Good day, everyone, and welcome to today's Home Depot Third Quarter 2013 Earnings Conference Call. Today's conference is being recorded. Beginning today's discussion, Ms. Diane Dayhoff, Vice President, Investor Relations. Please go ahead.
Thank you, and good morning to everyone. Joining us on our call today are Frank Blake, Chairman and CEO of The Home Depot Craig Meneer, Executive Vice President, Merchandising and Carol Tamay, Chief Financial Officer and Executive Vice President, Corporate Services. Following our prepared remarks, the call will be open for analyst questions. Questions will be limited to analysts and investors. Earnings Call.
Relations department at 770-384-2387. Before I turn the call over to Frank, let me remind you that today's press release and the presentations made by our executives include forward looking statements as defined in the Private Securities Litigation Reform Act of 19.95. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. Call. These risks and uncertainties include, but are not limited to, those factors identified in the release and in our filings with the Securities and Exchange Commission.
Today's presentation also includes certain non GAAP measurements. Reconciliation of these measurements is included in the release and is provided on our website. Now let me turn the call over to Frank Blake.
Thank you, Diane and good morning everyone. Sales for the Q3 were $19,500,000,000 up 7 point 4% from last year. Comp sales were positive 7.4% and our diluted earnings per share were $0.95 Our U. S. Stores had a positive comp of 8.2%.
From a geographic perspective, sales were strong across the U. S. All of our U. S. Regions posted positive comps in the quarter as did 39 of our top 40 markets.
The only exception was New Orleans, which anniversary the impact of Hurricane Isaac from last year. Our Mid South, Southeast and Pacific North regions had our strongest comp performance with double digit gains. During the quarter, we saw strong growth in both transactions and ticket. We have now had 10 consecutive quarters of transaction and ticket Growth, which we view as an encouraging sign of the balance in the growth of our business. We are also able to achieve operational improvement across key elements of our business with improvement in inventory turns, shrink performance and continued expense leverage.
On merchandising, as Craig will detail, Call. The core categories of the store were solid and we saw strength in larger ticket categories such as appliances and countertops. Project based categories such as tile and vanities performed well and our services business grew double digits. The recovery of our Pro business continues. In In the Q3, our Pro business grew at a slightly faster pace than our consumer business.
In addition to sales from our pro customers. We also track whether we're drawing an increased number of pros. We household our customer data looking at unique customers and account numbers, and we've seen a steady year over year increase in the Pro segment. During the quarter, we launched our first version of a mobile app for our Pro customers. The app enables Pros to see multiple stores' inventory at one time, provides them direct access to our Pro desks, tracks receipts and provides other functionality that can help Pros better manage their businesses.
We will continue to upgrade and improve the app and are already ahead of our plan on downloads. We also continue to enhance our website and consumer mobile presence. During the quarter, we added enhanced communication for order delivery, refreshed category pages, simplified the checkout process and invested across interconnected retail to improve the customer experience. Both traffic to the site and our conversion rate grew double digits in the quarter. Sales from our online channels, including those picked up in our stores, were up over 50% and are now approximately 3% of our total sales.
Marvin and his team rolled out new first training focused specifically on the interconnected experience in our stores. We know that our customers are expecting a simple and easy experience shopping online and in our stores and in the intersection between the two. That has required new training for our associates as well as technological improvements. Call. For example, during the quarter, we enabled our first phones to be able to process buy online and pick up in Store or BOPUS and Buy Online Ship to Store or BOSS orders.
Previously, An associate would have to go to a terminal for this activity, adding time to the customers' visits and complexity to our session. Now with the first phone, our associates can close the transaction immediately from wherever they are in the store. The training and additional technology have led to a significant improvement in our interconnected customer service. We separately track customer satisfaction scores on BOPUS and BOSS orders. Call.
Those scores have shown a marked improvement over the quarter and we will continue to refine and improve this process. On the international front, our Mexican business positively comped for the quarter. That makes 40 quarters in a row or 10 years of quarter over quarter positive comp growth for our Mexican business, a great achievement. Our Canadian business had positive comps for the 8th quarter in a row. As Carol will discuss in more detail, we are updating our sales and earnings guidance for the year based on our 3rd quarter performance versus our plan and a somewhat more favorable outlook for the remainder of the year.
We still face several headwinds in the 4th quarter, particularly the storm related sales from last year. But the housing market continues to be a positive. Private fixed residential investment or quarter. PFRI as a percent of GDP improved again this past quarter to 3.2%, but it remains well below the 60 year average of approximately 4.6%. Let me close by thanking our associates for their hard work and dedication throughout the quarter and for their ongoing efforts to assist those in need as the results of the tornado that hit the Midwest this past weekend.
Based on this quarter's results, Almost 100 percent of our stores would qualify for success sharing, our profit sharing program for our hourly associates. We're proud of that result and plan on carrying that forward into the Q4. With that, let me turn the call over to Craig.
