Good day, everyone, welcome to today's The Home Depot Quarter One 2014 earnings call. Today's conference is being recorded. If you would like to ask a question during today's call, please press the star key followed by the digit 1 on your touch-tone phone. 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, good morning to everyone. Joining us on our call today are Frank Blake, Chairman and CEO of The Home Depot, Craig Menear, President, U.S. Retail, and Carol Tomé, Chief Financial Officer and Executive Vice President, Corporate Services. Following our prepared remarks, the call will be open for analyst questions. Questions will be limited to analysts and investors, as a reminder, we would appreciate it if the participants would limit themselves to one question with one follow-up. If we are unable to get to your question during the call, please call our investor relations department at 770-384-2387. Before I turn the call over to 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 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. Let me turn the call over to Frank Blake.
Thank you, Diane, good morning, everyone. Sales for the first quarter were $19.7 billion, up 2.9% from last year. Comp sales were positive 2.6%, and our diluted earnings per share were $1. 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, we expected more normal weather for this spring. Instead, much of the U.S. and Canada had an even colder spring, 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 first quarter are counterbalanced by strength in the seasonal business in the second quarter. We expect the same effect to be true this year.
As we look at the performance of our business in the first quarter, 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. 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. 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, affordability, and an aging housing stock in need of investment will continue to drive growth. On the international side, 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, piloting it now in limited geographies, but eventually planning for coverage across the country. The power of interconnected retail and the opportunities it creates for us are now becoming apparent throughout North America, Canada, Mexico, as well as the U.S.
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 dot-com business had sales growth of almost 40% for the quarter. We are consistently seeing over 3 million visits per day, and our conversion rate continues to increase. Also, our dot-com 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, 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 first quarter 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 million to sales in the first quarter of 2013. In the Western and Southern divisions, we had solid positive comp performance almost twice the U.S. average. The departments that outperformed the company's average comp were tools, electrical, plumbing, kitchens, bath, hardware, decor, building materials, millwork, and lighting. 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, 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 second 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 2.1% for the quarter, while average ticket increased 0.6%. 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 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 first quarter. Transactions for tickets over $900, also representing approximately 20% of our U.S. sales, were up 2.5% in the first quarter. The drivers behind the increase in big-ticket purchases were HVAC, pro sales, and appliances. Our pro customer continues to recover, we saw broad-based strength in areas that were not affected by weather. Total pro sales grew at the company average, sales from our larger pro customers, which we define as those who spend more than $10,000 a year with us, grew more than twice the company average. Our ProXtra loyalty program continues to gain traction, we now have signed up over 1.5 million pros.
The goal of the program is to make our pro customers' jobs easier. 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 live 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 a frictionless 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. Let me turn our attention to merchandising activities in the second quarter.
We have an incredible lineup of great values and special buys for our Memorial Day, Father's Day, and Fourth of July events. We continue to bring new and innovative products to market. For example, expanding our offering of LED light bulbs from Cree with an additional 10 SKUs, including 100-watt equivalent and three-way bulbs. New in 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 an 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. It will be available in select stores and online by the end of the second quarter. These events, along with the continued productivity gains and our superior execution in the stores, will generate a lot of excitement in the second quarter. With that, I'd like to turn the call over to Carol.
Thank you, Craig. Hello, everyone. In the first quarter, sales were $19.7 billion, 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 2.2% in February, 3.8% in March, and 2% in April. Versus last year, a stronger U.S. dollar negatively impacted total company comp 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 and 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 five 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 chain. The team did a great job of managing these challenges, and at the same time, continued to build out our direct fulfillment capabilities. While some companies experienced deleverage from their supply chain costs in the first quarter, 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 first quarter, 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 2013, we owned 16.25 million shares of HD Supply common stock, or about 8% of outstanding shares. Our initial investment was worth $325 million, but we impaired and wrote off the carrying value several years ago. In April, HD Supply completed a secondary offering. We participated by exercising our piggyback rights. As a result, in the first quarter, we recognized a gain on sale of $97 million, which is reflected in interest and investment income. The net after-tax gain was $61 million, or $0.04 of diluted earnings per share. Following the sale, our equity stake in HD Supply is now approximately 12.4 million shares, or 6.3% of outstanding shares. Our income tax provision rate was 36.9% in the first quarter. We expect our income tax provision rate to be approximately 37% for the year.
