Good day, everyone, and welcome to today's Home Depot Second Quarter 20 12 Earnings Conference Call. Today's conference is being recorded. Press the star key followed by the digit 1 on your touch tone phone. Please note that any prompts entered before this time may not have registered into our System. Beginning today's discussion is Ms.
Diane Dehoff, Vice President, Investor Relations. Please go ahead.
Thank you, Alicia, eighteen. And good morning to everyone. Welcome to The Home Depot Second Quarter Earnings Conference Call. Joining us on our call today are Frank Blake, Chairman and CEO of The Home Depot Craig Muneer, 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. 19. And as a reminder, we would appreciate it if the participants would limit themselves to one question with one follow-up, please. If we are unable to get eighteen. To your question during the call, please call our Investor Relations department at 770-384-2387.
18. Now 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 20 30s Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual eighteen Results to differ materially from our experiences and projections. These risks and uncertainties include, but are not limited to, those factors 18, 2019, and we are pleased to report that we will be able to provide a brief update on our eighteen. Conciliation 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. 13. Sales for the Q2 were $20,600,000,000 up 1.7% from last year. Comp sales were positive 2.1 percent and our diluted earnings per share were $1.01 2. Our U.
S. Stores had a positive comp of 2.6%. From a geographic perspective, all 3 of our U. S. Divisions had positive comps.
18. As expected, comps for the Northern division, our largest division, were below the company average because of this year's early spring, 2, which pulled seasonal sales forward into the Q1. We continue to see recovery in the markets that were hit hardest 2nd quarter. In the downturn, particularly Florida and California, their comp performance improved from the 1st quarter 20. As Craig will detail, we see strength in the core of the store and 2nd quarter.
Our customer transaction growth was down sequentially from the Q1, 2. But that's largely a reflection of the seasonal shift from the early spring. Our pro business grew in the quarter. This is another 2. Positive sign because pro sales faced a difficult year over year comparison with last year's strong roofing sales 22nd quarter due to storm repair.
We also had double digit growth in our services business with strong growth in our 13th. Kitchen Installation Business, where Marvin and his team have focused on improving the customer experience. Our customer satisfaction surveys Now show that we can deliver an installation experience that consistently hits atorabove9 on a 1 to 10 customer satisfaction scale. Our services business has now seen 7 consecutive quarters of pro. Much like the pro customer, 20.
This business was under disproportionate pressure during the downturn. On the international front, our Canadian business posted positive comps 20 2 Conference in June. We have a number of strategic initiatives underway to position our business for a best in class interconnected retail experience. 2. These initiatives touch every part of our organization.
On the dotcom side, we relaunched our mobile website for homedepot.com. 2. Our upgraded mobile site provides significant new functionality, including the ability to buy online and pick up in store. And this now represents over 35% of our mobile sales. The in store execution, a buy online pickup 2.
In store is a focus for Marvin and the store operations team. We take surveys from our customers on our performance, timeliness, completeness of orders, ease of transaction, 2. And Marvin has set the same objectives for constant improvement in customer satisfaction as we have for our in stock business. 2. We are also preparing for the launch of buy online ship to store this year, which will significantly expand the range of options available to our customers.
2. On the merchandising side, Craig and his team continue to expand the breadth of SKUs available online. 2. And organizationally, we have integrated online and in store data, pricing analytics and product line review teams along with our merchant teams. 20.
This may not sound significant, but it's a key step in driving our own interconnection as those teams are now 2. Last week, we opened a new call center in Utah to support our interconnected business and we'll open another call center in Georgia this quarter. 2. We've also begun the development of new distribution centers to support direct to customer fulfillment and expect to complete this effort over the next 2 years. 2.
You may have noticed the addition of new decor offerings as part of our usual second quarter storage event. 2. We're leveraging the capabilities of our home decorators collection business, which began and continues as a decor oriented catalog and online 18 business, but which also adds a design capability for us that we're now using for branded in stock products. 2. In the quarter, we also launched our first pilots with our Red Beacon platform.
One of the advantages of the online space is 2. It gives us the ability to experiment, expand offerings and test the leverage we can generate from the combination of our physical and virtual presence. 2. Weather aside, we see strength in the core of our store, stabilization within the hardest hit housing markets in California and Florida 2 and signs of gradual improvement within the overall housing market. Housing now is a contributor to GDP 20.
Growth Rather Than A Drag and Private Fixed Residential Investment as a percent of GDP improved in the quarter. 2. As we previously discussed, we view our business as more correlated to GDP growth than the housing market given the current depressed levels of housing related 20. Consensus GDP estimates have been revised downward lately, which would indicate more downward pressure than upside opportunity in our sales guidance. 2.