Thanks, Frank and good morning everyone. We're pleased with our performance in the 3rd quarter as sales exceeded our expectations. Strength in the core of the store, The continued resurgence of our pro customers and mild temperatures helped us overcome difficult comparisons cycling last year's storm related sales. All merchandising departments posted positive comps. Kitchens, lighting, decor, lumber, electrical, Plumbing, outdoor garden, building materials, hardware and tools performed positively, but were below the company average.
In the core of the store, maintenance and repair categories saw continued positive comp performance in products like ladders, call. There was also strength in decor with comps above the company average in categories such as lighting, countertops, floor and wall tile, window coverings, faucets, vanities, fixtures and special order carpet.
At the end of the
Q3, we had approximately 400 stores with enhanced appliance showroom, a reset that we began last year. Using localization tools in these stores that have various footprints, We optimized the space between our kitchen and appliance showrooms and showcased our expanded assortment. This expanded assortment is also available online. And as a result, we experienced double digit growth for appliances both in store and online in the 3rd quarter. Earnings.
As Frank mentioned, pro customer sales continue to gain strength. And while pros shop across the store, We saw double digit comp growth in categories such as gypsum, concrete, pressure treated lumber and moldings. Mild weather throughout much of the quarter and across the country continued to drive sales in our exterior project categories. For example, sales in exterior stains and water sealers, pressure washers and exterior paint, all posted comps above the company average. Call.
Our Labor Day and fall cleanup events provided great values and were well received by our customers, resulting in solid comps in grills, storage in soils and mulches. Total transactions grew by 4%, while average ticket increased 3.2% for the quarter. Our average ticket increase was positively impacted somewhat by commodity price inflation from products such as lumber and copper. The total impact to call. Growth from commodity inflation was approximately 45 basis points.
Transactions for tickets under $50 representing approximately 20 percent of our U. S. Sales were up 3.1% for the 3rd quarter. Transactions per tickets over $900 also representing approximately 20% of our U. S.
Sales were up 10.3% in the 3rd quarter. The drivers behind the increase in big ticket purchases were continued strength in our pro business, appliances, HVAC, countertops and in stock kitchens. Now let me turn our attention to the Q4. Our strategy of partnering with our suppliers for exclusive launches of new and innovative products continues to gain traction. During the Q4, we're excited about the launch of the Nest Protect freeze run low.
Instead of just chirping at you, it speaks with a human voice and gives a friendly heads up before burning toast can turn into emergency. We're also introducing new technology in door locks with the Kivo Bluetooth deadbolt from Kwikset. With Kivo, your smart You can share keys with visitors, monitor locked activity and delete or disable access, Cree TrueWhite bulb. The TrueWhite LED bulb gives off some of the best natural color when compared to other LED bulbs on the market and is a great complement to product launches that we have celebrated this year. We have an outstanding offering of products in our gift centers for the holiday season.
Case at a price below the NiCAT alternatives in the market today. For our pro customers, we have exclusive values from Makita, Milwaukee and Rigid. And we're also introducing the Husky Total Socket. The Husky Total Socket is an adjustable wrench, one tool that replaces up to 44 sockets. It also features a lower profile than standard socket wrenches allowing you to get into tight spaces.
And Call. We have our best lineup yet in holiday decor. We continue to bring innovation and the latest offerings to our customers and we are becoming a leading destination for the category both in store and through our extended assortment online. We're committed to simplifying holiday decor for our customers. Earnings.
About half of our pre lit artificial tree assortment is designed with a quick set electrode connections. Just Connect the poles to the base and your tree will illuminate hassle free. Making it easy for our customers to enjoy the holidays and providing great values will allow us to win this holiday season. Finally, I'd be remiss if I didn't mention the outstanding Black Friday special buys that we have planned this year with extreme values for our traditional DIYers and professional customers including some amazing offers on Sciences. Going to our stores or online, and I think that you will agree, this is one of our most exciting lineups yet.
And with that, I'd like to turn the call over to Carol.
Thank you, Craig, and hello, everyone. In the 3rd quarter, sales were $19,500,000,000 a 7.4% increase from last year. Comps or same store sales were positive 7.4% for the quarter with positive comps of 8.7 percent in August, 8.2% in September and 5.6% in October. 9.4% in September and 6.2% in October. Our total company gross margin was 34.9 percent for the quarter, an increase of 35 basis points from last year, of which 32 basis points came from our U.
S. Business. Our gross margin expansion in the U. S. Is explained by the following factors.
First, we experienced 22 basis points of gross margin expansion in our supply chain due primarily to higher productivity. 2nd, We experienced approximately 17 basis points of gross margin expansion due to the impact of gross margin accretive businesses that were acquired in 2012. 3rd, our shrink reduction efforts continued to gain traction, and we realized 2 basis points of margin expansion due to lower shrink. Finally, we experienced 9 basis points of gross margin contraction due to a change in the mix of products sold, the majority of which was due to a higher penetration of appliance sales than 1 year ago. Call.
