Good day, everyone, and welcome to today's Home Depot Second Quarter 20 13 Earnings Conference Call. Today's conference is being recorded. At the tone phone. Please note that any prompts entered before this time may not have registered in our system. Beginning today's discussion is Ms.
Diane Dayhoff, Vice President of Investor Relations. Please go ahead, ma'am.
Thank you, and good morning to everyone. Joining us on our call today are Frank Blake, Chairman and CEO of The Home Depot Craig Meniere, Executive Vice President, Merchandising and Carol Tomei, Chief Financial Officer and Executive Vice President, Corporate Services. Following our prepared remarks, the call will be open for analyst questions. Questions will be limited to analysts and investors. During the call, please call Investor Relations department at 770-384-2387.
Before I turn the call over to Frank, let me remind you that today's press release and the presentations made by our executives include forward looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ Factors identified in the release and in our filings with the Securities and Exchange Commission. Today's presentations may also include certain non GAAP measurements. Reconciliation of these measurements is provided on our website. Now let me turn the call over to Frank Blake.
Thank you, Diane, and good morning, everyone. Sales for the Q2 were $22,500,000,000 up 9.5% from last year. Comp sales were positive 10 point 7% and our diluted earnings per share were $1.24 Our U. S. Stores had a positive comp of 11.4%.
We expected the 2nd quarter to be our strongest comping quarter of the year. The results exceeded our We grew sales by almost $2,000,000,000 in the quarter, posted the 1st double digit positive comp in our business since 1999 and had the Highest quarterly transaction count in the company's history. From a geographic perspective, sales were strong across the U. S. 2 thirds of our regions posted double digit comps.
All of our top 40 markets posted positive and 98% of all of our markets were positive. So the strength in the business was broad based geographically. This was also true across our merchandising categories. Every one of our merchandising departments exceeded plan for the quarter. As Craig will detail, we saw particular strength in our spring seasonal categories.
As you know, we had a weaker than expected selling season for outdoor categories in the Q1 because of the late spring, But that was counterbalanced by strength in this quarter as the weather turned more favorable. The core categories in our Door remains strong and we were pleased with the growth in our appliance business where we've added key brands and with the growth in decor categories like soft flooring, vanities and special order cabinets. With respect to our customer base, we continued to see strength in our Pro business. In the Q1, our pro customer growth outpaced our consumer growth. For the Q2, the growth rates were comparable.
This reflects less a slowdown in Pro than a pickup in our consumer sales. And as in the Q1, our larger Pros were our fastest growing customer group, but we also saw continued improvement in our smaller lower spending pros. On the international front, our Mexican business for the 7th quarter in a row. This quarter tested our ability to react and be flexible. Significant Outperformance to plan obviously presents some interesting operational and merchandising challenges.
On the operational conference. On the front, Marvin and his team were able to adjust store staffing and handle unexpected volume and transaction growth, while maintaining customer satisfaction levels. Earlier in the year, Marvin introduced Project Simple into store operations, dramatically reducing the administrative tasking within the stores. This played an important role in freeing up our store leadership to respond to changed circumstances. Many of the improvements that Craig, our merchants, Mark Holyfield and the supply chain team have made in our forecasting and replenishment systems have helped the business react to and recover from sales spikes while keeping inventory under control.
On interconnected retail, we are at the point where almost one store. This is important to us because we believe our more than 2,000 store locations throughout North America are a valuable convenience for customers and can and should be a competitive advantage for us. And of course, customers have the opportunity to buy additional items when they come into our store to return or pick up a product, As today, 1 out of 5 customers do. We're also pleased with the improvements we're making to the customer experience in our services business as we develop new project and communication tools online. In the Q2, we continued the rollout of a functionality we call My install that will provide customers specific installation information, dynamic tracking to keep them informed on the status of the installation, email notifications for appointments and a point of contact to process order changes and the like.
This provides both a better customer experience and a better foundation for us to manage a business that is growing at a double digit pace. As we look towards the back half call or PFRI as a percent of GDP improved to 3.1% in the 2nd quarter, but it's worth remembering that prior to the housing crash, this would have been below the previous 60 year low for PFRI. As Carol will detail, we are raising our sales and earnings guidance for the year. The housing recovery should be a positive for our market, but we have difficult sales comparisons in the back half of the year as we anniversary hurricane events from 2012 2011 and very strong holiday seasons in both of those years. Let me close by thanking our associates for their hard work and dedication.
It is easy to talk about a flexible business model, but the execution of that requires people willing to adjust to change circumstances and deal with business challenges while putting the customer first. Our associates did that. Based on this half's results, 100% of our U. S. Stores qualified for success sharing, our profit sharing program for our hourly associates and we will have our highest ever success sharing payout.
