Good morning and welcome to our 2012 Investor and Analyst Conference. This morning you will hear from Frank Blake, our Chairman and CEO Marvin Ellison, our Head of U. S. Stores Mark Powers, our Senior Vice President, Store Operations and Craig Meniere, our Head of U. S.
Merchandising. Then we will take a 20 minute break. After the break, our speakers will be Trish Mueller, our Chief Marketing Officer Hal Lawton, the President of our Online Business Mark Holyfield, Senior Vice President, Supply Chain and Carol Tamay, our CFO and Head of Corporate Services. At the conclusion of the second session, we will open the mics for Q and A. I would like to remind everybody that today's presentations made by our executives include forward looking statements as defined by the Private Securities Litigation Reform Act of 1995.
These statements are subject to risks and uncertainties that could cause actual results differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified on this slide and in our filings with the Securities and Exchange Commission. Today's presentations also include certain non GAAP measures. Reconciliation of these measures can be found on our website at ir. Homedepot.com.
It's now my pleasure to introduce Frank Blake, our CEO and Chairman.
Thank you, Diane, And good morning and many thanks to all of you for taking the time to join our 2012 Investor and Analyst Conference. This is an opportunity for us to outline some of the progress we've made over the last year and a half, and more importantly, to lay out our plans for the next several years. For our strategic framework, we borrowed from Jim Collins and used the 3 leg stool to answer the 3 core questions that every business should answer. What are we passionate about? Customer service.
What do we want to be best in the world at? Product authority for home improvement. And what drives our economic engine, disciplined capital allocation and productivity and efficiency. We've added a 4th element to this strategic framework, interconnected retail, because it's clear that multi channel capabilities are a Finding confidence for the years ahead. To reference another concept from Jim Collins, he talks about businesses needing to achieve Paranoid creative consistency.
So I'd add that as a defining attribute next to interconnected retail. Home Improvement is in many ways less vulnerable to online competition than other parts of retail. But as you'll hear, we approach this space with a healthy fear of competitors and intense focus on how we can creatively develop new opportunities And an underlying consistency in our business purpose. Before getting into our strategic plan, it's important to set out some of the We'll have to adjust over the next several years because they aren't entirely right, but I think transparency on our assumptions is helpful. 1st, on the housing market.
As Carol will detail, we believe that recovery in the housing market will be slow And our growth will continue to be linked more with GDP growth than with housing numbers. Since I've shown a chart on private fixed Residential investment as a percent of GDP since 2007, I thought it would be useful to show it one more time. We've dropped a long way in the last 5 years and recovery is still very limited. Carol will outline various scenarios on what a housing recovery might do in our business and what to watch for. We can adjust if the market returns more quickly or more aggressively than we anticipate, but our working hypothesis is that the recovery will be slow.
Along with a slow housing recovery, we also are planning based on the assumptions that GDP growth will be moderate. We will still face higher than normal unemployment and underemployment rates with the consequence that value will remain of major importance to our customers and that our focus needs to remain on investing for productivity and efficiency. Trish will show a chart on the demographics of our customer base. What you'll see is that Genwires provide growth over the next decade, But the baby boomer generation is still the driver of home improvement spend. With this aging cohort, Do it for me is likely to grow in importance, but Home Depot's principal focus will be on helping our pro customer serve that need and secondarily serving it directly ourselves.
This is one of the reasons behind our Red Beacon acquisition as Trish will discuss. We know that interconnected retail is only going to grow more important. We'll spend a fair amount of time this morning talking about the areas where we see opportunities, The areas we know we'll have to defend and how we can use interconnected retail to leverage our business model. Finally, our discussion today doesn't make any assumptions on healthcare. As an employer of over 250,000 associates in the U.
S, the impact The Supreme Court's decision on healthcare will be significant, but it's obviously premature to determine that impact in either direction. So understanding Home Depot past, present and future starts with an understanding that we are a values based business. You'll see our values wheel on every orange apron in the company and you'll see the inverted pyramid in every break room. Bernie Marcus and Arthur Blank summed up the company culture by saying, take care of your associates and take care of your customers and everything else takes care of itself. So in recognition of that, we consider the first step of customer service to be investing in our associates.
