Good day, everyone, and welcome to today's Home Depot First Quarter 2013 Earnings Conference Call. Today's conference is being recorded. Touch tone phone. Beginning today's discussion is Ms. Diane Dayhoff, Vice President, Investor Relations.
Please go ahead, ma'am.
Thank you, Mary, and thank you. 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.
And as a reminder, we would 7,703,230 7. 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 materially from our expectations live. Now let me turn the call over to Frank Blake.
Thank you, Diane. And I'd like to start by saying our thoughts and prayers are with those who've in
the
7.4% from last year. Comp sales were positive 4.3% and our diluted earnings per between the unusually warm spring of 2012 and the relatively cold spring of 2013. Our Western division was our best performing division, driven by double digit positive comps in most of the major markets in California. Our Florida markets also performed well with comps above the company average. Internationally, our Canadian business had positive comps for the 6th As Craig will detail, while weather negatively impacted our seasonal and exterior businesses, our core interior project business remained strong throughout the quarter.
This was encouraging and consistent with the view that the housing market is starting on the path to recovery. For the first time in the last several years, the growth rate in our Pro customer segment outpaced the growth rate in the Consumer segment. We've been tracking the relative growth rates of our Pro and Consumer segments as one indicator of the housing recovery. Since 2008, our Pro segment has underperformed our Consumer segment. Last year, the relative growth Rates drew closer and in the Q4 of 2012, they grew at approximately the same pace.
Our expectation was that the Pro business would accelerating during a housing recovery, and so this quarter's outperformance from the Pro segment is a positive sign. Some of the outperformance was due to the slower growth in our consumer oriented Garden business, but even adjusting for that, the Pro segment had a higher growth rate. Also our smaller spend pro customers contributed more significantly to the overall pro growth than in the last few years. Our expectation was that we'd see improved performance in the smaller spend pros as the housing market recovers, So this is another positive sign. Our services business had double digit growth in the quarter, and we're pleased with integration of Measure Comp and U.
S. Home Systems, our 2 recent services related acquisitions. Marvin and his team have been able to improve the customer experience both in the home and in the store by bringing these businesses directly into Home Depot. As part of our interconnected retail strategy, we have completed the rollout of buy online ship to store. This required an effort across our business from supply available for pickup at their convenience in our stores.
So far, the growth we've seen from this has been ahead of our expectations And 1 out of 5 customers who pick up an order at the store also buys an additional item while there. We also continued our efforts to improve the overall dotcom experience for our customers. We simplified our checkout process, refreshed landing pages and integrated e receipts into the site among other key activities. We're pleased that the online traffic to our site was up almost 50% And as part of that, not surprisingly, mobile traffic more than doubled. The U.
S. Macro data on housing continues to improve. Private fixed residential investment as a percent of GDP picked up for the 6th consecutive quarter to 2.7 percent. Increasing household formation, price appreciation and higher housing turnover are all positives for our market, But credit availability remains tight and constrains the velocity of the recovery. Last year at our Investors and Analyst Conference, we set out a framework Thinking about the recovery of the housing market and the impact the recovery would have on us.
In 20102011, We went through a period when our sales were growing, but the housing market was still down or at best stabilizing. Our sales performance correlated most directly to overall GDP. Last year, we had an additional modest assist from housing as the market started to approved. We saw that carry through in this past quarter, somewhat stronger than we anticipated after adjusting for weather impacts. As Carol will discuss in more detail, we are therefore revising upwards both our sales and earnings guidance for the year.
We remain focused on taking care of our customers and investing in our business and in our associates. I'd like to thank our associates for their hard work and dedication. Based on this quarter's results, roughly 98% of our stores And with that, let me turn the call over to Craig.
Thanks, Frank, and good morning, everyone. We are pleased with our performance in the Q1 with strength in our business across the breadth of the store. We had positive comps in all departments except our indoor and outdoor garden departments. The departments that outperformed the company's average comp were kitchens, plumber, tools, Plumbing, Decor, Electrical, Bath, Flooring, Lighting and Hardware. Paint, Millwork and Building Materials performed positively, while comp sales in indoor and outdoor garden were negative.
Spring arrived at various times across the country and we were ready when it broke. In the Western division where weather was more normal, We had positive performance in all departments throughout the quarter. In contrast, in the Northern and Southern divisions, where weather was significantly colder than a year ago. Spring Gardening and Outdoor Entertain categories posted negative comps in February March. Posted on our Garden business across all divisions in April.
Inside the home, we continue to gain momentum in simple decor. Apartment comp above the company average. In Bath, our lineup of Moen and Delta Foundation faucets as well as new vanities from Glacier Bay, who are the drivers of our performance. We continue to see strong results in lighting as customers transition to LED bulbs and light fixtures. Total comp transactions grew by 0.1% for the quarter overcoming significant downward pressure from our seasonal business.
