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 Mark ours, our Senior Vice President of Store Operations and Craig Meniere, our Head of U. S.
Merchandising. Then we'll take about a 15 to 20 minute break. After the break, our speakers will be Kevin Hoffman, the President of our Online Business Mark Holyfield, Senior Vice President, Supply Chain and Carol Tomei, 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 presentation 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, and many thanks To all of you for taking the time to join our 2013 Investor and Analyst Conference. We'll review some of Progress we've made over the last 18 months and our plans, challenges and opportunities over the next few years. We use this 3 legged stool as our strategic framework. Enormous changes have impacted retail and Home Depot over the last several years, Changes in our customers' expectations, changes in our competitive framework, changes in our business model, but the 3 leg stool That's out a pretty enduring strategic construct. Borrowing from Jim Collins, we try to address the 3 core questions that every business should 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. And 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 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 sets its founding over 30 years ago. Our values wheel is on every orange apron that every 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, but we hold ourselves accountable to them, and I believe this makes us a stronger business. Now turning to our specific plans. First, at every investor conference over the last 7 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 percent 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, but we still face headwinds, On the international side, we expect to see some recovery in the Mexican market and continued low to mid single digit growth in Canada. But 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 over the last 18 months as well as our areas of opportunity. As Carol will detail, we believe that we will achieve our twelvetwenty four It's 12% operating profit and 24% return on invested capital, fully a year ahead of time. That's Clearly an accomplishment. But as important as the numbers is the fact that we did this while gaining market share and maintaining We also showed, particularly in the Q2 of this year, that our business model is sufficiently The spring of 2013 was a major stress test
for
our supply chain and 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 We've also shown in the last 18 months that our customers are responding positively to our investments And we've been very encouraged, as Marvin will describe, by the recovery in our pro business. On the opportunity 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 We plan to roll out a new solution for buy online, deliver from store in 2014.
As Mark Holyfield will describe, we know last mile delivery is an important competence for us to have. We deliver from store now, but it is Connected to our online presence, and it's not optimized for our customers or associates. Improving this delivery process has taken longer And involve 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 Our focus is on making our physical assets and associates a competitive advantage. So far, the Bridges that we built, like buy online return in store, buy online pickup in store, buy online ship to store and appliance Kiosks have been successful, but we're only at the start of this process. We will continue and actually increase the pace of our experiments with the objective 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. And for my part, I underestimated the significance of this. It is 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 2,006, we paid out $26,000,000 in success sharing bonuses. That's our bonus program for our hourly associates. In the first half of fiscal twenty thirteen, we paid out 100 and $35,000,000 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. And we spend time and money recognizing our associates for great customer service. Our Homer Award program is now in its 7th year, and we spent over $86,000,000 in individual customer service Homer recognition 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 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. And 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 customers and also we hope build increased stickiness through recognition and special services that help them build their businesses.
For Home Depot, the journey on product authority began with a fundamental restructuring of our supply chain. It's difficult to Claim pride of praise 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 as Mark Holyfield will discuss is a new DC network for our dotcom 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 It's 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 and 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 impacts, but also more categories potentially benefiting The Internet has evolved from being an external threat to being part and 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 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 Hoffman, 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 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 As Matt will detail, we've made a lot of progress, but 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 And like the physical store, the virtual store requires constant upgrading and improvement, only with the virtual store, the pace is a lot 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, Already 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 3 virtuous cycles on which our business depends: sales growth, productivity 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 And we have no intent to build stores in other areas of the world, and here's the main reason why. In the Q2 of 2013, the 3 months of May, June July, we grew comp sales in our U. S. Business by approximately $2,000,000,000 in 3 months.
A wildly 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 EBITDAR ratio of 2x. Our Board approved a new $17,000,000,000 share repurchase program this year, and we're now $6,400,000,000 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 about 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 2,009, we ducked the specific year.
We said by 2000XX. I figured no one would remember by 2,099. 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're targeting in 2014 'fifteen, we're 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 I hope what you will take away from today is that Home Depot is committed to drive the 3 virtuous cycles 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.
And with that, let me introduce Matt Gehry, our Head of Information Technology. Matt?
Thanks, Frank, and good morning. You may remember this slide from our 2,009 investor conference. This timeline represented an advanced Retailers' IT journey and how we compared. At the time, I told you our capabilities were basically 15 years behind other retailers. So we needed to compress that time frame to deliver these capabilities and transition to a world class retailer with outstanding IT proficiency.
Over the past few years, we've 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 channel so Four trends I'd like to talk to you about today that will influence our future technology direction. 1st, leveraging big data. We have to efficiently utilize the vast amount of data our company produces to simplify and automate decisions. 2nd, pricing transparency and analytics.
Pricing transparency has changed the competitive landscape, and we must Use advanced analytics to constantly fine tune our portfolio strategy. 3rd, supply chain efficiency. Our investments in Technology for our supply chain will be a driver of efficient seamless customer experiences. And finally, creating a seamless customer experience. Customers expect a seamless experience across all selling platforms, even at a home improvement store.
So let's go into leveraging big data. Big data has been a topic for many companies, and Invasive data collection is transforming the way we look at serving our customers. With 1,300,000,000 transactions annually, Over 15,000,000 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. So 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 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 datasets and therefore infrequent changes among retailers. In today's multichannel We believe understanding the competitive environment is an imperative for any retailer who wants to win. That is That's why in late 2012, we acquired Black Locust.
It's a small group of data scientists focused on making complex datasets Actionable. And we will continue to invest in this space in 2014. Now 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 They never had to worry about picking the product or delivering it that last mile. The customer did that for them.
The customer 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 through 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. Next, the interconnected world requires us to rethink how we invest in technology to better serve our customer. 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, scanned guns, inventory management systems were the priority.
And while these systems 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 In closing, as I said earlier, we've come a long way in the last 5 years compressing 2 decades of development. Going forward, technology will continue to 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 Our strategic stool and 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 and our philosophy for customer service can be defined in 4 areas. Number 1, We have worked very hard to find innovative ways to put customer facing associates on our sales floor without adding incremental payroll. Number 2, we place a lot of emphasis on making our store environment simple. Number 3, we've taken steps to understand the unique Service needs of our interconnected customers. And lastly, we continue to provide a unique customer service experience for our pros.
So let's start with service in the stores. This operational plan is fundamental to the success of our overall customer service strategy, and the role of each Of years, how we achieved 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 cash from our sources has also allowed us to reengineer expectations of our sources and reallocate payroll to achieve our sixty-forty by the end of this year.