But as Carol will discuss, given our outperformance in the first half, we are maintaining our sales growth guidance and are raising our earnings per share guidance 2nd quarter. Let me close by thanking our associates for their hard work and dedication. Based on this quarter's results. All of our U. S.
Stores, every one of them qualified for our first half Success Sharing. As a reminder, Success 20.5 percent sharing payout, and we're very proud of that result. And with that, let me turn the call over to Craig.
Thanks, Frank, and good morning, everyone. 2. We finished the 2nd quarter with solid results. There were 3 main drivers to the quarter's performance. 2.
First, the core of the store delivered in line with expectations. 2nd, as we shared with you in the Q1, Record setting weather in February March hold forward activity that otherwise would have occurred in the Q2. And third, we lapped 2. The impact of significant roofing repairs made in the same period a year ago. The departments that outperformed the company's average comp were decor, Hardware, Lighting and Millwork performed positively, while sales in garden and building materials were down.
2. The impact of the weather and drought like conditions caused our Garden business to be slightly negative and comp sales in building materials were down due to 2. Tough year over year comparisons in roofing. Last year, we experienced several storms in the Southeast and repair activity in the North, which drove our roofing sales. 2.
In the quarter, the core of the store continued to perform. Maintenance and repair categories such 20. Lightbulbs, appliance parts, safety and security, wiring devices, plumbing repair, pipe and fitting and builders hardware performed above the company average. 13. Project completers such as power tools and accessories, electrical tools, tape, adhesives, lubricants and fasteners also positively comped.
2. And as I've shared in the past, the customers continue to spend on simple decor updates for their home. We saw double digit positive comps in spray paint, laminate flooring and area rugs. Wall decor, organization, paint, bath 20. Accessories, special order carpet, door locks, hard window treatments and wood flooring all performed above the company average.
Total transactions grew by 0.6%, while average ticket increased 1.8% for the quarter. 2. The average ticket growth was positively impacted by commodity inflation, which contributed approximately 50 basis points in comp 2, as well as strength in larger ticket categories. Transactions for tickets under $50 representing approximately 20% of U. 20.
Sales were down 0.7% in the 2nd quarter. We believe this is a result of the pull forward of seasonal sales into the Q1. 20. Transactions for tickets over $900 also representing approximately 20% of our U. S.
Sales We're up 3.4% in the 2nd quarter. The drivers behind the increase in big ticket purchases were strength in HVACs, 20. Now let me turn our attention to the Q3. In addition to the GDP headwinds Frank mentioned, 2. We will also face tough sales comparisons resulting from the impact of last year's Hurricane Irene.
The impact from lapping this storm is factored eighteen. We're pleased with the outstanding offerings, incredible values and special buys our merchants have created to drive business in 2. Recently, we announced an expanded appliance line, including Electrolux, Whirlpool and Frigidaire. These appliances are available online through homedepot.com and can be ordered in all of our stores. Additionally, in over 100 stores, we plan to 20.
Expand the footprint of our appliance showroom to display the broader brand presence. Coming this fall, our Husky brand will experience several product upgrades. 20. Offers industry leading quality and innovation. Husky products are exclusive to The Home Depot.
And we have ramped up our 20 2. We continue to bring innovation and value to Husky's soft sided storage. And in the Q3, we're excited to reintroduce our line of 2. Husky Steel Storage Products, including a new mechanics tool chest designed with 50 pound ball bearing drawer slides, Heavy Duty Castures and Lid Reinforcements with Gas Struts. We also will be the exclusive home improvement launch partner of the new Delta 20 2.5% brand toilets.
This new line of product includes innovative features such as SmartFit tank to bulk connections and integrated supply lines. Also 22nd. From Delta, 16 new SKUs of foundations branded faucets will be added to our assortment, a brand that resonates with our pro customers. 18. Innovation in key technologies is also part of our leadership strategy.
We continue to be innovative in LED And we will be introducing 15 new lightbulb SKUs in the 3rd quarter. These light bulbs are the 2nd generation of product from our original line of EcoSmart LED 10th selection over 1,000 LED fixtures online. And finally, with capabilities 2. Created through our supply chain transformation, our merchandising execution team and partners in operations, we will be setting holiday at the end of the 3rd quarter 13.5% in half the time previously needed. This improvement will allow us to extend our fall cleanup selling season.
2. With this activity, we believe that we will deliver within sales within our expectations. And with that, I'd like to turn the call 20.