Transactions for tickets under $50 representing approximately 20% of our U. S. Sales We're down 1.6% for the Q1, principally due to our Garden business. In contrast, in the month of April, we were able to drive positive transactions including tickets under $50 Transactions for tickets over 900 Also representing approximately 20% of our U. S.
Sales were up 9.7% in the first quarter. Average ticket increased 5% in the Q1. The drivers behind our average ticket growth were the strength in appliances as well as continued from our Pro business. Our average ticket increase was also impacted somewhat by commodity price inflation, mainly from lumber and copper, which contributed approximately 120 basis points to comp. Now let me turn our attention to the Q2.
We're introducing new technology and paint from Behr with our new line of Marquee Exterior Paint and Primer. This new paint creates a tough nonstick surface that resists dirt and offers advanced fade performance for longer lasting color, all backed by a lifetime guarantee. Our exclusive Marquee paint resists rain showers as early as 60 minutes after application introducing new paint sprayers from Graco. We have an incredible lineup of great values and special buys as well as innovative products for Memorial Day. We are introducing the 1st battery powered trimmer that converts to a corded trimmer, so that you never run out of power from Ryobi.
In store now, we have the Pennington Smart Feed Sprayer System. Without measuring, pouring or mixing, this system delivers even feeding every time recorded. And with that, I'd like to turn the call over to Carol.
Thank you, Craig, and hello, everyone. In the Q1, sales were $19,100,000,000 a 7.4% increase from last year. As you will recall, fiscal 2012 had a 53rd week, We had an additional week of spring sales. The calendar shift contributed approximately 320 basis points of year over year sales growth. On a like for like basis, comps or same store sales were positive 4.3% for the quarter, with positive comps of 4.6% in February, negative 3.5% in March and positive 9.9 percent in April.
Comps for U. S. Stores were positive 4.8% for the quarter, with positive comps of 4.8% in February, negative 3% in March and positive 10.8% in April. The monthly variation in our comps was due primarily to weather, which impacted our Garden department as well as the timing of Easter. As Craig mentioned, every department with the exception of our garden departments reported a positive comp
in the
quarter. Sales related to Hurricane Sandy were approximately $145,000,000 in the 2nd quarter, dollars 30,000,000 higher than the storm sales we realized from Hurricane Irene in the same period last year. As the rebuilding continues, we believe we will see some additional storm related sales in the 2nd quarter. Our total company gross margin was 34.9 percent for the quarter, an increase of 20 basis points from last year. This gross margin expansion came from our U.
S. Business and can be attributed to the following. First, our shrink efforts are gaining traction 2nd, we experienced approximately 20 basis points of gross margin expansion due to the impact of recently acquired businesses, which are gross margin accretive. And third, we experienced approximately 10 basis points of gross margin contraction due to a change in mix of products sold. For the year, we continue to expect moderate gross margin expansion.
In the Q1, operating expense as a percent of sales decreased by 112 basis points to 24%. Total operating expenses grew at a factor of 35% of our sales growth, better than our original guidance due principally to the sales environment. Interest and other expense was $161,000,000 for the Q1, an increase of $77,000,000 over the same period last year due to the following factors. First, in the Q1 of 2012, We had a $67,000,000 benefit arising from the termination of a third party loan guarantee that did not repeat in 2013. And second, our net interest expense was $10,000,000 higher than last year due for the most part recorded and we expect our income tax provision rate to be approximately 37% for the year.
Diluted earnings per share for the Q1 were $0.83 an increase of 22.1 percent from last year. Moving to our operational metrics. During the Q1, we opened 1 new store in Mexico for an ending store count of 2,257. At the end of the Q1, selling square footage was $235,000,000 and total sales per square foot for the Q1 were $3.28 up 7.8% from last year. Now turning to the balance sheet.
At the end of the We ended the quarter with $44,200,000,000 in assets, including $4,300,000,000 in cash. In the Q1, we repurchased $2,100,000,000 or approximately 27,200,000 shares of outstanding stock, including 9,100,000 shares through open market repurchases 18,100,000 shares through an accelerated share repurchase program. The shares acquired under the accelerated
in the
Q2. In April, we issued $2,000,000,000 of long term debt at a record low blended coupon of 3.45%. At the end of the quarter, our adjusted debt to EBITDAR ratio was 1.8 times against a target of 2 times, giving us approximately $2,000,000,000 in additional borrowing capacity. We have no plans to issue incremental debt in the second quarter, But if conditions warrant, we may look to do so in the back half of the year. Computed on the average of beginning and ending long term debt and equity for the trailing four recorded.