As a reminder, back in 2007, approximately 60% of all of our store hourly payroll was allocated Non customer facing activities, things like back office work and inventory tasks. If you fast forward to 2013, we'll end this With 60% of our store hourly payroll dedicated to customer service. This is over $700,000,000 This investment in payroll was engineered without adding 1 hour of incremental payroll expense to the stores. Our sixty-forty initiative has been a cornerstone to our customer service strategy over the past 5 years. So 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 5 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 1st strategy where we retrain each associate on the specific customer service expectations. But to me this slide represents more than just a list of programs. It also relives more changed management that we face in customer service the past 5 years than we probably face the 1st 30 years of the But as a result of the hard work of our great associates, we've experienced over 2,100 basis points of improvement in Net Promoter Score over the past 5 years. We set an internal goal to get above 70%.
Now 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 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. And in addition to this volunteer hours, our foundation committed $80,000,000 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 Or possibly you were one of the tens of thousands of customers that took a free picture with Santa. Or maybe you demoed 1 of our power tools from our great assortment or participated in a Kieth workshop to build an all important toolbox during Black Friday weekend. Although these activities may appear to be 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, while having personalized training during a workshop are activities that a pure online competitor Cannot replicate, and 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 Our customer demographic is very broad. So simplifying our in store environment is important in order to allow our associates 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 call Project Simple.
The goal of Project Simple is to eliminate reports, store based e mails and meetings that remove store management from the Project Simple has been a success. Through it, we reduced store reports by 40%. We decreased e mails by 20 But 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. And 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 And to date, we've had over 150 projects to go through this process, and over half of them were Either declined or had a significant change in direction. The win process was not meant to be punitive. However, it helps us to maintain a very disciplined 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 taking place in our U. S.
Stores the 1st 3 quarters of this year. As an example, we have almost 2,800,000 applicants for jobs. We hired 145,000 new associates. This led Staffing a total of 300,000 associates, which created 3,800,000 schedule changes. During the Same time frame, we executed 2,400,000 installs, 1,400,000 measures and had 1,200,000 store deliveries.
This all happened while we utilized over 7,000,000 hours for training, presented associates with almost 600,000 home rewards, recognized This is inherently complex. So when we talk about keeping things simple, it is a necessary ingredient to provide improved customer service While delivering payroll productivity. And 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 This slide says it all.
This was a very confusing and complicated process for our customers and our associates. We engaged 2 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 A complicated process. Today, this entire process has been reduced to 3 easy steps with only one store visit.
And 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 and other parts of the store. Now 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 And we've committed a lot of time and energy on improving this interconnected customer experience. With the introduction of Buy Online Pickup in Store Our online ship to store, BOSS, our traditional retail store has transitioned to more of an interconnected environment.
And 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. And to support the customer service focus in this area, we rolled out a new customer service training program that we call 1st for the interconnected customer. This training is designed to improve the Specific experience of our BOPUS 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.
And because the best ideas always come from the field, we canvas our stores for ideas As a result of our search for best practices, we've included 2 additional steps to improve the customer service For all BOSS customers by online ship to store, the customer receives an inspected by sticker confirming that an associate 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 both us and BOSS customers, we include a thank you card from the store manager personally thanking the customer for shopping with us and providing 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 In June of 2012, we started to measure BOPIS and BOS 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. But in January of 2013, we introduced BOSS, my Online ship to store, and candidly, we were unprepared for the increased volume and our customer satisfaction scores plummeted. We rolled out 1st for the interconnected customer training and through the hard work of our wonderful associates, we saw our customer service scores greatly Once again, we're able to see customer service improvement from an approach of clarity, Now let me discuss the service commitment we're making to our Pro customers. As a reminder, Pro is 3% of our customers, Approximately 35 percent 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. And to improve the engagement at our pro desk, We simply turn our monitors to face the customer and ask our sources to walk from behind the desk to stand side by side with the customer. As basic As it 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 And also to help our pros run a more effective business, this fall, we introduced a program that we call Pro Extra. Extra offers to Pro's online tracking for purchases, e receipts and a seamless no receipt of returns process.
Extra also provides 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. And we believe that programs like Extra will create customer Extra 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 Extra. 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 Extra and registered 8 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 2 50 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.
And from this data, we determined this customer was not Not a professional painter, but a general contractor. And to our surprise, paint was the lowest penetrated purchase category for this customer. So although we have programs that offer discounts to our pros like paint rewards in 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. And although Extra is a new program and we have much to learn, we are very excited by 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 process rebates and take any additional steps to facilitate a seamless customer service experience for our large pros. And 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're 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 1 minute video sent to our pros each week focusing on products or
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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 We understand that a simple store environment will allow our customers to be more focused on our Our associates and our associates will focus on enhancing their service and driving overall productivity. Now to discuss additional steps we're To improve productivity, let me introduce our Senior Vice President of Operations, Mark Powers.
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 In store operations, we truly believe that complexity is a proxy for And a major distraction to the customers' experience, so we build simple. Our focus 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 For example, I told you we would roll out 10 to 15 first phone juniors 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 stock quantity information to enhance the customer's experience as well as our 3 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 6 100,000 units. Finally, at our last conference, I told you we would continue to implement projects that would into the future by reaching our sixty-forty milestone, which Marvin explained to you, we will Complete this year. Now looking at sixty-forty a little deeper. As a reminder, in 7, we had so much complexity in our operational processes and stores 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 nonproductive activities B, Streamline required processes or C, invested in productivity generating technology. We have 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 to continue to implement and sustain simplified operations, optimize payroll And build productivity, all while enhancing our customers' experience. Some examples of these projects we will implement Can be aligned under 3 headers that I will cover with you at a high level today. The first one Our first phone generation 2.
Secondly, our in store operational actions to Support our interconnected growth. And finally, freight flow, which entails our efforts to provide a better product Shelf availability, meaning in stock for our customers. So 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 4 years ago.
And as technology has advanced, our first phone bricks, as our associates loving the call room, have been left behind. In 2014, we will provide our associates an updated first phone generation 2. This simple, intuitive tool We'll have greatly improved processing speed. It will also empower associates with what our customers will be 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 function much like our associates' personal devices.
This will give us the ability to hire an associate on Monday, and he or she We'll 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 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.comorders.
