Good morning, and welcome to our 2013 Investor and Analyst Conference. This morning, you'll be hearing from Frank Blake, our Chairman and CEO, Matt Carey, our Head of Technology, Marvin Ellison, Head of our U.S. Stores, Marc Powers, our Senior Vice President of Store Operations, and Craig Menear, our Head of U.S. Merchandising. We'll take about a 15-20 minute break. After the break, our speakers will be Kevin Hofmann, the President of our online business, Mark Holifield, Senior Vice President, Supply Chain, and Carol Tomé, our CFO and Head of Corporate Services. At the conclusion of our second session, we will open the mics for questions and answers. I would like to remind everyone today that today's presentations made by our executives include forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995.
These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified on this slide and in our filings with the Securities and Exchange Commission. Today's presentations also include certain non-GAAP measures. Reconciliation of these measures can be found on our website at irhomedepot.com. It is now my pleasure to introduce our Chairman and CEO, Frank Blake.
Thank you, Diane, many thanks to all of you for taking the time to join our 2013 Investor and Analyst Conference. We'll review some of the progress we've made over the last 18 months and our plans, challenges, and opportunities over the next few years. We use this three-legged stool as our strategic framework. Enormous changes have impacted retail and The Home Depot over the last several years. Changes in our customers' expectations, changes in our competitive framework, changes in our business model, the three-legged stool sets out a pretty enduring strategic construct. Borrowing from Jim Collins, we try to address the three core questions that every business should answer. What are we passionate about? In our case, customer service. What do we want to be the best in the world at? Product authority for home improvement. What drives our economic engine?
Disciplined capital allocation and productivity and efficiency. We tie these together through interconnected retail with the objective of strengthening our performance in each element of the framework. Before getting to the specifics of our strategy, I'd like to start with a few comments about our culture. There's a quote attributed to Peter Drucker that goes, "Culture eats strategy for lunch." The Home Depot culture is represented by these two diagrams, the inverted pyramid and the values wheel. They visually express the culture of the company set since its founding over 30 years ago. Our values wheel is on every orange apron that every associate throughout the company wears. We celebrate taking care of our customers, taking care of each other, and doing the right thing. We may not always live up to our values, we hold ourselves accountable to them, I believe this makes us a stronger business.
Now turning to our specific plans. First, at every investor conference over the last seven years, I've shown a chart on private fixed residential investment as a percentage of GDP. For the first few conferences, this was the let me share our pain and suffering chart as the housing related market set one new low after another on its way to an all-time historic low of 2.4% of GDP, well below the previous 60-year low of 3.2%. The housing market is now clearly recovering, though it's worth noting that the recovery so far just puts us at the level of the previous historic low. As Carol will describe, many of the fundamentals of our market are improving. We still face headwinds, particularly in the form of constrained credit, and we are still anticipating only modest GDP growth over the planning horizon.
On the international side, we expect to see some recovery in the Mexican market and continued low to mid-single digit growth in Canada. The U.S. is and will remain the dominant driver of our business. We are planning on a higher growth rate than we set out at our June 2012 conference, but still tempered from this year's pace. I thought it would be helpful to summarize a few of our accomplishments over the last 18 months, as well as our areas of opportunity. As Carol will detail, we believe that we will achieve our 12/24 targets, 12% operating profit and 24% return on invested capital, fully a year ahead of time. That's clearly an accomplishment. As important as the numbers is the fact that we did this while gaining market share and maintaining our customer service improvements.
We also showed, particularly in the second quarter of this year, that our business model is sufficiently flexible to take advantage of a dramatically improved sales environment. The spring of 2013 was a major stress test for our supply chain and store operations, and with the help of our vendors, we were able to pass that test and record the highest U.S. comp percent sales increase for The Home Depot in over 20 years. When you consider the relative size of our business now versus 20 years ago, that is a significant accomplishment. We've also shown in the last 18 months that our customers are responding positively to our investments in interconnected retail, and we've been very encouraged, as Marvin will describe, by the recovery in our pro business. On the opportunity side, our customers' shift to mobile technology has been much faster than we anticipated.
We're having to play catch up in this area, and it will be a major focus of our investment in 2014. We plan to roll out a new solution for buy online, deliver from store in 2014. As Mark Holifield will describe, we know last mile delivery is an important competence for us to have. We deliver from store now, but it is not connected to our online presence, and it's not optimized for our customers or associates. Improving this delivery process has taken longer and involved more complex issues within the store than we anticipated, but we feel confident about our ability to bring this to life next year. We'll see benefits not only in customer service, but also in the efficiency of our supply chain. We will also continue to experiment on the bridge, the interconnection between our stores and our online presence.
Some of this is a matter of technology and form of function in the real and virtual world. We're experimenting with kiosks, with Skype-type virtual services in store, and with new functionalities on our apps and mobile website. Our focus is on making our physical assets and associates a competitive advantage. So far, the bridges that we've built, like buy online, return in store, buy online, pick up in store, buy online, ship to store, and appliance kiosks have been successful. We're only at the start of this process. We will continue and actually increase the pace of our experiments with the objective of making the customer experience online and in our stores more engaging and simpler. Finally, one of our biggest opportunities is around our organizational process.
It's easier to say interconnected than to act in an interconnected way and to get the different parts of our business thinking through the customer's interconnected experience. Our organizational muscle memory is all based on physical retail. For my part, I underestimated the significance of this. It isn't going to be fixed overnight, as a leadership team, we are all focused on how we develop new patterns for our associates to work in an interconnected way through training, tools, and strategic alignment. The first leg of our strategic framework is customer service. Customer service starts with investing in our associates. We pay our associates an above-market wage rate, and even during the housing crisis, we maintained salary increases, maintained our 401 matches, and actually increased our bonuses for our hourly associates. For example, for all of 2006, we paid out $26 million in success sharing bonuses.
That's our bonus program for our hourly associates. In the first half of fiscal 2013, we paid out $135 million. We are also proud that we are the only major retailer in the country that provides stock grants over and above salary and cash bonus to our assistant store managers. We spend time and money recognizing our associates for great customer service. Our Homer award program is now in its seventh year, and we've spent over $86 million in individual customer service Homer recognition awards. As Marvin will describe, we are also adjusting our learning and training efforts to incorporate interconnected retail, making our virtual store presence part of our Customer First training. We're upgrading technology in the store to take advantage of the interconnected capabilities now available.
In a world where more data has been created since 2002 than existed in the history of the world prior to that point, Marvin and his team are focused on how we continue to simplify the business rather than drown ourselves in data. Finally, one of the unusual elements of The Home Depot business model is the importance of our pro customer. While a small percentage of our customer base, less than 5%, the pro accounts for over 35% of our sales, and the needs and expectations of this customer are different from those of our consumers. Over the last 18 months, Marvin and his team have rolled out programs that both improve our day-to-day service for these customers and also, we hope, build increased stickiness through recognition and special services that help them build their businesses.
For The Home Depot, the journey on product authority began with a fundamental restructuring of our supply chain. It's difficult to claim pride of place on product authority if you don't have best-in-class capabilities for getting product into the customer's hands. As you know, over the last several years, we've developed a new supply chain network with our rapid deployment centers or RDCs. The RDC strategy, along with improvements in our stocking and bulk DCs, allowed us to improve our in-stock rates, improve turns, and improve customer service. The next step, as Mark Holifield will discuss, is a new DC network for our dot com business, as well as a new platform for our store delivery process for the last mile delivery.
Along with the supply chain improvements, Craig and his team, with the support of Matt and the IT team, have been putting in place the competencies we call collectively merchandising transformation. Matt and Craig will discuss this in a few minutes. Matt's tape measure chart gives a visual representation of the fact that when he arrived here, we did not have many of the basic technological competencies that other retailers have had in place for years. Developing these capabilities in assortment planning, space allocation, and pricing has been an important part of establishing product authority. We're now at a point where the tools are largely in place, and we can begin to use them to create value for our customers, associates, and shareholders. These developments are the enablers for the larger portfolio strategy that Craig and his team have been working on.
At our last conference, Craig showed a chart that grouped our product categories into different clusters from the perspective of potential online competitive threats, with the upper right-hand quadrant of the chart representing the higher risk areas. If we were redoing that chart today, we would show both more categories with potential online impact, also more categories potentially benefiting from an interconnected experience. The internet has evolved from being an external threat to being part and parcel of our portfolio strategy. The focus of our merchandising strategy remains the same, winning through value, innovation, and speed to market, though some of the tactics do change. We need to adjust to account for some of the differences created by interconnected retail, differences such as increased pricing transparency, demand for enhanced delivery options, and the balance between long-tail demand and product curation.
As you'll hear throughout today, those adjustments are incorporated in some of our key initiatives. Kevin Hofmann, our head of online, reinforces this point. His strategy is a continuation of the merchants and the store operators. His goal is to improve traffic and conversion in store and vice versa. Because of our heritage as a bricks-and-mortar retailer with disparate systems that have developed over time, one of the major efforts we've undertaken over the last few years has been creating the technology platform that will support a seamless customer experience, whether shopping online or in store. As Matt will detail, we've made a lot of progress, we have more to do, and this remains one of our major areas for investment in 2014 and beyond.
Along with these foundational investments, we're also investing to improve the core functionalities of our site as well as our mobile web and mobile app capabilities. Aram refers to the smartphone as a store in a pocket, and like the physical store, the virtual store requires constant upgrading and improvement. Only with the virtual store, the pace is a lot faster. We've made significant progress over the last 18 months, but this is a process that will never end. The ongoing objective is to keep improving the ease of use, personalization, and connectedness of our online experience. The third question that our strategic framework addresses is: What drives our economic engine? This has represented the most profound change in the business over the last several years. Customer service and product authority have been hallmarks of The Home Depot since our founding. What has changed is the economic driver.
Used to be square footage growth. Now it is disciplined capital allocation. Carol has a chart that shows the three virtuous cycles on which our business depends: sales growth, productivity, and capital allocation. New store growth no longer plays a dominant or even significant role in sales growth or capital allocation. U.S. and Canadian markets are effectively saturated. There are continuing opportunities in Mexico, but this is modest in terms of store growth. Since our June 2012 conference, we exited our big box stores in China, and we have no intent to build stores in other areas of the world. Here's the main reason why. In the second quarter of 2013, the three months of May, June, and July, we grew comp sales in our U.S. business by approximately $2 billion in three months.
A wildly successful venture into a foreign country might yield $2 billion in sales after a decade of effort. So opportunity and capital efficiency strongly argue for intense focus here. While we don't see a need to add a significant number of new stores or enter a new country, we also don't see a need to shrink our existing footprint. We have near-at-hand opportunities to drive sales growth within our existing footprint throughout North America. As Craig will discuss, these opportunities start at the bay level and build out through the virtual interconnection between online and in store. Our shareholder and return principles are straightforward and haven't changed over the last several years. We will invest to maintain and grow our business, and we will return excess cash to our shareholders in the form of dividends and share buybacks.
We have a targeted dividend payout ratio of approximately 50% of earnings. This puts us among the top rank in retail, and we intend to increase our dividend every year. We will continue to buy back shares as long as it is value creating, and we have a targeted adjusted debt to EBITDA ratio of 2x. Our board approved a new $17 billion share repurchase program this year, and we're now $6.4 billion into that, and are looking at completing that authorization in 2015. In 2009, while we were still in the middle of the housing crisis, we set out an objective of achieving a 10% operating profit and a 15% return on invested capital by the year. Well, actually, if you were here in 2009, we ducked the specific year. We said by 2000 XX. I figured no one would remember by 2099.
Well, we achieved the target by 2012, well ahead of our plan. Last year, we set out a new target of 12% operating profit and 24% return on invested capital by 2015. We are planning to hit that target a year ahead of schedule, though as Carol will detail, we will arrive there in a different way than we thought, principally through higher sales driving greater operational leverage. Given this performance and the sales growth we are targeting in 2014 and 2015, we are recalibrating our 2015 target and have now set a 13% operating profit and 27% return on invested capital by 2015. We think these are both challenging but achievable goals. Most importantly, we think we can continue on the path of gaining share and improving customer service as we strive for improved financial performance.
I hope what you will take away from today is that The Home Depot is committed to drive the three virtuous cycles of sales, productivity, and capital allocation. We have a strong values-based culture, and we have an experienced leadership team focused on tackling exciting new challenges. With that, let me introduce Matt Carey, our Head of Information Technology. Matt?
Thanks, Frank, and good morning. You may remember this slide from our 2009 investor conference. This timeline represented an advanced retailer's IT journey and how we compared. At the time, I told you our capabilities were basically 15 years behind other retailers. We needed to compress that timeframe to deliver these capabilities and transition to a world-class retailer with outstanding IT proficiency. Over the past few years, we have successfully built out the capabilities of an advanced retailer, including store mobility, price management, auto-replenishment, global sourcing, and many others. Going forward, we have to have a holistic view of our business information and our selling channels so that we can keep pace with the technology that will support our rapidly adapting business. As we look ahead, there are four trends I would like to talk to you about today that will influence our future technology direction. First, leveraging big data.
We have to efficiently utilize the vast amount of data our company produces to simplify and automate decisions. Second, pricing transparency and analytics. Pricing transparency has changed the competitive landscape, and we must use advanced analytics to constantly fine-tune our portfolio strategy. Third, supply chain efficiency. Our investments in technology for our supply chain will be a driver of efficient, seamless customer experiences. Finally, creating a seamless customer experience. Customers expect a seamless experience across all selling platforms, even at a home improvement store. Let's go into leveraging big data. Big data has been a topic for many companies, and pervasive data collection is transforming the way we look at serving our customers. With 1.3 billion transactions annually, over 15 million visits to our website a week, and over 600,000 SKUs, 300,000-plus associates across 2,200 stores, we have a vast amount of data, as you can imagine.
Our ability to harness and leverage this data to make decisions in an efficient manner can be a differentiator and a competitive advantage. It can be overwhelming at times as well. Through analytics, rules engines, dashboards, we can make informed decisions efficiently. It can provide insight into what's happening across our business, whether it's marketing, merchandising, finance, supply chain, and even in our stores. It can help us better understand the customer and market to them, adjust assortments to trends and demographics, control costs, and better manage our stores. Going forward, we'll continue to build out our capabilities to help speed up and simplify decision-making across the business. As we think about big data opportunities to make key decisions with speed and efficiency, pricing is an area where the retail landscape has changed drastically over the last several years. Pricing is increasingly becoming more and more transparent and dynamic.
In a pure bricks-and-mortar world, understanding the pricing environment through competitive price checks was a real manual process. It's people on the ground, store by store, creating limited data sets, and therefore infrequent changes among retailers. In today's multi-channel world with pricing data for in-stores and online readily available, there is more information available to help understand the pricing landscape. We believe understanding the competitive environment is an imperative for any retailer who wants to win. That is why in late 2012, we acquired BlackLocus. It's a small group of data scientists focused on making complex data sets actionable, and we will continue to invest in this space in 2014. Let's talk about supply chain efficiency in an interconnected world. Traditionally, retailers have invested in supply chain to drive efficiency inside their bricks-and-mortar businesses.