Thank you, Craig, and hello, everyone. In the 2nd quarter, sales were $20,600,000,000 3, a 1.7% increase from last year. Comps or same store sales were positive 2.1% for the quarter With positive comps of 3.4 percent in May, negative 0.4% in June and positive 3.1% in July. 2.comps for U. S.
Stores were positive 2.6% for the quarter, with positive comps of 3.6% in May, Positive 0.2 percent in June and positive 3.8% in July. The variability in our monthly comps was due in part 2. To year over year comparisons and the impact that weather and storms had on our sales. Our total company gross margin was 34.2% for the 2 quarter, an increase of 17 basis points from last year, of which 15 basis points came from our U. S.
Business. 2. In the U. S, we experienced 4 basis points of gross margin expansion arising from lower costs within our supply chain 18. And the remaining 11 basis points of gross margin expansion was due primarily to a change in mix of products sold, 2nd quarter.
In the Q2, operating expense as a percent of sales decreased by 98 basis points 20 1.7 percent. Our operating expenses declined $125,000,000 from last year 13 due primarily to the following factors. First, in the Q2 of 2011, we had $42,000,000 of expense related to the impairment of Chem Dry and natural disasters that did not repeat. 2nd, 20. This year, we experienced $42,000,000 of favorability in our workers' comp reserve.
And third, our credit card expense was $40,000,000 lower than last year, reflecting lower debit card fees and a higher penetration 20.5 percent. For the year, we expect expenses to grow at approximately 10% of our sales 18% growth rate on a 52 week basis. Interest and other expense for the Q2 was $151,000,000 A slight increase from last year. Our income tax provision rate was 36.6% in the 2nd quarter. And for the year, we expect our tax 20.3 percent to be approximately 36.5 percent.
Diluted earnings per share for the Q2 were $1.01 20, an increase of 17% from last year. Moving to our operational metrics. During the Q2, we opened 1 new store in Mexico 20. For an ending store count of 2,255. At the end of the second quarter, selling square footage was $236,020,000 and total sales per square foot were $3.50 up 2.2% from last year.
$2,000 And now turning to the balance sheet. At the end of the quarter, inventory was $10,900,000,000 20. Up $150,000,000 from a year ago, reflecting purchases made for our upcoming holiday season. Inventory turns were 4.7 2 times, up from 4.4 times last year. We ended the quarter with $42,000,000,000 in assets, 2, including $2,800,000,000 in cash.
Moving to our share repurchase program. In the second quarter, we received and 2019 we initiated in the Q1. Additionally, in the Q2, we repurchased $1,500,000,000 $23,600,000 of our outstanding shares. This included 2,100,000 shares repurchased in the open market and 21,500,000 shares repurchased through an ASR program. For the shares repurchased 2.2.
Under the ASR program, this is an initial calculation. The final number of shares repurchased will be determined upon the completion of the ASR program and the Q3. Computed on the average of beginning and ending long term debt and equity for the trailing 4 quarters, 13. Return on invested capital was 16%, 2 50 basis points higher than the Q2 of fiscal 2011. 3.
As we look ahead, we see signs of slowing U. S. Economic growth, but housing appears to be a bit of a bright spot. August has started off in line with our expectations. Based on our year to date results and our outlook for the balance of the year, We continue to project fiscal 2012 sales will increase by approximately 4.6% on a 53 week basis.
From an earnings per share perspective, remember that we guide off of GAAP. We exceeded our earnings per share plan in the 2nd quarter. 2. And with that outperformance, we are lifting our earnings per share guidance for the year. We now project fiscal 2012 diluted earnings per share to increase approximately 19 percent to $2.95 on a 53 week basis.
This earnings per share guidance includes $2,600,000,000 of share repurchases completed in the first half and our intent and 2021 to repurchase an additional $1,400,000,000 of outstanding shares in the back half of the year. So we thank you for your participation in today's 2 call. And Alicia, we are now ready for questions.
Yes, ma'am. Thank 2. We'll go first to Dan Binder with Jefferies and Company.
Hi, good morning.
Good morning.
I was
wondering if you could just share with us maybe a little bit more color on your web eighteen. Sales performance as you've been making investments in that area of the business. If you could discuss a little bit about what's selling best, what's happened as you've made price investments in that area, 2. What the average ticket looks like and the margin behind that versus the store? So Dan, this is Craig.
2. We're very pleased with the direction of our business online. We do view this as total commerce, Because there's many projects that actually start online and actually complete in store, when we look at 2. We've made significant investments in our online business. We upgraded to WebSphere 7, big effort behind that, eighteen.