All of these brains work independently. So we have virtually no central view of inventory, customer purchase orders Or status of customers' special orders, installs or deliveries. In 2014, we will implement A central brain, if you will. We call Calm or customer order management. This will allow Real time view of the status of a customer's special order, dotcom 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. 1st, 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 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 Secondly, we are enhancing our warehouse pick, pool 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 customers' in store experience. And finally, concerning in store projects supporting our
interconnected growth, we are designing solutions to
allocate 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 I have to build a simple interconnected experience. We haven't lost sight of the fact that we still have a multitude of 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 2,008, we transitioned to a hybrid model where some of the where some of the freight is handled in the early evening while servicing the customer and then the remainder of the freight is Processed while closed to the public. Now we are currently running a model where approximately 1300 of our stores 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, In addition, as we improve our in store We are also working with Mark Holyfield to improve our incoming freight visibility, so we can optimize our payroll by leveraging our In store scheduling system we rolled out 2 years ago by scheduling the appropriate amount of store labor to handle the inbound The labor allocation will be driven off of individual product attributes and the validated time that is required to That will build productivity while delivering a better customer experience.
In wrapping up, as we implement an intuitive 1st 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 Meneer.
Thanks, Mark, and good morning, everyone. So today, I'm going to talk to you about our strategy to become 1 in the world in product authority for home improvement We define product authority as the customer's preference for Home Depot as the retailer of choice for home improvement products. To drive product authority, we start with a customer backed mindset, and 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 All of this is supported by the transformation of our merchandising tools to drive productivity 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 Home Depot, as I've outlined, but to drive profitable share gains in the business, Utilizing all channels, allowing the customer to shop when, where and how they want. POTS Authority starts with understanding the customers' needs, and there are factors that we must be keenly aware of over the next few years. These changes impacting the customer landscape have implications to 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.
And 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. And we must adjust our Communication and be more customized and more visual. Additionally, it means deeper coordination with our suppliers Also an economic impact that we have to be mindful of when it comes to assortment planning.
The U. S. Is experiencing a bifurcation of income with the middle class Now, let me bring this to life with some real examples. Traditionally, we go to market with multi packs and paper towels. Given the increased rental market and more single parent households trying to make ends meet, we added a single roll In time, we went out and tested $3,000 100 gallon Japanese maple trees, and we're quite successful.
So 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, and I'll show you in a minute just the many facets of But 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 taken a highly curated and narrow assortment to market.
And on the other side of the spectrum, there's competitors that offer very broad mixes, millions of SKUs. And we think the right answer for our customers is 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 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 a key to winning in product authority. Now given the rapid pace of change in 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 we've developed with companies like Behr and Paint, TTi and Tools, Custom building products and tile set materials and Cree in LED, and 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 and choice for R and D and for capital. And it Gives us the ability to have line of sight to product cycles, keeping the flow of innovation and value sustainable over time. 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. And we strive for best first cost, but we also Build cost leadership with infrastructure advantages. And later, you'll hear from Mark Holyfield how some of these initiatives are 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, and 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.
Now, we also want to deliver innovative products. And what you see here are categories that might be called staples of our assortment. We've sold paint, light bulbs, tools, glue, for ever. And most of these categories wouldn't be considered hubs of innovation. But as you saw in Marvin's video, Products like DAP Smart Bond 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 expanded extremely well, and none of these Present products in the opening price point segments of their categories. So let me share 2 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 Harrowed length of life. We've created value by performing relationships upstream with component manufacturers, And this has allowed us to bring top quality product at outstanding value. The pace of adoption by our customers has exceeded our The second example is PipeWell. Now this is a product that's all about driving efficiency for our pros. When a plumber fixes PVC pipe, it takes 3 steps: that clean, prime and adhere.
Pipe Weld 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.
And let me talk about speed to market by providing an example in a product category where we have a strong leadership position It took from the 1920s to the 1960s some 40 years to go from corded to cordless tools. Then it took another 40 years, roughly from the 60s to 2000 To bring cordless from a pro application to an affordable consumer use case. The changes over the last have outpaced all previous evolutions. Lithium was introduced 8 years ago with a bigger is better mentality Within 2 years, compact lithium hit the market and changed the game, not only for pros, but drove value for consumers. In less than 6 years, we are on our 4th 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. But having innovative product isn't good enough. We also want to be fast to market. So 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, 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. And the investment in MET has led In a saturated world where growth doesn't And 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 road map of the development of us moving from basic to a more automated rules based approach with 3 goals in mind.
Number 1, improving speed to market number 2, gaining efficiency and enhanced planning and number 3, deepening our collaboration and partnership with our suppliers. Now 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 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.
And we think about that growth at a bay, a store, a market, a cluster and a channel level. And 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 3 ms's Command product, which allows you to decorate your walls without using nails. We started with a side cap and a Utilizing our tools, we identified areas where we were overspaced on certain products and then scaled that back. Then we expanded our assortment and footage with the 3 ms products, and this drove productivity within our base. And we're enjoying double digit comps Now similar to micro space productivity, we have identified opportunities in store or macro space shifts. 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. And then we're traditionally out Assorted by specialty retailers. So space shifts are being made to add more mix and drive productivity of our Where markets call for additions. Here, we also leverage our online capabilities to drive productivity in store through the extended aisle and And enhanced delivery options for our customers, and you're going to hear more about this from Kevin and Mark. And finally, we use our tools to identify We also drive productivity At a market or area level.
And we've made great progress initially with scrappy tools and our basic market expertise, But now we're giving our merchants advanced tools to plan assortments that will make it easier to sort the right products in the right An example of this is Simmons Faucette in New England. And so for those native Bostonians in the room, you'll know that Simmons is a well respected pro brand in New England. And then 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 And as we've developed more sophisticated tools, we're able to dive deeper on unique customer needs.
And let me share an example of that with you in fire safety. So 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 become something that we've not had the capability to do previously. So 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 But 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. 2nd, certain areas Those 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 We found that counties with carbon monoxide regulations still acquire 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 1st to showcase more combo units, and we've averaged 2x the fire safety sales.
And in some of the carbon monoxide We've actually expanded our mix from 1 bay to 2 bays, led by our field merchandising team, and the fire safety sales increased Another 50%. So 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 The capability to create your own patio set was introduced this year on homedepot.com, and it was well received by our customers.
Next 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 So in closing, becoming number 1 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. And all of these initiatives wouldn't be possible We didn't enable our customers to shop when, where and how they want it. And 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 world, you need a world class web platform including mobile. And Kevin will tell you some of the things that we're doing to get there. So I thank you very much.
Ladies and gentlemen, we're going to take our morning break. 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 Dayhoff.
Of Ensigning Stretch now. So as a reminder, please silence your phone and I would like to welcome and introduce you to someone you may not have had a chance to meet before. That's Kevin Hoffman, the President of our online
Good morning, everyone. Today, it's my pleasure to speak with you about the status 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. So let's get right into it.