They never had to worry about picking the product or delivering it that last mile. The customer did that for them. The customer expectations have changed in an interconnected world. The customer expects to be able to buy something online or in a store and have it delivered to their home, or in some cases, installed. In order to provide this seamless experience, we are investing in technology that will help make this a reality. The interconnected world requires us to rethink how we invest in technology to better serve our customer. Traditional bricks-and-mortar retail technology was focused on the in-store environment. Technologies such as payroll systems, self-checkout registers, scan guns, inventory management systems were the priority. While these systems are important and integral to our business, today, the interconnected retail environment requires a broader set of competencies.
Interconnected retail across multiple channels changes how we approach our customer experience. We must create a seamless experience for our customers, regardless of the channel they choose. This requires investment in technology. As I said earlier, we've come a long way in the last five years compressing two decades of development. Going forward, technology will continue to evolve, and we are going to evolve with it. With that, let me introduce Marvin Ellison, our head of U.S. stores.
Thanks, Matt. Good morning, everyone. Our passion for customer service is the first leg of our strategic stool. Delivering unparalleled customer service has never been more important to our customers. Today, I'd like to discuss how customer service has taken on a broader definition. In the past, customer service was defined as activity within the four walls of our brick-and-mortar environment. Today, we see customer service as multidimensional. Our philosophy for customer service can be defined in four areas. Number one, we have worked very hard to find innovative ways to put customer-facing associates on our sales floor without adding incremental payroll. Number two, we place a lot of emphasis on making our store environment simple. Number three, we've taken steps to understand the unique service needs of our interconnected customers. Lastly, we continue to provide a unique customer service experience for our pros.
Let's start with service in the stores. This operational plan is fundamental to the success of our overall customer service strategy. The role of each associate is designed to deliver three objectives to create a great service experience for our customers. Although these objectives have remained the same for the past five years, how we achieve them have evolved based on new technology and changing customer needs. This simple approach resonates really well in our stores. It is our belief that simplicity and clarity allows us to remove complexity and focus on delivering customer service and driving sales. Our focus on this simple operating plan while eliminating tasks from our associates has also allowed us to re-engineer expectations of our associates and reallocate payroll to achieve our 60/40 target by the end of this year.
As a reminder, back in 2007, approximately 60% of all of our store hourly payroll was allocated to non-customer-facing activities, things like back-office work and inventory tasks. If you fast-forward to 2013, we'll end this year with 60% of our store hourly payroll dedicated to customer service. This is over $700 million in task out or an average of 10 additional full-time associates per store per week. As I mentioned earlier, this investment in payroll was engineered without adding one hour of incremental payroll expense to the stores. Our 60/40 initiative has been a cornerstone to our customer service strategy over the past five years. In addition to this payroll investment, we've also implemented numerous programs and initiatives to improve our customer service in the stores. This slide highlights some of these programs and processes from the past five years.
It represents our multi-year strategic plan to improve customer service within our brick-and-mortar environment. Programs such as Power Hours, where we stop tasking to focus on customer service between 10 A.M. and 2 P.M., or our Customer First strategy, where we retrain each associate on the specific customer service expectations. To me, this slide represents more than just a list of programs. It also lists more change management that we face in customer service the past five years than we probably faced the first 30 years of the company. As a result of the hard work of our great associates, we've experienced over 2,100 basis points of improvement in our Net Promoter Score over the past five years. We set an internal goal to get above 70%. We will work to build on this goal. Providing great customer service extends beyond the aisles in the stores.
It also includes making an emotional connection in the communities in which we operate. Through kids and do-it-yourself workshops and our weekend do-it-yourself clinics, we are committed to our customers. It also gives me a great sense of pride to work for a company where associates volunteered over 25,000 hours this year for over 900 community projects. In addition to these volunteer hours, our foundation committed $80 million to ensure that each veteran has a safe place to call home. We've also taken steps to extend our focus on making an emotional connection within the four walls of our stores. As an example, if you were shopping in one of our stores during the Black Friday weekend, maybe you saw associates handing out free coffee and donuts to customers waiting in line.
Possibly you were one of the tens of thousands of customers that took a free picture with Santa. Maybe you demoed one of our power tools from our great assortment, or participated in a kids workshop to build an all-important toolbox during Black Friday weekend. Although these activities may appear to be random, they are part of our strategy to bring a unique shopping experience to our brick-and-mortar environment. We know that actions like offering our customers refreshments, putting the tool in their hands so they can try before they buy it, or having personalized training during a workshop are activities that a pure online competitor cannot replicate. It reinforces the importance of why making an emotional connection is part of our customer service strategy. Now let's talk about the importance of keeping our store environment simple. Inherently, home improvement is a complex business.
We have over 35,000 SKUs per store, and our customer demographic is very broad. Simplifying our in-store environment is important in order to allow our associates time to engage customers. As we look for additional ways to make our store environment simple, earlier this year, we rolled out an initiative that we called Project Simple. The goal of Project Simple is to eliminate reports, store-based emails, and meetings that remove store management from the sales floor. Project Simple has been a success. Through it, we reduced store reports by 40%. We've decreased emails by 20% to our store managers. After addressing complexity in the store, we took additional steps to address complexity at our store support center. We call this process WIN, which is an acronym for worthwhile, intuitive, and necessary.
Before any program or initiative can be introduced in the store, it has to go through our approval process, which is led by our division presidents. WIN validates if a program meets our standard of being worthwhile, intuitive, and necessary. To date, we've had over 150 projects that go through this process, and over half of them were either declined or had a significant change in direction. The WIN process is not meant to be punitive. However, it helps us to maintain a very disciplined approach to keeping our stores simple. We talk a lot about keeping our stores simple because left to its own devices, complexity will take over. This slide highlights some of the activity that's taken place in our U.S. stores the first three quarters of this year. As an example, we have almost 2.8 million applicants for jobs. We hired 145,000 new associates.
This led to us staffing a total of 300,000 associates, which created 3.8 million schedule changes. During the same time frame, we executed 2.4 million installs, 1.4 million measures, and had 1.2 million store deliveries. This all happened while we utilized over 7 million hours for training, presented associates with almost 600,000 Homer Awards, recognized 190,000 associates for their anniversary while recycling 29 million pallets. As I mentioned earlier, our business is inherently complex. When we talk about keeping things simple, it is a necessary ingredient to provide improved customer service while delivering payroll productivity. Because of our success in the stores of removing tasks, we are constantly seeking additional opportunities to simplify other parts of the business. As an example, this slide represents our past process to purchase carpet. The visual of this slide says it all.
This was a very confusing and complicated process for our customers and our associates. We engaged two separate third parties. The customers had to make multiple visits to the store, and there was limited systems visibility. Simply stated, this was a very complicated process. Today, this entire process has been reduced to three easy steps with only one store visit. As Matt mentioned earlier, this is an example of a seamless customer service experience. The process change we've made in selling carpet is also an example that we wish to replicate in other parts of the store. Let me discuss the customer service focus that we're placing on the interconnected customer. Effectively merging online and brick-and-mortar into one seamless process for our customer is one of the biggest challenges facing traditional retailers today. We've committed a lot of time and energy on improving this interconnected customer experience.
With the introduction of Buy Online, Pickup in Store, BOPIS, or Buy Online, Ship to Store, BOSS, our traditional retail store has transitioned to more of an interconnected environment. Because of this transition, customer service is now extended beyond the traditional four walls of the brick-and-mortar environment. For these interconnected customers, we must provide service that meets their unique needs and their heightened expectations. To support the customer service focus in this area, we rolled out a new customer service training program that we call FIRST for the Interconnected Customer. This training is designed to improve the specific experience of our BOPIS and BOSS customers, and the training stresses the importance of quick pickup and project attachment. We also felt it was important to include a human touch to this process.
Because the best ideas always come from the field, we canvassed our stores for ideas on how to accomplish this. As a result of our search for best practices, we've included two additional steps to improve the customer service focus for our BOPIS and our BOSS pickup. For all BOSS customers, Buy Online, Ship to Store, the customer receives an Inspected by sticker confirming that an associate in the store took an additional step to open the order to ensure all parts, pieces had arrived, and to validate that nothing arrived damaged. For BOPIS and BOSS customers, we include a thank you card from the store manager personally thanking the customer for shopping with us and providing the customer with the name of the store manager and a direct phone line to reach them with any questions or concerns.
These ideas are entrepreneurial spirit at its best, and it has allowed us to more effectively merge the online and the store environment. This new training was needed based on feedback from our BOPUS and BOSS customers. In June of 2012, we started to measure BOPUS and BOSS customer satisfaction separate from our traditional voice of customer surveys. From June of 2012 to January of 2013, we were pretty pleased with our customer satisfaction results. In January of 2013, we introduced BOSS, Buy Online Ship to Store, and candidly, we were unprepared for the increased volume and our customer satisfaction scores plummeted. We rolled out FIRST with the Interconnected Customer training, and through the hard work of our wonderful associates, we saw our customer service scores greatly improve. Once again, we were able to see customer service improvement from an approach of clarity, simplicity, and role definition.
Now let me discuss the service commitment that we're making to our Pro customers. As a reminder, Pro is 3% of our customers but approximately 35% of our sales. We have a very basic strategy to serve these important customers and to create loyalty within our stores. For our Pros, we provide reserved parking, fast checkout, and loading assistance. To improve the engagement at our Pro desk, we simply turn our monitors to face the customer and ask our associates to walk from behind the desk to stand side by side with the customer. As basic as this sounds, our service scores improved simply because we removed the desk as a barrier and gave our customers a transparent view of the data on the computer screen. Our goal is to create loyalty through offering our Pros a great value and customer service uniquely designed for their specific business needs.
Also to help our Pros run a more effective business, this fall, we introduced a program that we call Pro Xtra. Xtra offers the Pros online tracking for purchases, e-receipts, and a seamless no receipt or returns process. Xtra also provides the Pro with discounted business tools for services like satellite roof measurements for professional roofers and discounted applicant background screening services. Our goal is to allow our Pros to leverage our economies of scale to take advantage of business services that may have been cost-prohibitive for a small business owner. We believe that programs like Xtra will create customer loyalty and allow us to gain a greater share of our Pro's wallet by assisting them in running a more effective business. In addition to these discounted services, Xtra also allows us to market to, identify, and support our Pro customers much more effectively.
Here's an example of an actual customer before and after Xtra. To the left, we had a customer to visit the store and made a very large paint purchase. Because of the size of the purchase, our paint associate assumed that he was a professional painter and signed the customer up for our paint rewards program. Months later, the same customer signed up for Xtra and registered eight credit cards. When the credit cards were registered, we immediately gained visibility to 24 months of transaction data. From this data, we learned this customer had rang up over 250 separate transactions in 18 stores over the past 12 months. We also learned that this customer had previously made large purchases of electrical, hardware, and plumbing-related products. From this data, we determined this customer was not a professional painter, but a general contractor.
To our surprise, paint was the lowest penetrated purchase category for this customer. Although we have programs that offer discounts to our Pros like paint rewards and our bid room, they do not give us the full view of the customer as shown in this example. Having such rich data gives us the ability to better communicate, market, and serve this customer. Although Pro Xtra is a new program and we have much to learn, we are very excited about the possibilities. To serve our Pro customers outside of the store, we use our outside sales representatives we call Pro account reps or PARs. Not only do our PARs drive sales, they also engage our larger Pros at their job sites or office locations.
The PARs will orchestrate job site deliveries, process rebates, and take any additional steps to facilitate a seamless customer service experience for our large Pros. These associates have played a key role in the success we have seen in the large Pro segment, which is defined as customers who spend greater than $10,000 annually. We are also taking steps to leverage technology to better communicate with our Pros. Each week, we partner with Craig and the merchants on a specific SKU that we will present to the Pros. We call this our Pro Pick of the Week. This is a one-minute video sent to our Pros each week focusing on products or services that save them time and money. Let's take a quick look.
Hi, folks. Mike from The Home Depot here to talk about the latest technology in construction adhesives with the DAP SMARTBOND foaming adhesive gel. What is the main difference? How about eight times the coverage of a traditional cartridge adhesive? That is right. One can offers the same coverage as eight 28-ounce tubes of traditional subfloor adhesive, and it is half the price. Watch this. The product applies as a foam and condenses down to form an adhesive gel that is three times stronger than the standard construction adhesive. It is also much faster on the job site since the pressurized aerosol does not require the same pumping action as a gun. It eliminates the continuous swap out, saving you time and money. One can weighs just one pound compared to the five pounds that each standard 28-ounce tube weighs.
At an average of 40-50 cartridges for each house, that makes for some tired arms. SMARTBOND is also available in heavy duty and landscape applications. DAP SMARTBOND Adhesive, available exclusively at The Home Depot.
To this program, so far, we've launched approximately 2 million targeted emails and have experienced some of the highest open rates of any emails in our CRM program. In closing, a simple store environment is key to our broader customer service and productivity strategy. Our goal is to keep our stores simple by centralizing data analysis and removing unnecessary complexity. We understand that a simple store environment will allow our customers to be more focused on our associates and our associates more focused on enhancing their service and driving overall productivity. To discuss additional steps we're going to take to improve productivity, let me introduce our Senior Vice President of Operations, Marc Powers.
Thank you, sir. Thank you, Marvin. At our last investors conference, I talked about how in store operations, we were leveraging the operational rigor that we had established to consistently implement processes and systems to not only build productivity but also to invest in our customers' interconnected retail experience. In store operations, we truly believe that complexity is a proxy for expense and a major distraction to the customer's experience, so we build simple. Our focus on productivity through simplicity continues to fuel our virtuous cycle. If you remember, I reviewed with you at our last conference just a few of the many projects we had lined up to enhance the customer's experience as well as build productivity. For example, I told you we would roll out 10 to 15 First Phone Junior per store in addition to our original 10 to 15 First Phone mobile devices.
These junior devices would provide more associates with basic product location and inventory in store quantity information to enhance the customer's experience while we optimized our payroll. We completed that rollout last year. I also told you we would improve our customer's experience by leveraging over 1,000 in store tool rental centers and the associates in those centers, as well as our three reverse logistics facilities to repair small engines, such as lawnmowers. Since then, The Home Depot has gone from repairing 0 of our customers' small engines to this year, where we will repair over 600,000 units. Finally, at our last conference, I told you we would continue to implement projects that would optimize our payroll and would demonstrate that we would consistently drive our virtuous productivity cycle into the future by reaching our 60/40 milestone, which Marvin explained to you we will complete this year.
Looking at 60/40 a little deeper. As a reminder, in 2007, we had so much complexity in our operational processes and store IT supporting systems that it required us to assign roughly 60% of our store labor hours to operational activities, leaving the remaining 40% of our store labor hours free to serve our customers. Today, through many projects, like you see on this slide, where we either, A, eliminated legacy non-productive activities, B, streamlined required processes, or C, invested in productivity-generating technology. We have been able to optimize and leverage our hours by reallocating them to where they provide a better experience for our customers. In fact, as Marvin and I have stated, by the end of this year, we will have flipped our labor allocation to have 60% of our store labor hours dedicated to the customer experience and only 40% executing operational activities.