Our total company gross margin performance also reflects $10,000,000 of inventory liquidation costs associated with our China store closings in 20 12 that did not repeat this year. While we continue to project modest gross margin expansion for the year, As we look to the Q4 of fiscal 2013, we expect our gross margin to decline roughly 15 basis points from what we reported in the Q4 of fiscal 2012 due primarily to certain gross margin benefits recognized last year that we do not expect to repeat. In the Q3, operating expense as a percent of sales decreased by 187 basis points to 23.1%. Our expense leverage reflects our strong sales performance and some favorable year over year comparisons. As you will recall, in the Q3 of 2012, we closed our stores in China and incurred $155,000,000 of operating closing costs that did not repeat this year.
Adjusting for the China store closing, we leveraged operating expenses by 101 basis points, better than our plan. For the year, we expect our expenses to grow at approximately 34% of our sales growth on a 52 week basis. Interest and other expense for the Q3 was $188,000,000 a 25.3% increase from last year, reflecting new interest expense associated with $2,000,000,000 of incremental debt issued in April and an additional $3,250,000,000 of incremental debt issued in September of this year. Proceeds from the September debt issuance will be used to repay $1,250,000,000 of outstanding debt that is coming due in December, with the remainder to be used for share repurchases. I'd also like to note that during the quarter, we received an upgrade from Standard and Poor's, taking our long term debt rating to single A.
Our income tax provision rate was 35.8% in the 3rd quarter. And for the year, we expect our tax provision to be approximately 36.5%. Diluted earnings per share for the Q3 were $0.95 an increase of 50.8% from last year. Conference. Adjusting for the cost of the China store closings, our diluted earnings per share grew 28.4% from the same period in the prior year.
Now moving to our operational metrics. During the Q3, we opened 2 new stores in Mexico for an ending total company store count of 2,206 days. At the end of the Q3, selling square foot was 236,000,000 and total sales per square foot were $3.29 up 7.2% from last year. At the end of the quarter, inventory was roughly $11,300,000,000 and inventory turns were 4.7 times, up from 4.6x last year. We ended the quarter with $43,800,000,000 in assets, including $4,900,000,000 in cash.
Moving to our share repurchase program. In the 3rd quarter, We received 2,400,000 shares related to the true up of an accelerated share repurchase or ASR program we initiated in the 2nd quarter. Additionally, in the 3rd quarter, we repurchased $2,100,000,000 or 24,500,000 of our outstanding shares. This included $600,000,000 or 8 point program. For the shares repurchased under the ASR program, this is an initial calculation.
The final number of shares repurchased will be determined upon completion of the ASR program in the 4th quarter. Further, we plan to repurchase call. An additional $2,100,000,000 of outstanding shares in the 4th quarter, bringing our total share repurchases to $8,500,000,000 for the year. 7%, 360 basis points higher than the Q3 of fiscal 2012. As we look to the Q4, please remember that the Q4 of 2012 had an extra week, contributing $1,200,000,000 of sales and $0.07 of earnings per share that will not repeat in the Q4 of fiscal 2013.
Additionally, we are up against some very tough comparisons as we had approximately $255,000,000 of storm related sales in the Q4 of 2012 that we don't expect to repeat. But we had a great Q3, exceeded our plan in all departments and our business momentum continues. Housing is a bright spot in our economy. As such, we are forecasting our 4th quarter sales and earnings to be stronger than our plan. So today, we are lifting our 2013 sales and earnings per share growth guidance, reflecting our year to date performance and our forecast for the Q4.
We now expect fiscal 2013 sales to increase by approximately 5.6 percent with positive comps on a 52 week like for like basis of approximately 7%. Earnings Conference. For earnings per share, remember that we guide off of GAAP. We now project fiscal 20 13 diluted earnings per share to increase approximately 24 percent to $3.72 This earnings per share guidance includes the $6,400,000,000 of share completed in the 1st 3 quarters of 2013 and our intent to repurchase an additional $2,100,000,000 in shares during the 4th quarter. Call.
We look forward to talking with you at our Investor Conference on December 11 in Boston, where we will update you on our key strategic initiatives and progress towards reaching our longer term financial goals. We thank you for your participation in today's call. And Jake, we are now ready for questions.
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to ask one question and one follow-up question to allow maximum participation in today's Q and A session. We'll pause for just a moment. And we'll hear first from Gary Balter with Credit Suisse.
Thank you. First of all, congratulations on just another solid, solid good quarter. Frank and call. A question is, in a couple of years ago when you had your last analyst meeting, you highlighted that you're more focused on GDP as your driver as opposed to PFRI or previous housing metrics that you used. Yet your numbers have clearly been better than GDP.
And Carol, as you just finished, you talked about housing being one of the drivers. As you look at your results and you look at the opportunities in Are you rethinking the metrics that you use from a macro perspective?