We pay an above market level hourly wage. We've maintained salary increases throughout the housing downturn. We've maintained our 401 matches. We increased our success sharing program, which is our bonus program for our hourly associates. And in fact, we paid out 3 times more in success sharing this past year than we did in 2,005 at the height of the housing market boom.
We have an extensive reward and recognition program for hourly and salaried associates. And Marvin will review with you some of the highlights of our training programs. Overall, we invest over 10,000,000 hours in training for our associates and we've intensified our communication vehicles throughout the company. It's always been true, but now even more so our associates have to be a competitive advantage And we need to be as purposeful in communicating with them as with our customers. We have an internal blog, internal magazines, internal videos, all with an eye to ensuring that our associates are engaged and empowered.
We have a clear understanding of what our store environment is and what we want it to be over the next several years. Our store is a working warehouse. We have attempted full remodels in the past that Focus more on the decor part of our business, but those haven't been successful and aren't consistent with our vision for the business. Farrell will outline for you our plan for store investments over the next few years. These don't include significant on store remodels.
They do include increased spend on the basics of store appearance, on making the shopping experience simpler for our customers, and on making sure that we keep up with the needs of an aging store base. Most critically, we will continue to invest in technology in our stores. Matt Carey and our IT team working with Mark Powers and store operations continue to roll out new technologies for our stores. First Phones, First Phones Juniors, new scheduling systems, new special order systems, new configurators for categories such as blinds and millwork and so on. Many of these begin as internally focused tools, but more often than not they add important capabilities for serving customers.
An interesting example recently has been the rollout of our centralized return to vendor program, which has had a side benefit of enabling us to directly serve the small engine repair market. We've seen a strong response to this offering which we haven't yet even really advertised well in excess of our projections. It's not an insight unique to Home Depot that customers in the coming years are increasingly going to Back to shopping experience that allows them to shop how, when and where they want. Hal will review with you some of what we're doing. Buy online, return in store, buy online, pickup in store, buy online, ship to store, these are all going to be table stakes for retailers.
We are focused on making sure that our execution is as flawless as we can make it. We review our interconnected performance on customer satisfaction as intensely as our store performance. Beyond that there are aspects of the customer interaction with our stores that are unique. In particular, the interaction on complex special order products and installs. We are building a new customer order management competency And we can we believe we can build on our existing My Account functionality and build that into something that provides a positive differentiated experience for our And as we've discussed before, we set up how to communities using our own in store associates who are product experts and trained in social media.
As Trish will discuss, we've been named in the Fortune Top 10 for social media and we believe this is one of the reasons. Craig and Hal will discuss how we look at our existing portfolio strategy through the lens of potential Internet competition and opportunity. As a general comment, every part of our business can benefit from the capabilities available through the Internet. Even areas like basic commodities from lumber to drywall to mulch and fertilizer can benefit from the functionality of remote inventory lookup Or buy online pickup in store. So even though these categories may be remote from Internet competition, We approach them with the understanding that they are still a part of our overall interconnected strategy, just with a different need and role in the portfolio.
In other areas such as decor categories where breadth of assortment is helpful, we see opportunities to expand our business. And as Craig will describe, there are also areas where we know we need to defend our share position And we will invest to do that through our cost position, product innovation and differentiation. As Carol will show, we've driven productivity and efficiency in our business over the last several years with the result that we plan to hit our 10:15 target earlier than we anticipated. Much of this improvement has come from the changes Mark Holofield and the supply chain team have accomplished, Not only standing up a new domestic distribution strategy with the rapid deployment centers, but also through implementing centralized inventory forecast and replenishment. We have much more to do as Mark will discuss.
At the same time, we see significant opportunities in our continuing merchandising of Transformation. As those of you who followed Home Depot for a while know, we've been on a long term path of developing world class merchandising tools. We decided against a company wide ERP strategy and have evolved from so called scrappy tools To invest in data management and a series of focused improvements in our merchandising tools. A good example is assortment planning, A critical competency. We know our tools are behind what was available to most retailers over a decade ago.
Very simply, we're in the process of building the ability to create relevant store clusters for different assortments And then giving our merchants visibility to SKU cluster performance. Not path breaking, not new within retail, But something that we know will allow us to drive significant benefit over the next several years. The discussion on tools and infrastructure also leads directly to our sourcing capability. The lack of effective inventory management and order visibility has constrained our sourcing operation. As we fix those basic competencies, we expect to do a better and better job at sourcing.