As we move forward, we have clearly defined numerous projects over the next several years that will enable us to continue to implement and sustain simplified operations, optimize payroll, and build productivity, all while enhancing our customer's experience. Some examples of these projects we will implement can be aligned under three headers that I will cover with you at a high level today. The first one being our First Phone Generation 2. Secondly, our in-store operational actions to support our interconnected growth. Finally, freight flow, which entails our efforts to provide a better product shelf availability, meaning in-stock for our customers. First, let me discuss our First Phone Generation 2. It seems like not that long ago that we rolled out our mobile First Phone devices. However, it was over four years ago.
As technology has advanced, our First Phone bricks, as our associates lovingly call them, have been left behind. In 2014, we will provide our associates an updated First Phone Generation 2. This simple, intuitive tool will have greatly improved processing speed. It will also empower associates with what our customers will be coming into our stores with on their devices, and that is access to the internet. In addition, the First Phone 2 will be web-based. Any application we design, we will be able to quickly download so our associates can immediately leverage it to enhance the customer's experience. Aligned with our productivity focus, unlike the original First Phones, Generation 2 will have an intuitive smartphone interface that will function much like our associates' personal devices.
This will give us the ability to hire an associate on Monday, and he or she will be able to be proficient on this device on Tuesday. Thus, this simple tool will build productivity while enabling a better customer experience. The second group of projects I'd like to cover with you addresses several in-store operational actions we are implementing to support our interconnected growth. The first project I'll discuss is our customer order management system. Much like today's outdated First Phone, we have an opportunity to simplify our customer order management systems while building productivity and delivering a better customer experience. Through the years, we developed independent software management systems to meet each unique business need that arose.
A simple analogy is we created a brain to manage special orders and install customers, another brain to manage tool rental customers, another brain to manage customer inventory fulfillment, and yet another brain to manage customers' dot-com orders. All of these brains work independently, so we have virtually no central view of inventory, customer purchase orders, or status of customer special orders, installs, or deliveries. In 2014, we will implement a central brain, if you will. We call COM, or Customer Order Management. This will allow all systems to pool network-wide inventory information, customer purchase order information, and a central real-time view of the status of a customer's special order, dot-com order, or delivery. Once again, the central brain will be a simple system that will enable us to build productivity while providing a better customer experience.
A few more projects that are being implemented to support our interconnected growth are centered around building productivity while providing a differentiating buy online, pick up in store, and buy online, deliver from store experience. First, we understand our customers don't buy online just to come into our stores to stand in line. Our customer insight data has clearly shown us our customers want to quickly pick up their online purchases upon arriving in store. With this in mind, we have recently rolled out the ability for all associates with mobile First Phone devices to complete, or what we call release, a customer's order from anywhere in the store with their First Phone. We are enhancing our warehouse pick, pull, and stage software to ensure we are efficiently executing this activity on our mobile devices.
To that point, we are also reallocating some of the payroll productivity we have built from other projects to this online customer's in-store experience. Finally, concerning in-store projects supporting our interconnected growth, we are designing solutions to allocate space appropriately to quickly fulfill the online customer's order when they come into the store to pick it up, or to allocate space to stage a customer's buy online, deliver from store order in such a way that it enables an efficient fulfillment process. The last project I will cover falls under the header of freight flow. As we strive to build a simple, interconnected experience, we haven't lost sight of the fact that we still have a multitude of opportunities to improve our operations for our cash-and-carry customers.
Some of those opportunities center around improving our shelf availability, or in-stock, and accuracy of our inventory on hand quantities, which is one of the main inputs to our replenishment systems. Historically, we have seen several versions of how we handle freight in our stores. In 1979, freight handling was an all-day activity where we handled freight while servicing our customers. In 2008, we transitioned to a hybrid model where some of the freight is handled in the early evening while servicing the customer, and the remainder of the freight is processed while closed to the public. We are currently running a model where approximately 1,300 of our stores are the hybrid day/night operation, and the remaining stores handle the entirety of freight while closed to the public.
For all these models, believe it or not, we have never given our freight handling crews a standard efficient manual process, nor any type of IT system to build productivity and improve shelf availability. We are currently in the process of testing a more efficient standard freight process that not only drives shelf availability, ensuring product is on the shelf when our customers need it, but also improves our inventory on hand accuracy, enabling our replenishment systems to order more accurately. As we improve our in-store process, we are also working with Mark Holifield to improve our incoming freight visibility so we can optimize our payroll by leveraging our in-store scheduling system we rolled out two years ago by scheduling the appropriate amount of store labor to handle the inbound freight.
The labor allocation will be driven off of individual product attributes and the validated time that is required to efficiently handle the product. Once again, the goal is to design and implement a simple, efficient freight flow process that will build productivity while delivering a better customer experience. In wrapping up, as we implement an intuitive First Phone Generation 2, a differentiating interconnected in-store experience, and develop an efficient freight process in store operations through these projects and many more, we will continue to relentlessly focus on building productivity through simplicity. We believe what Leonardo da Vinci said when he said, "Simplicity is the ultimate sophistication." Thank you for your time, and now I'd like to introduce our EVP of Merchandising, Craig Menear.
Thanks, Mark, and good morning, everyone. Today I'm going to talk to you about our strategy to become number one in the world in product authority for home improvement products. We define product authority as the customer's preference for The Home Depot as a retailer of choice for home improvement products. To drive product authority, we start with a customer back mindset, I'll talk to you about some changes that we're seeing with the customer today that will require us to think differently as it relates to our approach and our capabilities. The second element of product authority focuses on product. It's product around value, innovation, and speed to market. All of this is supported by the transformation of our merchandising tools to drive productivity and growth. I'll walk you through how we intend to build a competitive advantage and achieve our strategy.
The goal here is to create a preference for The Home Depot, as I've outlined, to drive profitable share gains in the business, utilizing all channels, allowing the customer to shop when, where, and how they want. Product authority starts with understanding the customer's needs, there are factors that we must be keenly aware of over the next few years. These changes impacting the customer landscape have implications to our assortment and our approach, it also represents opportunity for us. We have an aging boomer population. Some are electing more do it for me as they retire. This represents an opportunity for our services business and growth with our pro customer. Likewise, there's an emerging Gen Y group, an up-and-coming customer base at the early stages of DIY. Here, we must instill confidence in product and projects.
We must provide simple solutions with the products that we put on our shelves. In terms of technology, mobile is here to stay. The customer has access to more information than ever before from anywhere, including the aisles of our store. This information is around product specs, pricing, ratings, and reviews. We must adjust our communication and be more customized and more visual. Additionally, it means deeper coordination with our suppliers to monitor and react to customer feedback about products and the shopping experience. There's also an economic impact that we have to be mindful of when it comes to assortment planning. The U.S. is experiencing bifurcation of income with the middle class shrinking. Let me bring this to life with some real examples. Traditionally, we go to market with multi-packs in paper towels.
Given the increased rental market and more single-parent households trying to make ends meet, we added a single roll of paper towels, which sold for less than $1. Sales of this product have been largely incremental to the business. At the same time, we went out and tested $3,000, 100 gallon Japanese maple trees and were quite successful. This bifurcation will challenge the traditional thinking about line structures, and it could provide opportunity for us on both ends. The next hallmark of product authority is assorting products that provide value, innovation, and speed to market. Our mission as merchants is to be the customer's advocate for value. I'll show you in a minute just the many facets of value. One underlying tenet, however, is customer relevancy, and that's how we become the customer's retailer of choice for home improvement products.
Portfolio strategy guides our merchants' decisions to be most relevant in our space. The home improvement landscape today has some competitors taking a highly curated and narrow assortment to market. On the other side of the spectrum, there's competitors that offer very broad mixes, millions of SKUs. We think the right answer for our customers is somewhere in the middle. Through portfolio strategy, our merchants use their industry expertise to curate relevant selections for our customers as they shop across channels and offer solutions to a broad range of home improvement needs. This has been our winning strategy in brick and mortar, and it will be our strategy across all channels going forward. How we act on customer insights is key to winning in product authority. Now, given the rapid pace of change in the interconnected retail world, we believe that speed to market is a winning strategy.
Product authority starts with value, and our goal is to optimize productivity so that we can deliver best-in-class value for our customers. We create a competitive advantage with our strategic supplier partnerships that allows us to be leaders in assortment. We also look at programs where we've developed with companies like Behr in paint, TTI in tools, Custom Building Products and tile set materials, and Cree in LED, and The Home Depot enjoys outsized market share penetration in these categories in comparison to the company average. We engage in multi-year collaborative planning cycles with our suppliers, and this gives the supplier the necessary confidence to make us their investment in choice for R&D and for capital. It gives us the ability to have line of sight to product cycles, keeping the flow of innovation and value sustainable over time.
Now, our private brand portfolio augments our mix and delivers value for our customers as well. We are a branded house, and we intend to remain a branded house to satisfy our customer preferences. Our private label products fill in gaps in line structures and give customers alternatives. We strive for best first costs, but we also build cost leadership with infrastructure advantages. Later you'll hear from Mark Holifield how some of these initiatives are helping to optimize our supply chain. There's still a great deal of work ahead, especially when we think about the testing and engineering capabilities that we're developing to be able to gain efficiency and speed to market.
We're also getting smarter about how we analyze the markets that we serve, our investment in tools and technology continue to drive our market strategy in terms of price and assortment, which I'm going to speak to in just a minute. We also want to deliver innovative products. What you see here are categories that might be called staples of our assortment. We've sold paint, light bulbs, tools, glue forever. Most of these categories wouldn't be considered hubs of innovation. As you saw in Marvin's video, products like DAP SMARTBOND is changing that line of thinking. Customers are willing to spend when we bring products that make projects easier, products that save them time and money, and products that embrace technology to drive efficiency and performance. Innovation launched with The Home Depot changed the trajectory of these businesses.
Customers have responded extremely well, none of these represent products in the opening price point segments of their categories. Let me share two examples. First, we are the number one seller of LED bulbs on the planet. This technology is expanding from light bulbs to multiple products across the store as customers understand the benefits of lower energy costs, enhanced performance, and unparalleled length of life. We've created value by forming relationships upstream with component manufacturers, this has allowed us to bring top quality product at outstanding value. The pace of adoption by our customers has exceeded our expectations. The second example is PipeWeld. This is a product that's all about driving efficiency for our pros. When a plumber fixes PVC pipe, it takes three steps. They have to clean, prime, and adhere. PipeWeld takes this to one step, saving time on the job site.
We're committed to a first-to-market mentality when introducing product. Our merchants partner with key suppliers to bring innovation to our customers with exclusive launches, many of which you see here on this screen. These launches have allowed us to capture share and give us a competitive advantage in the marketplace. We're dedicated to developing innovation that simplifies, saves time and money for our customers, and embraces technology to enhance performance. Let me talk about speed to market by providing an example in a product category where we have a strong leadership position and share, power tools. It took from the 1920s to the 1960s, some 40 years, to go from corded to cordless tools. It took another 40 years, roughly from the 1960s to 2000, to bring cordless from a pro application to an affordable consumer use case.
The changes over the last decade have outpaced all previous evolutions. Lithium was introduced eight years ago with a bigger-is-better mentality for the pros. Within two years, compact lithium hit the market and changed the game not only for pros, but drove value for consumers. In less than six years, we are on our fourth platform of lithium. Each phase has delivered enhanced performance, provided more efficiency for our pros, and more affordable products for our consumers. Enabled by our strategic partnerships with our suppliers, we deliver speed to market, leading technology with great value. Having innovative product isn't good enough. We also want to be fast to market, we leverage our merchandising execution team, or MET, to execute our strategy with speed. MET is approximately 20,000 associates strong today, focused on executing our merchandising strategies in a shortened cycle time to the shelf.
Here, The Home Depot is investing in technology, tools, and systems to improve efficiency and productivity, availability, localization, and speed to market. MET is driving significant productivity in our ability to execute on the right products in the right place at the right value. The investment in MET has led to productivity gains since day 1 and continues to do so today. In a saturated world where growth doesn't come from new square footage, by what you add into the square footage that you have, tools and process capabilities are very important. Merchandising transformation is an enabler to deliver on product authority and to drive growth. I've shared this chart with you 18 months ago, showing our roadmap of the development of us moving from basic to a more automated rules-based approach with three goals in mind. Number 1, improving speed to market.
Number 2, gaining efficiency and enhanced planning. Number 3, deepening our collaboration and partnership with our suppliers. This is the current status of our progress in merchandising transformation. Our desire here is to free up our merchants' time to work on product development. We want to create efficiency to drive value for our customers and do a better job of coordinating our efforts with all of our suppliers. This is essential to driving leverage against fixed costs so that we help our suppliers drive efficiency and greater value for our customers. The end result is improved sales growth within the space that we own. We think about that growth at a bay, a store, a market, a cluster, and a channel level. What I'd like to do is walk you through examples of these.
We look first to drive sales growth at a bay level, or what we call micro space planning. Remember our discussion about the renters and the opportunity with paper towels? Well, here, an example of micro space planning, which has driven productivity as well. A great product for renters is 3M's Command product, which allows you to decorate your walls without using nails. We started with a side cap and a handful of items. Utilizing our tools, we identified areas where we were over spaced on certain products and then scaled that back. We expanded our assortment and footage with the 3M products, and this drove productivity within our base. We're enjoying double-digit comps in the categories. Similar to micro space productivity, we have identified opportunities in store or macro space shifts. These are represented by the areas here in red in the store.
Driven by changes in the customer's shopping process for big-ticket purchases, we optimized our kitchen and appliance footprint and added new brands to appliances. This allowed us to significantly grow our appliance business while maintaining our share in kitchens. Then we're traditionally out of sorted by specialty retailers. Space shifts are being made to add more mix and drive productivity of our assortments where markets call for additions. Here, we also leverage our online capabilities to drive productivity in store through the extended aisle and enhanced delivery options for our customers, and you're going to hear more about this from Kevin and Marc. Finally, we use our tools to identify space availability for categories where we're disproportionately under-penetrated in share. We can repurpose this available space to expand categories such as cleaning, and there's many other opportunities to come.
We also drive productivity at a market or area level. We made great progress initially with scrappy tools and our basic market expertise. Now we're giving our merchants advanced tools to plan assortments that will make it easier to assort the right products in the right areas. An example of this is Symmons Faucets in New England. For those native Bostonians in the room, you'll know that Symmons is a well-respected pro brand in New England. When you skip to the other coast, lithium-ion technology also allows us to solve problems. For those customers that have small yards, they no longer have to mix or store gas for their lawnmowers. This technology also addresses issues around carbon emission regulations. As we've developed more sophisticated tools, we're able to dive deeper on unique customer needs.