Well, Gary, thanks for your question and for your comments. Thank you very much. We still think GDP is the basis for sales growth. But as you know, we have an imperfect but directionally correct model that gives us some insight as to how housing is driving our sales. Now it's hard to nail it on a quarter, but for the year, we feel pretty good about what our model is telling So as you know, we've just increased our comps for 2013 to 7%.
And the way we get there is this way. First, we start with the GDP estimate of around 2%. Then we add to that what we think housing is contributing to ourselves. We look at housing turnover, home price appreciation and new household formation. And when we look at those drivers, we think housing is contributing about 2 50 basis points of our growth.
To that, we add the benefits that we've enjoyed this year from commodity price inflation That's maybe around 80 basis points for the year. The benefits that we're enjoying from our new expanded appliance assortment, that's another 80 basis points. And then there's about 90 basis points left. That's just coming from other growth, be it new innovation that we're bringing into the store, great execution by our store associates, But that's how we get to the 7%.
Thank you. That's very helpful.
And now we'll take a question from Christopher Horvers with JPMorgan.
Following up on the housing topic. There's been some of the metrics recently have slowed down or at least perhaps plateauing and you've had a lot of rate volatility. So Curious what your thoughts are around that if you're seeing anything in your business and playing devil's advocate Is what you're seeing today simply a lag effect that would suggest that later on as we start to comp to comp And see the lag from slower housing metrics that things are going to be slower in the future.
So Chris one of the things that I'd say and Carol might want to I'll elaborate on this is for us new home construction is call. Less important as a driver of our business than what is happening with existing homes, both turnover and most importantly, price depreciation. We've long thought that one of the key determinants of our business is do people feel good about investing in their house, Because they're going to see pricing appreciation in their home and that continues to move forward at a pretty good pace. But Carol, you may want to call. Sure.
And in more detail.
So we've rest ourselves both against 10 year treasuries and 30 year mortgages, See if there's any sort of correlation, and we can't see it. But all that being said, we do pay particular attention, as Frank mentioned, to both housing turnover and home prices. And if we were to see housing turnover decline because of a rising rate environment, we would then look to see what's happening to home prices. And if home prices were to decline, then we might have a different point of view on the housing recovery, but we're not seeing that. And to us for us anyway, we think home price appreciation has been the biggest contributor of our sales growth this year.
And if you look at the Case Shuler data, it shows that home prices are up 10% year on year. And if you look at the composite index, maybe up closer to 13%, but still 25% lower than their peak. So we think that there's a lot of room for recovery and it's not going to step out in the short term.
And how much of that
do you think is that perhaps Is
the underinvestment that the home's a durable product filled with durable products and there's this recapture effect as people had underspent for a number of years.
That's a tough one to answer Chris. I would say many years ago Somebody's comment and economist comment to us was, look for when consumers start to think of a granite countertop as an expense rather than an investment. And our hypothesis is there are a lot of things that people want to do with their home whether it's just Improving the livability or actually fixing things up that is determined by that investment versus expense factor.
And CoreLogic has done some interesting work that shows people who have positive equity in their home and that comes as a result of rising home prices. People who have positive equity in their home spend 3 times as much as those who have negative equity in their home.
Thanks very much.
Brian Nagel, Oppenheimer will have the next question.
Hi, good morning.
Good morning. Question on
the pro customer. The comments you made today in your prepared remarks suggest that the pro business for you continues to improve. And if I look back over the Prior few quarters, it seems like we're seeing a strengthening trend there. The question I have is how should we think about the potential for pro going forward and with the backdrop and improving Housing and Environment.
So Brian, I would say, first off, it has been really for the last several years one of our key indicators on recovery, because the pro customer was hit harder in for us during the housing crash and now is recovering. Going forward and you see it a bit this past quarter, We would expect Pro to be growing at or maybe slightly better than our than the rate of our consumer. Call. But really the catch up has happened and now they should both be growing probably at about the same rate. Call.
And it will probably bounce a bit back and forth depending on the quarter. 2nd quarter consumer grew slightly more than pro. 3rd quarter Pro grew slightly more than consumer, but the good news is both are experiencing growth.
Call. Got it. And then just a quick follow-up if I could for Carol. If you look at the expense leverage and more I guess more of a modeling question, if you look at the expense leverage here in the 3rd quarter versus what we saw in the Q2. It was much better.
In the Q2, you called out the step up in incentive compensation. I know there's a lot moving on, but was that basically the difference Q2 to Q3?
Well, there are a number of things that drove the differences between the quarters. In the Q2 of 2012, we had some good guys that didn't repeat, including a positive expense resulting from our casualty reserve analysis. As we look to the Q3 and the Q4 of 2013. We're going to have higher expenses related to compensation and we're really thrilled. And if I could just put our expenses into effective for you.
If you go back to the beginning of the year and the guidance that we gave, fast forward now to the end of Q3, we've increased Our sales growth guidance by $2,900,000,000 We've increased our expense guidance by $180,000,000 And of the $180,000,000 and this is all implied in the guidance that I've given. Of the $180,000,000 a third of that is variable compensation, success sharing and bonus.