We're very proud of that result. And with that, let me turn the call over to Craig.
Thanks, Frank, and good morning, everyone. We're pleased with our performance in the second quarter, posting positive comps in all departments. There were 4 key factors that drove our performance: strong summer events, A recovery in seasonal business, commodity inflation and strength across the remainder of the store. The departments that had double digit positive comps for kitchens, indoor garden, lumber, outdoor garden, lighting, tools, electrical and flooring. Bath, plumbing, decor, building materials, paint, hardware and millwork performed positively, but were below the company average.
Our seasonal business exceeded our plan as spring finally kicked into gear in the Q2. We were able to recover all the lost sales we projected from exterior project categories in the Q1 and then some. In indoor and outdoor garden, Our 2nd quarter success resulted in positive comps in both departments for the first half of the year. The core of the store delivered solid sales growth throughout the Q2. In maintenance and repair categories, we saw continued comp performance in light bulbs, wiring devices, cleaning, plumbing repair, fasteners, builders hardware, caulk and adhesives.
We also saw traction in comps above the company average in special order carpet, special order cabinets, floor tile and lighting as well as strong comps in faucets. Our store associates did a great job executing our summer events and creating excitement. Our Memorial Day, Father's Day In 4th July, special buys and great values were well received by our customers and drove double digit comps in categories like appliances and riding mowers. Our results were achieved through a coordinated effort between our supply chain, our merchants, our stores and our vendors. The investments we've made over the past several years gave us the flexibility and capability to respond quickly and
meet spikes in
demand. Total comp transactions rebounded in the first quarter from the first quarter and grew by 5.7% for the 2nd quarter, driven by traffic related to our seasonal business. Transactions for tickets under $50 representing approximately 20% of U. S. Sales were up 3.8% for the 2nd quarter, principally due to our Garden business.
Transactions for tickets over $900 also representing approximately 20% of our U. S. Sales were up 15.5% in the 2nd quarter, driven by the strength in appliances, riding mowers, flooring as well as continued improvement from our pro business. Average ticket increased 4.3 which contributed approximately 70 basis points to comp. As Frank mentioned, we had one of Best quarters in our recent history.
As we look forward to the back half of the year, we're projecting solid sales growth, but we do have several conference. 1st, we'll face tough sales comparisons resulting from impacts of consecutive years of autumn storms. 2nd, commodity inflation is on track to no longer be a tailwind as lumber and copper prices have begun to moderate. 3rd, we begin to lap excellent response to our rollout of our expanded appliance business. And as we get to the 4th quarter, the holiday shopping season will be a week shorter due to the date on which Thanksgiving falls this year.
Now let me talk specifically about the Q3. We continue to focus on innovation as a key part of our leadership strategy. In stores now, Behr percent acrylic form a available in 54 colors conceals splinters and cracks and creates a slip resistant finish. We continue to be innovative in lighting technology. As an example, we're introducing an LED 90 watt equivalent floodlight from Cree, Now giving us a full range of assortment for the top 3 most popular bulbs at market leading values.
For our pro customers, we are introducing DAP Smart Bond Adhesive Foam Gel that is faster and easier to use call. Also new through homedepot.com for our pro customers, we're offering a line of fully welded steel cabinets from Husky, which feature a variety of door and interior configurations. This allows a customer to customize their cabinets exactly the way they want. For our Labor Day and fall cleanup events, we have an extensive lineup of great values and special buys. These events along with our superior
call. Thank you, Craig, and hello, everyone. In the 2nd quarter, sales were $22,500,000,000 On a like for like basis, comps or same store sales were positive 10 point 7% for the quarter with positive comps of 10.2% in May, 11.5% in June and 10.5% in July. Comps for U. S.
Stores were positive 11.4% for the quarter, with positive comps of 11.5 percent in May, 11.7% in June and 11% in July. Total sales grew 9.5% from last year, reflecting the impact of the calendar shift. As you will recall, fiscal 2012 had a 53rd week, which shifted our fiscal calendar. By starting fiscal 2013, 1 week later than last year, We had one less week of spring sales in the 2nd quarter when compared to the same period in 2012, which negatively impacted total sales growth by approximately $249,000,000 or 120 basis points. As Frank and Craig mentioned, our 2nd quarter sales performance exceeded our expectations due in part to strong demand for appliances and recovery in our garden department.
Further, sales related to Hurricane Sandy were approximately $47,000,000 in the 2nd quarter. We expect to see some benefit from storm related sales in the second half of the year, but the year over year benefit will diminish as we begin lapping hurricane sales in the 3rd quarter. Our total company gross margin was 34.3% for the quarter, An increase of 12 basis points from last year, of which 13 basis points came from our U. S. Business.