Let me share an example of that with you in fire safety. Our investment in tools allows us to assort at a store level versus an entire market previously. Recognizing an opportunity in one store or a group of stores and then applying that knowledge to other stores that have similar opportunities is a capability that we're giving our merchants. Additionally, to understand this across categories in different departments becomes something that we've not had the capability to do previously. For example, in California alone, we identified several trends. The first of which is stores that are near water sell marine safety products well, and that's obvious when you think about coastlines. Using our tools, however, now we can cluster stores inland, which are located near bodies of water, and adjust the mix to include similar marine products.
Second, certain areas of California have natural gas as the prevailing energy source, and naturally, we see customer demand for natural gas detectors. Again, our clusters allow us to scale this nationally in areas with similar store characteristics. Third, our most pronounced pro stores sell multi-packs of fire safety well, and we can adjust our mix to multi-packs to favor our pros. Now, on a broader scale, we found that counties with carbon monoxide regulations sell fire safety very differently than non-regulated counties. For example, you'll notice here a lot of green dots in California, and these show a customer propensity towards combination smoke and carbon monoxide alarms. Just across the state line, however, you'll notice that in Nevada and Arizona, non-regulated carbon monoxide counties are mostly purple, representing smoke-only alarms.
We've adjusted our mix in the green stores to showcase more combo units, and we've averaged 2X the fire safety sales. In some of the carbon monoxide stores, we've actually expanded our mix from one bay to two bays led by our field merchandising team, and the fire safety sales increased another 50%. We've recently begun to use our more sophisticated assortment and clustering tools, and there's a lot of runway ahead of us as we integrate this into our core merchandising activities. The last example that I'll speak to is channel optimization. Here, we're using technology to enhance the customer shopping experience, which will potentially impact space productivity in store. Customers are looking for customization and simplification in purchasing products. The capability to create your own patio set was introduced this year on homedepot.com, and it was well-received by our customers.
Next year, we'll continue to enhance this experience and actually shift more business in this category to homedepot.com away from the stores. This will free up space in store, allowing additional sales with other products. Further, we'll continue to simplify project shopping through coordinated experiences with our extended assortments on homedepot.com. This may change space allocation for completion items within projects in store. In closing, becoming number one in product authority is about understanding your customers, delivering product that offers value and innovation with speed, building capabilities through merchandising transformation to drive growth. All of these initiatives wouldn't be possible if we didn't enable our customers to shop when, where, and how they wanted. We have approximately 2,000 convenient warehouses that facilitate an interconnected experience every day. We've invested in capabilities for our customers to buy online and pick up in store.
They can see the inventory at a store level prior to purchase. They can buy products online that are not stocked in our stores and have them sent to our stores for pickup. They can use our stores as a convenient return center in the event that they need to. In order to win in an interconnected world, you need a world-class web platform, including mobile. Kevin will tell you some of the things that we're doing to get there. I thank you very much.
Ladies and gentlemen, we're going to take our morning break. We're going to take a 20-minute break. We'll start back our conference at 10:40.
All right, ladies and gentlemen, our conference will resume in five minutes. Again, our conference will resume in five minutes.
All right, ladies and gentlemen, our conference will begin in about a minute. We would ask that you would go ahead and take your seats and we'll get started back. Ladies and gentlemen, please welcome back Diane Dedolph.
Welcome back. Everybody did their seventh-inning stretch now. As a reminder, please silence your phones. I would like to welcome and introduce you to someone you may not have had a chance to meet before. It's Kevin Hofmann, the President of our online business. Remember arms.
Good morning, everyone. Today, it's my pleasure to speak with you about the status of our online efforts inside The Home Depot. There are really just a couple of key points that I hope you'll take away. First, that we have some real advantages in this space because we can not only exploit the new channels and technologies that Craig was mentioning, but we also have tremendous assets and capabilities that we will build upon. Secondly, we're investing significantly, and our investments are led with the customer experience in mind to make sure that we're positioned well for the future. We all recognize that the retail world is changing, and it's changing significantly. How consumers browse, research, how they get informed, and how they shop is dramatically different than it was just a few years ago.
It's also changing how we fulfill for the customer and how we provide great customer service. We're building competencies to compete in the digital world, and we're increasingly focused on how the physical and digital worlds are converging. The lines are blurring across these channels. These worlds and these channels need to work in concert together for the benefit of the customer. This blending of the channels is what we call interconnected retail. In the past, e-commerce has been viewed as a separate and distinct channel. That's no longer true. Moving forward, e-commerce has simply become commerce. To illustrate, here's some stats for you. We see over one-third of our online orders getting picked up or fulfilled out of a physical store location. 90% of our online returns enjoy the convenience of free returns in our stores.
Thousands of times a day, online browsers are greeted and helped via interactive chat by an orange apron-wearing associate, which is located in a centralized call center, helping them with their home improvement challenges. Almost half of our online visitors indicate their next stop is a Home Depot store. That's interconnected retail. Sometimes it's really tough to see how this blurring between the channels works. I thought I'd share a customer story with you. We think it illustrates how interconnected retail plays out. Let me introduce you to Janet. This is a customer in Minnesota who recently bought a house about 12 months ago, and she came to Home Depot to help her make this house a home. Over the course of the year, she shopped across two different stores and homedepot.com using various devices.
Janet has spent over $20,000 with us over the last 12 months. Many of her transactions are in the store, but she's also transacted a number of times online. What's interesting about this example, and it's not atypical, is that oftentimes the journey begins in one channel but ends in the other. She bought a high-end vanity online, one that we wouldn't typically stock in a store. Her contractor picked up via her buy online pickup in-store order, supply lines, a faucet, and accessories to complete the install of that vanity. She spoke to one of our call center associates about an online appliance order and eventually transacted. She researched cabinet pulls online. Eventually transacted in the store.
Another order where she's buying mulch, flowers, and soil for the spring planting season. Another where she's engaged our services business online, scheduling her water heater install in her home, and our technician and service providers getting the product from the store and completing the install in the house. Over the course of the year, she's had 22 transactions: 14 physical in-store transactions, 8 online transactions, 6 of those from a PC, and 2 from a mobile device. Outside of those transactions, we can count literally hundreds of interactions with our company and our brand. Some with a website, some with an in-store associate, and some with a call center associate or an in-home agent. What brings this home is this: rarely can you find a purely online order or a purely in-store order along Janet's journey. The transactions are only part of the story.
These lines are blurring. The physical and virtual worlds are colliding to solve problems for our customers. For us, we think of it as another one of our virtuous cycles, where the digital efforts are driving traffic and improving conversion in our stores, and also how our stores will drive traffic and conversion to our digital properties. Here are some more examples on how these two worlds play off each other and which might help bring this to life for you. Millions of times a week, consumers are using the technology to get real-time product availability of product in our stores. They're behaving just like Janet. We see consumers engaging in our online content, watching videos, reading reviews, accessing how-to information on their mobile devices hundreds of thousands of times a week while they're physically in our stores.
We also see over 10% of all of our online orders are created in store with a consumer or a pro working together with a store associate. We've also been successful when we bridge these two worlds. For example, our conversion rates are significantly higher when we bring the consumer and the associate together over the digital channel via interactive chat. We do that thousands of times a day. The physical and virtual worlds are coming together for the customer's benefit. Interconnected retail is a huge opportunity for us. We have lots to improve yet, I'm going to parse out just a few of the items we're investing in to forward our interconnected cause. I'm going to chat with you about two major buckets, our core site capabilities and our mobile activities.
On the core side, we've tried to focus on a few key areas that our customers are asking for: having the right product, making it easy to find, having quality content that brings product and projects to life, and giving the customer confidence in their choices. Of course, making the transaction as frictionless and seamless as possible is a must, and we see mobile as having the great connective tissue between our customers and our company. Here, we are investing because this is where the customer is going. Over one-third of our traffic is now mobile or tablet-based, and it's growing at a great clip. I'll share more specifics on mobile when we get to that section. Let's go deeper into some of these areas. First are our core site capabilities.
What I'll do to illustrate our approach is to take a walk down memory lane a bit. I'm going to show you some examples of then versus now. Let's start with one of our most frequently used features, which is search. Back in 2010, we outsourced our search capabilities. If you entered in a search term, honestly, you were lucky if you got back relevant results, let alone results that were best in class. We all experience it now, but customer expectations have changed, and search is one of the most important features for us and other retailers. We've invested a lot into our search capabilities, and it's a significant focus. We process nearly 1 billion searches from our customers, basically answering 1 billion home improvement questions. Now we offer them type-ahead suggestions, visual prompts, and allow them to give us voice search and scan search.
There are also specific search experiences tailored to the mobile user. Going forward, this will be an area of continued investment. Search is getting more personal, more local, and more visual. In the past, our purchasing experience was product-centric and lacked any inspirational content for customers to help steer them towards their product. If you really knew what you wanted and could navigate through the assortment, then you could make it through checkout. It wasn't a frictionless or seamless process. Now, that's not good enough, and we've gotten much, much better. Today, shopping and purchasing online allows us to touch some areas that we've not been able to go before as a company. Now I can show you not just the product you need, but the whole room. I can allow you to build your own custom patio sets.
I can show you collection shopping so you can coordinate all the items in a room. We'll make adjacent product recommendations based on other shoppers' behaviors, and we'll suggest accessories to make sure you've got everything you need for your project. We also have tools that help you manage your project. After all, we're not just a company of products, we enable projects. Lastly, another activity that's had a nice reception from our customers is augmented reality. This technology allows you to see and visualize the products in your living space before you purchase them. We still have lots of room for improvement here, helping the customer filter, select, personalize, and visualize better. Sticking with our then versus now examples, we've struggled to bring our product to life in an engaging way that brought knowledge and confidence to the customer.
We were very text-heavy, we lacked videos and product reviews, and we had limited fulfillment choices. We now provide the customer with a lot more content to help them in their purchasing decision. We need to give you confidence and share with you our know-how. We're doing this through enhanced imagery, over 2.5 million user reviews, including uploads of user-generated content, extensive video collections, and multiple fulfillment options. For many products, we provide expert Q&A forums and real-time chat capability with a Home Depot associate. This improved content helps give the customer confidence, informs their buying decision, and improves the conversion rates, whether they're in store or online. Great search, great content, frictionless purchasing. That's all great, but you need to have the products customers care about.
We have a great assortment of products in our store, and we leverage the online world to augment our stores with an expanded assortment and have hundreds of thousands of products online. We also collect and leverage the data online to inform our store assortment decisions. Likewise, trends in the store and purchase patterns inform what we need to do online. Obviously, this is a great service to the customer, but it's also a great service to our stores and our store associates. This broadened assortment helps us always get to yes whenever a customer has a need. Recall, 10% of all of our online orders are originating in our stores. We'll continue to grow our assortment where it makes sense and the customer is looking for more choice. Our next area of investment is mobile.
Here's a quick snapshot of how mobile devices are changing our traffic patterns dramatically. Just a few years ago, we had only 4% of our traffic coming from mobile phones and tablets. This year, it will approach 35%, and on some days and events, it's even higher. This is where the customer is going, and we plan to never be more than a finger swipe away from the customer walking into our virtual store and engaging our brand. Oftentimes, our team gets asked about how many stores we're building. Well, my answer is this: with 5 million downloads, we just built 5 million new stores and intend to build millions more. I'd like to get a store into the purse, the pocket, the backpack, or briefcase of every man, woman, and child in the country.
Everybody might not want a The Home Depot app on their phone, but as I said, we need to be present where the customer starts their shopping journey. Here's our approach to mobile. We started a few years ago and have built a mobile portfolio over time to address different target markets and platforms. We have a consumer app we launched in 2010, and we've continued to improve it. We also have a mobile web experience for the customer that wants to connect directly through the browser on their device. This is actually our most active mobile channel. While it launched in 2009, we brought it in-house in 2011. We also have a specific tablet experience that takes better advantage of tablets' expanded capabilities. Lastly, we recently released our Pro app, which is geared toward the different experiences our pros want.
I'll speak more on each of these in just a minute. There's a ton you can chase in the mobile world. Our mobile investments are specifically following the customer's needs and usage patterns. Really helping the customer engage with us when they're on the go, when they're browsing and shopping, when they want to connect with our stores, and navigate our stores and our offers. Purchasing and converting on a mobile device is really starting to heat up, so we're focused there too. We are also focused on the ideal mobile customer, which is the pro, who engages across multiple stores and truly lives that nomadic lifestyle and needs access to us at their fingertips. The pro wants help, of course, saving money, but also saving time and connecting with our pro associates in the store.
We believe mobile is and will be a critical tool to help the customers anywhere they want, shopping online and helping them shop our store. Let's look at some examples of what we can do today. First up is our mobile web experience, and I mentioned this is our most used mobile channel today. This channel does almost everything that the consumer app does, except the features that are inherent on your smartphone, like your camera. This is a critical channel because not every customer is going to download your app. Via your browser on your mobile device, you can search, you can browse, you can find a product, you can engage in the content, easily check inventory, and locate it in your store, or have it staged for an in-store pickup, or, of course, ship right to your doorstep. Mobile web varies a bit from the tablet experience.
Moving from a three- to four-inch experience to a seven- to 11-inch experience on a tablet. While you're generally engaging on the app or the mobile web when you're on the go, the tablet is used more for that lean back experience when the customer is shopping or browsing and engaging in content for longer periods of time. The lines are blurring here too as the phone and the tablet worlds converge, but we want to take advantage of the different experiences that tablets allow for. This is critical as tablets are currently 10% of our traffic, and the projections are that there will be over 30 million more tablets sold in the U.S. in just the next few months. Next up is our consumer app, and what you'll see on the screen is basically the proverbial store in your pocket.
We get millions of visits and app activations both in the store and out of the store. With an app downloaded on your phone, we can take advantage of some of your phone's features, your microphone, your camera, your GPS. Obviously, too, the app reduces a few steps for the customer, so we're keen to get it on your phone. You just saw a customer doing a voice search for a product, checking out the product, locating a store, and transacting a Buy Online, Pick Up In Store order. Lastly, is our Pro app. You'll notice the user interface is a bit more spartan. Our Pros are looking for slightly different experiences. They generally know the product they're looking for and are interested in quantity on hand, availability, and price. They want that across multiple stores, not just one.
They want to send a crew member to pick it up. Primarily, they want to transact quickly, and they also want access to our Pro Xtra loyalty program and manage the receipts for their jobs. Hopefully, that was just a few good examples of how we're making progress on mobile. We've come a long way in our online journey over the last few years, but we still have many challenges ahead of us. As we look into the future, we need to listen to our customers and provide them the online experience that they want. That means more personalization. How do we connect online and bring that human touch to these experiences? It also means becoming much more visual and inspirational. We need to have a rich sensory experience for our customers and bring not only products, but their projects to life.
Overlaying both of these opportunities is an enhanced, frictionless experience and more access and functionality around our mobile offerings. Our customers must be able to move seamlessly not only through our online experience but seamlessly hop between the online and in-store channels. Thanks. With that, I'm going to turn it over to Mark Holifield, our Senior Vice President of Supply Chain.