Very helpful. Thanks.
Conference. Our next question will come from Dan Binder with Jefferies.
Hi, good morning. Congratulations on a good quarter. Thank you. My question was regarding the appliance resets. I was wondering if you can give us any more color around how the stores with the full reset are performance.
Performing in that category versus the stores that have not received the reset, specifically in the appliance business.
Dan, obviously, the customers responded well to the expanded brands that we have and where we're able to show that footprint. We're seeing very nice lift in those stores, but also remember that All those brands became available to all stores through homedepot.com. And as a result, we've seen nice lift really in all stores. First and seeing category growth in every subset of Atlanta's business. So we're very pleased with how that is going so far.
I guess I was wondering because I as you look at the 2 different sets, The reset obviously is pretty impressive. I'm just curious how many stores you ultimately put that in and why you wouldn't put it in certain Stores versus others because it seems like it's a material improvement over what you had.
I mean, we certainly intend to continue to look at the opportunity. We don't see this as a fit for all stores. But clearly, there's opportunity for us to continue to improve and additional stores. And we'll evaluate that as we continue to watch
the performance.
We'll talk more about this at our investor conference, because we're going to lay out our calls for 2014, and we'll talk to you about our capital and where it's going.
Okay, great. Thanks.
Now we'll take a question from Matthew Fassler, Goldman Sachs.
A couple of questions. First First of all, can you talk to us how to think about the cadence of the business given the trend you saw in October and the compares that you faced here in Q4. Maybe any initial comments on the tone of business in November as presumably you're facing kind of the teeth of the Sandy compares would be very helpful.
Well, sure. As you know, we did a lot better than we thought we would do in the Q3. And the cadence of the business is really collection of year over year comparisons. So we had strong comps in all three months, but obviously, October was our lowest comping month. If you If you think about that, that's when we were up against the Sandy sales from last year, and we had $122,000,000 of Sandy sales in October.
Also, if you think about one of our largest Gulf region, the Gulf region had a terrific month in October. It slowed down year on year because the prior year, they had double digit comps coming off of other storm sales. So we were pleased with the cadence of the business. And now as we've entered into the Q4, and obviously, it's very early in the Q4, our toughest compare ahead. Our hardest toughest month is the month of December.
But Matt, we lifted guidance today because we think we're going to do better than we originally thought in the 4th quarter, And we wouldn't have done that today if we haven't started off ahead of our expectations.
Great. And then the second question, As we look at the expectation for EBIT for this year on a full year basis, you're sort of creeping up to that 12% number, probably a little faster than you thought you would when you first issued that guidance, I guess, about 1.5 years ago. How does that lead you to think about the long term target, which which probably becomes quite germane as you look towards next year where expectations probably are going to start to get to that number.
So Matt, the good news is we have our conference Coming up in just a few weeks. And so we'll be able to lay that out for you and everyone then.
Fair enough. Thank you, guys.
Conference. And now we'll take a question from Aram Robinson with Wolfe Research.
Thanks, everybody. Great work. Question on the balance of ticket and traffic. I think the last time we saw ticket and traffic so well balanced actually, I think if you go back to before the year 2000. I'm just wondering if you can talk about whether or not you find that as significant in what it says about the business and if you'd expect the shape of that to change as the Cycle Progressives.
Thank you.
Yes. The first comment Arun is as I said in my opening comments. We do find that as a see that as a real positive for the balance of the growth of our business. And Obviously, it's something we'd like to sustain.
Yes. It is definitely something we work on consistently to drive both traffic and ticket. And we do think it's important. Certainly, Call. It's a measure of how well the assortments are performing within the store.
Clearly, we've seen nice growth and big ticket categories for several quarters in a row now. And again, our pro contributes to that. Things like kitchens and HVAC, call that has been positive contributors. But likewise, we've been really focused on making sure that We capture the opportunity for the consumer with the smaller tickets as well. And some of the key driving factors behind The lower ticket categories are things like bulbs and power tool accessories and fasteners that are being driven with larger projects, more pro business as well as great innovation in products like spray paint and hand tools that have allowed us to drive the smaller ticket.
So it's something that we really focus on to try to bring a balanced approach to the business.
Thanks. And it's not easy to stay in stock on a lot of those smaller ticket items when you're comping as hard as you are. So you must be doing a great job on that supply chain.
The supply chain is definitely helping with awesome in stock position, while leveraging inventory investment.
Thanks guys.
We'll take the next question from Budd Bugatch with Raymond James.
Good morning and let me add my congratulations on a very solid Quarter. I guess my first question really has to do with the leverage factor, Carol. You've talked about 34% for the year. I wonder if you could Maybe give us some more color on the Q4? And how should we think about that for 2014 and beyond now?
Yes.