We all recognize that the retail world is changing and is changing significantly. How consumers browse, research, how they get informed and how they shop It's 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 of customer service. So 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 a customer. This blending of the channels is what we call interconnected retail. And in the past, e commerce has been viewed as a separate and distinct That's no longer true. Moving forward, e commerce has simply become commerce. To illustrate, here's some stats for you.
We see over onethree of our online orders getting picked up or fulfilled out of a physical store location. 90% of our online orders or excuse me, our online returns enjoy the convenience of free returns In our stores. And thousands of times a day, online browsers are greeted and helped to be an interactive chat by an orange apron wearing which is located in a centralized call center, helping them with their home improvement challenges. Almost half of our online visitors To indicate their next stop is a Home Depot store. So that's interconnected retail.
So sometimes it's really tough to see how this blurring between the channels works. So I thought I'd share a customer story with you. We think it illustrates how interconnected retail plays out. So 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 of home.
Now over the course of the year, she shopped across 2 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. Now 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 And then 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, but eventually transacted in the store. Another order where she's buying mulch, flowers Our technician and service providers getting the product from the store and completing the install in the house. So 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 Now, inside 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. Now 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 and 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 So how our stores will drive traffic and conversion to our digital properties. Now 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 Online content watching videos, reading reviews, accessing how to information on their mobile devices 100 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 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 customers' So interconnected retail is a huge opportunity for us. We have lots to improve yet. And I'm going to parse out just a few of the items we're investing in to So I'm going to chat with you about 2 major buckets, our core site capabilities and our mobile activities.
And on the core side, we've tried to focus on a few key areas that our investors are sorry, 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 Of course, making the transaction as frictionless and seamless as possible is a must, and we see mobile as having the great 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 So let's go deeper into some of these areas. First, our CoreSite capabilities. What I'll do to illustrate our approach Just to take a walk down memory lane a bit. I'm going to show you some examples of then versus now.
So 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, results, let alone results that were best in class. We all experience it now, but customer Our expectations have changed and search is one of the most important features for us and other retailers. So we've invested a lot into our search capabilities, and it's a significant focus.
We process nearly 1,000,000,000 searches from our customers, basically Answering 1,000,000,000 home improvement questions. Now we offer them type ahead suggestions, visual prompts and allow them to give us voice search and ScanSearch. There are also specific search experiences tailored to the mobile user. Going forward, This will be an area of continued investment and 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 them towards their product.
If you really want want if you really knew what you wanted and could navigate through the assortment And 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 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 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. So 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 2,500,000 user reviews, including uploads of user generated content, extensive video Collections and multiple fulfillment options. For many products, we provide expert Q and A forums and real time chat capability with a Home Depot associate.
This improved content helps give the customer confidence, informs our buying decision and improves the conversion rates whether they're in store 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 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 broad 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.
So 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. So 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 Welcome to 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 5,000,000 downloads, we just built 5,000,000 new stores and intend to build 1,000,000 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. Now Now everybody might not want a Home Depot app on their phone, but as I said, we need to be present where the customer starts their shopping journey.
So So here's our approach to mobile. We started a few years ago and have built the 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 To connect directly through the browser on their device. This is actually our most active mobile channel.
And while it launched in 2000 and We brought it in house in 2011. We also have a specific tablet experience that takes a better advantage And lastly, we recently released our Pro app, which is geared towards the different experiences our Pros want. I'll speak more on each of these in just a minute. So there's a ton you can chase in the mobile world. Our mobile investments are specifically following Customers 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 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 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. So let's look at some examples of what we can do today.
First up is our mobile web 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 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 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, shipped right to your doorstep. Mobile web varies a bit from the tablet experience, moving from a 3 to 4 inches to a 7 inches to an 11 inches 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 Tablets are currently 10% of our traffic and the projections are that there will be over 30,000,000 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 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 Obviously, too, the app reduces a few steps for the customer, so we're keen to get it on your phone. You just saw Lastly is our Pro app, and 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. And they want that across multiple stores, not just and 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 Extra loyalty program And manage the receipts for their jobs. So hopefully that was just a few good examples of how we're making progress on mobile. So 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 Thanks.
And with that, I'm going to turn it over to Mark Holyfield, our Senior Vice President of Supply Chain. Good morning, everyone. It's 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 And over the next few years, we'll build a network to support our fast growing direct fulfillment business. And 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 Employment center or RDC platform indicated by the 18 orange stars on the chart here. For about 70% of SKU count. This is the optimal path to our stores.
These innovative centers execute flow through distribution, and 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. And what enables This fast flow, our superior information systems that enable a just in time allocation process and state of the art material handling infrastructure. And as a result, the RDCs are our lowest cost path to move carton goods to our stores, and they hold no inventory, Accelerating our turnover.
Now for highly seasonal goods or products with spiky demand or products with a long or unreliable lead time like From imports, we do employ traditional stock and pick methods in our stocking DC locations or SDCs, represented by the And for bulky goods that typically come to us on railcars and move best to The stores on flatbed trucks like lumber and building materials are both DCs represented by the 26 blue circles are the Typically products where a store sells a full truckload a week or more or products requiring special handling like locally sourced live goods. So as you can see, Our core U. S. Store supporting infrastructure is well in place at this point, and about 70% of our product flow measured in dollars is flowing through it. While our distribution networks to serve our stores in the U.
S. And in Mexico are substantially 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 Q1 of 2014, And we're planning a second Canadian RDC in Western Canada for opening in 2015. We're looking forward to providing our Canadian Now while we put in place our optimal flow network to move product to our 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 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 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, and also we had 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.
And we deliver and Install appliances through our depot direct network. While independently these networks do a pretty good job of serving 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. Mark Powers talked about our comm system or customer order management, And 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. And ultimately, we need to offer enhanced delivery options to customers, including online scheduling and shortened delivery windows. And 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 Customer 1. And 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 Stores as effective origins for delivery to include taking orders online for delivery from the store. And we're working more effectively with our vendors as well to further enable vendor direct fulfillment, including the Depot Direct. And 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 Our ability to say yes to customers with confidence. Yes, you have access to all of our inventory to fulfill Yes, you can schedule a convenient delivery.
And yes, you can rely on real time information updates about your delivery. 1 of the largest investments we're making in interconnected retail is that we're adding 3 new direct fulfillment centers Strategically located across the country. These new centers will range in size from a little under 1,000,000 square feet to Over 1,500,000 square feet. The intent of these centers is to enable same day shipping of orders And fast delivery to customers. And 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 the ECCs.
Our intent with these centers and systems is to support and the systems that Supportum 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 p. M. Would be shipped out no later than that same evening. And 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 2 days using economical ground service.