Good morning, everyone. It's my pleasure to give you an update on our Supply Chain. Over the past few years, we've built a completely new network to support our core retail store base. Over the next few years, we'll build a network to support our fast-growing direct fulfillment business. While we do that, we'll optimize our Supply Chain to continuously improve our product availability, our inventory productivity, our total logistics costs, and our service to customers. Our distribution network to serve our core retail store base is now in place. We've made significant investments in our distribution network and in our Supply Chain systems. The intent of this network is to provide the optimal flow path for each SKU in our assortment from vendor to store or to customer.
The cornerstone of our network is our rapid deployment center or RDC platform, indicated by the 18 orange stars on the chart here. For about 70% of our SKU count, this is the optimal path to our stores. These innovative centers execute flow-through distribution, that represents about half of our flow measured in dollars. Our RDCs provide fast and efficient aggregation and allocation of product orders from our vendors. Our RDC process is superior to traditional retail hardlines distribution, as in these innovative facilities, product never gets put away into storage or into a pick location as in a traditional DC. What enables this fast flow are superior information systems that enable a just-in-time allocation process and state-of-the-art material handling infrastructure. As a result, the RDCs are our lowest cost path to move carton goods to our stores, they hold no inventory, accelerating our turnover.
For highly seasonal goods or products with spiky demand or products with a long or unreliable lead time like some imports, we do employ traditional stock and pick methods in our stocking DC locations or SDCs, represented by the 12 green triangles on the chart. For bulky goods that typically come to us on rail cars and move best to the stores on flatbed trucks, like lumber and building materials, our bulk DCs, represented by the 26 blue circles, are the optimal path. Finally, there are some products that remain optimal to move directly to stores from vendors. These are typically products where a store sells a full truckload a week or more, or products requiring special handling like locally sourced live goods.
As you can see, our core U.S. store supporting infrastructure is well in place at this point, about 70% of our product flow measured in dollars is flowing through it. While our distribution networks that serve our stores in the U.S. and in Mexico are substantially complete, we're pleased that we're working to bring the benefits of our RDC distribution platform to our Canadian stores. Our first Canadian RDC in Vaughan, Ontario in the Greater Toronto Area is on track to open in the first quarter of 2014. We're planning a second Canadian RDC in Western Canada for opening in 2015. We're looking forward to providing our Canadian stores with benefits similar to those achieved in the U.S. with the RDC platform: better in-stock, better inventory turns, lower logistics costs, and improved store service.
While we've put in place our optimal flow network to move product to our The Home Depot stores, the changing world of interconnected retail requires us to continue to build out and serve our growing business in interconnected retail. Our customers continue to increase their take-up of our delivery offerings, bringing product to them when they want it, how they want it, and where they want it. We've delivered product for years from our stores. We've done so in a relatively fragmented fashion. In the past, we've had independent or channel-specific networks that operate essentially in silos. Our direct fulfillment network receives and fills millions of orders each year for delivery direct to customers, primarily via parcel freight and truck freight.
Our stores make deliveries direct to customers, primarily with flatbed and box trucks in dedicated contract carriage. Also, we have some hotshot delivery trucks, primarily serving our Pro customers. Our vendors make drop ship deliveries direct to our customers as well for orders taken online or in the store. We deliver and install appliances through our DepotDirect network. While independently, these networks do a pretty good job of serving our customers, these channel-specific efforts have resulted in a network that's not particularly flexible, not very consistent in service, and doesn't provide many delivery options. As we look to the future, our aim is to create a flexible network of customer delivery options, leveraging all of our inventory and all of our logistics resources. Marc Powers talked about our COM system or Customer Order Management. This will provide us a new single view of customer orders.
Building on that, we need to be able to leverage inventory from all channels to fulfill customer orders. We need to be able to leverage all of our deliveries and get optimal utilization and performance out of all of our transportation assets. Ultimately, we need to offer enhanced delivery options to customers, including online scheduling and shortened delivery windows. Given those needs, we're building a network that leverages our direct fulfillment centers, our vendors, and our stores to enable delivery when, where, and how the customer wants. To do this effectively, we're investing to more capably fulfill orders from each of those origins. Specifically, we're building out our network of direct fulfillment centers. We're also investing in our systems and processes to further enable stores as effective origins for delivery, to include taking orders online for delivery from the store.
We're working more effectively with our vendors as well to further enable vendor direct fulfillment, including DepotDirect. This integration of our view of orders, inventory, and transportation resources will enable more flexible customer delivery options, improved inventory productivity, and a more efficient transportation process. The way to think about this effort is that we're investing in our ability to say "Yes" to customers with confidence. Yes, you have access to all of our inventory to fulfill your order. Yes, you can schedule a convenient delivery, and yes, you can rely on real-time information updates about your delivery. One of the largest investments we're making in interconnected retail is that we're adding three new direct fulfillment centers strategically located across the country. These new centers will range in size from a little under 1 million square feet to over 1.5 million square feet.
The intent of these centers is to enable same-day shipping of orders and fast delivery to customers. To do this, we're investing in new warehouse management systems and new material handling systems to enable fast response order picking and shipping in these DCs. Our intent with these centers and systems and the systems that support them is to allow us to take orders all day and be able to ship those orders out that same day. So orders received by 5:00 P.M. would be shipped out no later than that same evening. With that same-day shipping capability, these centers are geographically positioned to leverage our parcel freight carriers network to deliver 90% of our customer parcel orders within two days using economical ground service.
For example, when the network's complete, most customers will be able to order on a Wednesday by 5:00 P.M. and have that product delivered by Friday. These centers will stock SKUs beyond the current store assortment. This expands our offering to customers. The three centers will each have the capability to hold as many as 100,000 SKUs. One of the primary intents of our new network is to provide same-day shipping and fast ground delivery, usually within two days for parcel freight. Perhaps this is a good time to drone on a bit about next-day or even same-day delivery. We've studied our customer behavior and our customer surveys considerably as we've developed our network of delivery capabilities. Our customers want fast delivery. When surveyed, with cost being equal, customers expressed preference for same-day delivery over next-day delivery, which in turn they prefer over two-day service.
Our customers also want low cost. When given a choice between fast and low cost in actual observed customer behavior, our customers generally prefer low cost. Our future network with the three new direct fulfillment centers we're building provides a solid balance of speed and cost that we think meets most of our customers' needs. In the event a customer wants their product faster, there are multiple options within The Home Depot to meet that need. First, we operate a network of 2,000 stores conveniently located with over 30,000 SKUs in stock. A customer can simply stop by or now place an order for pickup. Additionally, we'll continue to offer expanded expedited shipping from our direct fulfillment centers and vendors for customers with more urgent needs.
The value of our direct fulfillment center network will be the ability to ship orders from a broader assortment consistently, quickly, and efficiently. Our direct fulfillment centers will stock a variety of goods. This will include products that customers most frequently want delivered, like our highest volume SKUs and our private brand SKUs. Products where an extended assortment will be enabled through direct fulfillment, like lighting and fans. Products where a direct fulfillment strategy provides a better customer solution than stores for job-lot quantity delivery. Think about flooring. Finally, seasonal products where a central fulfillment strategy allows us to offer a more compelling assortment while limiting our inventory exposure, like higher-end patio furniture. A further option for delivery to our customers is our ability to deliver directly from our stores.
Today, virtually every Home Depot store is an origin for delivery of customer orders that are taken in-store against store inventory. Usually these deliveries are made on a next-day basis. Perhaps surprisingly, while customers can routinely place online orders for pickup in the store, we're not yet able to take an order online and drop that order to the optimal store for delivery direct to the customer. We're investing in state-of-the-art systems that will allow us to do that in the future, unlocking the potential to leverage our store locations, our inventory, and our delivery resources to serve our customers better. In 2014, we'll enable placement of orders online for fulfillment from stores or buy online, deliver from store. Associated with this, customers will have the ability to schedule their delivery from the store within defined time frames.
We expect this to be especially valuable to our Pro customers who are looking to schedule time-definite delivery of building materials to job sites. Customers will also be able to receive updates about their deliveries and track them to completion. At this point, with our core store supporting DC network built out, all of our network development efforts relate directly to enhancing our interconnected retail capabilities. Just to recap, we've enabled Buy Online, Return In Store, Buy Online, Pick Up In Store, Buy Online, Ship To Store, and in 2014, we'll add Buy Online, Deliver From Store. Our core store supporting network is built, and we continue to build out our network in the direct-to-customer space. We still have great opportunity across our supply chain that we've developed over the past few years. The average age of our RDCs is only 3.7 years old.
This platform that handles the bulk of our SKUs and half our dollar flow remains relatively young and therefore has great potential for continuous optimization going forward. Our experience in central inventory management at The Home Depot also is fairly recent, and we continue to find opportunities to improve and optimize those processes as well. As we consider optimizing our core supply chain, our deliverables continue to be those shown on this chart. First, we must be in stock, whether that's in store or online. Second, we must optimize our inventory productivity, driving the best use of our working capital. Third, we must be the leader in low-cost logistics, landing the right product at the right place at the right time at the lowest cost in our industry. Fourth, we have to provide our internal and external customers with great service.
Continuing to optimize against these objectives and continuing the virtuous productivity cycle that they enable will allow us to continue to be a leader in our segment in these key measures of core supply chain effectiveness. While we worked on our supply chain during the downturn, we knew that the true test of our new supply chain's effectiveness was yet to come. The key question was, with our new supply chain, with its focus on lean inventory, driven by flow-through distribution to drive turnover, will that be able to respond when the economy recovers and when we face the potential of double-digit comps? In the area of inventory management, we're pleased that we've improved our inventory turnover, but we're even more pleased that we've been able to continuously improve our in-stock for our customers.
That's been possible thanks to having the right people and process and technology in place to respond. We're using state-of-the-art inventory forecasting and replenishment tools with a team of supply chain professionals that continuously monitor and respond to changes in the marketplace to ensure we're in stock. We've not stopped developing new and innovative processes and tools to further our capabilities. On the right side of the page is one example of applying advanced data analytics to drive results in inventory planning and replenishment. I've talked to many of you before about the particular challenge of maintaining job lot quantities in home improvement retailing. We continue to advance our science on this challenging problem, utilizing operations research techniques to help us define and address the job lot quantity issue at the SKU level, but also at the store SKU level.
Using statistical techniques such as the Gini coefficient, shown here, we're able to identify store SKU combinations that warrant different job lot quantity strategies. Let me give you another example of our advances in forecasting and replenishment. Over the past few years, we've continuously improved our forecasting systems, making modest investments each year that pay back in improved in-stock and inventory turnover. This chart will help me show you how responsive these systems are now and just how they operate at a more granular level. This product here, this is a chrome drip bowl for an electric range stove top. Despite what you might think, it exhibits specific store-level spikes caused by local factors. In this particular case here, Boulder, Colorado, you can imagine students moving into a college town as the school gets back into session. The black line indicates our actual sales.
The red line is the old forecasting model. The green line is the new and improved forecasting model. As you can see from this view, going into the peak selling period, the old forecasting algorithm would not have predicted the sales lift for this SKU, as seasonality was managed at a higher level. As the peak selling week arrived, the old forecast adjusts to a new level of sales. Well, now the peak has passed. The old forecast stays with the new higher level. The new and improved forecast, thanks to ability to set unique seasonal patterns to the SKU store level, drives an improved, more realistic and responsive forecast and allows a logical drawdown of our inventory.
The new forecasting does a better job of capturing sales by ensuring the right product gets there at the right time ahead of demand. It also ensures that we don't invest in inventory after the sales have occurred, as would have happened with the old forecast. Again, this is just one example of how we continuously develop our inventory management systems to be more accurate and responsive to current trends. The results of those efforts have been a key driver of our continuous improvement in inventory turns since 2009 while improving our in-stock position for our customers. As we exited the downturn and saw the market improve, our logistics have had a lot to respond to in terms of much higher volume.
We've been pleased with the capability of our network to handle these new higher levels of volume. We've seen continuous productivity improvement across the logistics network. This page simply breaks down logistics into the most impactful levers in continuously improving our logistics cost structure. These metrics measure three simple variables. How full are the trucks coming inbound to The Home Depot? That's a very effective proxy for how well we're managing our inbound transportation. Second question, how efficient is the labor in our RDCs in moving the product through the facilities, labor being the key variable expense within the four walls of our distribution centers? Then how full are the trucks leaving RDCs, our proxy for effectiveness in driving productivity and our transportation from our distribution centers to our stores?
As you can see from the charts, we've been pleased with the productivity improvements we've continued to make and expect more productivity in the future with specific targets for these. Marc Powers talked to you earlier about our efforts to improve freight flow all the way to the shelf in our stores. Marc and I are locked at the hip on this. We're working jointly to optimize and synchronize our freight flow. This includes an end-to-end focus, improving the visibility and reliability of the arrival of freight at our stores. This will continue to drive labor productivity throughout our supply chain, and most importantly, improve service and on-shelf availability for our customers. To wrap up, we continue to target a best-in-class supply chain at The Home Depot.
Our intent is to be the best in stock, the most productive on inventory, the low-cost provider, and to provide our customers, whether in store or online, with the best service possible. Thanks. I'd like to now introduce our CFO, the best in the business, Carol Tomé.
Thank you, Mark, and let me add my welcome to our investors and analysts. We are glad that you joined us this morning. As you heard from my partners, there's a lot of internal momentum at The Home Depot, and we are happy to have this opportunity to update you on our strategic initiatives and our financial outlook. Today, I'd like to cover six topics. First, quickly discuss our 2013 financial guidance. Second, share with you our point of view on the U.S. home improvement market. Third, review how we think about interconnected retail through the lens of a financial model. I'll then provide you with our preliminary thoughts on 2014 and take a minute to look ahead to 2015, and finally, wrap it up with a discussion on capital allocation. Let's get started by taking a quick look at our 2013 guidance.
In November, we lifted our sales and earnings per share guidance for the third time this year. We confirm that guidance today. We expect fiscal 2013 sales to increase by approximately 5.6%, with comp sales growth on a 52-week like-for-like basis up approximately 7%. As for earnings per share, we project fiscal 2013 diluted earnings per share to increase by approximately 24% to $3.72. By delivering these results, we will be reporting our strongest comp sales growth since 2004. Turning to our view of the U.S. home improvement market, we believe the health of the home improvement market rests on two drivers, GDP growth and housing. In June of 2012, we set forth our point of view on housing recovery and suggested that it would be a staged recovery. That's turning out to be true. Let's start with the good news, because there is some good news.
It begins with U.S. GDP. From a forecast of about 2% growth in 2013, U.S. GDP is expected to grow in the 3% area over the next several years. This forecast comes from the Federal Open Market Committee, where there seems to be a bit of a bias of wanting to project 3%. On the other hand, it doesn't appear there's a lot of downward pressure on GDP. So we are using this forecast as the basis for our point of view on the health of the home improvement market. Moving to housing, we look at several factors. First, we look at household formation. Here you can see that from 2007 to 2011, there was a sustained annual shortfall in household formation, building a deficit that began to reverse itself in 2012.