Return on invested capital was 17.7%, 2 30 basis points higher in the Q1 of fiscal 2012. Continued strong performance in the core of the store drove 1st quarter sales ahead of our plan. Further, we know that some Garden sales that were deferred in the Q1 will be realized in the 2nd quarter. Finally, while the forecast for GDP growth in the U. S.
Hasn't changed materially, housing continues to recover. Today, we are lifting our 2013 sales and earnings per share growth guidance, reflecting our first quarter outperformance and our forecast for the Q2 where we are projecting sales and earnings to be higher than what we originally planned. Approximately 4%. Given our updated sales growth guidance, we now expect expenses to grow at 30% of our sales growth rate on a 52 week basis. For earnings per share, remember that we guide off of GAAP.
We now project fiscal 2013 diluted earnings recorded to increase approximately 17% to $3.52 This earnings per share guidance includes the $2,100,000,000.01 of share repurchases completed in the Q1 and our intent to repurchase an additional $4,400,000,000 in shares over the course of the year. So we thank you for your participation in today's call. And Mary, we are now ready for questions.
Thank you. Submitted. And we'll take our first question from Dennis McGill from Zelman and Associates.
Hi, good morning. I guess first question, Carol, I think it was a couple of years ago you had mentioned an REO turnkey program for banks on the foreclosure side and I think that business is probably still growing and you've got an emergence of single family rental companies out there as well that are going to be a little bit more institutionalized and maybe national. Can you just talk Big picture kind of what that program looks like today and how you guys are thinking about maybe agreements that could get you into the maintenance side on the single family part of the business on the rental side?
Well, I'll start and Marvin maybe you want to kick in. We're pleased with this business. On a relative basis, Dennis, it's pretty small for us, but we are seeing nice growth And we will continue to use our services organization to expand this across the country. What we're more Excited about actually is what Frank commented on is to strengthen our pro business. And the REO would not be inside of that pro business necessarily, but we're really excited in that regard.
Marvin, any color you want to add?
Dennis, the only thing I'll add is, as you know, the business is shifting from Traditional foreclosures with banks to private equity funds going in purchasing up groups of properties. So we're shifting and adjusting, but I think Carol's point is most important. This is a small business. It's something that we're very interested in. We think that we have unique competencies with our pro business with the products that we sell.
And our key is really two things leveraging our GC network that we have Because we are in the services business and the pro business, but also leveraging product pull through. We want those customers to come to our stores to buy products and those products To be the fixtures, the faucets, the plumbing, supplies, etcetera that we put in those homes from a remodel and from a maintenance So far so good, but it is a relatively small business.
Roughly how big would that be today?
We haven't disclosed that, Donna. Okay.
Second question, as you talked about double digit comps in California for the quarter, can you maybe go into a little bit of detail as far as categories that you see driving that performance? And then Maybe Frank just big picture how you think about that maybe being a lean indicator to other parts of the country as home price inflation gains momentum as well?
Well, let me take the latter first, Dennis. I mean, what we've seen Over the last several quarters is some of our most hard hit markets, the markets that were really ground 0 of the housing collapse recover and that's California, Florida moving into Arizona, now even Las Vegas and Nevada. So it's really part of how Badly, those markets suffered previously and now starting to return to more normal performance. I'd let Craig and Marvin comment, but I'm not aware of any particular differences in terms of What's being sold in those markets? We're really selling across the store there.
Yes. It really is broad based. When you look at virtually Every department we have all posted positive growth in the California area. So we're very, very pleased that it's a broad based sales pattern.
There's that saying, a rising tide lifts all boats. The entire business is lifting. Correct.
Pretty bullish. Thanks guys.
And we'll take our next question from Gary Vaucher with Credit
Thank you. Just two questions. One is, can you talk about you've been doing these different tests with PayPal and other ways of servicing the customer from a payment point of view. Could you discuss where you're going with that? And what's been the results of some of the tests?
And what are you rolling out, etcetera?
Well, on the PayPal front, we're very pleased with the year over year performance. It actually doubled in penetration. Big area is very, very small. We brought PayPal into our business because our customers wanted to use that as a form of tender. And so we're delighted to have the relationship with As we look ahead, we've set our eyes wide open as to what may be available to retailers from a mobile wallet expected.
And there are a number of things that are being talked about as you know. There's a consortium of retailers. We are not part of that consortium, but we are watching what they're doing at the MCX. We're Obviously, we're watching what Google is doing. There was announcement today about Google.
So we're eyes wide open. We want to be with where the customer is going. We don't necessarily want to lead the way.
Okay. And Lowe's being part of that consortium doesn't really impact your decisions, right?
Eyes Wide Open. We want to do the right thing for our customers.