It proves speed dramatically for our customers, as well as features that allow the customer a better shopping experience 20. Online overall. And so we're very pleased with the performance. We're approximately 2% of our sales 2. It's roughly come through our online business directly.
And then as a follow-up, could you discuss a little bit about How the pro customer is doing versus the consumer in terms of comps by group?
So Dan, the This quarter, the pro customer sales growth was lower than 2. But as I noted, if you take out we did have and you heard it both in Craig and Carol's comments, we did have some tough comparisons on roofing. 2. When you take out roofing, they were pretty much the same, same level of growth between the pro and consumer. So we're very pleased with that because as 2.
This is one of the indicators for us of our business for Cover.
Great. Thank you.
We'll go next to Budd 2 guys from Raymond James.
Good morning. Congratulations and thanks for taking my questions. I guess I want to talk a little bit about the SG and A performance, which was terrific. And I think 2. Best SG and A ratio since maybe the Q2 of 'six.
Carol, you called out I think three items that 20. Sort of the difference between this year and last year. Can you talk and you talked about what you thought would be The ratio or the growth going forward, but can you kind of give us maybe the callouts as to what you think affects the 3rd Q4 to the working capital reserves? Is that a true up that still
2. We were pleased with our expense performance in the second quarter for sure. And as we look out for the back half of the year, we do expect expenses to be higher in 18. The back half of the year versus last year relative to expenses being under the first half of the year, for a couple of 10. We talked to you about the fact that we are investing in interconnected retail, and that includes the new call centers that Frank mentioned, 18.
And broadband expansion inside of our stores, delivery for dotcom. So we're making some investments in the back half of the year, which will cause our expenses to be 2. Higher than they were last year, but we should see continuing benefit coming off of our credit card. And as it relates to workers' compensation expense, 2. You'll recall that during our Investor Day, we've called out an expense opportunity with regard to our twenty nineteen.
And in fact, we've called out that we thought we could get about $100,000,000 between now and 2015. So we were pleased with the benefit that we saw in the 2nd quarter. 2. I wouldn't expect that to repeat in the back half of the year, but I would certainly expect to see continuing benefit between now and 2015.
2. Okay. Thank you. And as a follow-up, I go back long enough to remember when you used to parse out the operating expense by store expense 18th quarters. Can you maybe give us a little bit of a read of how that affects or how that looks today?
2. Yes. Well, as Frank pointed out, we are so thrilled that 100% of our U. S. Stores are in success sharing.
Eighteen. And so as you think about what that means for bonus payments, bonuses are up year on year and we're thrilled with that. But we are able to offset that cost 2,000. Through cost out in other areas. And we didn't spend a lot of time going through it, but we continue Marvin and his team are doing a masterful job 2.
Of leveraging payroll by moving hours away from selling non selling tasks to selling, and it's working very beautifully for
2. Okay. Thank you very much. Congratulations and good luck for the second half of the year. Thank you.
Thanks, Budd.
12. I'll go next to Aram Robinson from Nomura.
Thanks and good morning.
Good morning.
Couple of things. 1, at your Analyst Day, you gave us kind of a 4 different product categories, one that you would want to own in the store, one that's online know how and in store pickup and in store experience, One that's kind of grown across channels and one that's kind of more of a defend share. I'm wondering if you guys look at comps or sales trends by each of those buckets Because of the online significance in there and curious how that's trended year to date.
Aaron, I would say that we 18. Candidly, we look at the comps across each of the businesses. I haven't exactly totaled them by those four categories. 2. But inside of those, we certainly look at it.
So if you remember the categories in the red at highest risk, 2. Actually, right now, we're performing very well in those categories. We like that. The areas in the yellow were growth opportunities both in store 18. And online and some of those are some of our stronger growth areas that we're seeing, particularly in our online expansion as we 2.
Broaden the assortments and a lot of the simple decor categories. And then if you recall the lower left hand side, which was Kind of more maintenance and repair and things that we felt would have less pressure. We experienced some pressure in that business as it relates to Garden With the pull forward from Q1 and the drought conditions that impacted things like live goods and so on.
2. Well,
I'm very impressed that you remembered all those buckets offhand. Thanks for that. And then one quick follow-up, your DSOs were 2. Flat, I'm sorry, your DSIs, your inventory days were flat. Wondering if you can kind of characterize the balance inside the mix and whether or not kind of having a lawn and garden 20.
Dean kind of outsourced, really helped save the margins or how that would have looked otherwise. Thank you.
Well, we were very pleased with 18. Our inventory performance, turns were up year on year. That's how we look at it. And as we mentioned on the call, we have made purchases for our holiday season. 2.