While there are mixed signals on household formation in 2013, an interesting statistic to note is that in 2012, a record 36% of all young adults aged 18 to 31 were living with their parents. That's up from a long-term average of 32%. As employment recovers for this age group, we believe the household deficit will be absorbed. While housing affordability peaked in 2012, it is still at historical highs. There's been some concern raised that if the Fed starts to reduce quantitative easing, mortgage rates could rise and negatively impact housing recovery. The data show that mortgage rates could increase by 200 basis points, and the affordability index would still be north of 100%. As a result, we think affordability will continue to be a driver of housing recovery for the next several years.
Looking at housing turnover, we see housing turnover moderating towards the historical average of about 4.6% of units. At the same time, the quality of housing turnover has increased as distressed sales decrease to supporting the sustainability of this recovery. Further, we see housing inventory down almost 50% from what it was in 2010. The current months of supply of about five months is actually lower than what you want to see in a normal housing environment, which housing experts state is about six months. Looking at housing prices, while housing prices are up around 11% this year, they are still 23% off their peak back in 2006. We believe home price appreciation is a key contributor to our sales growth. Once the homeowners view their home as an investment and not an expense, we believe they spend more money on their home.
In 2013, in the face of rising home prices, we have seen a shift in how our customers shop. For example, in the third quarter of fiscal 2013, we saw double-digit growth in our premium price point products. We know that we have an aging housing stock in the U.S. Approximately 63% of all homes are more than 27 years old. As houses age, they need repair, which speaks to continued growth in our maintenance and repair categories. And here's the really good news. Based on the fiscal 2013 sales guidance that we have shared with you, we expect that our consolidated sales will reach approximately $79 billion this year, equal to the peak sales we reported in 2006. When you look at this chart, you can see that many of our U.S. classes have not fully recovered, supporting our point of view that there's more upside ahead.
There are areas of concern. Lending standards are still very tight. The way to read this chart is that following the housing crisis, most banks significantly tightened underwriting standards for both prime and non-traditional mortgages. Today, only a small percentage of banks have loosened underwriting standards. The GSEs continue to be the major source of liquidity for the mortgage market. Without mortgage financing reform, there will be continued pressure on the kind of mortgages that can be originated and sold through the GSEs. Why? Because the GSEs are requiring FICO scores of 700 and down payments of 20%, which are hard for many Americans to produce. When we add it all up, we believe we've moved past the workout stage of housing recovery that we shared with you back in June of 2012, and that we are firmly in stage 2 recovery.
In stage 2 recovery, we expect our sales to grow at a rate of GDP plus 2%, more or less. Now, let me put some numbers behind our housing recovery framework. As we've discussed, we use a directionally correct but imperfect model to predict our U.S. sales growth. On this chart, we are showing you what our model predicted versus what we actually reported for fiscal years 2011 and 2012, as well as a forecast for 2013. We start with U.S. GDP growth and add to that the impact we believe home price appreciation, housing turnover, and new household formation will have to our comp sales to develop a predicted sales growth number. You can see that our predicted sales growth was pretty close to our actual sales growth in both 2011 and 2012.
For 2013, our model is not projecting the 7% comp guidance that we have provided, but that's because our 2013 comp growth guidance includes the impact of commodity price inflation and market share gains in merchandising classes like appliances. We'll come back to this model when we look at our sales growth guidance for 2014 and beyond. Moving away from the economy, let's turn to our interconnected retail financial model. We believe our model is driven by three virtuous cycles: sales growth, productivity, and capital allocation. On this chart, we show a historical perspective on how these cycles have changed. Sales growth is probably the most dramatic. For the first 25 years of our history, our sales growth came from square footage growth.
In 2008, upon reaching what we believe to be market saturation, we then moved to a period where we slowed our new store openings and actually lost sales due to the housing-led recession. In 2010, as housing started to recover, so did we. By the end of this year, as we have discussed, we will have regained most, if not all of the sales we lost during the recession. Looking ahead, our store openings will be few and far between. We believe our sales growth will be driven by continued recovery in the housing market as well as interconnected retail, a business model we've been talking about all morning. From sales growth, we move to our productivity cycle. We used to think that if expenses grew slower than sales, we were driving productivity. During the recession, we launched some major cost out efforts like closing stores and exiting businesses.
Now we've reached a virtuous cycle where our cost out efforts are targeted and focused, like replacing energy systems to reduce the heating and cooling of our stores. This approach to driving productivity will stay with us in 2014 and beyond. Finally, our capital allocation cycle has really matured over time. In our formative years, we allocated capital to new store openings. Today, we have a disciplined and balanced approach, investing in our business to support interconnected retail and returning capital to our shareholders in the form of dividends and share repurchases. Looking to 2014 and beyond, we will stay true to this approach. Earlier today, Kevin Hofmann said that for us, interconnected retail means where online increases traffic and conversion in our stores, and our stores do the same for online. You can see the financial expression of our definition by looking at this chart.
Here we are showing fiscal 2012 reported sales as well as a projection for fiscal 2013 pursuant to our sales growth guidance. On this chart, we break out sales in store and sales online. We also show square footage. With the power of interconnected retail, by providing our customers with offers like buy online, pickup in store, buy online, ship to store, we can drive sales per square footage growth without adding square feet. Let's turn to our view of 2014 and our longer-term financial targets. As you know, in June of 2012, we announced our 2015 targets, which were to grow our operating margin to 12% and our return on invested capital to 24% by 2015. We call them our 1224 targets.
Based on our 2013 guidance and our forecast for 2014, we now believe we will reach our 1224 targets in fiscal 2014, one year ahead of our plan. For fiscal 2014, here are some high-level financial targets. We will give you more specificity in February when we release our fourth quarter results. For 2014, our view of U.S. sales growth is based on U.S. GDP growth forecasts of 3%, plus 200 basis points of growth coming from continued recovery in the housing market. For Canada and Mexico, we are projecting similar sales growth rates such that total company sales growth will be approximately 5%. We're targeting eight new store openings in 2014, most of which will take place in Mexico. We are projecting operating margin expansion of roughly 70 basis points, taking our operating margin to over 12%.
We anticipate earnings per share growth of approximately 17%, based both on earnings growth and the impact of share repurchases. We intend to repurchase approximately $5 billion of outstanding shares in 2014 using excess cash. With stronger earnings and our share repurchase plan, we project return on invested capital to hit approximately 24% by the end of fiscal 2014. In fiscal 2014, we are planning for $1.5 billion in capital expenditures, much like what we intend to spend in 2013. We would expect $1.5 billion to be the run rate for capital spending over the next several years. We project strong cash flow generation in 2014, and we'll use our cash to fund $1.5 billion in capital expenditures, $5 billion in share repurchases, and $2.6 billion in dividends. Note that the dividend represented on this page is an estimate pursuant to our targeted dividend payout ratio of 50%.
Any increase in our dividend will need to be approved by our board of directors. With our 2014 guidance, our sales, operating margin, net earnings, and return on invested capital will exceed prior peak levels, which occurred back in 2005 and 2006. The path to a 12% operating margin is a bit different than we thought in June of 2012. As you can see, we project less gross margin expansion and more operating leverage than we originally believed. This is a function of higher sales growth, the mix of products sold, and a relentless focus on cost out. As we look through 2014 to fiscal 2015, we see our operating margin approaching 13% by the end of fiscal 2015. This continuing margin expansion starts with our point of view on sales growth, approximately 5% in 2014 and 4% in 2015, based on our view of the state of housing recovery.
It also reflects our virtuous cost cycle. Our largest cost pool is cost of goods sold. Within cost of goods, we have a number of efforts underway to drive productivity. Matt and Craig talked about the new tools we are using to drive sales. These tools also help us drive productivity in cost of goods. Further, we've stood up a cost out team that works hand in hand with our merchants to better understand what the right cost should be, identify strategic cost out opportunities, and to be better prepared to address vendor cost increase requests. This is a virtuous cost cycle that started a couple of years ago and now is part of the operating rhythm of our business. We also see continuing cost out benefits coming from our maturing supply chain, as you heard from Mark Holifield.
From a gross margin perspective, we've said that a rate of 35% is as high as we want to go, and it might peak out at slightly less than that, as we will look to reinvest productivity savings into value-creating opportunities. We have some natural expense leverage in our business, to drive the kind of results we have and will continue to deliver, it's actually a lot of work, as you heard from Marvin and Marc Powers. We put together cost out targets. We embed the targets into our financial plans. We utilize cross-functional teams to create action plans, then we execute against those plans. As we think about expense leverage, a good rule of thumb is that expenses will grow at about 35% of our sales growth on a go-forward basis.
Our financial model is clearly a series of virtuous cycles, all working together to drive higher margins and higher returns on our capital. While the path to reach our targets may change over time, with our virtuous cycles, we believe we can reach our targets. Moving to return on invested capital, we believe that by staying focused on capital allocation, our return on invested capital will reach 24% by the end of fiscal 2014 and trend closer to 27% by the end of fiscal 2015. Higher returns on capital start with inventory productivity. We're on a path to grow our inventory turns from the 4.5 times we reported in fiscal 2012 to five times by fiscal 2015. As we continue to drive productivity in our supply chain, the rate of inventory growth will be less than the rate of sales growth.
We believe that this, coupled with inventory management initiatives like localized assortments, will drive higher returns. Working capital will be a source of cash for our company. As Frank mentioned, we have three shareholder return principles. First, our dividend principle is to target a payout of approximately 50% of our earnings, targeting an increase in our dividend every year. Our share repurchase principle is to use excess cash to repurchase shares as long as it's value-creating. Finally, from a return on capital perspective, our goal is to maintain a high return on capital, benchmarking all uses of excess liquidity against the value created for our shareholders through share repurchases. Moving on to our debt capital structure, we have $15 billion of long-term debt with staggered debt maturities across 31 years. We intend to repay $1.25 billion of debt that comes due later this month.
The weighted average maturity of our debt portfolio is 15 years, with a weighted average coupon of 4.7%. By the end of fiscal 2013, we project to have an adjusted debt to EBITDAR ratio of about 1.8 times, yielding $1.9 billion of incremental borrowing capacity pursuant to our targets. This borrowing capacity is expected to grow to over $5 billion by the end of fiscal 2015. It's our intent to maintain our strong investment-grade rating. Today, we use adjusted debt to EBITDAR as the guidepost for our debt ratings, with a targeted cap of two times adjusted debt to EBITDAR. Our cash flow is very seasonal. Periodically we have big cash demands, like when we pay our quarterly federal tax payment.
To better manage the volatility in our cash balances and avoid keeping too much cash on hand, we will likely access the commercial paper market from time to time. With our borrowing capacity, we have ample flexibility. As for share repurchases, we've been repurchasing our shares since 2002. Through the first nine months of fiscal 2013, have repurchased approximately 1.1 billion shares for $44 billion, or an average price of $40.50 per share. We intend to repurchase $2.1 billion in the fourth quarter of fiscal 2013. Looking to 2014, we are targeting $5 billion of share repurchases. That would leave $3.5 billion remaining in our board authorization. We plan to complete our authorization in 2015. We will seek additional authorization at that time. Based on the numbers that we just shared with you, we are projecting cumulative free cash flow of $25.5 billion between 2013 and 2015.
This number is after cumulative capital expenditures and reflects $4 billion of debt capital raised in 2013. Using our targeted 50% dividend payout, we look to pay cumulative cash dividends of $7.7 billion during this period. Using excess cash and with additional authorization from our board of directors, we project the ability to repurchase $17.8 billion of our shares by 2015. This is the basis for our 2015 return on invested capital target of 27%. If we were to layer in incremental debt, the amount of shares repurchased could increase to $23.5 billion. When added to the amount of shares already acquired, that's over $60 billion of repurchased shares, or 60% of today's market cap. The power of The Home Depot to say yes to our shareholders has been and will continue to be seen in our financial results.
We really thank you for your time today, we're going to break now into our Q&A session. I'd like to invite all the speakers back up on the stage, if you'd just give us a few minutes to get settled, we'll get into your questions. Thanks very much. We have three associates with microphones moving around the audience, Ryan, Barbara, and Jeff. If you have a question, you know the drill, raise your hand, and wait until the microphone gets to you. We want those joining us on the web to be able to hear the questions. Also, please state your name and the firm that you are with before asking a question. Ryan, is Eric there?
Yeah. Eric Bosshard, Cleveland Research. Carol, you made a comment about the gross margin getting to a peak of 35% then reinvesting after that. Curious if you could give a little bit more color on that and reinvesting, then also the 35% leverage relative to the investment that interconnected retail might require of the organization. If you could give a little color on that.
I'd be happy to. Perhaps I'll go back a bit in time to June of 2012 when we laid out our gross margin targets, at that time, we said through a number of initiatives, we would grow our gross margin by 100 basis points, reinvest 60 of that for a net expansion of 40 basis points. Within that 100 basis points of expansion, we had three big buckets, 60 basis points coming from merchandising excellence, 20 basis points coming from supply chain excellence, another 20 basis points coming from operational excellence. We're making really good progress against those three big buckets. Let's talk about supply chain. I think we'll actually do better than the 20 basis points that we laid out. Last year, we had three basis points of benefit from supply chain.
We're thinking we'll get about 13 basis points this year, that takes us around 15 basis points, more or less. We should get another 10 basis points between now and 2015. We're going to do better than we thought on the supply chain. On the operational excellence bucket, that was another 20 basis points. We're about half of the way there, all coming from shrinks, really great performance there. On the merchandising excellence bucket, we're doing a lot better there. We are investing, we're investing in categories that have a lower margin, like appliances. We love the sales that we're getting off appliances. They are a lower margin, we'll take that all day long. Relative to what we said we would do, we've done really well.
Looking ahead from now until the end of 2015, our gross margin is going to reflect investing, part of that comes from the classes that have not fully recovered. If you look at the chart that we shared with you where the classes have not fully recovered, that's a $2.6 billion sales opportunity, the majority of those classes have lower margins than the company average. Eric, that's part of the reinvesting that's happening is just recovery in classes that haven't fully recovered. Moving to your second question about operating leverage and our expense growth factor of 35%. Our largest expense component is payroll, and you heard Marvin and Marc talk about the great work that they've done in terms of driving productivity in payroll. Well, they'll continue to do that.
The nature of our expense leverage, in many ways, is a function of how the sales will come. As we build our financial models, we assume that sales will come both from ticket growth and transaction growth. If all the sales were to come from transaction growth, we would have more expense leverage. If all the sales came from ticket growth, because we have an activity-based model, that might put some pressure on our expenses. As we build on the growth factor rate, as we build our plans, we build them 50/50, more or less. We feel very good about the expense growth guidance that we've given as a result.