Okay. And second question, your productivity now by assuming the calculation Lisa is about 3.26 Per square foot, you peaked out about $100 higher back in the good old days. And just comping in the high singles, you're going to get near there. As you look at your staffing in the stores and the way the stores set, do you have do you feel like you could the capacity is fine for getting up to those levels or do you feel that maybe you'll start stretching your stores again and you have to start changing the way you The market a little bit.
Well, it really depends on the nature of the sales growth. As you know, we forecast sales growth 50% coming from transactions, 50% coming from ticket growth. As you saw in the Q1, our growth came from ticket growth. That has an impact on our staffing model because it's an activity based stacking model. But Marvin, you've got tons of flexibility to do what you need to do to serve customers.
Yes. Gary, we do in fact. If you go back To the host sixtyforty initiative over the last 4 years, we've reinvested roughly 500 hours per store per week back to the stores For service and that's for reallocation not an incremental add. So that's really allowed us to continue to sustain a service level while Making sure that we respond to the needs of the business. But I think Carol's point is very key and that is we have an activity based Driven by transactions and ticket.
So where sales are picking up, staffing has increased. We think we'll be in a perfect position to Keep up with the trends. We work hand in hand with Craig's team. So as we forecast events, new product introductions, We will adjust our staffing and make sure we have customers served in the most appropriate way. So we feel really good about the future and how we can keep up with the business.
Gary, The one other point that I'd add to that on the store, we're pleased with the size of our store. We don't see a need to substantially remodel our stores or Expand them. The one thing that we're dealing with between Marvin and our supply chain team is Buy online, pickup in store has and buy online, ship to store and buy online, ship to store, particularly that we've had some pretty good customer interest in that. And so we're thinking about how do we segment parts of the store to more efficiently That customer who's coming in and has bought online and just wants to pick it up in the store. So Martin and his team are working on, gee, what would we do with the store layout?
But that's a slight alteration. It's not a remodel.
Here's a really interesting statistic. If you look at the Q1, 22% of the sales placed online were actually picked up in the store and 10% of those were BOSS related buy online, ship Store related. Isn't that interesting? Yes.
Thank you very much.
And we'll take our next question from Aram Rubinson. Hi,
Rubinson.
Hi. Good morning. A question about traffic I see the quarter's entire comp as you said came from ticket. There were a number of factors though that might have influenced that such as The week shift and the weather and other things, can you help us disaggregate some of those factors? I'm trying to get a sense of how the underlying traffic is On a reported basis, underlying traffic on a comp basis was slightly negative.
So I was just trying to get a little context around that.
Well, I can start and Craig, you can add some color. Our comp transactions, as Craig pointed out, were up 0.1%. And that's a good number given how we are so heavily penetrated in Garden in the Q1. Our Garden business makes up 18% of our total sales. If you look at our comp average ticket, it was up 4.2% year on year.
And if you look at the drivers, it was across all categories. As Craig pointed out, we had about 120 basis points coming from commodity inflation. We had about 70 basis points of growth coming from appliances. Our appliance business is growing quite nicely and then the rest was across all categories. Craig, you want to give me more color?
Yes. To reiterate, when we got into April and actually began to see a more normalized weather pattern, we were able to actually drive With the Garden businesses kicking in and getting to positive growth in the month of April, it significantly helped that including the lower ticket categories, which Yes, grew as well.
So usually in a cyclical rebound, we see ticket lead to comp. Is that just part of what we're seeing naturally or do you expect the traffic to kind of be balanced with the ticket in the year ahead?
Well, we would expect the traffic to come back in the Q2, of course, because the sales that we didn't get in the Q1 have not been lost. As we look at our Garden sales, you recall last year we had a really warm Q1. So we pulled forward about 100 and $1,000,000 of Garden sales into the Q1 last year. This year, we estimate we lost about $188,000,000 of Garden sales, but it's not lost forever.
Maybe some of it's lost. Right.
But we're going to get the majority of that back in the Q2 and with that comes people.
I think the other factor when When you think about the growth in ticket as we called out over $900 being up 9.7%, the improvement in the Pro business Is also a factor there that's helping to drive that higher ticket. While we're not back to historical norms, We're seeing improvement in terms of unit productivity and the number of items in a basket with our Pro customer. And so that's encouraging for us as well.
Now open. Great.
All right. Thanks for that thoughtful reply.
And we'll take our next question from Dan Bender with Jefferies.
Hi, good morning. I was wondering if you could just give us your Best thoughts on what the when the seasonal shifts will occur, what the I should say the weak shift That occurred in Q1, how that plays out across the rest of the year? And then my second question was just regarding Competition both online and on land, how that's looking these days?