For example, when the network is complete, Most customers will be able to order on a Wednesday by 5 p. M. And have that product delivered by Friday. These centers will stock SKUs beyond the current And this expands our offering to customers. The 3 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 2 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 Express preference for same day delivery over next day delivery, which in turn they prefer over 2 day service.
But our customers also want low cost. And when given a choice between fast and low cost in actual observed customer Our customers generally prefer low cost. Our future network with the 3 new direct fulfillment centers we're building The solid balance of speed and cost that we think meets most of our customers' needs. Now in the event a customer wants 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. Now our direct centers will stock a variety of goods, and 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 fan or product Where a direct fulfillment strategy provides a better customer solution than stores for job lot quantity delivery. Think about flooring.
And 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 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 We're investing in state of the art systems that will allow us to do that in the future, unlocking 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. And we expect this to be especially So at this point, with our core store supporting DC All of our network development efforts relate directly to enhancing our interconnected retail capabilities. And just to recap, we've enabled But 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 At the Home Depot also is fairly recent, and we continue to find opportunities to improve and optimize those processes as well. So as we consider optimizing our core supply chain, our deliverables continue to be those shown on this chart. 1st, we of Capital. 3rd, 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.
And 4th, we have to provide our internal and external customers with great service. 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 Now, while we worked on our supply chain during the downturn, we knew that the true test of our new supply 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 comp? 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. And 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.
But we've not stopped developing new and innovative processes and tools to further our On the right side of the page is one example of applying advanced data analytics to drive results in inventory planning and replenishment. And I've talked to many of you 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 lock quantity strategies. Now let me give you another example of our advances in forecasting Over the past few years, we've continuously improved our forecasting systems, making modest investments Each year that pay back an improved in stock and inventory turnover.
And this chart will help me show you how responsive these systems are now and just how they operate at a more at the You might think it exhibits specific store level spikes caused by local factors. In this particular case here, Boulder, Colorado, you can The red line is the old forecasting model and 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 arrives, 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, but 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. So the new forecasting does a Better job of capturing sales by ensuring the right product gets there at the right time ahead of demand, but it also ensures that we don't invest in inventory 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 metrics measure 3 simple variables: how full are the trucks coming inbound to the Home Depot? And that's a very effective proxy for how well we're managing our inbound transportation. 2nd 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.
And then how full are the trucks leaving our DCs, our proxy for effectiveness productivity in 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 and expect more productivity in the future with specific targets for these. Mark Powers talked to earlier about our efforts to improve freight flow all the way to the shelf in our stores. And Mark and I are locked at a hip on this. We're working jointly to optimize and synchronize our This includes an end to end focus, improving the visibility and reliability of the arrival of freight at This will continue to drive labor productivity throughout our supply chain and most importantly, improve service and on shelf availability for our customers.
So 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. And thanks. I'd like to now introduce our CFO, the best in the business, Carol Tomek.
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 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 6 topics.
1st, quickly discuss our 2013 financial guidance 2nd, share with you our point of view on the U. S. Home improvement markets. 3rd, 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 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 3rd 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 20 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 markets. We believe the health of the home improvement It rests on 2 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. So let's start with 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 broadcast comes from the Federal Open Market Committee, where there seems to be a bit of a bias of wanting to project 3%. But 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 markets. Moving to housing, we look at several factors. First, we look at household formation. Here you can see that from From 2007 to 2011, there was a sustained annual shortfall in household formation, building a deficit that began to reverse itself in 2012. And 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 high. 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 Unit. At the same time, the quality of housing turnover has increased as distressed sales decreased, so supporting of this recovery. Further, we see housing inventory down almost 50% from what it was in 2010. The current months of supply of about 5 months is actually lower than what you want to see in a normal housing environment, which housing experts state is about 6 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 their homeowners view their home as an expense excuse me, as an investment and not an expense, We believe they spend more money on their homes. In 2013, in the face of rising home prices, We have seen a shift in how our customers shop. For example, in the Q3 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 $79,000,000,000 this here, equal to the peak sales we reported in 2,006.
But 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. But 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 nontraditional mortgages. And today, only a small percentage of banks have loosened underwriting standards. And the GSEs continue to be the major source of liquidity for the mortgage 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.
So when we add it all up, we believe we've moved past the workout stage of housing 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 of Framework. As we've discussed, we use a directionally correct but imperfect model to predict our U. S.
Sales On this chart, we are showing you what our model predicted versus what we actually reported for that the impact we believe home price appreciation, housing turnover and new household formation will have to our 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 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 of the model. We believe our model is driven by 3 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 1st 25 years of our history, our sales growth came from square footage growth.
In 2000 We lost sales due to the housing led recession. In 2010, as housing started to recover, so did weight. And 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 as well as interconnected retail, a business model we've been talking about all morning.
From sales growth, we moved to our productivity We used to think that if expenses grew slower than sales, we were driving productivity. During the at Stor. This approach to driving productivity will stay with us in 2014 and beyond. And finally, our capital allocation The 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 into 2014 and beyond, we will stay true to this approach. Now earlier today, Kevin Hoffman said that for us, interconnected retail means where online increases traffic a version 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 on on. We also show square footage. With the power of interconnected retail, by providing our customers with offers like buy on at 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 twelvetwenty four targets. Based on our 2013 guidance and our forecast for 2014. We now believe we will reach our twelvetwenty four targets in fiscal 2014, 1 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 4th 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 I present. We're targeting 8 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 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 $5,000,000,000 of outstanding shares 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 $1,500,000,000 in capital much like what we intend to spend in 2013. We would expect 1.5 Ashflow Generation in 2014, and we'll use our cash to fund $1,500,000,000 in capital expenditures, dollars 5,000,000,000 in share and $2,600,000,000 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 2,005 and 2006.
The path to a 12% operating 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 let's 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. Now 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 and 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, to identify strategic cost out opportunities and to be better prepared to address vendor cost increase requests. This is a 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 from our maturing supply chain, as you heard from Mark Holyfield. 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 of our business.
But 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 Mark Powers. We put together cost out targets, we embed the targets into our financial And we utilize cross functional teams to create action plans and 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 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 4.5x we reported in fiscal 2012 to 5x 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 and working capital will be a source of cash for our company.
As Frank mentioned, we have 3 shareholder return principles. First, Turn on capital perspective, our goal is to maintain a high return on capital, benchmarking all uses of excess equated against the value created for our shareholders through share repurchases. Moving on to our debt capital structure. We have $15,000,000,000 of long term debt with staggered debt maturities across 31 years. We intend to with a weighted average coupon of 4.7%.