We saw a considerable amount of movement in our gross margin during the quarter as explained by the following. First, we experienced approximately 22 basis points of gross margin expansion due to the impact of gross margin accretive businesses that were acquired in the back half of last year. 2nd, we had 13 basis points of gross margin expansion due to expense leverage within our supply chain. 3rd, our shrink efforts continue to gain traction as we realized 10 basis points of gross margin expansion due to better shrink performance than 1 year ago. And finally, we experienced approximately 32 basis points of gross margin contraction due primarily to a change in mix of products sold.
To put this contraction into perspective, over 50% or 19 basis points came from a higher penetration of appliance sales than 1 year ago. For the 1st 6 months of the year, our gross margin grew by 16 basis points. As we look to the last 6 months of the year, we would expect our gross margin expansion to be about half of what we experienced in the 1st 6 months. So for the year, expect moderate gross margin expansion. In the 2nd quarter, operating expense as a percent of sales 8% of our sales growth, better than our expectations for the quarter due to strong sales performance.
For the year, we are expecting our expenses to grow at approximately 30% of our sales growth on a 52 week basis. But note, like what we experienced in the 2nd quarter, there will be quarterly distortions to that rule of thumb given year over year comparisons and certain expense items like success sharing. For example, in the Q2 of 2013, Over 300 stores were in higher success sharing payout tiers than 1 year ago. This caused 14 basis points of expense deleverage in the quarter. Interest and other expense for the 2nd quarter was $172,000,000 a 15.9% increase from last year, reflecting increased interest expense associated with $2,000,000,000 of incremental debt issued in April of this year.
Our income tax provision rate was 36.9% in the 2nd quarter and we expect income tax rate to be approximately 37% for the year. Diluted earnings per share for the 2nd quarter were $1.24 an increase of 22.8% from last year. Moving to our operational metrics. During the Q2, we opened 1 new store in Puerto Rico for an ending store count of 2,258. At the end of the second quarter, selling square footage was $235,000,000 and total sales per square foot were $383 Now turning to the balance sheet.
At the end of the quarter, inventory was $11,100,000,000 and inventory turns were 4.9x, up from 4.7x last year. We ended the quarter with $42,200,000,000 in assets, including $3,400,000,000 in cash. Moving to our share repurchase program. In the 2nd quarter, we received 2,100,000 shares related to the true up of an accelerated share repurchase or ASR program we initiated in the Q1. Additionally, in the Q2, we repurchased $2,150,000,000 or 25 and 19,600,000 shares repurchased through an ASR program.
For the shares repurchased under the 2nd quarter ASR program, This is an initial calculation and we expect to receive an additional 2,400,000 shares in August. Computed on the average of beginning and ending long term debt and equity for the trailing 4 quarters, return on invested capital call was 19.1%, three ten basis points higher than the Q2 of fiscal 2012. We had a solid first half as evidenced by strong performance across our store. As we look to the back half, we believe we will continue to report solid sales gains and that sales will be higher than we originally planned. So today, we are lifting our 2013 sales and EPS growth guidance, reflecting our first half performance and our forecast for the second half of the year.
We now Expect fiscal 2013 sales to increase by approximately 4.5% with positive comps on a 52 week like for like basis of approximately 6%. We expect the rate of comp growth for the back half of the year to be about 50% of the rate comp growth we experienced in the first half of the year. Our second half forecast is based on our view that we are in the early stages of housing recovery, That GDP will grow less than 2% for the year and reflects certain back half challenges that Craig detailed. Finally, we, like others, are watching the interest rate environment as consumer spending and mortgage availability Could be negatively impacted if interest rates were to rise. In the absence of rising interest rates, however, If there is a bias in our second half forecast, today we would say there is more upside opportunity than downside risk.
For earnings per share, remember that we guide off of GAAP. We now project fiscal 2013 diluted earnings per share to increase approximately 20 percent to $3.60 This earnings per share guidance includes the $4,300,000,000 of share repurchases completed in the first half of the year and our intent to repurchase an additional $2,200,000,000 in share during the second half of the year. So we thank you for your participation in today's call. And Marquise, we are now ready for questions.
Thank you.
More confident. What causes obviously, the results should cause that confidence, but what causes that confidence going forward? And what are you seeing competitively in terms of pricing or anything along those lines? Because gross margin looks solid given this shift in mix.
Well, thank you, Gary. We look at a number of factors, both internal and external, to arrive at a point of view as to how our sales will In the back half of the year, coming off obviously a very strong first half of the year, the best thing we can look at are current trends. And I will tell you the current trend of the business is good. Sales are quite brisk. Now competitively, Craig, you might want to comment.
Yes. Hey, Gary, from a competitive standpoint. We saw the last quarter that we just exited here pretty comparable. Most folks went hard after the seasonal business given the late start to the business. And certainly in big ticket, it appears you still need to stimulate the customer to buy, but not a radical change and kind of would expect that going forward.