Sure. So let's talk about the seasonal shift and I'm going to do it on a comp basis. So for the Q1, we told you that the seasonal shift was 320 We will actually have a lower comp basis and it will be lower by about $300,000,000 So if you think about what that means, our comps will be higher in the 2nd quarter than our total sales growth. And looking to the 3rd quarter, there shouldn't be any meaningful difference in the comp basis. And then finally, in the Q4, our comp basis should decline by about $100,000,000 You can call that pretty flat.
So hopefully that's helpful.
And as far as the competition, really it's still there. We have plenty out there. I haven't seen anything dramatically different in the last quarter. But clearly, it's Yes. We monitor what's happening in the marketplace and then adjust according to what we see happening.
Great. Thanks.
And we'll take our next question from David Gobler with Morgan Stanley.
Good morning, guys. Craig, I was just wondering if you could touch a little bit on some of the merchandising initiatives, particularly on the localization front. As you ramp into the busy part of the year, any kind of update on what you're seeing there and how you're expecting that to impact the business, whether that would be contributing to kind of ticket or traffic?
Yes. David, we have as you know, we've put tools in place to assist our merchants in assorting. We are working on actually delivering enhancements to those capabilities right now. We have been developing clusters, so working to do a better job of sorting locally. Sure.
So working to do a better job of assorting locally. Probably an example of that would be Adjustments in Fluor Tile Mix. And we had pretty nice performance. So we believe that paying off for us and seeing it in the performance.
And maybe just a follow-up on the appliance business. I know Carol mentioned that that continues It seems like in the Q4 that was a big call out as you guys expanded a couple of relationships with vendors. Are you still seeing momentum there? And as you continue to roll that out, are you seeing the impact across the stores that more localized to the appliance section?
First of all, let me start, we are pleased with the performance that we're seeing in the appliance business. As Carol called out, it contributed about 70 basis points of comp in the expanded store base, which was 120 stores at the end of last year. And we are moving forward, as we called out last quarter with an additional The appliance business is an interesting business. It's highly repair oriented. A lot of appliances break every day in the country.
So we do see that as a big repair business. It also does complete the kitchen. So there's an opportunity on both sides.
Got you. Thanks.
And we'll take our next question from Christopher Horvers with JPMorgan.
Thanks and good morning. Karen, I believe you mentioned 18% of sales is historically you said Garden in the Q1. What was that this year? How does that compare to 2Q? And perhaps can you expand that bucket?
How much would you say is seasonal and outdoor broadly historically in the
Well, the 18% number that I shared with you was the penetration this year. And as we pointed out, our comps were negative. Obviously the penetration was higher last year, slightly higher. And Craig, you might want to talk about how we've categorized
Yes. In terms of outdoor Categories in total as we look at it. Generally in Q1 that roughly represents about 30% of our business and it Grows to about 35% of our business in Q2.
And then Okay. And so I would assume last year that that was a lot higher in the quarter is that 200 basis points, 300 basis points higher this the flip year to year or is it something smaller?
Well, if you just want to give us a second, we can tell you. So the penetration has changed about 200 basis points year on year.
200 bps year to year. Okay. So you're raising the guidance for the You're just raising assuming that the seasonal business shifts into the 2nd quarter from the first, The 100 and I think the $180,000,000 that you mentioned, they missed this year, that's about 90 basis points. I mean, Should we look at the 2Q outlook on a stack basis? Or are we just going to sort of assume that the 4.8 Domestically and I get the 90 bps back of that Garden business shifting or is another 200 basis points from the seasonal shift Total Outdoor Seasonal Shift.
Well, let me share with you how we're thinking about it. The guidance that we've given today, the lift from 2% to 2.8% or on a comp basis 3% to 4%, equates to about $800,000,000 more in sales than Q1. So the balance we believe will come in the Q2. And we get there the following way. 1st is recovery of Guardant and we won't recover We also believe that we'll have additional sales from Sandy and these will all be incremental sales.
We're projecting $80,000,000 from Sandy and I will tell you that is a projection, don't really know. And then the rest will come from strength across the core of the business. It's May 21. Our sales thus far in the month are great, so we feel very comfortable with the guidance that we've given.
Open. Thanks very much.
And we'll take our next question from Michael Lasser with UBS.
Good morning. Thanks a lot
for taking my question. I actually have 2. First, it's on the flow of credit to consumers. How are you viewing That dynamic within the broader macro environment is influencing your sales. Is that starting to happen, which is a driver?
Or do you expect that that's still on the horizon that that will happen down the road? And I have a follow-up.
So Michael, Question is on consumer credit.
Yes. It's starting to flow and we saw in the 4th quarter home equity lines were still down year over year. What do you think is fostering All this good growth that you're seeing.