Peter Benedict at Robert W. Baird. Carol, question on the two times adjusted debt-to-EBITDA ratio. If the plans you laid out here today happen exactly as they've been laid out, help us understand the decision process between whether you will go to 2.0 or not. Secondly, when you say value creating in terms of determining whether or not you'll buy shares back or not, help us understand how you define value creating. Thanks.
Well, as you know, Peter, we were aggressive in the debt capital markets this year, raising over $5 billion. $1 billion of that, more or less, to be used to repay some maturing debts, $4 billion for incremental share repurchases. We were very happy with that trade. The after-tax cost of debt was something like 2.3% against a dividend yield of 2.1%, it was an excellent trade. As we look out going into the future, it's our point of view that interest rates are going to stay relatively flat for a little bit. That gives us opportunity, perhaps, for additional great trades. There's no better time to raise debt capital in the face of an improving market. We do want to leave some space between the time that we would raise debt capital because we respect our debt holders.
We want to make sure that we have excellent execution for them. We don't have any near-term expectations to raise debt capital, but we certainly wouldn't preclude that going forward.
Morning. It's Laura Champine with Canaccord. Got a couple of detailed questions for Mark Holifield. I thought I remembered from years past that the target was for direct ship to store to get down to 25%. If that has changed, if you could just let us know how and why. Then secondly, as you make deliveries less siloed and perhaps more flexible and central, do you expect any changes in the way you install categories to customers like flooring, like appliances?
Yeah. It's a great call-out on the 75%. Today I talked about 70% going through central distribution. When we talked about 75% or 80% going through central distribution, our sales per store was at a lower level than it is today. Now with a higher level of sales per store, more product gets to that truckload quantity that I talked about to go direct to store. 70% is where we are, and we don't expect that to change materially over the next couple of years. In terms of delivery, we're working to improve all of our offerings at the point of delivery. We are looking at programs where we would assemble and install products beyond the appliance installations that we do today. Things like assembling grills, things like assembling patio furniture, unboxing that, taking it away, and then taking the dunnage away.
These are offerings that can be enabled with a better delivery offering. No plans in the immediate to make that happen in the next couple of months, but that's certainly on our roadmap going forward.
Thanks a lot. It's Michael Lasser from UBS. My question, first, two questions. One for Frank. If you laid out the roadmap that Matt Carey uses for the technology and apply culture to that, where do you think the culture is as far as how it needs to be to address interconnected retail? As a follow-up, Carol, can you talk about what's different on the gross margin perspective such that you're going to get 20 basis points rather than the 40 basis points? Thank you.
First, Michael, on the tape measure, Matt's tape measure chart. The only good news is that there isn't a lot looking back, so we don't have quite the same catch-up that Matt had on IT. Speaking candidly for the organization, I'd say we're still in the very early days of having a truly interconnected thought process, that we're working very hard on it, and it is still, though, relatively new. Really, for our organization, I thought Marc Powers' brain chart was a great chart because you saw there's dot-com, 2003, separate, sitting out there with its own brain. It's within recent memory that we've been treating these things in a very siloed fashion. I'd say we're very early days.
Michael, to your question about the gross margin going from the 40 to the 20, it really is a function of where the business is growing. As we look at recovery in those classes that have not fully recovered, they tend to be lower margin categories, so that's a mix. We also have growth higher than the company average in categories that have lower margins, like appliances. In Craig's chart, he showed growth in hardset. We love that lower margin. We've got an investment that we're making, and we're happy to do that all day long.
Hi, it's Aram Rubinson from Wolfe Research. Question about the Pro, if you don't mind. I know you mentioned it's 3% of your customers and a little more than 35% of sales. A couple follow-ups. Can you guys talk about the penetration maybe by category now that you've got maybe better data or insight that there are certain categories that over-index and under-index? A question about the Net Promoter Score, if you've got kind of an equivalent for the Pro as you do for the total, and how those compare.
I'll take the Net Promoter Score question. I'll let Craig get into the categories. The Pro for the first time has actually outperformed the consumer from a Net Promoter Score. We're slightly above 73, which for us is very important. As I mentioned in my presentation, we really focused on how do we make the customer a more effective business person. If you summarize everything a Pro really is all about, they're a small business person from a one-person operation to a 50-person operation. Pro Xtra is a way to help with that. In addition to that, we just want to make sure that we're doing all the necessary things we can to create a great service environment. The Net Promoter Score has actually exceeded the consumer for the first time this year.
On the category side, with the data, we actually do have the capability of letting our merchants see what the penetration is from a pro versus a consumer standpoint. Logical categories that you would think of if you think about things like concrete, very high pro penetration, drywall, very high pro penetration. Flip that over into things like mulches and soils and live goods, much lower, way more consumer focused. Power tools, accessories would be a category that has strong pro penetration. We do have the ability to now see that in a more granular level, and the merchants can act accordingly.
Wayne Hood, BMO Capital Markets. Kevin, just coming back to the interconnected piece for a second. When you look at your conversion rate, can you put some parameters on what that rate is right now? If you were to increase that rate by 100 basis points per year, how much of an increment would we see to overall revenue growth? Then talk about your abandonment rate a little bit. Then Marvin, as you move to buy online, ship from stores, what you're asking the stores to do is different from a delivery standpoint than what you would have historically thought about. How do you change the dynamic of that store putting different things on them and it potentially impacting the cost structure that Carol Tomé's outlined around 35%?
First on conversion rates. Unfortunately, the answer is it varies widely across categories, widely across modalities. As you can imagine, mobile app and mobile web conversion rates much, much smaller because the customer's checking inventory, locating product in the store and compare or contrast the customer that's on a PC or a tablet, the conversion's much higher. When it all blends, it's in the range of, depending on the category, the core categories can go as high as 4% or 5% conversion. Other categories like building materials can go very low in the sub one conversion because the customer's generally just checking inventory, checking availability, checking price. Conversion rate is something that we're very focused on because as you can calculate, every basis point of improvement is money. Very big focus for us.
I suspect if you were doing some math, you get how many visits per week?
Think of it as 2 million-3 million visits per day in, yeah.
You could do some math there and say, well, if they convert it up and apply an average ticket to that, you could work a math what it could mean to us. It's big time money.
Wayne, on the ship from store initiative that Mark Holifield talked about, I give you an answer in two ways. If we tried to implement that with our current technology, it would be very dilutive to our payroll efficiency and to the operational efficiency of the store because our system is primitive. The associate has to work through different screens and different interfaces to operate a delivery. As I mentioned, in the first three quarters of the year, we executed 1.2 million store deliveries, primarily to our Pro customers, it's not an efficient process. With the work of Matt's team, with Marc Powers and the operational team, we're creating a process, a system that's going to be a much advanced system that will be simple from an interface standpoint and simple from a visibility for the associate and the customer receiving the actual delivery.
What we're going to do is take our culture, and I think Frank's question teed this up. This will be a cultural change because our innate ability in the store is to service the customer standing in front of us. We've gotten much better at that. We're going to have to become even better at servicing customers that are not there, i.e. deliveries. We're going to look at, and we're structuring this as we speak, teams in the store that will be fulfillment teams. Associates that will not only do will calls and deliveries, but will call deliveries and online orders. We're going to try to create efficiency in how we do that. It also ties to freight flow.
We think as Mark continues to become more efficient from a supply chain perspective, that we'll be able to allocate our payroll effectively so that we're going to be able to manage this without creating massive amounts of deleverage. We don't predict any deleverage in this. We predict just a different allocation of how we serve the customer. We have lessons to learn, but the key will be the efficiency and the sophistication of the system that's currently being developed with the partnership of supply chain operations and the IT team.
Hi, Budd Bugatch with Raymond James. The progress on the interconnected retail is very impressive, and all the systems are. I heard the mention of price transparency, but price leadership has also been something that The Home Depot has been known for its years. How do you do that now in interconnected retail? How do you do that in an interactive way with the consumer if they find something that's lower priced? What is the process and what's the thought process and the systems needed to do that? Thank you.
Bud, from a product standpoint, let me start with, it's important to understand that anything carried in the store that's online is the same price. Never want to put our associates in a position of trying to explain the difference in price. Then we're giving visibility to the merchants, just like you would in a brick and mortar as to what's happening in the digital world, so that we can use our portfolio approach to make sure that we're competitive across all channels. That visibility is really important that they can see what's happening, and be able to react accordingly based on our portfolio strategy.
What happens if the customer finds something that is a lower price somewhere? What happens if the customer finds something that's lower priced, and how do you react to that on a real-time basis?
I mean, we, Marvin, I don't know if you want to in store, but we take care of our customers based on our price guarantees that we have in place. We'll deal with each individual situation with a customer.
Budd, the most important thing for us is we don't try to legislate every decision from Atlanta. We want to empower our associates to understand that they have the ability to solve their customer's problem in the store, in the aisle, and they understand the thresholds of that authority. We allow them to do what is best for the customer and for that transaction.
Matt.
Hi, it's Matt Fassler from Goldman Sachs. My questions relate to the pro business. I think I'll direct them really to Marvin. You spoke about the loyalty effort. You spoke about your pro sales reps. Can you put some numbers perhaps around adoption or penetration of some of those programs? Also, to the extent that, I guess, pro and DIY have sort of been neck and neck in sales growth for the past several quarters, and you talked about your market share gains. Can you talk about your market share gains in pro specifically, perhaps, as compared to DIY? Thanks.
Great. Market share gains, Matt, is tricky for us in home improvement in any category, in DIY and pro, but I can address the large pro to small pro and the pro reps. These Pro Account Reps, as we call them, PARs, are focused primarily on the larger pros, defined as greater than $10,000 in spend, but we call these managed accounts. These are larger customers. The large pro is growing 3x the smaller pro, the pro spending less than 10,000. We believe part of it is the relationship and the solution-based initiatives that this dedicated headcount provides to these larger customers. We're pleased with that. If you look at the third quarter, I think our overall pro business slightly exceeded the consumer business, but the large pro was far and above the highest performing segment of our customers.
We're trying to understand what is driving that, and as we look at the categories, as we look at the SIC codes that these customers are engaged in, we want to make sure we understand what they're buying, when they're buying it, and programs like Pro Xtra give us visibility that we've never had before. Now, the caveat is, this is a very new program. We're still understanding the data set. We're giving that data to our CRM team to be more efficient in how we communicate, how we market to, and how we solve problems. Early days, we feel good about the data and good about the decisions we can make with that data to better serve the customers. Hope that answered your question.
Seth.
Hi, Seth Basham with Wedbush. First, in terms of the online penetration and the growth rate, how are you thinking about that going forward? 50% growth this year, what kind of growth rate do you expect going forward?
As far as the penetration goes, so we're not talking about a specific goal. Our thoughts are the customers are going to lead us there in specific categories and where they want to transact in the physical world or the online world. In growth rates, we still have-
Kevin's avoiding his budget negotiation.
That's right.
Bring it on, Kevin.
No, I'll stop there. I mean, our growth rates are embedded in the guidance we just gave you.
All right. Well, to follow up on that, if you think about the capabilities you're building out in terms of delivery from store, ordering online for categories like building materials, that's a category that you never thought would be much penetrated online. Do you still have that view, or if you take competitors like BuildDirect who are going down that path, do you see opportunities for people to take share in that space?
Absolutely. We look at every category, whether it's a transaction online or research online or checking product and availability online, we look at every category as how can we improve the customer experience. Again, it kind of goes back to the conversion question. In the interconnected world, what is conversion? When the customer comes and looks at lumber and building materials and looks at price and availability and then actually has it delivered from the store, is that an online sale? Is it an offline sale? It's an interconnected sale. We look and track at all those emerging competitors that you guys would talk about. We look at every category now as an opportunity for interconnected treatment and how we can improve the customer experience.
I would add to that, too, in terms of the delivery and fulfillment capability, our goal is to be best in class in home improvement in fulfillment and delivery. That means building materials. That means big and bulky things. That means things that need to be installed. Yes, that includes parcel freight as well. That's why we're building out the range of delivery and fulfillment capabilities that we talked about.
Dan.
Hi, it's Dan Binder at Jefferies. As your web business grows, you're adding DCs inventory. I think you said you have 600,000 SKUs you offer online. How much of that would you actually plan on carrying in these new DCs? As you rely less on the vendors to ship direct to the customer and you do more yourself, I mean, in terms of the cost to serve the customer, it would seem that it's going up. Can you just share a little bit of the economic model around the dot com business? I realize it's all interconnected, there are clearly different costs between running stores and dot com. I'm not sure how much you could share with us, but any color would help.
In terms of the inventory productivity in those distribution centers, over the long haul, we do see that the inventory in our direct fulfillment centers would be accretive to our inventory turnover, and it's included in our guidance to 5 turns as we go forward over the next couple of years. We've said those will hold about 100,000 SKUs. We still expect to have a pretty good penetration of vendor direct fulfillment as we look to extend that endless aisle. Today, about 40% of our deliveries are fulfilled in-house, and about 60% are fulfilled by vendors.
We don't see that changing too much over the next few years as we go forward. We'll still rely on vendors for a big part of the slower-moving things and things that are less strategic for us. The things that are strategic and the things that are faster-moving, we'll have in our distribution center so that we can consolidate orders there for customers very efficiently.
What you're hearing is the relentless focus on channel profitability. We will keep the customer experience forefront, of course. There will be decisions that we make to channel inventory through the most profitable delivery method so that we feel confident that we can deliver on the targets that we've outlined.
Just as a follow-up to that question, as you do more deliver from store, I'm not sure if that also means that you're exposing more of the inventory of the individual stores to the broader online traffic, but maybe you could talk to if there's ultimately a benefit from transitioning goods online from individual stores rather than just depending on the store traffic of a specific store. Clearly, you're going to have allocation.
Yep.
No, absolutely. If you think about the algorithm that would determine what the optimal store to fulfill an order from, it might not necessarily be the closest store. It might be the store that has the right level of inventory. They might be overstocked on something that you could easily fulfill from the closest store or maybe from a central distribution center. In fact, it's most optimal to fulfill from that store based on the inventory position in that store. Those are the kinds of algorithms we'll develop over the coming years.
Thanks, Robert.
Hi, Brian Nagel from Oppenheimer. I wanted to bounce back to the issue of gross margins. I guess my question is specifically for Carol. If we go to the chart, the table you had on page 12, which showed the areas of the store which haven't recovered yet, and the gross margin comments you made around that. Are we saying, is The Home Depot going to do some type of specific reinvestment to drive stronger sales in some of those bottom categories? Is it simply that the categories that haven't recovered are not as high on margin?
It's more of the latter than the former. If you look at the category that's the least recovered, special order kitchens, that's really a function of the state of the housing recovery. Our special order kitchen business is pretty doggone good.
It's done very well.
It's still got a long way to go to recover. It's a lower margin. We just wanted to reflect a gross margin target that's reflective of recovery, reflected by a lot of the merchandising actions that we're taking too, in terms of the investments we've made in categories like appliances, investments that we've made in hardset, those kinds of investments.