And there's been a lot of talk and then I'll get off the phone. There's been a lot of talk about interest rates rising and the impact that could have on housing and you guys, etcetera. What are your thoughts on where we are?
Well, as you know, 30 year mortgage rates are up. Call. They're at the highest rate that they've been since October of 2011 at about 4.4%. The affordability index It's still at a historical high, Gary. So if rates were to move up, it would impede that affordability index, but we've got a long way Before it should have a dramatic impact, we believe mortgage availability or the attractiveness to a consumer or homeowner to take out a mortgage.
All that being said, however, we're watching it.
Thank you.
We'll take our next question from Dan Bender with Jefferies.
Hi, good morning.
I was
wondering if you could comment Two things. 1 on sort of the bigger ticket project business what you're seeing in Kitchen and Bath in particular? And then also if you could comment on Credit availability, I know you guys had started doing that second look program. Any color around that?
Dan on the big ticket, we did see very nice strength in tickets above $900 growing at 15.5% In the quarter, that was largely driven with appliances, things like riding mowers, which were strong throughout the quarter. We saw flooring projects, as well as our kitchen business all contributed to that. And then certainly the continued Strength of our pro business, which carries a higher average ticket overall helped that as well.
And on the credit front, During the quarter, we opened 1,400,000 new private label credit card accounts, so we were very pleased with that. The penetration of our private label card grew 44 basis points in the quarter now standing at 22.6%. So that's good news too. We also saw an increase in bank cards. So it appears Consumers are willing to use their bank cards, our bank card penetration up 30 basis points year on year.
If you look at what's going on within our private label portfolio, We see consumer approval rate hovering around 68%. That's good news too because as you know, they were dropping as a result of of the changes coming out of Durbin, but now we see it hovering around 68%. The average line approved is $5,800 that's up $200 year on year at a FICO at about $7.16 On the commercial front, the average approval rate there is 70%. The line approved is $6,800 That's also up $200 year on year. We are coming behind our pro customers because they They're so very important either with second look programs or we work with the underwriter to extend credit lines on a case by case basis.
So credit obviously is an important part. It's not the entire story here, but it's certainly part of the story.
Great. Thanks.
We'll take our next question from Christopher Hovers with JPMorgan.
Can you talk about it was very consistent comps throughout the quarter. Is there a way to think about what the seasonal business actually lifted perhaps July which was later in the quarter, but obviously you have these record moisture levels out there and mowing and cutting bushes and so forth. So is Is there a way to sort of peel that back and think about what July is ex seasonal?
Yes. Chris, the seasonal business obviously carried strong throughout the quarter. We saw, for example, in sales and things like power equipment, remained very solid throughout the quarter, including July. As you mentioned, due to the fact that we had a moist July that obviously kept the grass growing as well. And when we looked at the seasonal business in total, one of the risk factors coming off of the Q1 was whether or not you'd be able to recover Full live goods and fertilizer business.
And because of the moisture, we actually were able to get all that business back in Carrying through June July and then actually some went above what we thought.
Yes. July was our easiest compare. So that's another way to parse it out. If you think about it, the recovery of Garden sort of evened out the monthly performance.
Okay. And then on the so I guess you would say like obviously guiding about a 4% comp in the back half of August is very strong, but Maybe the ex seasonal or core underlying growth rate in the business is somewhere between that 4% and call. That you posted in July.
Well, here's the way I'd like you to think about the back half of the year. And I'll walk you down from what we posted The first half to the second half. So I'm going to round. So the first half, our comp was 8 ish. I'm rounding down.
I'm going to walk you down to the guidance that we're giving you, which is about 4 ish. First, we're up against some very tough hurricane sales. And I'd like you to think about this really on a 2 year basis. We forget sometimes that we had a hurricane in 2011 Hurricane Irene and we had $360,000,000 of hurricane related sales in 2011. Then if you move to 2012, we all know we had Hurricane Sandy, but we also had Hurricane Isaac.
So when you add up those sales, that's about $377,000,000 of hurricane sales. So on a 2 year basis, we're up against more than $730,000,000 of sales coming off of hurricane. So one of the walk downs, obviously, would be we're not We would be, we're not anticipating hurricanes. Now if we get a hurricane, it's a different story. But right now, we're not anticipating a hurricane.
So knock maybe 1.5 of growth off of just hurricane related sales. Then as Craig pointed out, commodity prices are starting to moderate. If you remember the back half of last year, Structural panel pricing took off. It's now coming down. So we would knock off maybe a little maybe a point, call it 130 basis points for commodity price inflation.