Many of those purchases come from outside of the United States. We have paid for those, but the inventory is on the water making its way to the stores.
You don't feel heavy anywhere is what you're saying?
I feel really good about inventory levels, don't you, Chris? Yes.
I feel very comfortable with where we're at overall in inventory. Yes.
2. Thanks so much. Have a good Q3.
Thanks.
Thank you.
We'll go next to Kate McShane and 2 from Citi.
Hi, thanks. Good morning. Good morning. I was wondering if there was any more detail you could give behind your buy online, Pickup in Store and how that may be contributing to the comp and what you're expecting the contribution to be from the buy online ship to store Going Forward.
So Kate, it's still a very, very small I mean, it's a fraction of a small part. But 2. It's important directionally for us because we really do believe if you look out over the next 5 to 10 years that 2. Interconnecting the virtual physical presence is going to be a key differentiator. So right now and 2.
Then also by the same token, if you looked at comp performance on buy online pickup in store sales, very high growth, but 20. It's small base.
Okay. Thank you. 20. We'll
go next to Michael Baker from Deutsche Bank.
Alicia, good morning.
Mr. Baker, please go ahead. 2. We are getting no response. We'll move on to the next question.
We'll go next to Colin McGranahan 10 from Bernstein.
Good morning and thank you. First question for Carol. Just back on SG and A, understanding those three those buckets and that was But if we strip those out, SG and A dollars would have been still pretty flat on sales per square foot and comp store sales up. So it sounds like you had some labor dollar productivity improvement given that bonuses were higher. Understand the shifting of Tasking to selling, but can you comment a little bit about what labor productivity looked like and maybe where some of the productivity improvements are coming from?
2. And if there's anything else in the other SG and A bucket advertising or anything else that was favorable?
Yes. We leveraged hourly payroll by 21 basis points in the quarter, 2. Of which 18 basis points came from non selling. So that's really what Marvin is doing in terms of driving tasks out of the store, terrific performance. And Collyn, as you know, we've got a laser like focus on cost out.
So I can go line by line to tell you 2. We were down in common area maintenance. We were down in advertising. We were down in a number of other expense areas because we're just getting much 2. And Marvin, maybe you want to talk about some of the activities that are going on inside the store.
Yes, Colin. If I can take you back 11. We rolled out centralized return to vendor, a big, big process change for us. But if you think about it, every store in the chain 2. At a minimum of 44 time hours in the backroom processing vendor returns, we stood up to the central reverse logistics centers, 2.
A big deal, great productivity for us. In addition to that, we worked hand in hand with Matt Karish's team on labor productivity We rolled out a enterprise wide in the U. S. Scheduling system and payroll system for all stores, enable us to take 2. The schedule writing process in some cases to 3 to 5 days to a matter of hours.
So I can go through a list of projects that we put in place To drive productivity in the stores, we're excited about what we've done. We have the sixty-forty target that we hope to complete 13. And as Carol mentioned, I mean, our goal is simply to figure out ways to take nonproductive, nonservice related payroll and shift it to the sales floor and
2. Great. That's helpful. Sounds like a good process going on. Second question for Frank, more strategic.
2. Just on acquisitions, maybe you could talk about what the rationale is behind U. S. Home Systems acquisition during the quarter? 2.
And then thinking about a potential Lowe's acquisition of Rona, how would that impact your thinking and your Strategic Positioning in Canada.
So on the first, on USHS, as you know, Really, they were 100% dedicated to the Home Depot or effectively 100% dedicated to the Home Depot. And much like 2. The acquisition we did earlier in Measure Comp, which was also a company that was 100% dedicated to the Home Depot. 2. There are benefits to us to just making it part of the company.
2. There are efficiencies we're going to gain. We think there's a tremendous improvement in customer experience that we can drive as we connect 2. Our store experience with that in home selling on USHS. And I'd also say on USHS, 2.
As you might remember, Colin, many years ago, we bought another company that was exclusively dedicated 2. The Home Depot on in home selling that did roofing, siding and windows. Marvin and his team have been driving that business. We 2. Like the experience that we can provide to customers on that and we want to be able to do the same thing on USHS.
And on the second 2 comment. Our strategy will remain the same in Canada, and we're very pleased with how we're doing in 2.
Okay. Thank you very much. Thanks.
We'll go next to Christopher Horvers from JP 10.
Thanks and good morning.
Good morning. Can you share
your latest thoughts about adding leverage? Holding the trend into year end, 2. Seems like your adjusted leverage ratio will decline maybe about 1.7. Understand you don't need the cash, but given the rate environment and you're a little bit more twenty. Can you talk about the decision points on whether you would decide to let the ratio drift lower into year end?