Well, interestingly, we did see improved penetration on our private label And if we look by category where we saw that growth, it was driven by our kitchen department, our millwork good news. I will tell you our approval rates continue to decline principally because people are coming off the sidelines with lower FICO scores And they're not being qualified. So our approval rates are about 65%, down from last year slightly. The average FICO score being approved is 7.10 with an average credit line of $5,800 The other interesting statistic is that for our existing Our pro approval rates were about 70%, a bit of a higher line there, dollars 6,800 but only 20% utilized. Now on the consumer side, as you know, the ability to pay or the Card Act really negatively impacted approvals.
The Consumer Financial Protection Bureau came out with some changes recently, which we think will help approval rates. We think it will help grow our approval rates by 100 basis points more or less. So that's good news. This is my long answer to your question that much like the housing market is beginning to recover, the consumer and credit availability is beginning to recover, but it's not recovered.
And it sounds like you're doing your part to contribute to the freer flow of credit to the consumer.
Yes. We are.
And my second question is, As the housing recovery continues, the profitability of the supply chain should improve of the entire Home Improvement Supply Chain Should Improve as Capacity Utilization Rates Rise. Are you starting to see evidence that you're benefiting from that and whatever capacity you think
You might. Well, as you know, we've given guidance through 20
Sure. The
seasonal business and the spiky sales and our supply chain did a great job in the Q1. But longer term, we should enjoy more benefit.
So I wasn't necessarily talking about your supply chain.
Sorry for the confusion.
I was talking about your vendors becoming more profitable such that you would start to participate in their improved profitability.
Certainly, when you can put throughput through the factories that improves overall profitability. And And we do have agreements in place with our suppliers where as we drive productivity for them, We share in that productivity and obviously can deliver greater value for our customers as well.
Okay. Thank you very much.
Yes. And we'll take our next question from Matthew Fazler with Goldman Zacks.
Thanks a lot and good morning. Good morning. You spoke about the strength in your commercial business And you attributed that in part to macro dynamics, which clearly are working in your favor. When we've been talking to pros over the past month About the power center channel supplying to them. Home Depot often stands out as taking more aggressive action and making incremental having incremental impact.
So is it possible to try to disaggregate you think the contributions of your own changes and you might talk about any ones that are new or
So Matt, first off, I'll ask Marvin to address some of the actions we've taken in the store to better serve our PROs. But I'd just say, generally, it's tough for us to measure share period. It is really hard for us to measure share with the Pro, because the Pro shops across so many different channels. There are so many different kinds of Pros in our stores. So we really don't have a good read through into To what extent do our pro numbers reflect some possible share gain versus the market?
Since we started for several years now, we've had a notional theory of what we'd see in the housing recovery. And since we're seeing that play out with our PRO numbers, we're more inclined to think of that as a more general market recovery. But we have done and thank you for noting, we have done some things that are very focused on this customer segment in the store. And maybe Marvin you want to comment on some
Sure. Matt, we really took advantage of the downturn. We had processes and our focus Was really not that good to be quite candid. And so when the market was depressed, we decided to invest in a couple of things. Number 1, we had a very distinct focus on what we do in the store and what we do outside of the store.
In the store was primarily for our smaller pros. Outside of the store was for pros that Typically would not venture into Home Depot because of the nature of their business. And in the store, we focus on speed and convenience. We put in dedicated cashiers for the pros. We put in dedicated loading.
We created pro power hours where we eliminated And we wanted service focused for specific times of the date and we really made a really consistent focus on speed. We leveraged the mobile point of sale to help pros accelerate their transactions. Then we shifted outside of the store. We put in a sales force designed specifically to go to the pros, the larger pros and to make sales calls talking about the features and benefits of And buying from the Home Depot. We work with Craig's team to improve the bid room process.
It would take in the past days to get a bid back. We turned it into minutes. We continue to listen to PROS and just made the necessary changes. And what we hoped is that when the market started to improve that The investments in training and service that we put in place would benefit us. It's still very early.
We still have a lot of work to do. And to Frank's point, it's
Thank you.
And we'll take our next question from Brian Nagel with Oppenheimer.
Hi, good morning. Good morning. First question, I just want to follow on Matt's question on the pro a bit, but you called out the strength you've seen in Now. And with all that's going on in the macro environment, it's not surprising Pro is picking up. Are you seeing something in your data to Just know that there's we do have a sustainable trend here now for Home Depot and this pro business more than we've seen in the past.
So I'd say, Brian, this is so interestingly, this is the first quarter that the Pro segment sales have based on consumer segment sales. So we are, I think appropriately cautious about drawing broader generalizations. As Carol said, we raised our guidance thinking through what's going to what we think is going to play out in the second quarter. And we're just I would say it's a bit early from this quarter To say, boy, this is sustaining. We do like the trend over the last I mean, definitely, the trend has been a It
might be helpful to share with you the top 10 pro classes to the question of, well, what are they buying? It includes plywood, gypsum, on dimensional lumber, pipe and fittings, floor and wall tile, tile set moldings, interior paint, studs and light bulbs. That's pretty core to a Pro customer.