Our customers are looking for innovative products that make projects simpler to do and that create value. We've seen this consistently across the entire store whether in paint where through Behr we first introduced the paint and primer product Or tools where through our exclusive brands we've maintained leadership in battery technology. We are focused On Home Depot being the best partner for our vendors to bring innovation. We have a process to target innovation And we expect to continue to drive this over the next several years. One of the major changes at Home Depot over the last several years Is that we recognize that the driver of our economic engine has changed.
It is no longer square footage growth. It is disciplined capital allocation and productivity and efficiency. We don't see that changing over the next several years. The U. S.
And Canadian markets are effectively saturated. The only new stores will be those necessary to address shifting pockets of growth or relocations. We will have continuing opportunities in Mexico and China is still a work in progress. Other markets, for example, in South America are of potential longer term interest, but not within this planning horizon. While we don't see a need to add a significant number of new stores, we also don't see a need to shrink our existing footprint by downsizing existing stores or closing stores.
We have opportunities to improve the productivity within our stores, Driving higher sales per square foot and that will be our principal focus over the next several years. Our shareholder return principles are straightforward. We have a targeted payout ratio of approximately 50% of earnings. This puts us among the top in retail and we intend to increase our dividend every year. We will soon hit Paid a new buyback authorization in 2013 and the underlying principle will be the same.
We'll use our excess cash After meeting the needs of the business to repurchase shares as long as the activity is value created. And finally, we will maintain a high return on invested capital benchmarking all uses of excess liquidity against the shareholder value created through repurchases. As you know in 2,009 we set out a long term operating profit target of 10% With a return on invested capital of 15%. We expect to hit those numbers sooner than we thought And Carol will give you some of the detail around that. What I would call out is that we achieved about 400 basis points of operating profit In the sluggish sales environment, the 3 year CAGR of about 1% on sales.
And we improved our competitive position gaining share in key categories along the way and improving customer service scores. So this was not profit improvement gained at the expense of operational performance. Later this morning, Carol will discuss our new twelvetwenty four target, 12% operating margin and 24% return on invested capital by 2015. But let me outline some broad principles. First, we expect most of the improvement in operating margin to come from Natural operating leverage of the business.
Of course, in reality, there's nothing Natural about this leverage. To achieve it requires consistent discipline around every aspect of cost in our business. We've shown over the last few years that we can do that. We can improve our operational performance and our profitability at the same time. We will need to continue that over the next several years.
2nd, we're assuming a modest Largely GDP driven growth behind this natural leverage. We hope that this proves conservative, But we'll be prepared to adjust in either direction. And finally, we want to continue to gain share regardless of what's happening in the market. So our primary focus is on reinvesting the productivity and efficiency that we drive within the organization, whether on the store operations side or the merchandising We believe this creates a virtuous cycle that benefits our customers, associates, and shareholders. Let me close by going back to the Jim Collins phrase of paranoid creative consistency.
We know Retail is changing at a faster pace than any time in history. We are not taking our market position for granted. We expect constant challenges. We are driving for innovation and creativity, whether it's in how we run our stores, Build our interconnected site, talk to our customers or develop our product offerings. And we recognize the power of doing this In a strong company culture with a limited set of clear objectives executed by an experienced team.
And with that, let me introduce Marvin Ellison, our Head of U. S. Stores.
Hey, thanks Frank. And our passion for customer service It is the first leg of the strategic stool and delivering unparalleled customer service is more important today than ever before. Today, customers compare service in our stores to a broader landscape of retail, and we've created an operational plan in our stores to address the needs of our customers. This operational plan is fundamental to the success of our stores. The role of each associate is designed to deliver customer service, A strong in stock position in a vibrant store environment.
These three objectives are clear, They're concise and they're very simple. And this operational plan is essential in our efforts to improve the shopping experience for our customers. So today I'm going to talk about how we serve customers in the store, in their home, on the job site, as well as in the community. Today customers are seeking a frictionless experience when they shop, whether they shop in the store or shop online. And it is our responsibility to design an environment that facilitates the needs of our customers however they would like to be engaged.
So let's talk about how we're providing great customer service in our stores. So as a reminder, back in 2,008, we took unprecedented steps to train all U. S. Associates on our new customer service expectations. We call this initiative Customers First.