Be happy to. Our adjusted debt to EBITDA ratio stands at 1.7x today against a cap of 2x. So we have a little over $2,000,000,000 of borrowing capability pursuant to our guidelines, if you will. As we think about when We'll access the debt capital markets. We look at it really from an environmental perspective.
And by that, I mean, The economic environment, which we would define as pretty volatile. While housing is a bit of a bright spot and that's good news, we wouldn't call 3 today. We still think we're in workout phase, working towards recovery. GDP forecasts have come down. We've got an election ahead of us.
We have uncertain tax policy. We We don't know what's happening in Europe. Chairman Bernanke has said he stands ready to take action if necessary. So we think there's a ton of beta in the environment. And when there's a ton of beta in the environment, not the best 2.
Time to add debt leverage. So our point of view, Chris, that interest rates aren't moving anywhere. If we thought that there was an opportunity to be lost, 20. We would have a different point of view, but we don't think there is an opportunity to be lost. So for now, we're sticking where we are and we'll tell you what we plan to do when we plan to do it.
So this doesn't I guess, given the amount of cash that you have, it doesn't necessarily impact how much you could buy back Into the balance of the year.
Well, as we look at our cash balance, and we are very pleased with that cash balance of $2,800,000,000 a couple of things to remember. 3. First, we've only spent about $550,000,000 of capital this year against our plan of $1,325,000,000 So we've got a lot more capital spend in the back 2nd quarter. 2nd, we need about $1,000,000,000 to operate just given the size of our business, the seasonality of our sales, etcetera. And then 3rd, none of our cash is available.
We do 2. Full cash outside the United States in Mexico, Canada and China. So we'll always have some cash on the balance sheet.
2.
Okay. And then as a follow-up, you commented that the weather drove some of the variability on the monthly side in the quarters. 2. Was the July acceleration at all weather driven? And can you talk can you share with us whether you see much difference in U.
S. Comps in 3Q 4Q. Thank you.
On the weather side of it, July's acceleration wasn't really driven by weather itself. We had strength 20. Across the store in the month of July.
And I'm not sure if your comment was on last year or this year. Last year in the U. S. Comps in Q3 were 20. 3.8 percent, which about 100 basis points was driven by Hurricane Irene.
Comps in the Q4 last year were 6.1%, 10. Which was driven in large part by that warm weather that we had in December January. Now we've planned for that as we built our plan for Q3 and Q4 of this 2. So as we look at U. S.
Comps for Q3 and Q4 this year, they should be more or less in line 2. With what we experienced in the Q2. Is that helpful?
Thanks very much.
2. We'll go next to Alan Rifkin from Barclays.
Thank you very much. I know that you said ticket was up 3.4 while Sales of small purchases actually declined slightly, but could you maybe shed some color on what you're seeing with respect to discretionary items Regardless of price point?
Yes. Alan, I think we're very pleased with things like 20. Kitchens, which is clearly a discretionary spend and also a very large spend. The team has worked 2. Incredibly hard to build a better experience for the customer, whether that be through the product offerings that we have or Marvin's 18.
And the service group on the install side of that experience. And we saw strong growth there. And we've grown that business 2. Just now for almost 2 years. So we believe that we're taking share in those type of businesses.
And it's an effort of eighteen. Continuing to remain focused on the value proposition that we're providing the customer in those bigger ticket categories. So whether it's kitchens, flooring, 2. All of those businesses have performed and our sales and tickets over $900 have actually been 2. Solid performance and we believe it's because of the value proposition that we're bringing to the market in those categories and taking share.
2. Thank you. And one follow-up, if I may. As you continue to grow the dotcom business, obviously, at a greater rate than brick and mortar and Obviously, I realize it's only about 2% of revenues. Do you believe that you're taking share more so from other competitors?
Or do You think that there's some cannibalization going on? And can you maybe just shed a little bit of color on how we should be thinking about the inherent profitability of Dotcom relative The brick and mortar for let's say a given product.
So as it relates to sales, I mean, I think we're taking 2. And I would say at this point in time, don't see a lot of cannibalization in the business in total. And so we 20. Again, our focus on the experience that we're delivering to the customer. I want to make sure that we're providing experience that allows us to grow that business $2,000,000 by taking share from the market.
And from a profitability perspective, as you know, we're on a path to reach a 12% operating margin by 2015 20. And that path includes the impact of Dotcom.
Okay. Thank you all very much.
We'll go next to Matthew Fassler 3rd from Goldman Sachs.