And then while we will have growth in categories like appliances, we don't anticipate the explosive growth that we had in the First half, just because we're anniversarying new brands. So knock off another 120 basis points, something like that, and you get to the
Understood. And then one last question. Can you talk about what the SG and A impact in this quarter Or was from a leverage perspective, how much the fact that it was driven by traffic versus ticket impacted leverage overall? Thank you.
Yes. Well, first, let me say, Marvin and our operations team did a fantastic job of managing payroll in our stores, Given the spike that we saw in our sales growth, we leveraged hourly payroll in the quarter. We leveraged hourly payroll by 38 basis points. So Really excellent, excellent work there. There's just some year over year comparisons, Chris, that are kind of distorting the performance in the second quarter.
And Let me just give you some of that color. It might help you better understand the shape of the year. First of all, if you recall last year, we had a Good buy coming from workers' comp in the amount of about $42,000,000 This was an actuarial reserve adjustment that we had last year. That did not repeat this year, so it gave us some pressure on a year over year basis. Secondly, I called out the gross margin benefit of our newly acquired businesses.
Well, they come with expenses too. So on a year over year basis, we had $37,000,000 of expenses from our newly acquired businesses that we didn't have 1 year ago. Now we will start to anniversary the acquisitions, if you will, towards the back half of the year. So our expenses are become much more in line with the guidance that I've given you. The only thing I'd like to call out because we're just so really excited about this for our store associates.
As Frank pointed out, We will be paying record success sharing checks for our store associates. The year over year increase is $46,000,000 And in fact, it's twice as much as what we paid in 2011.
Chris?
Thank you. Okay.
We'll take our next comes from Peter Benedict with Robert Baird.
Hey, guys. Thank you. Carol, quickly just on D and A, it was flat to down in the last few years, but It's up, I think, about 5% year over year in the first half. So just a modeling question, what's driving that? And how should we be thinking about the growth in D and A going forward?
Well, it's really a change in the mix of our capital spending. We used to spend most of our capital on new stores that had long lives. We're now shifting our capital to sort of live assets, including IT. So this year, we'll spend about $435,000,000 in IT. The longest lag we've got there is 6 years.
Both of it is riding off over 3.
Okay. And if so So if we
think about the 6% comp that you guys have for this year and let's assume that persists for the next couple of years going forward, is The OpEx growing 30% of sales, is that kind of a good benchmark to use? Or does it start to evolve as we look out, again, assuming kind of a 6% type comp view?
Well, for modeling purposes, I would think 30 basis points expense growth is the right number.
Okay, perfect. And then just for Craig, you talked about some of the decor categories. Can you maybe talk about some of the real remodel categories? I'm thinking things like windows and Things like that. Are you starting to see kind of evidence of that kind of activity starting to pick up in the stores?
Yes, we are. We're starting to see, for example, in lumber, not only did we have some inflation year over year With about 70 basis points of our comp coming as a result of that, but we also saw unit productivity, which is our pro customer starting to come back, Solid growth in things like fasteners and pneumatics, all those are heavy predominate categories.
Okay, great. Thanks very much guys.
We'll go next to Michael Bassett with UBS.
Good morning. Thanks a lot for taking my question. First, within the product mix, are you seeing any shift around From opening price points to better and best price points? And then I have a follow-up question.
Not a lot of change, Michael in the line structure. The only The thing I'd point out on that is, we've had some really nice innovation in things like LED, which carry a higher Bear ticket certainly within the light bulb category we're seeing customers step up. The Bear Premium Deckover is a Great product. So we're seeing customers willing to spend really in every segment of the category Within a category, whether that be opening price point mid or high.
And is that because you're seeing customers across all price points Come back, which may be obscuring some of the trade up? Or is there just not really that willingness to trade up at call.
No. Again, I think the innovation in many categories is what's driving the trade up. Okay. So Customers are willing to step up and spend money when they see great innovation that either makes a project easier And or like in the case of LED saves them energy cost around the home. They're definitely willing to step
Got it. Sorry, I was confused. The second question I had is, if you look on a like for like basis within products, how and I recognize that you got 70 basis points of from commodity price increases. But how are prices trending on like for like non commodity oriented products if you look back say a year ago?
I mean, I would say that our focus is a relentless focus on driving value for the customer. We're always looking to provide a better value. So we're working hard to drive unnecessary Cost out, whether that be working with our suppliers on how we can drive out costs. Our obviously supply chain is allowing us to leverage cost and we're looking to bring better value to our customer and reduce prices wherever we can.
If I could just Because Craig mentioned it, but I just want to reemphasize the point. We saw an increase in items in the basket this quarter. It contributed 20 basis points of growth to our ticket in the quarter. It has been a drag since the housing crisis. So we can't overstate the importance of what that means in terms of recovery, both for our PROs, Of course, but as well as our DIY customers.