This training was designed to clarify customer service expectation by specific position. We wanted to reinvigorate our customer This year, so back in the spring we took advantage of the increased customer foot traffic in sales and in February we retrained All of our associates and we call this customers first in spring training. So once again, we set a very aggressive timeline In over a 6 week period, we retrain all 250,000 U. S. Store associates on our continued commitment on customer service.
During this training, we discussed how the competition has changed, we introduced the concept of doing the unexpected for customers, and we emphasized the importance of thanking our customers. We also allowed our store managers to customize the training and focus on elements of firsts that they felt their store may be struggling with. So I'm pleased to say as a result of this retraining, we've seen a 330 basis points improvement in our Net Promoter Score in the Q1 of 2012. And as Frank mentioned, each year we dedicate 10,000,000 hours to train associates in our stores. So in addition to training, in 2010, we relaunched or we launched the warehouse to gain better visibility of our associates' concerns.
So specifically, the warehouse is an online community that allows collaboration between store associates and our store support center. With its groups, its blogs, its hosted online chats and search capabilities, the warehouse allows us to share knowledge and best practice, answer questions, And more importantly, address store associate concerns. To date, over 52,000 associates have contributed 276,000 posts. This is a unique communication tool and it's allowed us to identify and attack areas of customer service and training. We also recognize our associates for their exceptional customer engagement.
Home awards, Team Depot badges on the aprons of our associates distinguish those who have been recognized in the store by their peers and by customers for living the values and participating in community events. Our executive leadership team also recognizes stores for Exceptional community involvement through our Emotional Connection Award. We also recognize individual associates For outstanding customer service through our weekly Legends Award. Starting back in 2010, we developed an annual publication that Some of the legendary customer service of our associates. We send these books to each store to keep in their break room As a way to reinforce our commitment to exceeding customers' expectations, while recognizing the wonderful customer service of our associates.
And the Home Depot Legends program, we recognize the amazing connections that are made each and every day between our associates And the customers that shop in our stores. And we're extremely proud of the behavior of our sources to drive customer service, and this program helps to reinforce that. So let me take a moment and share with you a video that will outline some of the outstanding customer service from some of our Legends winners.
I was called by a fellow associate over to IL-fifteen to help out a customer, Stephanie. She was brainstorming, trying to figure out what she could do to set up a little project for her son.
My son, who is autistic and loves to watch flowing water, I had come up with kind of an idea of how to make something for him so he could have water constantly flowing without having our hose on all the time.
She would have the garden hose running in the backyard. Her backyard turned into a mud pit, cost a lot of money. She was trying Do something to cut down on that. By the 2 of us putting our heads together, we came up with a little recirculating pool. I had ideas of what I wanted But I wasn't sure how to do it.
So I ran into Jeff and Jesse and explained to them what I was trying to do with the customer.
Glen called us over because he knew what the customer wanted to build was our area of expertise. We brought her down the plumbing aisle, pieced everything together, made We're explaining to her, this is how it's going to get put together. If you want us to put it together, we'll be more than happy to do it for you right now. We tallied up all the SKUs gave her total price and it was a little bit out of her budget. So she said she was going to have to purchase some items now and come back for a couple of items later.
I figured why don't we just take care of this customer and make that personal connection. I contacted my assistant manager just to get the approval for And everything was a dreamlike.
And they were like, we'll give it to you. And I was just I was dumbfounded. I was like, what do you mean you're going to give it to me? Why? Why would you do that?
Being the mom of a special needs child, when someone makes that extra effort to help you, there is an instant emotional connection.
Her Reaction was unbelievable. It's such a great feeling to see someone that was in need that we were able to take care of.
They were genuinely interested. And I got home and shared the story on Facebook and people shared it, people wrote back and the theme throughout all those comments was that you restored
Our ability to connect emotionally with our customers at a local level is very, very powerful. And all of our associates are dedicated to doing just that. As you'll hear later on from Mark Powers, the sixty-forty initiative That was developed to remove tasking hours and replace them with customer service hours. There's been a very large undertaking, which has required a massive change management of our associates. What's listed on the screen is a sample of the projects that have been implemented over the past 3 years to transfer payroll hours from tasking To drive service and sales in area like hardware, paint, garden and plumbing.