So as you look to the 4th quarter, our expense growth factor will be higher than it was in the Q3 for a couple of reasons. It will be higher because of incentive comp. We just raised our guidance, which means we're going to blow through the plan that we together, which is great news for our store associates and for everyone who's boneless or success sharing eligible. So that will drive year over year outperformance and higher expense growth, if you will. We also pushed some of our We've got a year over year comparison, pardon me, related to China.
Last year, we had a good guy in China. It was $20,000,000 good guide and that will not repeat. So as I look at our expense growth factor in the Q4, it will be more like 50% of our sales growth, earnings for the year, 34%. And as Frank pointed out, we've got an investor conference coming up on December 11, and we will give you longer term point review on expenses at that time.
I thought that would be the answer And just you talk about you did better than you expected. Can you give us how can you quantify how much better than expected you did in both sales and maybe earnings?
Well, sure. I mean, I'm happy to do it from an earnings perspective. Well, I'll give it to you for both. Why not? So we beat our sales plan by about $700,000,000 And we beat our earnings plan from an earnings per share perspective by about $0.10 a share.
Very impressive. Thank you very much. Look forward to seeing you in a couple of weeks. Call.
Thank you.
We'll take a question from Dennis McGill, Zelman and Associates. Go ahead please.
Good morning and thank you.
First question would just be
As it relates to mix within categories and thinking about consumers' willingness to trade up, can you maybe just elaborate on what you're seeing there and maybe any examples Whether you, I guess, are seeing mix benefits and BFR where that might be?
Yes. That's we are seeing customers willing to spend, particularly where you're bringing innovative product that helps In the market compared to incandescent or halogen for that matter or CFL bulbs, we're seeing terrific growth in that as customers understand the value proposition. Likewise, when you think about tools, lithium continues to grow. It carries a premium and price in the market, particularly in the Pro Tools, because the performance enhancements have been there. And we're on about our 4th generation of lithium battery technology over the past 5 years.
So we've Seeing customers step up there. And likewise, we've seen customers willing to step up and things that we tested for example a 100 gallon Japanese maple tree for $3,000 this spring. And we were actually quite surprised at how well that sold. So there are customers willing to step up. And likewise, at the same time, we need to be conscious that there are more runners in the market today, less space.
So we're also looking at the opening price point or the smaller items within our categories as Well. For example, we added in products in our cleaning when we took it out of club packs if you will and brought in singles and we've seen nice response with that as well.
This is Marvin. And also Double digit growth in the services installed business is a reflection of customers' willingness to trade up and take on bigger ticket purchases.
So I guess it sounds like innovation is a big part of it. If I said it in a different way, is the better and best portion of the price spectrum gaining share at the expense of good if you looked across the store?
No, I wouldn't necessarily say that. I think the opportunity that we've seen is Yes. We have customers willing to step up, but not necessarily seeing a decline in the opening price point.
Okay. And then second question, The 4th quarter comp which you highlighted seems to be a recurring theme that we've seen now for the last few years and you've continued to best that comp, I think, above expectations after the quarters wrapped up. Or I guess said another way, the 4th quarter Seems to becoming a bigger portion of the story as you get into more decor and holiday items. How should we think about that growing piece of the pie in relation to how you're approaching merchandising and the categories that are in the box.
Certainly, one of the things that we're trying to do is, In many ways, create our own seasons, if you will. And so we have seen tremendous growth over the past several years with our holiday decor program as a driver of both traffic to the stores, New customers coming into The Home Depot. So that has been nice. We have likewise focused on the opportunity that we have around the gift giving holiday season with Black Friday. We've put a bigger effort around that as well.
But even with those things said, Call. We have a lot of customers doing projects every single day in our stores and we're continuing to focus on the core of the store as well, call, which is a key factor. Things like paint remain one of the top categories. Customers need cleaning products. They need bulbs earnings and so on throughout the year.
And that's really been our focus is to drive productivity through our basis quarter over quarter.
Great. Best of luck guys.
Thanks.
We'll take a question from Keith Hughes with SunTrust.
Thank you. My question on gross margin. You had discussed in the prepared text about a 15 basis point sequential decline. Can you give any more detail on what's happening as we move from the 3rd or the 4th on that metric.
Happy to. In the Q4 of 2012, we had 15 basis points of gross margin expansion coming from improved shrink. As you know, Keith, we've been really working on through a cross functional effort to manage our shrink down. We've done a great job, but we don't expect that 15 basis points to repeat in the 4th quarter. The other thing that's happening from a year over year perspective is if you look at the nature of the products sold in January.
The margin coming off of that tends to be higher than the nature of the products sold both in December November. In the Q4 of last year, we had an extra week. That extra week was in the month of January that had a higher margin rate. So just the year over year comparisons is causing that 15 basis points decline.
Okay. The 15 basis points is year over year, correct?
It is.
Okay, year over year. And then second question on, I believe as Marvin mentioned earlier about the Do It, the installed product being strong in the quarter. Is Is there any specific product that was stronger than other in the last quarter or 2?