Our diluted earnings per share for the first quarter were $1, an increase of 20.5% from last year. Our diluted earnings per share for the first quarter included a $0.04 benefit from the gain on sale of HD Supply shares. During the first quarter, we did not open any new stores. We ended the quarter with 2,263 stores and selling square footage of 236 million. Total sales per square foot for the first quarter were $334, up 1.8% from last year. Turning to the balance sheet. At the end of the quarter, inventory was $12.3 billion, up approximately $518 million from a year ago. Inventory turns were 4.4 times, flat to last year. We ended the quarter with $42.6 billion in assets, including $2.5 billion in cash. In the first quarter, we repurchased $1.25 billion, or approximately 15.8 million shares of outstanding stock.
For the remainder of the year, we intend to repurchase approximately $3.75 billion of outstanding stock using excess cash, bringing total 2014 share repurchases to $5 billion. Computed on the average of beginning and ending long-term debt and equity for the trailing four quarters, return on invested capital was 21.2%, 350 basis points higher than the first quarter of fiscal 2013. When we built our 2014 sales plan, it was based on U.S. GDP growth forecasts of approximately 3% and about 200 basis points of growth coming from continued recovery in the housing market. It also assumed that we would have a normal winter and that commodity prices would remain fairly stable. What's changed? We didn't have a normal winter. As Craig detailed, we believe that most of the sales lost to snow on the ground in the first quarter will be realized in the second quarter.
While U.S. GDP growth in the first quarter was weak, consensus forecasts for the year are still in the 3% area. Housing statistics are not as robust as they were last year, but they aren't materially different than the assumptions we used to build our plan. Finally, while we experienced commodity price deflation in the first quarter, commodity prices appear to be stabilizing. As we look at our U.S. comp performance in the first quarter, 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 million of sales pressure coming from Superstorm Sandy sales last year. Considering these factors, the run rate for our U.S. business in the first quarter was in line with our expectations.
Further, May sales are robust. Today, we are reaffirming the sales guidance we laid out on our fourth-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 HD Supply stock, and now expect diluted earnings per share to grow by approximately 17.6% to $4.42. We thank you for your participation in today's call. Levi, we're now ready for questions.
Ladies and gentlemen, as a reminder, that is star one for questions. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We'll go to our first question from Dennis McGill with Zelman & Associates. Please go ahead.
Carol, I think you got some people excited with that word, robust.
Good morning, Dennis.
Good morning. I guess the natural 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. Maybe, Craig, you want to give a little color.
Yeah, we continue to see strength across the store as we did in the quarter. As the weather improves, we're seeing an improvement, obviously, in our seasonal businesses and exterior categories.
Okay. Secondarily, on the inventory side, I think with that being up, maybe this ties into the trend, but how would you describe what you'd expect for inventory turns and inventory through the year? Maybe just address anywhere where there's elevated inventory relative to expectations and how that might impact margin as we move forward.
Inventory is up year-on-year by a little over $500 million. 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.
We'll go to our next question from Brian Nagel with Oppenheimer.
Hi, good morning.
Morning.
I too wanted just to quickly address the recent sales commentary. Obviously, robust is a strong word here, and the market's reacting favorably to that. As you look at, as the weather's turning here, and maybe more of a qualitative-type question, but as the weather's turning, how would you characterize the products that consumers are buying now? Are you seeing clear evidence that there's a lot of repair-type items they're buying and that maybe the typical spring-type products are still to come? Or now it's catch up to spring?
Yeah, we are seeing, 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. A follow-up question, and 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. 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 other factors more than making up for that?
Brian, we believe, as we set out before, that home price appreciation 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. We've seen 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%-6%, depending on the year.
To put it in perspective, housing turnover is at 4% of units today, and that's what we use when we build our plans.
Got it. Good. Well, thank you very much.
Thank you.
Thanks, Brian.
We'll go to our next question from Chris Horvers with JPMorgan. Please go ahead.
Thanks. Good morning. I'll try to sharpen the robust pencil point as well. As you think about May, is sort of the bounce in the landscape business, the comparison in April and May were pretty similar overall last year. Does that acceleration mean more than sequential, i.e., is it accelerating on a year-over-year basis, May relative to April?
It does. When I answer your question positively, I'm referring to the adjusted April, which was a little over 4%. May is higher than the adjusted April.
Perfect. 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? Is that sort of seeing a similar bounce as you look at May?
Yeah, 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.