Thanks a lot. Good morning. One question on the tone of business and then one follow-up on the balance sheet. Alan 2. I sort of touched on this a bit, but you talked about what you're seeing in terms of GDP forecasts.
And then obviously, you see the cadence of the business day to day And what the rhythm is among categories. Is there anything that you saw kind of from Q1 to Q2 exing out the weather That would have suggested or substantiated the notion of a slowdown in consumer spending or your cautious comments just a function of sort of What the forecasters are saying.
So I'd say, Matt, that the cautious comments are a little bit what the forecasters 2. If you just look at our business and you look at the core of the store And you adjust for the pull forward. You'd actually say the core of the store was strong in the 2nd quarter. Yes.
2. Got it. And then Carol, obviously, you had 2 quarters in a row of ASRs, which is for those of us trying to reconcile shares, that is
a bit of a nightmare. So 13.
I'm sure it's good for
the company. If you could
just give us a sense as to how this sort of trues up As we get through the Q3 and the Q4, what kind of share count we could look for? Because presumably, you'll have a bunch of Stock coming out with less of an expenditure in the second half.
Well, first let me tell you why we do ASRs. They are a pretty efficient way to And there are derivatives, as you can appreciate. And we can set the strike price wherever we want to set it. 2. So the higher we set the strike price, the larger the discount to BWAP.
So when we did BASR for $1,400,000,000 in 2nd quarter. We set the strike at $65 which meant we immediately brought in 21,500,000 shares. Now obviously, our stock $60 So as the ASR is completed, they're buying the shares in at the price every day. So it will average down 20. Considerably, the economic benefit in doing this is almost $0.80 off the VWAP every day.
So there's real value to be created by doing it 2. This way, so you picked what the average stock price might be. The ASR expires on August 24. It could close out anytime between now and August 24th. But I'm thinking we'll get another 7,000,000 shares in or something like that.
So hopefully that will be helpful.
So that comes in, in addition
To What we've already gotten. Yes.
And then you've got then on top of that, you've got the incremental buyback that you guided to, which we should think about at market prices.
20.
So $7,000,000 comes in with an incremental expenditure that's the true up?
That's right, more or less.
Got it. Cool. Thank you.
Okay.
2. First, Craig, on the ticket decelerated from 2.2 to 1.8 in the second quarter from the first. Can you describe how weather or perhaps disinflation 2. May have impacted that, especially given that vendors gross margins have started to improve as raws come down?
So, the ticket improvement really was 2. Driven through a number of categories around bigger ticket spends, the HVAC, the appliances, the twenty nineteen. The kitchen, the flooring, a little bit of drag on the bigger ticket was things like tractors, which 2. We're impacted both from a pull forward where if you're going to buy a tractor, you bought it in the Q1, you're done. 20.
And as we called out, we estimated that the pull forward in the Q1 from the second would be roughly 100 $25,000,000 to $150,000,000 That's about what the number was. And it impacted categories like tractors. 2.
And Craig, if I could just jump in for a second. There's a currency impact in the ticket in the second quarter. If you look at the ticket growth in the U. S. In Q2, it was up 2.5%.
2. Got it.
And then secondly, and this is maybe a little bigger picture looking forward for whoever wants it. 2. We now have Affordable Care Act is going to go forward. I'm curious what you guys have done to sort of start preparing for 2. Whether it's looking at your full time versus part time labor, potentially outsourcing some certain things.
Marty mentioned 2. Tasking to maybe putting some business of work back on vendors. Just think about a bigger picture as to how you guys
are preparing
for that? So 2. So Greg, we're obviously spending a lot of time thinking through the implications of the Affordable Care Act and how 2. We'll respond. But I would tell you, we run our business the right way to run our business.
We're not going to change 2. Full timers to part timers because of the health care legislation nor would we outsource work for that reason. 18. The overriding the customer experience and what our associates provide to the customer experience in the I mean that's our business.
Is there something that you're waiting for to be able to make some more decisions about how to do that best in the new
2019. Oh, my gosh. There are so many there are a lot of regulatory uncertainty still. 2. There are many when you get into this is obviously a very complex area, and we spend a lot of time internally going through the 2.
Here are the different variables that we've got to take into account. And there's a lot that still has to be determined.
All right. Thanks a lot.
2.
We'll go next to David Schick from Stifel Nicolaus.
Hi, good morning.
Good morning.
Good morning. Good morning.
Two questions. First, How are private label sales doing online? It would be interesting. And secondly, Frank, you talked about 20. The kitchen install and Craig, you talked about the value proposition that's helping to drive that.