We started out with many small projects and then moved to more complex changes. For example, we completed the rollout of our fast labor system in our stores, which allows for better payroll allocation. We also moved the returns to vendor process from each of our approximate 2,000 stores to 3 very large central processing centers. Not only has sixtyforty allowed us to allocate payroll hours to customer service, it's also helped to develop a process for us to redirect hours And from our customers that we will assist them in doing their projects. And we've created this expectation by years of providing know how and expertise to our customers when they shop in our stores.
And our focus on emotional connectivity with our customers creates an opportunity For us to leverage out all of our sources and approximately 2,000 stores in a way that we believe cannot be matched by our competitors. Although we are a very large retail company, we are different from many brick and mortar stores. At The Home Depot, we sell projects, not just products. And we believe the project nature of our business places an increased level of importance on our brick and mortar locations and on the engagement and connection between our customers and our associates. And through our weekend clinics, our kids and do it herself workshops, we are forging an emotional bond with our customers And committing to emotionally connecting with our customers also means that we will continue to do what I call good old fashioned customer service.
And I'll commit to you that our focus on customer service will continue to be the number one priority for our stores. So in addition to emotional connection that's created in the stores, we also leverage our home services business To connect with our customers in a very personal way in their homes. We have over 30 installation projects that can bring life to a home That range from things like countertops and carpet and HVAC and roofing. And our Orange Apron associates visit customers' homes more than 500,000 times And there's one customer group where building a strong eVosha connection is essential and that is our Pro customer. The Pro customer remains an important component to our current and future sales performance.
And in 2011, we estimate that Pro customer represented approximately 35% of our sales and we've seen over a 5% sales growth to this customer group in the Q1 of 2012. As we think about the growth potential in this business, it's important for us to stay focused on the needs of this customer. Therefore, when we ask the pros how we can better serve them, thus gain a greater share of their wallet, They have 2 very simple requests. First, they say treat me like you know me and secondly, they want us to be a business partner. We responded to these requests by implementing the following initiatives.
1st, in 2011, we rolled out a customer service initiative designed specifically for the Pro called 1st for Pro. This initiative focused on the key drivers of Pro satisfaction, things like speed of checkout, better trained associates, In stock product at great prices and a convenient safe place to park. We value our Pro customers and we develop specific initiatives to address each of these requests. So to assist with speed at checkout, we staffed our stores with dedicated pro cashiers. These cashiers are trained to understand the Pro business and know the Pros by name.
They focus on speed of checkout but also they do a last check any forgotten items that a Pro may need. Time is money for these Pro customers and Pros are looking for a different level of service than our traditional DIY customer. A simple example of how we're making in store changes to assist our Pro customers can be found at our ProDesk. To improve engagement and assistance, we ask our ProDesk associates to reposition their computer terminals, move out in front of the desk so they can make assisting these customers their number one priority. This simple change removed the desk as a barrier and better position our associates to help customers.
We've also recently rolled out designated parking spaces for our pros and we've designated associates who focus on nothing but loading specifically for these very important customers. The goal is simple. We want to help these customers so they can leave their workers on the job site versus bringing them to the store assist them with loading. These two initiatives have not only improved customer service, they've also allowed the pros to get in and out fast. And as I mentioned earlier, Time is money for these customers.
Being a one stop shop is key in today's economy and our Pro delivery program is focused on allowing the Pro to buy and have us deliver curbside or right to the job site. Our broad delivery offering removes the hassle of arranging transportation, Whether you need a flatbed with a forklift, a box truck, a rooftop delivery, a boom and scatter for drywall, the key for us is to offer the service to the pro So we can help them solve the need of their specific project thus saving them time and money. Having access to credit remains Very important need to assist our Pro customers in growing their business. And our Pro customers are offered 2 primary credit instruments. First, we have a prox card With detailed billing in 30 day terms, and we have a revolving charge with the flexibility of running a balance until the job is complete.
Home Depot offers industry leading approval ratings and credit lines and approximately 70% of our pros that apply for credit are approved. And finally, it's important that we understand the diversity of our Pro customers. I have a very simple belief that you cannot serve customers that you don't understand. Therefore, we are committed to understanding the diverse cultures and needs of our customers. A large group of our Pro customers are Hispanic and many key groups like masons, Drywallers painters, the Hispanic pros make up more than 50% of the customer base.