Yeah, 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. We're excited about the pro business. 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 Xtra, which is our loyalty program, which we have 1.5 million pros signed up. We're excited. We have a lot of work to do, we have good momentum going.
The final question in terms of the commentary around the deflation in the quarter, do you expect that to flatten out for the rest of the year, or what's the shape of that curve look like going forward?
Well, the good news is that lumber is 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, it's our point of view that it'll normalize and flatten out.
Perfect. Thanks very much.
Welcome.
We'll go to our next question from Matthew Fessler with Goldman Sachs. Please go ahead.
Thanks a lot, good morning. My first question relates to the sequential sales trends in the South and West in the first quarter relative to the fourth quarter. 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 year?
Well-
I got to pull up from memory where we were. 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. Then my second-
I would also note-
Sorry.
I would also note that that was even with some weakness in the garden areas because of-
Drought
well, Also in Texas, we had a slower spring. That was true even with that. It went down slightly from Q4, again, ahead of our expectations.
Got it. Then my second question, I think, is for Craig. Flooring is a category that you cited as tracking, I believe, a bit below positive, a bit below the chain average. That's a business that I guess is indoor-driven. I wouldn't be sure if there's a weather impact. Can you talk about what's going on in that category, please?
Yep. 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. We saw it there, we were very pleased with the hard surface flooring sales.
Got it. Thank you so much.
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 dot-com being up 40% year-over-year. I don't remember if you gave us a comp store sales impact. Carol, if you might do that.
Yeah, I'd be happy to give you just a little bit more color on dot-com sales. The sales growth for dot-com year-on-year was $232 million, now making up 4.2% of our total penetration. For the U.S., the comp contribution is a little over 100 basis points.
Okay. Was there much difference regionally? Could you see any weather impact on that?
We have Kevin Hofmann here. Kevin's our president of our online business. Kevin, if you want to respond to that.
Thanks, Budd. 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 lawn mowers. Not as big of a regional difference as you would see in the physical stores.
My second question really goes to gross margin. I think your guidance for the year is flat gross margin. I think you restated that this morning. You had up five basis points, but you had some challenges in the first quarter that you referred to from the weather. Maybe that gross margin is going to be a little bit better than you originally thought?
Well, Budd, we planned for our gross margin to be down in the first quarter because we thought we would have a higher penetration of lumber and garden than we experienced. We were pleased with the performance, of course, but it was really a function of sales. As you think about the second quarter then, as we recover in those categories, you should plan on the gross margin in the second quarter 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.
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&A side, really impressive controls with the business being slower. If you could take us through the mechanisms that were at work there and how we should think about those at work over the balance of the year.
Well, thank you. A few things about the expense performance in the first quarter. We called out lower expense items, 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 plan, that delta is about $27 million. That was one of the ways that we drove expense leverage. A function of last year we were beating, this year, we think we'll make our plan. We did, Marvin did an excellent job, 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 second quarter, we did.
For example, advertising was under our plan because we thought, why advertise into a snowstorm? We pushed some of that spending into the second 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 quarter and the fourth quarter to be under our guidance, the second and third quarter to be over our guidance. It's just a function of year-over-year items, for the full year growth of 33% of sales growth.
Thank you.
You're welcome.
We'll go to our next question from Aram Rubinson 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 the Spring Black Friday promotions. I know in the past, the industry's moved more to everyday low price. What's the internal debate about whether or not we're moving away from that at the margin, and how should we think about that?
As it relates to Spring Black Friday or any of our key promotional activities heavily centered around special buys, that's 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.
then-
not a real big change.
Okay, that's not a slippery slope that we're starting to climb onto.
No.
No.
No. 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 a showroom type of philosophy. What other areas of the store are you 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, where they're leveraging digital technology to do research up front. 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, we obviously are using that to expand as well. We also are working pilots in lighting to have a similar type effect where we can show product, a broader breadth of assortment in lighting and sell it through the digital channel.
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 a kind of 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 comparisons on product. Our experience has been that not a lot of engagement with the customer by themselves, more of an assisted sale.
Aram, in total, 450 additional stores this year will have some sort of an appliance change made to them, either more square footage or another kiosk. Yes, technology is a way that we can help drive sales.
Thank you, guys.
Welcome.
We'll go to our next question from Gregory Melich with ISI Group. Please go ahead.
Hi. Thanks. I wanted to follow up on the appliance point, then another question. Given the added stores 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.