But any more detail on 10. And labor efforts, staffing, marketing around the incremental share you're grabbing there, as you said would be helpful. Thank you.
2. So I'll start on the second one, which is the kitchen sales and in particular just going back to a comment I made on the improvement on 2. Our kitchen install side and Marvin may want to add a comment here. I'd say that one of the important things is 2. Our associates in selling a kitchen install.
And so you really have to look at it as a multiyear effort from Marvin and his team 2. Building up our associates' confidence that when we sell a kitchen installation, it's going to go 20. Well, and we do very extensive points of the customer surveys on this. And Marvin, you might want to add a comment. 2.
Yes. Look, the key is the confidence of the associate. I mean, I can take you back to the days when I was a division President and you could directly correlate 2. Full performing stores and markets in kitchen sales to their perception of the quality of the service providers. So to Frank's point, over the last couple 2.
Yes, we've taken some very specific steps in putting all of our service providers through our version of customer first 20. We rolled it out to the store. We rolled it out to the executive team and we figured, you know what, let's roll it out to the service providers because when you step foot in the home, you represent the and 2021. Home Depot and you should have the same brand standard for customer service. That was a big deal because we've never really done that before.
In addition to that, eighteen. We put some very rigorous standards in place on the voice of customer surveys. We changed the way the surveys are conducted. Now we have a third party that will 20. If they perform well, we give them positive incentives.
If they don't, they can lose business and in some cases suffer exiting their relationship. 2. All that being said, we're very pleased. Frank mentioned early on that our service scores are north of a 9 on a scale of 1 to 10. 2.
We've never had that before and we've sustained that. Our goal is to improve it. We still have concerns about getting better because we have high standards. But the 2. Service quality, the training has really played a big role and to help Craig's team take great value, great confidence and to install it in a way that 2.
We think it's very consistent with the brand standard of our service proposition to the customers.
And Dave, as it relates to private label sales online where we have 2. Categories in store, online with same kind of makeup of private label versus national brand and product. The sales were roughly in the same penetration ranges as they are in store.
2. Great. Thanks very much.
We'll go next to Michael Lasser from UBS.
Good 2. From a product perspective, if you look at the categories that are most below peak volume levels. How did those perform during the quarter? And where do you expect them to go over the course of the improvement in the housing recovery? 2.
So the categories that are kind of past peak would be those seasonal businesses that were coming out of Q2. Candidly, the pull forward in Q1 had an impact on them. 2. So business and as well as some of the areas in the North had impact from drought. So 2.
Things like live goods and fertilizer had some weather impacts from the drought in the north, things like patio and grills and 2. Riding mowers that are past their peak, we saw some pull forward from
2. Michael, do you mean within the year or over time?
Over time. I meant looking back to the peak of the housing bubble, you're doing 20. 60% of the volume in kitchen remodels that you were back then and those were some of the best performing during the quarter.
Yes. You got it exactly right. So if you look 20. Over time, the categories that have been hit the hardest are kitchen remodels. And you've heard 3.
We're improving there. Job site tools is always an interesting category because they 2. Kind of correlate to job sites and I'd say stabilizing, it's stabilizing.
Lump up the penetration.
20 2 has a ways to go. So you would characterize 2. So those categories are some of the better performing during the quarter? And then I'm also curious about July into this quarter, because Again, the historic relationship between the housing market and home improvement would suggest that you're going to start to see some of that activity really take shape in the second half of the year.
20. What I would say, Michael, is that what those categories that were hardest hit would say would be The market is stabilizing. As Carol said, we're kind of in a workout mode, but 2. It's not like this is taken off. It's stable.
It's improving and that's 2. Positive in a workout sense, but they're not I mean, it's modest.
Okay. It's more of a slow grind higher than 20. And then it's sharp up turn.
Right.
Okay. Thank you very much. Yes.
Alicia, we have time for one more question.
Yes, 2nd quarter. We'll take the last question from Scot Ciccarelli from RBC Capital Markets.
20. I guess I was asking going to ask a question fairly similar to Michael. When you look at California and Florida, 2 areas that you basically eighteen. As highlighted, do you see much of a difference in terms of mix from what you're seeing through the rest of the country, just given the fact that they're coming off such a trough level?
3. No, it's not a dramatic change in mix of sale.
Not at all.
Not really. No.
2. Okay. That's all I had. The
market's improving, but the mix is about the same. Okay.
Thanks a lot.
Appreciate it.
All right.
Thank you. Thanks, Scott.
20. Well, thank you for joining us on today's call, and we look forward to talking to you at next quarter in November.
That does 2nd Today's Conference. We thank you for your participation.