I mean across the board, I mean, when You think about install business as well as you think about carpet, you think about kitchens, countertops, we had strength really in the flooring side of the business. We also had strength across the board from a kitchen standpoint. We're pleased with that business. We worked really hard to Simplify the entire offering and the process, as you can imagine, big ticket and also big complexity. So we're working really hard on the customer experience, and we're going to talk The Investor Conference about our vision of how you take our flooring model and how we really transition into 3 easy steps for the customer.
And we're going to try transition more of our installed businesses to a similar format. But overall, we're pleased with that entire business platform. Okay. Thank you.
We'll take the next question from Kate McShane, Citi Research.
Thank you. Good morning. I wondered if we could hear a little bit more about the ongoing improvements in supply chain. It seemed like You benefited more this quarter with the 22 basis points of gross margin expansion from the supply chain. Can you walk us through if there were any meaningful changes during the quarter?
Well, I can start and then maybe Mark Holyfield will jump in. As I look at it from at least the lens of the CFO, we had higher units per hour. We had better outbound and inbound QB utilization, which drove productivity throughout the supply chain. But it didn't just stop us there. We also had about a basis points of benefit coming from lower fuel costs and then we had about 7 basis coming.
This is all within the 22 basis points, 7 basis points coming from lower costs within our international distribution channels. Mark, do you want to Do you have any more color?
Yes. Carol has run down the key points there in terms of the key contributors to productivity. I would just add call. That occurred across the board, all of our distribution platforms, our direct to store expenses for transportation and our international logistics were all leveraged during the quarter.
Okay. That's great. Thank you. And my second question is Kind of a longer term question. Carol, you've always given your opinion on what you thought could be the next leg for growth in the housing market aside from the turnover and higher prices and that was the easing of the availability of mortgages.
I just wondered You could maybe update us on what your opinion is on timing or anything you're hearing with regards to that?
Kate, that's still an opportunity, isn't it? If you think about it, the underwriting standards are very tight. There was a recent survey of banks. 79% of the respondents said that they have not loosened up on their underwriting standards. And you can appreciate that from some perspectives because they're all faced with higher capital requirements.
They're trying to make a buck in a low interest rate environment, so taking on more risk is difficult for these financial institutions. But probably we sure need some movement there because that I think would just be a big boost to the steepness of the covering. We also continue to believe there needs to be reform with the GFEs and there's a lot of dialogue there, but nothing really happening. But if we were to get some movement in this space, I think we'd earnings. But if we were to get some movement in this space, I think we'd see a sharper recovery than what we're experiencing.
Call. Thank you.
Michael Lasser with UBS will have the next question.
Good morning. Thanks a lot for taking my question. I'm curious about the week to week volatility within traffic that you're seeing in stores. How does it compare to what you saw a year or 2 ago and when the cycle just started to build? And then how does that compare to The depth of the declines.
Are you just seeing more consistent traffic build on a week to week basis at this point?
Call. Michael, you're getting us I don't think we have a good answer for you in terms of whether if If I understand your question is whether the delta on traffic week to week, whether that differential is narrower with Recovering Market or Steeper. And it's an interesting question and don't have an answer for you.
And Michael, we'll get back to you.
Yeah.
Call. Is it more consistent now?
So you Yes. I understand the question. And to be honest, we just haven't analyzed that. And Clear question.
Yes. We'll have to figure out how to normalize for weather because it certainly impacts traffic. But we'll take a look at that. It's a good question.
Yes. Okay. The other question I had Call. If you look within the basket of the Pro customer, is there anything to suggest that you are starting to take share within categories where you have historically call. Under index relative to that customer base, I think probably the prototypical product is Paint, but presumably there's others as well.
I mean, I would say that when we look at Our unit productivity across many pro dominated categories, we're very, very pleased Whether that be things like dimensional lumber, plywood, concrete, we're extremely pleased with the Extremely pleased with the performance and actually the growth in terms of quarter over quarter growth as well.
And
It's a little bit hard to tell you around share with the pro, because it's a very fragmented market against A lot of competitors lumber building material, supply houses, electrical distributors. And that data is a little bit harder to get at. But given the unit productivity we have, we feel pretty solid that we think we are taking some share.
Mike, this is Mark. The only thing I'll add to that, the expanded appliance offering gave us the ability with property investors to have a better more economical offering for appliances. And so call. We've seen strength in that category. Craig noted that appliances was really strong across the board.
The Pro segment contributed to that. Other than that, I think Craig answered the question pretty well.
Okay. That's very helpful. Thank you very much.
Thanks. We'll now take the next question from Greg Melich with ISI Group.
Hi, thanks. I have a couple of questions. One is on gross margin, just to understand the 4th quarter a bit more. Historically, your 4th quarter gross margin usually gets better sequentially, and I would have thought supply chain and other things wouldn't go away. So I understand last year's comparison, but if you just look at sequentially, why would gross margins be down a little bit if I take your guidance right?
Sequentially they won't be. I'm just talking year over year.