If I could follow up, maybe for Craig. You pointed out some products, the new innovation hitting your category. Is there any way to, so to say, quantify or give us some idea of where we are in this process? It seems like maybe we're just at the beginning, where you're actually seeing a real wave of innovation here in home improvement, and The Home Depot is very well-positioned to benefit from it. How many analyst meetings are we going to sit here talking about new products coming online, basically?
Hopefully, ongoing. Every one we have. That's a real focus for us. While we've always been focused on that, I think we're really trying to ratchet up that effort with our merchant team and our supply base. Particularly working with strategic suppliers to get further out in that innovation cycle. It's really important as we're working two and three years out on that innovation curve, and getting the input from the merchants to our supply base and vice versa. That really is what we believe will give us a sustained effort against innovation going forward. It's a very, very important focus for us.
Brian.
Gary Balter and Simeon Gutman from Credit Suisse. I'll ask the question, I'll pass it over to Simeon. We're a team. Just following up on Carol's comments on the 35% gross margin. This is for Frank and Craig. How do you determine what the elasticity of the products that you're selling in terms of can we be at 37? We all here would love you at 40 and give us such high returns. We're more oligopoly in terms of the nature of the business. You're clearly the leader in the business. How are you thinking about that 35? Why not go to 36, especially because you're probably getting more support from vendors, et cetera?
First of all, we start with the competitive set that we're operating in and the visibility that we give our merchants. We need to make sure that we're responding in the marketplace and putting sufficient value and pressure in the market. Candidly, we're out there testing on an ongoing basis as well. We do a lot of work around elasticity in different categories, different products within a category, and how does it respond. Can we drive significant unit productivity as a result of changing the approach in the market, or does it not respond and, in fact, that's not nutritive calories. That's an ongoing effort. It's part of what the merchant's job is.
Part of what we're doing with the tools that we're building out with the help of Matt's team is to give them more sophistication around that and better understanding of those elasticities.
The follow-up is on the services and installation business. Can you talk about what percentage of sales that represented at the prior peak, where it is today, and maybe talk about the breadth of services you're offering today versus then? In just thinking about the sales opportunity, it sounds like there's a lot of ways that using technology, such as using satellite to look at a roof, to make things a little bit easier. Is that something we could be underappreciating is where this sales opportunity can go during this peak?
The services business is performing really well. Currently, it's roughly 4% of total sales. We had double-digit growth in the third quarter. We feel great about the current business and the future of the business. If you go back to the slide with the complexity in the previous carpet transaction, that gives you a glimpse into the work between the services team, the merchants, and the dotcom, and the IT team to really create a more sophisticated offering for customers. As we look at the transition of the economy and the economy becoming more stable and customers getting more into the do-it-for-me category, we think the services only has brighter potential in the future. However, there's a lot of work that we're going to put in.
There's a lot of new technology that gives greater visibility to the customer, to the associate to understand special orders and configurable transactions to track it throughout the entire process that we're not really good at today, that we're working on. In addition to that, we look at programs like cabinet refacing. We look at programs like countertops, programs like solar, programs like HVAC. These are very well-performing programs for us today, and we just continue to believe that the business is going to stay strong if the broad economy stays strong. On the previous penetration, I'm not quite sure where we were in the past, but I don't know if we have that number, but I can tell you that we feel good about the current state.
Actually, the penetration is about the same as it was the previous peak. The difference is it's much more profitable today. We had a lot of customer satisfaction claims during the previous peak. Marvin and his team have done a masterful job of improving the overall experience for our customers. It's just a better business today. With the growth, that's pretty exciting.
Yeah.
Jeff?
Hi, it's Greg Melich with ISI. I wanted to go back to online, just given the impressive growth there. What does it do to the margin structure today for the whole enterprise? What does that look like if we look out over three to five years? Craig and Marvin, if you could, as part of that, how have the incentive structures for either merchants or the store people shifted given the importance now that online's sort of the whole store, not just a quarter of the store potentially?
As Carol mentioned, channel profitability is a big focus for us. Of course, in the direct-to-consumer model the shipping charges and the logistics charges are a bigger burden for us to bear. Again, we go back to the interconnected story of how we monetize those transactions and those footsteps when they come into the store to pick up, how we drive attachment, and how we think about not only the full basket that we're selling online, but the transaction journey the customer goes on, like Janet did, over the life cycle of their projects and activities. Obviously, the shipping charges are pressure, but we run the business like everything else, through a portfolio approach. Where we have pressure in one area, we make it up in another.
Yeah, to put that into perspective, we'll be on our gross margin rate plan for the year, but we certainly didn't plan to grow our online sales by 50%. We run it as a portfolio, and that's how we run the business. Looking ahead, as we focus on this channel profitability analysis, not very concerned about pressure coming at us from a margin perspective. If we weren't looking at it, then we all should be concerned about it. We've got a whole bunch of folks all over this.
Talking about dotcom in the store, I think is very appropriate to take Frank's quote from Peter Drucker that culture eats strategy. When we initially started our dotcom business, it was separate from the store, meaning stores did not get credit for the sales. We are blessed with very competitive store culture, and they saw dotcom as a competitor, not as part of their core offering to the customer. Today, if you're in an IP address of a store, if you're a customer, the store gets credit for that sale. This is more accounting than anything internally to make sure that we leverage the entire company's benefits and the ability to serve customers more broadly.
To take that to the next level, last year, we rolled out a training that we call Never Lose a Customer, and we train each associate on the steps you take if a customer requires an item that we don't have on the shelf. Rather than saying we don't have it, your next step is to take them online via their mobile device or smartphone or take them to a terminal to do one additional source to see if you can close the transaction out online. The key for us is the fact that the associates understand that dotcom and online is a part of commerce, not a separate entity from their store. Therefore, they can serve the customer from a much broader list of items than just what's on their shelves.
From a merchant standpoint, our homedepot.com merchants actually are part of our core department merchandising teams, and all of the financials of that are integrated and compensated accordingly.
Carol, if I could, just a quick follow-up. The next year projection's a 5% from a 7% comp this year. If I look at your factor model, the big difference seems to be appliances and those big-ticket items. Is it a fair assumption that you're thinking that ticket will be less of a driver of comp next year as you think it through, that being the difference?
Well, as you know, we build a plan based on a macro. Don't build a plan for market share gains and that sort of thing. We will be anniversarying the appliance rollout and the great sales growth that we've experienced in 2013. We didn't carry that into 2014. That's not necessarily to say that big ticket won't be a driver of sales. We've had 10 quarters in a row of growth in transactions of tickets of $900 or more. I don't suspect that's going to change dramatically, but we aren't going to come out with a sales plan that has inflation and market share gains. That's just not how we run our business. We build a plan reflective of macro inputs then strive to be better than that.
Yeah. Thank you. Thomas Paulson, Cornerstone Capital. Frank, I had a question for you about the U.S. consumer, and Carol, I had one about omni-channel and dollar investment. Frank, how would you characterize the U.S. do-it-yourself consumer here in the second half of this year, and how do you anticipate that to change as you go into the first half of 2014?
Carol's comment during her presentation, I think, is the key of how we look at the U.S. consumer in our space. We see the consumer in our space driven by their perspective on home price value. As prices have increased in house and people are more comfortable that their expenditure in home, the do it yourself or do it for me improvement projects, that those are an investment, as Carol said, versus an expense. We think that there is the demand to continue to do those projects. That psychology around the wealth that our consumers in the U.S. are creating in their homes, we think is a crucial part of how the home improvement consumer is responding.
Thank you. Carol, just what's the dollar investment that you're looking at next year for your omni-channel, both the IT side and the distribution and all of that, and how does that compare to this year?
It's a big investment. There's really not a bright line because it's all interconnected. If you look at just the capital chart, we've called out $200 million in support of interconnected retail. That's for mobile, that's for site enhancements, that's for the direct fulfillment facilities. In supply chain, we have a new warehouse management system that's in the $100 million of capital that we have for supply chain, and that's supporting interconnected retail. It all kind of comes together. I would say everything that we're investing is in support of an interconnected business. We don't try to snap that chalk line and say, "Aha, this is for omni-channel and this is for not." It's all coming together.
It would really only be that $200 then. That would be on a shorter depreciation curve than your other investments.
Yes. As a result, our depreciation expense, if you're modeling, I'd use about $1.7 billion going forward just to reflect the investments that we're making.
Thank you.
Yeah. Perhaps I could just add a comment on the consumer. I was thinking about that. To Frank's point about housing and how it's impacting our customers, many retailers said they had a pretty soft Black Friday, and they were disappointed with their sales results, and that certainly wasn't the case here at The Home Depot. Jeff?
Chris over at JPMorgan. Carol, I'm surprised it took that long for that comment to actually come out.
No one asked.
You said internal momentum was the first thing that you said. I thought that was the veiled reference. I want to ask you, Carol, a question about incremental margins. In the past, you've said that fixed costs were about 47% of your cost structure, and now you're identifying a 35% sales growth ratio. Just curious, what's changing? Is it where we're moving up the sales productivity curve? Is it because you're at 60% customer-facing labor? Is it a traffic ticket assumption? What's changing there?
It's really our assumptions on traffic and ticket growth. Again, if all of our growth is coming from transactions because of the activity or excuse me, from ticket, because of the activity nature of our model, we'd have more expense leverage. We build a model that's 50/50, and as a result, we think that 35% growth factor is the right growth factor to use. Another way to think about it is that for every point of comp, I'll get between 15 and 20 basis points of leverage. There are a number of different ways to cut it. Then there will be quarterly year-over-year distortions, right? For example, we've talked about in the past, for our casualty reserves, like workers comp and general liability, we have close to a billion-dollar liability on our balance sheet.
As we continue to make our stores and our distribution centers a safer place to shop and work, well, that's coming down. We basically accrue every month for that expense, then we do two six-month true-ups relative to what the actuarials are telling us. Sometimes we see big reductions. We continue to focus on getting more and more reductions as we're running a safer business. That could distort our expense growth factor, but we're not going to count on that, obviously. We'll just report it to you when it happens.
Fair enough. Thank you.
Robert.
Hi, thanks. It's Peter Keith with Piper Jaffray. I want to ask a two-part question on inventory turns. You'd outlined a couple of impressive initiatives that you have rolling out this coming year. Just checking my notes, you talked about the customer order management, freight flow improvement, and the improved forecasting. I was wondering if you could rank those in terms of which ones you think will be most important or impactful over the next two years. The second piece to that question is, when you look at the guidance on your inventory turns, are you calling for that to accelerate over the next two years relative to the past two years? If not, why not, given all the initiatives?
I think, whenever we talk about inventory turns, the most important thing to talk about up front is our in-stock position. The number one goal of our supply chain is be in stock. I would tell you, this team holds me accountable, and we hold ourselves collectively accountable for that more than anything else. As we look at the inventory turn targets, it's tough to tease out. Multiple initiatives and which one is driving exactly what inventory benefit. In my career, I've had numerous times where the inventory management initiatives have totaled up to more than the inventory that you have because they just don't work that way. We've got a collection of initiatives that we're working there. I'd expect it to be pretty solid progress towards that five turns over the next few years.
The most important thing in our inventory management is being in stock.
I might just jump onto that for a moment. I think localized assortment could actually be one of the biggest drivers of inventory turnover improvement, let me tell you why. 15% of our store base has a sales volume that's 52% of our company average, yet we are assorting those stores the same for events as we are assorting our larger volume stores. That's a lot of inventory that's going into those stores. Oh, by the way, that inventory then has to be marked down. As Craig and the merchants, with the help of the supply chain and the operators, really work on localization, I think that's going to be a big enabler, don't you, Marc?
Sure. Yeah. No, how we merchandise is key to inventory turns as much as the supply chain initiatives.
Matt?
Hi, Joe Feldman from Telsey Advisory Group. Wanted to ask something that didn't come up today, the Affordable Care Act, maybe how you're thinking about it both from your employee perspective and how you're going to handle it, presumably it's in the numbers, but also what impact it may have on the consumer and how they'll spend, especially that do-it-yourself consumer.
It is in our numbers, it's very important to us. We employ 325,000 people, well over 100,000 full-time associates, it's our objective to provide them great healthcare. We are going to provide them great healthcare, our compliance with the Affordable Care Act is in the numbers you've seen this morning. In terms of the impact on the consumer, I'd say we're not expecting any impact on the consumer, certainly we haven't put that in any of our modeling assessments.
Thanks. Then just a total separate question. Back to some of the online stuff. I'm wondering, when you look at your Pro customer, how much of online sales, I guess, is coming from the Pro, and how much of it is shipped to the job site the next morning? It doesn't seem like that's a big factor for the Pro, and I'm wondering why that is, and is that an opportunity for you to make it a bigger factor?
I'll chime in, and if Marvin wants to provide any color. We've seen a pretty good adoption from the Pro on our website properties, but also with our recently released Pro app. As you'd expect, it is a lot of checking inventory, putting in buy online, pick up in-store orders, and they view it as a great time saver for them. Pros, generally, as a generalization, have been some of the not early adopters of the technology, but we see that ramping up very quickly, and we want to be poised to make sure we're there to service them when they're ready. Today, huge usage of inventory checks, price checks, connecting with the physical stores and store associates for the Pro.
The only point I'll add is the Pro app, I think, is the key. If you go back to my comments on working to make the Pros run a more effective business, part of that is to help to educate them on ways they can be more open to changes in technology to be more efficient. One of the great attributes of the Pro app for our professional customers is the ability to do the inventory lookup, but also to then get a store map and to get to a specific bay location. Why is that important?
You may live in one part of the city and frequent that store from a consumer perspective, or you may be working on a job site on a totally different side of the city, and you're not familiar with the store, you're not familiar with the layout, and that Pro app gives them the ability to do the inventory lookup in multiple stores and to find a product quickly. Remember, time is money for these customers, and we're going to try to continue to help them to be more open and to adapt quicker to this technology we think will benefit their business.
Marvin, you ought to talk about eReceipts, too. That's a great feature that they like as well.
It is a great one. Thanks, Matt. It's not uncommon to have a customer that spends a significant amount with us that manage their entire purchase portfolio in a folder or in their pickup truck. Not uncommon at all. They keep their receipts because you buy more than you need because you're working on a job, the worst thing is not to have enough, so you always buy more than you need. Then you have to hold that receipt to get your return in case you need it or to make sure that you can use it for bookkeeping purposes.
As simple as eReceipts are and as, I guess from a technology standpoint, as non-innovative as it may be in the year 2013 for our Pro customers, it's a big deal. It's a game-changer in helping them from a tax standpoint, doing their books, also to make sure they manage their businesses and have ease with no receipt returns.
Well, thank you. That pretty much concludes our Question and Answer period. I'd like to thank our presenters today, Carol, Mark, Kevin, Marvin, Frank, Mark, Craig, and Matt. Many thanks also to the investor relations team, Daryl, Tammy, Ryan, Matt, Ben, and Dan. Thanks to Lori and the corporate events team, Matt, Fred, and the Dillon team, Barbara, Jeff, and all of our Boston-based associates. This concludes our presentation.