So we're supporting this critical customer in 3 very basic ways: Localized merchandising, targeted marketing and a focus on bilingual staffing. As a result of all the efforts I've outlined I'm pleased to say that our Pro customer Net Promoter Score has improved by 35% since 2008 And I feel that we are well positioned to grow this business in the future as this group continues to recover. In addition to connecting in our stores, in customers' homes and on the job site, Team Depot, our associate led volunteer force, Completed more than 1,000 community service projects last year. And our associates are out in full force every single day in the neighborhoods Where they volunteer their time and talents to rehab and repair homes for deserving families, refurbish local parks, schools, community places and gathering spaces, And many, many other projects. In addition, when disaster strikes the city of town, The Home Depot is among the first on the scene ensure our customers have supplies, resources and support they need to rebuild their homes and communities.
The power of our social volunteerism is Extended even further by our Home Depot Foundation, which donated almost $60,000,000 in product and cash grants to communities in 2011. And we also committed $30,000,000 over 3 years to address the housing needs of veterans. Veterans and their families face Often significant challenges in finding affordable housing or homes that fit their disabilities, and our goal is to ensure that every single veteran has a safe place To call home. It's a personal issue for us because more than 35,000 of our associates are veterans. So we know That veterans are a valuable resource not only to our business but to the communities in which they live.
And this call is a very passionate subject for our associates. And as a result of all the things that we've done to renew our focus on the customer and our associates, we have seen strong and sustainable improvements in our customer service results. Specifically, we've seen a 31% improvement in our Net Promoter Score and an 11% improvement in the University of Michigan Annual Customer service survey since 2008. So in closing, we're committed to maintaining a simple operating environment in our stores. As illustrated on the slide, although telling time is simple, the complexity is visible when you remove the face of the watch and see all the intricate moving parts.
Quite candidly, this reminds me of a Home Depot store. Although our stores are inherently complex, we are committed to keeping this complexity behind the scenes While maintaining a simple environment for our store associates. When we truly commit to a simple environment, we allow our associates to focus their time and attention on taking care of customers, driving sales, thus creating shareholder value. I would like now to introduce Mark Powers, who will provide more detail on Everything we've done and we plan to do to keep the store environment simple and to continue to make the emotional connections possible. Thank you.
Thank you, Marvin. Today, I'll share with you examples of how we will leverage the operational rigor That has now been established in store operations to implement simple processes and procedures to not only drive productivity, But also exceed our customers' expectations now and in the future interconnected retail experience. Today, I am also pleased to share with you that we have projects in flight that, along with projects we have already completed, Will allow us to achieve our sixty-forty goal in early 2013. As you may recall, in the beginning of 2,008, in In store operations at The Home Depot, we operated with such antiquated legacy processes and systems That it required us to assign roughly 60% of our store labor hours to tasking. This left the remaining 40% of our store hours free for our associates to serve our customers.
At that time, not known for our operational efficiency or consistency and with an aspirational goal we called sixty-forty because of our desire to flip the numbers to have at least 60% of our stores' hours freed up to serve our customers. We set out on a journey to establish a new operational rigor in our stores that would allow us Not only to simplify the operations in order to achieve the productivity we sought to reinvest in customer service, but Also to establish a proficiency in operations that we could leverage in an interconnected retail experience. As I've said, we will complete sixtyforty in early 2013. Going forward, We will transition from talking about the sixtyforty project to a larger discussion of actually sustaining the leverage In the business driven by the virtuous productivity cycle we have established through the implementation of operational rigor in our stores. At this time, I'd like to follow-up with you on some of the projects we committed to implementing in order to free up associates to serve our customers while achieving sixty-forty.
The first project we call base sequencing Was intended to make it easier to locate products for both our associates and our customers by electronically mapping the locations of all products in each individual store. This project was foundational due to the fact That unlike other retailers, we had no planograms. The project has been completed and we are now not only sustaining this data, But we are leveraging that foundation to drive even more productivity in our store operations through efficiently guiding tasking activity. We are also leveraging this process to enhance our customers' experience by presenting the exact In store aisle location of product to our customers online. Hal will speak later about how we also present our product on hand information to our customers online.