Okay. You're focusing got it. And then on online, call. So if I got the number right, it was up 50%? Was that in the prepared comments?
Yes.
Was there acquisitions or anything else driving that? Or what changed? And And how does that impact traffic and ticket and all the other metrics we talk about? Because that's a point of revenue. Yes.
We are very pleased with our online performance. We've been talking to you a lot about all the investments that we're making from an interconnected experience, and it's starting to play out in terms of sales. So as Frank pointed out, about 3% of our total sales are now online, up 50% year on year. I can give you a little color as it relates to traffic. Traffic for our company was up $13,000,000 year on year, $1,000,000 of that was driven by our online property.
But remember, Greg, we look at this totally interconnected. It's how do we increase Drawing close in our stores, how do we do how our stores do the same thing for our online presence and it seems to be getting good traction.
And there was no acquisition?
No, there was no acquisition.
Nothing else, Turn that around. And then lastly, Carol, could you update us on credit? You talked about how generally speaking banks have not shifted to their underwriting standards. How have you guys been able to maybe help your consumer out to offset that?
Yes. Well, Our private label grew from a penetration perspective. It grew 68 basis points in the quarter. We're now standing at 23.4%. If you look at the consumer approval rates, they were up 150 basis points year on year, so now 69%.
The through the door FICO score is 715, so that's still pretty doggone high. But like I'm glad to see that the approval rates are up. Those lines for consumers are about $5,700 and they're about 26% utilized on the pro, where credit, I think, is actually more important. We also saw approval rates at 69%, a much higher rate. The average line is around $8,400 And what we're doing for the pro is a couple of things.
It's very targeted. It's very focused. But for our large spend pros, we will work with them to extended line. So we work with the underwriter of the program and we will go back and extend the lines. We think that makes good sense.
We also have a card called a card, which is a payment term card usually 30 days. For certain Select Pro customers, we will extend to give credit to this very important customer.
That's great. Thanks.
Yes, you're welcome.
Next question will come from Scot Ciccarelli with RBC Capital Markets.
Hey, guys. Scot Ciccarelli.
The slowdown that we call in the month of October. Was that more on the transaction side or ticket side? Because obviously, if there's more ticket, that might just be a mix issue. And I know you guys have touched a little bit upon kind of big ticket sales during this call. But is there any reason to believe that the momentum we've seen in that kind of category or bucket should slow anytime soon.
Thanks.
So on the Sales Slow Down. Basically, you're up against $122,000,000 of storm from a year ago. And so that's spread across things like generators and cleaning and those type of categories where batteries, flashlights. So that's really the pressure that you saw in October and the year over year.
So more ticket than transactions, because those generators are big ticket items.
Big ticket, right. Call. And then as it relates to big ticket in general, as I mentioned earlier, we've had several quarters in a row now of Strong growth in big ticket and don't really see why that would change going forward. We have Continued opportunity to grow big ticket categories, things like appliances, things like kitchens, chlorine, All those have been key focuses for us to continue to enhance our offerings, our assortments. And we saw strong Strong growth in those categories again.
And Craig, if I may, we saw an increase in items per basket in the 3rd quarter. That's the 2nd quarter in a row where we've seen that and that's a contributor isn't it to the big ticket growth.
It is. And as Marvin mentioned earlier likewise Our install businesses have seen nice growth as well and we see that continuing going forward.
Excellent. Thanks a lot guys.
We have time for one more question.
And that question will come from Eric Bouchard with Cleveland Research Company.
Good morning. The improved sales in the second half, both 3Q and 4Q relative to your expectation, Any specific categories or areas of the store that you would look at and say that we thought this wouldn't be as good as it's turning out to be?
Yes. So we did about 400 basis points call. Better from a growth rate perspective in the Q3 than our expectations. And we had thought that we would see a drag from appliances. We thought that we would see commodity deflation, and we didn't expect to have good weather in the Q3.
And when you add that all up, that contributed about 2.30 basis points of that outperformance because we didn't get commodity inflation, appliances grew and weather was a help. And then the remaining 170 basis points was across the store. Listen, as Craig pointed out, every department was positive. And as we look to the Q4, we're expecting more of the same.
Call. Within that, I guess, the appliance drag, is this the category you expected to be slower or the payback from your expansion initiatives and market share efforts you expected to flow. What if we drilled into that specifically?
Yes. If you remember right, Eric, we had begun to roll out expanded showrooms at the end of The Q3 last year actually beginning of Q3 into Q4. And we thought that we would see tougher comps as we came over those rollouts from a year ago, but that wasn't the case.
And then secondly on The impact of Sandy in October from a basis point perspective, what was roughly the impact? It looks like it's 150 basis points or 200 basis points was the back of that.
And I'll give you the dollars and you can calculate it. Last year, we had $122,000,000 of Sandy sales.
Call. Well, thank you all for joining us today, and we look forward to meeting with you at our conference in Boston on December 11.
Ladies and gentlemen, will conclude your conference for today. We do thank you for your participation.