By the end of fiscal 2013, we project to have an adjusted debt to with a pursuant to our target. This borrowing capacity is expected to grow to over $5,000,000,000 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 2x adjusted debt to EBITDAR. Our cash flow is very seasonal, and We have ample flexibility.
As for share repurchases, we've been repurchasing our shares since 2002, and through the first 9 months of fiscal 2013 had repurchased approximately 1,100,000,000 shares for $44,000,000,000 or on an average price of $40.50 per share. We intend to repurchase $2,100,000,000 in Q4 of fiscal Looking to 2014, we are targeting $5,000,000,000 of share repurchases. That would leave $3,500,000,000 remaining in our Board authorization. We plan to complete our authorization in 2015 and 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 $1,000,000,000 between 20132015.
This number is after cumulative capital expenditures and With the cash dividends of $7,700,000,000 during this period. Using excess cash and with additional authorization from our Board of Directors, we project The ability to repurchase $17,800,000,000 of our shares by 2015, and 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 $23,500,000,000 When added to the amount of shares already acquired, that's over $50,000,000,000 of repurchase 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. So we really thank you for your time today, and we're going to break now into our Q and A session.
So I'd like So we have 3 associates with microphones moving around the audience, and Barbara and Jeff. So 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 your question. So Brian, Eric there?
Eric Bostarck, Cleveland Research. Carol, you made a comment about the gross margin getting to a peak of 35% and then reinvesting after that.
Curious if you could give a
little bit more color on that And then reinvesting and then also the 35% leverage relative to the investment that interconnected retail might require of the organization. If you could give a
little 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. And at that time, we said through a number of initiatives, we would grow our gross margin by 100 basis points, reinvest 60 Of 40 basis points. Within that 100 basis points of expansion, we had 3 big buckets, 60 basis points coming from merchandising excellence, 20 basis coming from supply chain excellence and another 20 basis points coming from operational excellence. We're making really good progress against those 3 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 3 basis Points of benefit from supply chain, we're thinking we'll get about 13 basis points this year. So that takes us around 15 basis points more or less. We should get another 10 basis between now and 2015.
So 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 shrink, so really great performance there. And on the merchandising excellence bucket, we're doing a lot better there. But we are investing and 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, but we'll take that all day long. So relative to what we said we would do, we've done really well. Now looking ahead from now until the end of 2015. Our gross margin is going to reflect investing and part of that comes from the classes that have not fully recovered.
So if you look at the chart that we shared with you where the classes have not fully recovered, that's a $2,600,000,000 sales And the majority of those classes have lower margins than the company average. So Eric, that's part of the reinvesting that's happening. It's just recovering classes that haven't fully recovered. Now 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 talk about the great work, Marvin and Mark talk about the great work that they've done in terms of driving Productivity and 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. But as we build on the
growth Sure on our expenses. But as we build on the growth factor rate, as we build our plans, we build them fifty-fifty So we feel very good about the expense growth guidance that we've given as a result.
Peter Benedict, Robert Baird. Carol, a question on the 2x adjusted debt to
EBITDA ratio. If the plans you laid out here today happen exactly as
they've been laid out, Plans you laid out here today happened exactly as they've been laid out. Help us understand the decision process between whether you will go to 2.0 or And then secondly, when you say value creating in terms of determining when all your buy shares back or not, help us understand what you How you define that, Grady? Thanks.
Well, as you know, Peter, we were aggressive in the debt capital markets this year, raising over $5,000,000,000 a $1,000,000,000 of that more or less to be used to repay some maturing debts and then $4,000,000,000 for incremental share repurchases. And we were very happy with that trade. The after tax cost of debt was something like 2.3% against the dividend yield of 2.1%. So it was an excellent trade. And if you look out going into the future.
That's point of view that interest rates are going to stay relatively flat for a little bit. So that gives us opportunity perhaps for additional great trade. And there's no better time to raise that capital in the face of an improving the market. But 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 So we don't have any near term expectations to raise debt capital, but we certainly wouldn't preclude that going forward.
It's Laura Champine with Canaccorda. I've got a couple of detailed I thought I remembered from years past that the target was for direct ship to store to get down to And if that has changed, if you could just let us know how and why. And then secondly, the 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.
Yes. The it's a great To call out on the 75%, and today I talked about 70% going through central distribution. When we talked about 75% or 80% going through Our sales per store was at a lower level than it is today. And 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. So 70% is where we are and we don't expect that 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, Certainly on our road map going forward.
Thanks a lot. It's Michael Lasser from UBS. My question first, two questions. One for Frank. If you laid out the road map that Matt Carey uses For the technology and applied culture to that.
Where do you think the culture is in as far as how it needs to be to Address interconnected retail. And then as a follow-up, Carol, can you talk about what's different on the gross margin perspective, Essentially, you're going to get 20 basis points rather than the 40 basis points. Thank you.
So 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. But 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 I thought Mark Powers' brain chart was a great chart because you saw theirs.com2003 separate Sitting out there with its own brain. So it's within recent memory that we've been treating these things in Very siloed fashion, so I'd say we're very early days.
And Michael, to your question about the gross margin going from the 40 to the 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 hard set. We love that lower margin.
So we've got an investment that we're making and we're happy to do that all
along. Hi, it's Aaron Robinson 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 of follow ups.
Can you guys talk About the penetration maybe by category, now that you've got maybe better data or insight, if there are certain categories that over index and under index. And then a question about the Net Motor 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. So we're Slightly above 73, which for us is very important. As I mentioned in my presentation, we really focused 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 1 person operation to a 50 person operation. So Pro Extra is a way to help But 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, so the net promoter score has actually exceeded
And on the category side, we actually with the data, we actually do have the capability of letting our merchants See what the penetration is from 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 and accessories would be a category that has strong pro penetration. So 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 When you look at your conversion rate, can you kind of put some parameters of what that rate is right now? And if you were to increase that rate by 100 points per year, how much of an increment would we see to overall revenue growth? And then talk about your abandonment rate a little bit. And 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 more different things on them and it's Potentially impacting the cost structure that Carol's outlined around 35%.
So first on conversion rate, so unfortunately The answer is it varies widely across categories, widely across modalities. And as you can imagine, mobile app and mobile web Conversion rates much, much smaller because the customer is checking inventory, locating product in the store and compare and contrast the customer that's on a PC or The conversion is much higher. And so when it all blends, it's in the range of depending on the category, the core categories can It was high as 4% or 5% conversion. Other categories like building materials can go very, very low in the sub-one conversion because the customer is generally We're just checking inventory, checking availability, checking price. So conversion rate is something that we're very, very focused on because as you can calculate, every Basis point of improvement is money.