Next, I'd like to follow-up on a project That freed up labor hours on our front end, while providing a better checkout experience for our customers. We call this group of projects the payment experience. We have now reengineered our point of sale system So anyone can run a register at any time by just logging on, which unlike most retailers was not possible in our stores with our old systems. We also have added the capability for our customers to be able to conveniently pay for product Inside our stores at point of sale utilizing their PayPal account. And finally, We can also now take mobile payment utilizing the first phone.
We introduced the first phone over 2 years ago. This phone, walkie talkie and handheld computer has quickly become a foundational tool For customer service and operational excellence. I will share with you a few of the ways we are building on this foundation in an upcoming slide. So in implementing these projects as well as many, many more, since 2,008, We have been able to free up more than the equivalent in hours of 10 full time associates in every store By simplifying the operations for our associates, allowing us to reinvest in customer service. In order to optimize the hours we freed up with these projects as well as future projects, we implemented a new sales forecasting and scheduling tool we call F.
A. S. T. This system, which is now live in all U. S.
Stores And will be rolling out to our Canadian stores this year, is efficiently moving associates around the store to align with customer demand. FaaS also gives us the ability to optimize our customer service coverage by automatically recognizing Where associates who have training in multiple departments are needed and are available. In other words, The tool solves for the total store customer experience as opposed to only solving for individual department needs. This systems technology also greatly increases our ability to interact with our associates regarding their work schedule. FaaS provides our associates with the opportunity to not only view their work schedule from their home desktop computer Or their preferred mobile device, but they can also interact with their store's management team By entering any requests for future days off or schedule preferences through the Internet as well.
So before I speak about how we will sustain the leverage in the business driven by the virtuous productivity cycle in the future, I would first like to look to the past. When I began working at the Home Depot over 26 years ago And as recently as 2007, our store operations were designed so that almost every associate inside each store Along with everyone at the store support center could order product. At least 75% of cost of goods We shipped direct from the vendor to the stores. There was no coordination between supply chain and the stores. And in fact, at times, it felt like we had an us against them mentality.
There were random amounts of freight flowing in at random delivery times. And as a result, we had freight in our overheads, freight in our aisles, And sometimes, if we were lucky, freight on the shelves and seldom did we know where it was or how it got there. In this environment, most of our operational activities and our associates' time had to be dedicated to inventory management. Now, let's consider the present with an eye to the future. Through close collaboration with merchandising, Supply chain, IT and store operations.
The majority of our product is centrally ordered and now approximately 70% of Cost of goods flow through our centralized distribution network. Although we have made process changes through sixtyforty, We have by no means optimized for today's environment, let alone optimized for tomorrow's interconnected retail operating demand. So I would like to provide you with some examples of projects where we are leveraging our operating proficiency To simplify the operations, drive productivity and enable us to support an interconnected retail experience. Working closely with our supply chain partners, we are working on optimizing the supply chain, not only upstream, But also in the stores. We are partnering to determine the best freight delivery schedules for individual stores And what type of load a store should receive, meaning a trailer where all the product is loaded on the floor and cubed out Or trailers that are dropped at the store so that they can be unloaded when the store labor is available.
Inside the store, we are redesigning the store labor requirements, roles and responsibilities And equipment needed to meet each model's needs to drive productivity and ensure we are prepared to exceed our customers' expectations Now and in the future. Another project, which is an example of leveraging our operational proficiency to optimize for today And Prepare for the Future is a pick and pull application we have recently added to the first phone. This application Manages the in store process for pulling product that is purchased by a customer online to be picked up in the store. In the future, this pick and pull application will be used to manage any activity that will require us to pull specific product off our shelves, overheads or holding areas for our customers. We have also added Another application on the first phone we call the in stock action list.
This application efficiently guides our individual merchandising department supervisors through an exception based workflow summary. This application significantly reduces the amount of time required to manage the department, thus freeing up time for our department supervisors to engage customers or train their associates. Another project that will contribute to optimizing our operations Is yet another application we will add to the first phone this year. We call this application the Pack Down Action List. This application will simplify a process that currently requires several associates in each store to execute every weekday morning.