Okay. A lot less. Okay. Great. I think the second question was more of a technical one. Carol, if the fourth quarter has an extra week, how come the SG&A doesn't grow as much in that quarter?
It's just year-over-year expense items.
It's just sort of the end of the year stuff coming together. It's just you expect less in the fourth quarter.
Exactly.
Okay. I did want to ask Craig one thing. You mentioned COM, this Customer Order Management system.
You'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. What we're trying to do is give greater visibility to the consumer and our associates to special orders throughout the process. 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. 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. It's a coordinating effort that drives back into our manufacturers, our suppliers, to be able to coordinate all the way through the supply chain.
If I could just pile on, each store is like an island. We had these customer order central to the store. If you shopped in a store in Manhattan and then were visiting a store in Chicago, couldn't see your order in Chicago. Now, because we have a common order management, you'll be able to see the order wherever you shop. That's good for the customer and good for the associates.
Yeah, Greg, this is Marvin. In the past, your greatest visibility was a phone call to an associate in the store for a status update. We want to give the information to the customer at their convenience. Mobile device, PC, text, allow the customer to choose how they want to receive that information.
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. Obviously, a lot of opportunity for error. We've eliminated those faxes, put it on EDI, and it really started to streamline how those orders flow.
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.
Yeah. If the smaller suppliers don't have it directly, they'll go through a VAN. It'll be EDI 100% when we're done.
That's great. Good luck.
Thank you.
Thank you.
We'll go to our next question from David Strasser with Janney Montgomery Scott. Please go ahead.
Thank you very much. I had two questions. The first one, in the first quarter, you saw the big ticket decelerate. Obviously, I'm sure some of it had to do with weather. Can you quantify how much of that deceleration came from weather? Then as things rebounded again in May, if you saw that number bounce, the bigger ticket bounce along with the rest of the business back into the range of the 5% plus that you've been seeing 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 first quarter. We can assume that that's weather related.
Do you think that the numbers are holding up relatively if there was any sort of sense of normalization, as you looked at May, I guess, did those bigger ticket things bounce back as rapidly as the live stuff and the rest of lawn and garden?
We haven't parsed through the data
Right
in that kind of detail. We will now. 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 saw, how do you guys adjust the infrastructure of the business to be able to act like that? The difficulties of 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 with inventory in stocks and deliveries and everything in such a volatile environment, I guess?
David, just two comments on that. You hit two big points of variability in our business. Our labor force and our supply chain, also our vendor responsiveness. What you saw in the first quarter of this year, as well as the first quarter and second quarter last year, was the ability of our teams to be very flexible in terms of responding both to lower demand and significantly increased demand. We have Mark Holifield here, who leads our supply chain effort. Mark, you might want to comment on the supply chain side of that and Marvin on the payroll side of it.
Yes, it was a very challenging quarter from a supply chain perspective with transportation rates and the weather led to a lot of issues there. The RDC network really gives us the capability to respond along with our stock in DC. 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'll add in the stores is that we partner very closely with the supply chain. 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. I'm very proud of the stores, very proud of our payroll management team here at the store support center. It's a coordinated effort. Again, as Carol Tomé mentioned, we leveraged 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 improving service. Great partnership with supply chain. We have to be nimble. We're pleased with the performance so far.
Thank you very much. Appreciate it.
We'll go to our next question from Michael Lasser with UBS. Please go ahead.
Good morning. Thanks for the opportunity. My question, two questions, actually. First, we can see the relationship between home improvement comps and housing turnover. 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? Is it flooring? Is it appliances? What typically are consumers doing when they're moving into a home or moving out of a home? The obvious question is, will that allow us to observe those areas and see some sense if the sector's going to become recoupled with that metric over the next couple of quarters?
Michael, one comment I'd make is it depends a bit on the nature of the turnover. If you go back to 2005 and 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 crash. 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 around, you've got to make sure the infrastructure of your home is right. You may paint, you may do some gardening.
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. I don't know, Carol, Craig, if you want to add some commentary to that.
Would agree, of course, 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 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 first quarter of this year.
Okay, that's helpful. Frank, just to follow up on some of your comments. There's probably no other senior executive in the country who's got a better vantage point into what's happening in just the housing market based on what you see 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, the obvious explanation is mortgage rate increases.
Absolutely.
You could look, mortgage rates took a pretty significant jump up in the summer of 2013, you saw a not surprising response to that in the housing market. I would say, just to emphasize Carol's point, I would say actually the surprising part has been how strong housing price appreciation is notwithstanding that. 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. 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.