Okay. That's very helpful. Thank you very much.
We'll go next to Matthew Fassler with Goldman Sachs.
Thanks a lot. My primary question and then I have a quick follow-up is just if you could talk about The evolution of your expanded appliance assortment. Talk about the pace of the rollout just to put it in context and compare the rollout in store To the rollout and penetration online and how far along do you think you are in realizing the benefits of this rollout process? Thanks.
Okay. Matt, At the end of last year, we had rolled out about 120 stores with an expanded appliance program. We added brands in the fall season. We added Samsung around the December timeframe, which got us to the full offering of brands that we have right now. We're in the process right now of expanding another 120 stores for an expanded showroom experience.
And all of those brands are available on homedepot.com and have been since last December. And we're seeing a very nice response from the customer.
So to the extent that you guys cited this as a headwind for the year, it sounds like The rollout is not yet done. So do you think there could be some ongoing gains from incremental Penetration to offset the fact that you had this in the base a year ago?
Well, I think we went at 120 stores last fall. Obviously, we're overlapping that. We started with some of our best stores where we felt we had The greatest opportunity. So we'll see how that plays out.
Got it. And then my second question, I think we've come at this maybe a couple of different ways. Is it possible to sort of put a number on the comp benefit that you think you captured just in terms of the shift in volume from Q1 to Q2.
Yes. We outperformed the guidance that we gave you by about $800,000,000 And as we look at that outperformance, the combination of appliances and garden made up 50% of that. And excuse me, Garden would have been about $200,000,000 of that.
And you're talking about Carol, when you talk about guidance, you're talking about for the first half of the year or for the second quarter call.
For the Q2.
Great. Okay. Thanks guys.
We'll go next to Greg Melick with ISI Group.
Hi, thanks. Carol, I wanted to
ask on the SG and A to make sure I got this right.
Okay.
The Q2 you grew operating expenses over 50% of sales.
Yes.
But you still expect for the year that it will grow to 30%? Or do you think in the Second half, it will get back to that 30% level, so that the full year is still right above.
Our guidance is that the full year expenses will grow at 30 Percent of our sales growth rate. Now let's just think about it on a quarterly basis so we can get our models right.
If
we guide off of GAAP, In the Q3 of last year, we had expenses associated with our China store closing. So in the Q3 This year, our expenses will be under last year. Then in the Q4, it will return to more normal, it would be more in the 30% range. So when you add it up for the It will be 30%.
All right. That's helpful. Thanks.
Yes.
And then a bigger picture question. Frank, it was in your prepared comments, You talked about getting one of every 3 online orders now done through the stores and that 1 out of 5 buy something else. Could you give us the benchmark of where that was a year ago and where you'd like it to be or where you expect it to trend over the next year or 2 if you do things Great.
So we've Greg, we've just rolled started this year with the rollout of buy online, ship to store. Last year, we had buy online, pickup in store. So there's been a substantial increase in the penetration Because of the addition of buy online, ship to store and the improvement of buy online, pickup in store. And I would say we don't have a specific target on what we'd like to see the customers can tell us. But we think, as I said, that Our stores we want our stores to be a competitive advantage and we want the convenience of our stores to be something that our customers See is a value and we're seeing that now.
We're really pleased with it. It puts a lot of pressure on Marvin and his team because we've got new product rolling into the stores That they have to be able to respond quickly to the customer desire to pick it up. But that's really One of our long term sustaining competitive advantages we believe.
And if I could, if Marvin's there, just of the added labor hours that you end up having to put in this quarter, was it all just related to just overall sales? Or was this a particular driver of it?
Overall sales, but we have a very detailed analysis that we conducted at the beginning of the year trying to understand So to be specific, we made labor investments in pro in 2 areas speed of checkout. So we invested We made investments obviously in Garden because of just the overall sales trend. And believe it or not, we made other investments just in the lot Because the transactions were at a record pace and we wanted to just provide assistance with loading and other departments throughout store. So the overall business drove a lot of the investment, but also just a penetration of businesses like Pro Allowed us to make incremental investments over and above just the overall business trends.
That's great. Thanks.
We'll go next to Budd Bugatch with Raymond James.
Good morning. Thank you for taking my questions. Congratulations Another very good quarter, great performance. My question Carol for you is kind of help us Walk through the 3rd and 4th quarter sales guidance or how you would look at that. I know you walked us through the second half, but maybe you could go And parse some of those hurdles that you face in by quarter during the second half.
I'd be happy to. On the sales front, call. You should expect our comps to be in a fairly narrow range. So as we're guiding to, let's say, 4% for the back half of the year, that gives you An idea. We're going to be in a fairly narrow range.