Right. And, Brian, the only thing I'll add is when you talk about the large Pro, which we define as over 10 The smaller Pro is improving and that's a good sign as Frank noted earlier. And what we're hearing from the Pro just a very simple definition as to why a lot of the smaller PROs basically shut their businesses down and started to work for the larger PROs. So now as the business and the market improves, there are more jobs available and a lot of smaller pros are venturing out again To open up their shops and they're back in business, but it's very early. But the trend is positive.
We just hope that it sustains.
That's very helpful. And then maybe just a shorter question on it's a lot of us are focused here on seasonal sales because it's a key this time of year and there's been Shifts with the weather and such, but is there a way that you can look at your business and say, okay, despite all these weather shifts we've had 2013 versus 2012, seasonal sales are actually Better this year or are they the same as last year? Is there some way to look at it like that?
Sort of a weather adjusted No sale metric. We really don't have that. Okay. That would be I mean that would be a difficult one to Come up with it.
I think what we do, do is we look at this really on a half basis. Yes. And we try to take into account both quarters combined to eliminate the shifting noise, if you will, from year to year. And we look at multiyear penetrations by category, by week. And this is why, as Carol said, we feel like we've got an opportunity to gain most of those sales in Q2.
You may have some categories like pre emergent that we may not get it all back, but we feel pretty confident that we'll get the majority of
Thank you.
Thank you.
And we'll take our next question from Peter Benedict with Robert Baird.
Hey, guys. Thanks. What do you guys make of the recent decline in lumber prices? What do you think is driving that? And just getting to Your outlook for inflation over the balance of
the year, what are you
guys thinking from that front?
Yes. The lumber pricing has been interesting for the year. I think Output in Q1 from the industry was up double digit in the U. S. As well as up high single digit from Canada.
I'm sure that has a factor on driving the overall pricing in the market. It's still up significantly year over year, but I think that's Probably a factor to the recent declines.
And we plan on a commodity neutral basis.
Right.
So as you know we haven't lifted the back half
Okay. Thanks. And then diving a little
bit more into that pro Some of the pro questions here. Any indication in some of the categories things like job site tools, windows things like that, are they starting to show An uptick or is that still on the comp?
I mean, when we look at pro categories, Carol called out the top We're seeing growth in those businesses and we saw growth in the Q1 obviously versus the Q4, which you would expect to see some based on just seasonal. So we're encouraged by the growth across those categories.
Thanks. And then just one last one. When spring arrives as it did this year, I mean, when does it typically peak? I mean, are we seeing the peak now? Does the peak occur kind of as you get into June?
Just trying to Understand
how long the spring season goes, when it arrives, when it at a similar time as it did this year? Thanks. That really varies by Area of the country. And as you can imagine, the South peak several weeks in advance Of the North, but even in that the peak in any given area can shift up to roughly 2 weeks, Give or take. So it really does vary by area of the country.
In some areas, it can be as early as week 10. In other areas, it can be as late as 2017 or 2018.
Yes. Based on our month to date sales, I would say it hasn't peaked.
Has not. Thank you very much.
And we'll take our next question from Greg Melich with ISI Group.
Hi, thanks. I have one follow-up question from before and then a longer term one. Carol, you mentioned that May is running great. Would you describe April as great as well?
Well, April was an outstanding month, but I also want to bring your attention to the timing of Easter. Because of where Easter fell this year versus last year, March was the negative comp was overstated by about 2 30 basis points, which means the positive comp in April was overstated by about 2 30 basis
Got it. So April was great, not outstanding if you adjust the rates. I'll leave it at that. So another more serious question. Your free cash flow guidance you didn't update as part of the change in your EPS guidance.
I think it was around $7,000,000,000 Has that changed particularly given that it seemed that inventory was only up 2% to get the sort of top line growth? Should we expect More free cash flow leverage or is it still the same number there?
No. We've updated our forecast. I didn't call it out because I don't think it's really material on a $7,000,000,000 number, but it's up maybe $200,000,000 or $300,000,000
Okay. That's great. Thanks.
Yes.
And we'll take our next question from Michael Baker with Deutsche Bank.
Hi. Thanks. So one shorter term, one longer term question. Shorter term. Just this quarter, can you tell us the EPS impact of that calendar shift of the 540 odd 1,000,000 Caller's.