So very, very big focus for us.
I suspect if you were doing some math, you get how many visits per week.
So think of it as 2,000,000 to 3,000,000 visits per day in So
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.
So Wayne, on the Ship from store initiative that Mark Holifield talked about, I'll give you an answer in 2 ways. If we try to Our system is primitive. The associate has to work through different screens and different interfaces to operate a delivery. And as I mentioned, in In the first three quarters of the year, we executed 1,200,000 store deliveries, primarily to our Pro customers, but it's not an efficient So with the work of Matt's team, with Mark 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 So 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. But we're going to have to become even better at servicing customers that are not I. E, deliveries. And so 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. And we're going Try to create efficiency in how we do that.
Now, it also ties to freight flow. We think as MARC continues to become more efficient from a supply chain perspective, that we'll be able 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. But we have lessons to learn, but the key will be the efficiency and the sophistication of the system that's currently being developed with
Hi, Budd Bugatch with Raymond James. The progress on the interconnected retail is very impressive and all the And I heard the mention of price transparency, but price leadership has also been something that Home Depot has been known for, 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. 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. And then we're giving visibility to the merchants just like you would in a brick and mortar as to what's in the digital world so that we can use our portfolio approach to make sure that we're competitive across all channels.
And so that visibility is really important, that they can see what's happening, and be able to react Accordingly based on our portfolio strategy.
It is a lower price somewhere. What happens if the customer finds something that's lower priced? And how do you Back 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 and we'll deal with each individual situation with the customer.
And Bud, the most important thing for us is we don't try to legislate every decision from Atlanta. We want to empower our sources 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, and we allow them to do what is best for
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?
And 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, 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, DIY and Pro, but I can address The large pro, the small pro and the pro reps. So 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 approach growing 3x, the smaller Pro, the Pro Less than 10,000.
So we believe part of it is the relationship and the solution based initiatives that this dedicated Headcount provides to these larger customers. So we're pleased with that. If you look at the Q3, 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. And so we're trying I 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 Extra 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 a problem, but early days we feel good about the data and good about the decisions we can make with
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?
So 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 Want to transact in the physical world or the online world. In growth rates, we still have
Kevin's avoiding his budget That's
right. That's right.
But bring it on, Kevin, please.
Right. 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 the opportunities for Pela to take share in that space.
So absolutely, we look Look at every category and whether it's a transaction online or research online or checking product and availability online, we look at every Category is how can we improve the customer experience. And 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?
It's an offline sale. It's an interconnected sale. So we look and track at all those emerging competitors that you guys would But we look at every category now as an opportunity for interconnected treatment and how we can improve the customer experience. I would I'd 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, and yes, that includes parcel freight as Well, so that's why we're building out the range of delivery and fulfillment capabilities that we talked about.
Dan?
Hi, it's Dan Jefferies, as your web business grows, you're adding DCs inventory. I think you said you had 600,000 SKUs you offer online. How much of that would you actually plan on carrying in these new DCs? And as you rely less on the vendors to ship direct to the customer And you
do more
yourself. I'm just curious, 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 dotcom business? And I realize it's all interconnected, but there are clearly different costs between running
In terms of the inventory Activity 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 of vendor direct fulfillment as we look to extend that endless aisle. Today, About 40% of our deliveries are fulfilled 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.
So 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 a relentless focus on channel profitability. And we will keep the customer experience forefront, Of course. So there will be decisions that we make to channel inventory through the most profitable delivery method so that we feel confident that we can around 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 what the ultimate It is ultimately a benefit from transitioning goods rather than online from individual stores rather than just The store traffic of a specific store to because clearly you're going to have allocation.
No, absolutely. As you think about the algorithm that Would determine what's 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 Stock on something that you could easily fulfill from the closest store or maybe from a central distribution center, but 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 Those are the kinds of algorithms we'll develop over the coming years.
Hi, Brian Nagel from Oppenheimer. I want to bounce back to the issue of gross margins. I guess my question is specifically for Carol. 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 there is Home Depot going to do some type of specific reinvestment to drive stronger sales in some of those bottom categories?
Or is it simply that The categories that have recovered are not as high a margin.
It's more of the latter than the former. So if you look at the category that's the least recovered, special order kitchens. That's really a function of the state of Housing Recovery. Now our special order kitchen business is pretty doggone good, but it's still got a long way to go to recover, and It's lower margin. So 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 Hartford, those kinds of investments.
And if I could follow Great for Craig. You pointed out some products, the new innovation hitting your category. Is there any way to sort of say quantify or give us some idea of where we 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 Home Depot is very well positioned to benefit from it. How many analyst meetings would
you consider talking about products coming new products coming online basically? Hopefully, ongoing. Every one we have, that's a real focus for us. And while we've always been focused on that, I think we're really trying to ratchet up that effort with our merchant team and And our supply base and particularly working with strategic suppliers to get further out in that innovation cycle. It's really important as we're working 2 3 years out on that innovation curve and getting the input from the to our supply base and vice versa.
That really is what we believe will give us a sustained effort against innovation going forward. So it's a very, very important focus for us.
It's Gary Balter and Simeon Gutman from Credit 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 like Can we be at 37? We all here would love you at 40 and give us such high returns.
But we're more oligopoly in terms of the nature of the business. You're clearly like the leader in the business. How do you how are you thinking about that 35,000,000? Like why not go to 36,000,000, especially because you're probably getting more support from
I mean, I think,
first of all, we start with the competitive set That we're operating in and the visibility that we give our merchants. And so we need to make sure that we're I mean, in the marketplace and putting sufficient value and pressure in the market. And then candidly, we're out there testing on an ongoing basis as well. And 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.
And so that's an ongoing Effort is part of what the merchant's job is and 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.
And 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 And maybe talk about the breadth of services you're offering today versus then. And then 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. And so that's something we could be underappreciating
The services business is performing really well. Currently it's 4% of total sales. We had double digit growth in the 3rd quarter. We I 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.
And as we look at the transition of the economy and the economy Coming 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 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, I mean, we look at programs like cabinet We look at programs like countertops, programs like solar, programs like HVAC.
These are very well performing And we just continue to believe that the business is going to stay strong if the broad economy stays strong. And 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 During the previous peak, Marvin and his team have done a masterful job of improving the overall experience for our customers. So It's just a better business today. And with the growth, that's pretty exciting.
Jeff? Hi. It's Greg Melick with ISI. I want to go back to online, just given the impressive growth there. What does it do to the margin structure Today for the whole enterprise and what does that look like if we look out over 3 to 5 years?
And Craig and Marvin, Arvind, 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 The whole store, not just the quarter of the store potentially.