I've already talked about expenses. Expenses should be lower in the 3rd quarter and then Trending more at our guidance of 30% of sales growth in the 4th quarter. I do want to pause and make sure everyone remembers that we had that Extra week, they got to back that extra week out when I talk about guidance here. The other thing I should comment on is our gross margin performance. As we've looked at our gross margin rate up 16 basis points before the half and I guided that for the back half of the year, It would be about half of that rate or call it 8 basis points, which translates to 12 basis points for the year.
That's actually slightly under what we had planned at the beginning of the year, but it's Purely a reflection of what our consumers are buying in our stores. We are doing a great job of managing what we control, Supply chain leverage, shrink leverage, cost out, but when a customer comes in and buys a lower margin product, we're going to take that sell all day long. And It impacts our rate performance? It impacts our rate performance.
Okay. And my follow-up question goes to kind of appliances and cabinets. Do you have a market share number now for appliances that you could share with us? And I know kitchen was up double digits as were appliances. I don't know if I heard about cabinets in that I Yes.
But on the appliance side as reported by independent third parties on a rolling Well, we're at about 11.8% in the industry. So we're still a distant third.
And And that's versus about 10 last year Craig? Is that what I recall?
10 and change, yes. Yes. So up slightly, yes.
And And cabinets, how are they performing, Glenn?
Cabinets continue to do well. We had strong growth in our overall kitchen business. We offer a wide variety of options for our customers whether that be in stock cabinets, semi custom, Fully assembled and we did well in the quarter.
Okay.
And if I could just sneak one other quick one in. Supply chain Carol you noticed that as a benefit. We haven't talked about that as much in recent quarters. What do you see going forward for that?
We expect to drive continued leverage in our supply chain. So Mark Holyfield and team continue to drive productivity improvements. I would say our RDC network is becoming a to our network, but it doesn't stop there. As you know, we're investing in direct fulfillment facilities. This is a transportation play.
It will help lower our transportation costs. Our biggest cost is in supply chain transportation. But everything that Mark and team are doing, not just running better facilities, but managing the optimization of Transportation should help us grow. And as you know, when we set out our road map to a 12% operating margin by 2015, supply chain was in that road Looking at a 20 basis points benefit.
And we seem to be outperforming that now?
Well, with a double digit positive comp, we sure hope so.
But in 2012, we picked up 3 of that. So there's about Continue to go between now and 2015.
Congratulations again. Thank you for taking my question.
Thank you.
We'll go next to Dennis McGill with Zelman and Associates.
Hi, thank you. Carol, could you just detail what the appliance Benefit was to comps both in the quarter and the first half of the year?
Well, the appliance benefit to the quarter was 80 basis points. Year on year, Craig, do you have that number? I know that appliances are up $307,000,000 year on year for the half, but I don't know The conference.
Yes. It
was You can back into it.
Yes. Okay. Got it. And then Frank, I guess just big picture when you see double digit comps come through And even if you think about 8% for the first half of the year being much stronger than probably what anyone would have thought a year ago, does it change the way that you think about the recovery and what The stores can handle and what this recovery could look like if the housing market keeps unfolding?
I'll split that into 2 parts. First, what our stores can handle and then second, the broader comment on the market recovery. In terms of what our stores can handle, As I said in my comments, really an extraordinary job done by our store associates, our Supply chain team, our merchants and our vendors to respond to a much sharper increase in sales than we expected. And As I said again in my comments, it's easy to say you have a flexible business model. That puts a lot of pressure on you.
And when you just look at the inventory performance, The leverage in payroll as well as the sales, we're really pleased with our ability to respond flexibly. In terms of the overall market recovery, as Carol said in terms of what's underneath our Guidance for the year is the housing market is clearly an assist to us. And that was something we saw in the second The quarter we saw through the first half. We expect that to continue in the back half. There are some things we're watch Full of, but we expect it to continue.
And then we have some specific things within our business that moderate that and both Carol and Craig detailed those.
And on the front part of that as far as how the business responded to the strong comps, would you say that's better than you expected it to be or it met your expectations?
Yes, Senator, thank you. And I would welcome my colleagues here to speak because I think It was a difficult quarter. It's the kind of difficulty that you want to You want to be challenged by sales, but it required a lot of flexibility and responsiveness.
Well, some of us were here the last time we did a double digit
And Dennis, this is Marvin. And Frank said it well. I mean, I'll just remind people, we don't increase dock doors or receiving space. And we had record transactions. And The associates of merchants, the supply chain deserves a lot of credit.
Managing payroll in the environment was tricky, but We have a new payroll system that Matt Kerr and IT team helped us design about 18 months ago and it worked perfectly. And so we're very proud. And we kept our net promoter score year over year relatively flat over 70, which any other time wouldn't be pleased with flat. But In a record transaction quarter, we feel pretty good about the service levels for all of the transactions and customers and freight that we had to deal with. So Very pleased.