Sure. The EPS impact was $0.03
Okay. Thank you. And then the longer term, So at least in my model, the last time you were at an equivalent sales per foot number, your operating margins were 250 points lower than they are now. So as I sort of start to think out longer term and if you can get back to where sales per foot were pre recession, Is there any reason to believe that your operating margin shouldn't be that much higher 200, 300, 400 basis points higher than they were last time they
Well, as you point out, we have a ton of operating leverage in our business. And by the great work of the team in terms of cost out and just driving productivity. It's more productive than it's ever been. We've guided to a 12% operating margin by 2015. Let us get there and then we'll talk about how much more opportunity it
looks like you're going to get pretty close by
the end of Maybe within 50 basis points.
We'll wait for that update.
Very good. Thank you.
Thank you.
And we'll take our next question from Alan Rifkin with Barclays.
Thank you very much. With respect to the average ticket 900 plus is the composition between Large Pro, Small Pro and the DIY similar within that category as the rest of as the corporate average?
It's interesting when you look at that average ticket performance, some of the top drivers of the year over year growth were in the appliance category. And that's mostly consumer.
That is mostly consumer.
Okay. So collectively, I Compared to 3 6 months ago, what is your take on the proclivity for both the pro customer large and small as well as the DIY Customer to take on some of these larger projects. Are you seeing clear evidence of that?
I mean, I think we've seen expansion of The project business as I called out, we have seen nice growth in the simple to core. So whether that's Taking on flooring projects or now taking on storage projects where in the past they might have deferred that. We've begun to see those categories have nice growth in the business. So we're encouraged by that. Other drivers to kind of expansion of ticket is also innovation.
So things like LED, Which drives ticket expansion inside of a category things like lithium technology, which drive expansion in Tools now across almost 5 departments in the store. All of those have positive influences on The growth of average ticket as well.
And here's one thing we are looking at very carefully and this data comes from CoreLogic and that is where homeowners are on a loan to value basis. Because once homeowners believe their home is more of an investment than an expense, We believe the nature of their spending will change. And so this data came out in the Q4, it's just those that have negative equity spend maybe $1,000 a year, but those that have 100 percent positive equity or maybe a loan to value as much as 49%, they'll spend close to $3,000 a year. So we're watching with home price appreciation how households will move in different spending buckets and then trying to determine what the impact on our business will be. It's a little early, Alan, obviously, because the data is just coming out, but we're really trying to understand
California, Florida, Nevada, Arizona, outsized gains. Where are we today in absolute terms with where your stores in those markets are relative to Where we were 6 years ago when the crisis really began. Are we above those levels in absolute terms at the store level?
Not yet. No. Not yet.
No. Any quantification of still how far below you are on an average store revenue basis in those markets?
Just think about it as of the end of 2012, we still had close to $3,000,000,000 of sales to recover from what we lost during the recession.
Very interesting. Thank you. Good luck.
Thank you.
And Mira, we have time for one more question.
Okay. And our last question comes from Scott Ciccarelli with RBC Capital Markets.
Good morning. Obviously, there were
some weather challenges that you guys kind of called out already. But in general, I think what we've continued to see Over the last several quarters is relatively modest improvements in the smaller ticket sales, but pretty big improvements in bigger ticket sales. I guess my question is how much of that is due to changing mix on the assortment side? And if this trend continues, Is that something you continue to adjust in terms of the mix and assortment in the stores in addition to the labor enhancements Marvin's already called out?
I mean, it is certainly a portion of this is driven by the growth in categories like appliances, which carry a big ticket. But certainly in the 1st quarter, the smaller ticket was clearly negatively impacted by the lack of Garden sales, which is a massive driver to transactions On smaller ticket. As you can imagine, lots of customers coming in buying some bags of dirt and buying live goods and so on, Which carry a much smaller ticket. But as we look at the larger ticket, Improvement in penetration in lumber with our pro customers, one of the top classes, Both plywood, dimensional lumber fall into that. Gypsum, those are businesses where customers on the pro side are buying multiples, helping to drive the larger ticket, as well as, as we say, the appliance business.
We've seen over multiple quarters, the hard work that we've put into things like our kitchen business overall and as well as the improvement of our services businesses, Which drive ticket pay off and help drive the growth in the larger ticket over the past several quarters. We still feel that it's balanced that we'll be driving both on an annualized basis both transactions as Well as ticket in our business.
But is there anything that you've seen in the business to make you think that the trends that we've seen recently Won't continue. I mean it seems like you've been calling out appliances for a while. Lumber has obviously been gaining steam for the last couple of quarters. Like These tend to be kind of long cycle trends, don't they?
Yes. I think they'll continue to help us grow the larger ticket Categories for sure.
Okay. Got it. Thanks a lot, guys.
Well, Thank you very much for joining us today. We look forward to speaking with you next quarter.
And that does conclude today's conference. Thank you for your participation.