Is that telling you Something about the remodel activity going on.
What can you tell us about the window trends?
As Frank I had mentioned, one of the categories that we got hit hard in was kitchens. Likewise, the window business went through a pretty significant downturn As well in the 2,008, 2,009 area, we are seeing a nice improvement In the millwork business in total and in the window business. So we're very pleased with the current trends in that business.
And is that is it wide Spread across the country or was is it concentrated in any specific area? No, it's fairly widespread. Okay. Thanks very much.
And we have time for one more question.
And we'll go to our next question from Peter Keith with Piper Jaffray.
Hey, thanks everyone for squeezing me in. I think I just have one last question for you. When you're talking about the importance of Home price appreciation, we certainly agree with that. I was hoping you could put on your economist hat though and maybe even looking out beyond this year, do you see A couple of years of home price appreciation, do you think it's going to slow down to 1%, 2% after 2014? Curious on how
What happened definitely during the housing downturn was a dramatic drop in household formation. We know that there has been a substantial increase of folks Between the ages of 1835 who are still living at home. That creates a potential pent up Demand assuming that they eventually form their own household and their own household units that Would allow for continuing gains in price appreciation recognizing that always You're looking at overall affordability as a key part of the equation. But for right now, houses are very affordable. We're at really Within the last 20 years, this is probably one of the most affordable readings on housing you're going to see.
So supply and demand What's going to happen with household formation would be the real question to ask over the next several years and we think it's going to be a positive dynamic.
Okay. I appreciate that Frank and congratulations to everyone on operating in a tough weather environment.
Thank you. Thanks very much, Peter.
Well, thank you everyone today for joining us, and we look forward to talking to you at the end of our Q2. Thank you.
This does conclude today's conference. We appreciate your participation.