Yes. I'd also be remiss if I didn't call out the fact that between our inventory plan and replenishment team, our merchants working with our suppliers, our Since working with our suppliers, our suppliers did an awesome job of working with us to make sure that product was flowing and be able to take care of the Demand spikes. We couldn't have done it without them.
So can you handle the 20% comp?
We'd like to Trying.
Give it a shot. Absolutely.
Thanks guys.
We'll go next to Brian Nagel with Oppenheimer.
Hi, good morning. Nice quarter. Thank you. Big picture question. Carol, I want
to go back. You commented at the end
of your prepared remarks Interest rates is a factor you're watching. And I think now in the retail community, higher interest rates in the next the latest boogeyman, which could So the question I have for you is, as you think of Home Depot, where if interest rates started to have And then the follow-up to that is and just to be clear with interest rates having already ticked up a bit here. I Have you seen any indications thus far of the skittishness on the part of your consumers as a result of that?
Well, let me ask or answer the latter part of your question first. As we look at the housing drivers that impact our business, really looking at turnover and home prices. And as you've known, we've seen a nice increase year on year in both of those. And we think based on forecasts for both housing and turnover, That will drive about 2 50 basis points of our overall growth this year. Now how do interest rates come into play for prices The turnover, well, if you can't get financing, then you can't get things to move.
So it could have an impact, but we certainly haven't seen that to date. So we've tried to do a lot of modeling and correlations to say, well, what would happen if rates went up another 100 basis points, another 2 hundred basis points. We're not seeing anything, that we can point out to as, here's a big learning. But Just our intuition would tell us consumer psyche can change in a higher interest rate environment, so we want to be cautious.
And is there any just to follow-up on, is there any historical precedent if you look at Home Depot through various interest rate cycles? As to what point a higher interest Could actually impact the business?
If you go back through time and higher interest rate cycles, We are oftentimes powered through those cycles. So no.
Okay. Thank you.
Yes. Thanks, Brian.
We'll go next to Kate McShane with Citigroup.
Hi, thanks. Good morning. A lot of my questions have been answered, so this is a little bit more Smaller question, but I wondered if you could go into a little bit more detail about what you're seeing from the smaller pro customer. You highlighted you've seen an improvement, but have we seen an inflection with this group? And are they comping positively?
First Kate and I'll I'll turn it to Marvin to respond more fully. But yes, they are positively comping and the rate of Growth is improving. It's not at the same rate of growth as our larger spending pros, but that is actually consistent with How we thought this would develop. But yes, it's positive and strong.
And Kate, the point I'll add to that is when we dissect the data understanding why the larger pro is Growing at a more robust rate, a lot of times it comes down to liquidity and just access to capital. These smaller pros are gaining steam. We were very pleased with their performance in the quarter and just pleased with All the partnership with the merchants in getting the products and the prices that they want. And as I mentioned earlier, we made Payroll investments on that side of the building because they've told us for years they want to get in and out fast and they want us to help them grow their business. And we think because of the Investment in payroll from a loading, from a service and some of the customer service initiatives we put in place and things as simple as Dedicated parking, which doesn't appear to be important, but to a customer where time is money, those things are very critical.
We're pleased with the growth and we hope that we
Thank you. Marquise, we have time for one more question.
We'll take our last question from Mike Baker with Deutsche Bank.
Thanks. Two questions. 1, Following up the appliances, you have it in 120 stores and you said you'd do another 120 that still only puts it in a little more than 10% of the store base. Is that the right number longer term? Or is it something that you'll continue to put that jumbo set in more and more stores over time?
I mean our intent will be to continue to evaluate the opportunity as we go forward.
Okay. So again, is there something I assume these are just better stores, but is there something specific about these 240 Or so stores that make the appliance work there that wouldn't work elsewhere?
Well, as you can appreciate, when we went into this, we looked at some of highest volume store and those who were close to clients' competitors. As we look ahead, we want to make sure that any incremental investment that we make will be value accruing.
Okay. Fair enough. One more. Just on leverage and where you are now, I think you're just under your benchmark 2.0 times.
Earlier in
the year you had talked about potentially taking on more leverage. I think you had said in December if memory serves or later in the year. Where do you stand right now with your outlook on debt?
Well, our adjusted debt to EBITDA ratio stands at 1.7 times against Cap, if you will, at 2x. That gives us about $3,400,000,000 of borrowing capacity as we stand today. We do have $1,000,000,000 in a quarter that comes due in December. And so we'll take a look at whether or not we want to raise incremental financing at that time.
Above and beyond what's due? Yes, Right. Okay. Thank you very much.
Well, thank you to everyone who's joined us today and we look forward to talking to you next quarter.
That does conclude today's conference.