Just to add-
Okay. Let me ask one final question on the eCommerce business. Nearly 40% growth in the first quarter, another good outcome, albeit a little slower than the nearly 50% growth that you saw in the fourth quarter of last year. Is it becoming harder to sustain the growth as the business becomes a bigger piece of the total? Was there some other dynamic that's going on there to explain the slight deceleration? Thank you very much.
I would say, first of all, our dotcom business grew faster than what we planned. We were very pleased by this. Remember, we are anniversarying the launch of Buy Online Ship to Store. We had expected the growth rates to slow down. It was better than we thought. In fact, if you look at the $232 million of growth that we saw in the first quarter, almost $100 million of that came from BOSS-related sales. 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.
We'll take our next question from Eric Bosshard with Cleveland Research Company. Please go ahead.
Good morning.
Morning.
Morning.
You talked about the Pro loyalty effort. I know there's a couple 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.
Eric, this is Marvin. I'll give you an overview of the program. We call it Pro Xtra. As Craig mentioned, we've signed up roughly 1.5 million Pros. It's a very basic program. We're trying to do 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. Pros tend to buy more than they need when they're working on projects and jobs. We want to make sure that that returns process is seamless and easy. We give them discounted business tools. As an example, if you're a roofer, it's very difficult for you to get a contract to get satellite imaging. If you sign on to Pro Xtra, we give you discounted fees for that because we have a company contract.
We also give them discounts on things like background checks. Just business tools to help them to run a better business, an opportunity to tie in to things that they can't afford as a small business person. Also exclusive offers. If you sign up, we work with Craig and his merchandising team. 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 and size of basket increase. It's very early. We're not proclaiming victory. We just think we're onto something that we can build on. We're looking forward to the future benefits of it.
Perfect. Secondly, in terms of promotions, I know you commented earlier about Spring Black Friday. As you think about the delayed spring, how you're thinking about managing promotions and managing inventory inflow and out from here, 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. Those are set and ready to go for the second quarter. We're very comfortable with our inventory positions in terms of beginning of the quarter and how 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 as a result of improved weather.
Great. Thank you.
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 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?
Our forecast is that Q4 would be slightly stronger than Q2. Let me just say that the var Q2, Q3, Q4 is pretty narrow.
Okay. 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 two 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. Certainly haven't taken anything off the table. As you recall, last year, we said at the beginning of the year, we'd do $4.5 billion of share repurchases. We ended up doing $8.5 billion.
Right. Finally, just on HD Supply, just curious what drove the decision behind selling a part of the stake versus the whole stake?
We have piggyback rights, so we followed along with the selling shareholders on a pro rata basis. 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.
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 a change in sales trends in areas where home price gains may have slowed a bit?
Well, we looked at Phoenix, for example.
Yeah
There's been a bit of a slowdown in home price appreciation in Phoenix, and no, I'm not seeing anything materially changed.
Okay. 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 the right way to kind of interpret it?
It's part of the overall recovery.
Okay. Second, how are you guys thinking about 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 your 2Q outlook, are you simply thinking about your pre-planned promos and outdoor gardening 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's certainly landscape repair that has to happen. We know that there's roof patch that will take place in certain areas based on ice damage. We've tried to look at, in general, what's the planning for the seasonal categories, how does that fit in, 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.
Scot, this is Marvin. We have a roofing, siding, and windows services business, and the only thing I piggyback on to Craig's comments is we have to staff up. 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.
We'll go to our next question from Peter Benedict with Robert W. Baird & Co.
Hey. Thanks, guys. Just one question for Craig. Just on the windows business, you talked about window 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 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 2008-2009 area. We're seeing a nice improvement in the millwork business in total and in the window business. We're very pleased with the current trends in that business.
Is it widespread across country, or is it concentrated in any specific area?
No, it's fairly widespread.
Okay. Thanks very much.
We have time for one more question.
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 you view sort of the multi-year outlook on that metric.
Peter, I would say one of the underlying questions on that is the basic supply and demand equation. You see a lot of wrestling with the question on household formation now. 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 18 and 35 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. For right now, houses are very affordable. Within the last 20 years, this is probably one of the most affordable readings on housing you're going to see.
Supply and demand equation, 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 second quarter. Thank you.
This does conclude today's conference. We appreciate your participation.