So, as Carol mentioned, so channel is a big, big focus for us. And of course, in the direct to consumer model, the shipping charges and the logistics charges are a bigger burden for us to bear. So 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 lifecycle of their projects So obviously the shipping charges are pressure, but we run the business like everything else through a portfolio approach and where we have pressure in one area we make it up
Yes, 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 So 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 ability 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. But we are we've got a whole bunch of folks all over this. About it, but we've got a whole bunch of folks all over this.
So talking about Dotcom in the store, I think it's 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. And 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 The address of a store, if you're a customer, the store gets credit for that sale. It's just more accounting than anything internally to make sure that we leverage The entire company's benefits and the ability to serve customers more broadly.
And 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 I would advise their smartphone or take them to a terminal to do one additional search to see if you can close the transaction out online. But the key for us is the The Therefore, they can serve the customer from a much broader list of items than just what's on their shelves.
And from a merchant standpoint, our homedepot.com merchants actually are part of our core department merchandising teams, and all All of the financials of that are integrated and compensated accordingly.
Carol, if I could, just a quick follow-up. The next year projection is 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 Your 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 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, so we didn't carry that into 'fourteen. 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 So I don't suspect that's going to change dramatically, but I'm just not going to or we are are 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
Thomas Paulson, Cornerstone Capital. Frank, I had a question for you about the U. S. Consumer. And Carol, I had one about omnichannel and dollar investment.
So Frank, how would you characterize the U. S. Do yourself consumer here in the second half of this year and how do you anticipate that to change as you go into First half of
twenty fourteen. So Carol's comment during her presentation, I think, is the key of how we look at the U. S. Consumer in our space. So we see the consumer in our space driven by their perspective on home price value.
So as As prices have increased in house and people are more comfortable that their expenditure in home, the do 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 United States are creating in their homes, we think is a crucial part of how the home improvement consumer
And then Carol, just what's the dollar investment that you're looking at next year for your omnichannel, Both the IT side and the distribution and all of that and how does that compare to this year?
It's a big investment. And there's really not a bright line because it's all interconnected. But if you look at just the capital chart, We called out $200,000,000 in support of interconnected retail. That's for mobile, that's for site enhancements, that's for That's for the direct fulfillment facilities. But then in supply chain, we have a new warehouse management system that's in the $100,000,000 of capital that we have Our supply chain and that's supporting interconnected retail.
So it all kind of comes together. I would say everything that we're investing is in support of an interconnected We don't try to snap that chalk line and say, this is for omni channel and this is for not. It's all coming together.
So it would really only be that And that would be on a shorter depreciation curve than your other investments.
Yes. And as a result, our depreciation expense, if you're modeling, I'd use about $1,700,000,000 going forward just to reflect the investments that we're making. Thank you. Yes. Perhaps I could just add I 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.
Chris, over to 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 I thought that was the veiled reference. I want to ask you, Carol, a question about incremental margins. You said that 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. So just curious what's changing?
Is it where we're The sales productivity curve, is it because you're at 60% customer facing labor? Is it a A ticket assumption, what's changing there?
It's really our assumptions on traffic and ticket growth. Again, if all of our growth is From transactions because of the activity excuse me, from ticket, because of the activity nature of our model, we have more expense leverage, but we build a model that's fifty-fifty. And as a result, I 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 1520 There are a number of different ways to cut it. And then there will be quarterly year over year distortions, right?
And we've talked about in the past for our casualty reserves like workers' comp and general liability. We have a close to $1,000,000,000 liability on our balance sheet. And as we continue to make our stores and our distribution centers a safer place to shop up in work. Well, that's coming down. And we basically accrue every month for that expense, but then we do 2, 6 month true ups relative to what the actuarials are telling us.
And sometimes we see big reductions, and we continue to focus on getting More and more reductions as we're running the SAFR business. So 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.
It's Peter Keith with Piper Jaffray. I want to ask a 2 part question on inventory turns. So you'd outlined a couple of impressive initiatives that you Rolling out this coming year, just checking my notes, you talked about the customer order management, Freight flow improvement and then 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 And then the second piece of that question is, when you look at the guidance on your inventory turns, are you calling for that to accelerate over the next 2 years Relative to the past 2 years, if not, why not given all the initiatives?
I think Whenever we talk about inventory turns, the most important thing to talk about upfront is our in stock position. The number one goal of our supply chain is be in And 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 often 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. Initiatives have totaled up to more than the inventory that you have, because they just don't work that way. So we've got a collection of I'd expect it to be pretty solid progress towards that 5 turns over the next few years, but the most important thing in our inventory
I might just jump on to that for a moment. I think localized assortment could actually be one of the biggest drivers of inventory turnover And let me tell you why. 15% of our store base has a sales volume that's 52% of our company average, and 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 and oh, by the way, that inventory that has to be marked down. So as Craig and the merchants with the help of the supply chain and the operators really work on localization, I think that's
Joe Feldman from Telsey Advisory Group. I wanted to ask something that didn't come Today, the Affordable Care Act and maybe how you're thinking about it from both from your employee perspective and how you're going to handle it, and presumably it's in the numbers, But also what it might impact it may have on the consumer and how they'll spend, especially that do it yourself consumer?
It is in our numbers, and it's very important to us. We employ 325,000 people, well over 100,000 full time associates. And it's our objective to provide them great health care. We are In terms of the impact on the consumer, I'd say we're not expecting any
And 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 the pro 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?
So I'll chime in and if Marvin wants to provide any color. But so we've seen A pretty good adoption from the Pro on our website properties, but also with our recently released Now as you'd expect, it is a lot of checking inventory, putting in buy online, pickup in store orders, and they view it as a great A time saver for them, and we expect pros generally as a generalization have been some of the not early adopters of the technology, We see that ramping up very, very quickly and we want to be poised to make sure we're there to service them when they're ready. But today, huge, huge usage of inventory checks, price checks, 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 Why is that important?
You may live in one part of the city and frequent that store from a consumer perspective, but 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 Look up in multiple stores and to find the product quickly. And 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 e receipts too. That's a great feature that they like. It is
a great one. Thanks, Matt. I mean, it's not uncommon to have a customer that spends a significant amount with us that manage their Our purchase portfolio in a folder in the 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, but 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 E receipts, as simple as e receipts 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 and it's a game changer in helping them from a tax standpoint doing their books, but also to make sure they manage their businesses and have ease with no receipt returns.
Well, thank That pretty much concludes our question and answer period. And 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 Laurie and the Corporate Events team Mike, Fred and the Dillon team and Barbara Jeff and all of our Boston based associates. This concludes our presentation.