Every morning, at least 2 to 3 associates use their first phone to scan every shelf out of stock. If the system determines the store has the product in the building somewhere, the system will create a list for other associates to locate that product And put it on the shelf. We call this activity pack down. This new application We'll enhance our central replenishment process by leveraging our point of sale. The application will create the fact down list From our registered sales data, eliminating the scanning process with the first phone and thus freeing up our associates.
Also, in order to provide more associates with customer facing tools to enhance the customer's experience As well as driving productivity. Before the end of the year, we will be rolling out 10 to 15 first phone juniors to every U. S. Store. This tool has the same phone, radio, product information And product locator application as the larger first phone.
The only applications the juniors won't have are the replenishment application and the business analytics application. 1 of the more complex projects That truly demonstrates how we are leveraging the operational rigor that has now been established in store operations To not only drive productivity, but to exceed our customers' expectations now and in the future are our 3 reverse logistics Distribution Centers we recently opened. These 34 100000 square foot mechanized facilities Now consolidate all our customer return product by leveraging the backhaul leg of the RDC distribution network. This project has currently afforded us several productivity gains as well as created an infrastructure We will leverage for future projects. These gains include the ability to simplify the in store return process And reallocate 1 full time associate in each store from a backroom task to the sales floor.
Also, we have taken expense out of the operation through waste diversion while generating salvage revenue from that same product. And now we not only sell tools, but also rent and repair them with our new rental and repair business That leverages these new reverse logistics centers and our RDC network, which is something many of our competitors do not offer. In this new process, we are also leveraging our over 1,000 in store tool rental centers To not only rent tools, but also complete non warranty simple tool repairs on small engine and power tools Brought to us by our customers, not just the tools we sell. For warranty work or more complex repairs, We have set up a state of the art repair center within each of our 3 reverse logistics centers. Each center has highly skilled vendor certified Home Depot tool technicians who expeditiously repair and turn tools that will be backhauled through our rapid deployment centers to our stores.
So in conclusion, We are very proud of the transformational work we are putting into achieving sixtyforty, but we are more energized By the operational rigor that has now been established in store operations. So going forward, we will continue to take a leadership role in implementing, Enhancing and sustaining simple processes and procedures inside our stores that not only drive productivity, but Our customers' expectations now and in the future interconnected retail experience. Now I'll turn it over to Craig Muneer for a review of our merchandising strategy. Thank you, Mark, and good morning, everyone. So today, I'm going to speak to you about how merchandising will support driving value for our customers, delivering comp performance in an increasing competitive environment and at the same time, achieving our financial objectives for our shareholders.
So let me start by briefly reminding you of the journey we've been on inside of merchandising. For the past couple of years, it's all been about Storing the competitive position of Home Depot in the marketplace. We needed to build out the tools and infrastructure necessary to manage centrally. But looking forward for the next 3 years, it's all about driving product authority in the new world of commerce. We are in the 3rd phase of retail with the customer now in control.
And our efforts are around allowing the customer to shop when, where and how they want. The customer's path to purchase has evolved in different product categories And the front door of our store is now in the customer's home for specific categories. So what you're going to hear about today is how our merchandising Strategy has evolved. We'll talk about moving our business from transactions to relationships with our customer. And I'll share with you how our portfolio, product assortment and brand strategies have changed.
And finally, What we had to do to adjust our merchandising transformation to compete in retail today. So the components of driving product authority requirements have really required a new approach in the last 18 months. Our portfolio strategy is our starting point. And as you all recall, it's our decision road map and our resource allocation approach. So I'll share with you momentarily what it looks like in the new interconnected retail world.
Key areas of focus and product assortments are being formed by data from our consumer insights groups and where we believe the customers will most likely engage in home improvement going forward. We also needed to step back and think about the capacities that we were building within our merchandising transformation. For example, with increased transparency for the customer, it actually required greater visibility for our merchants as well as speed and decision making. And this is not only true around product, but speed is also a factor in marketing as you have to serve up real time relevant content. So what this chart shows is how we're thinking about specific types of our businesses and how they will be impacted in the new world of commerce.
In our portfolio strategy, we're now thinking about the role of our stores, homedepot.com and the combination of both as levers we can pull. And homedepot.com has both a defensive and offensive element inside of our strategy. Now I will speak to you about 3 of the 4 circles that you see on this chart, And Hal will cover the 4th shortly. There are product categories on the left side of this chart around urgent need, Maintenance and repair commodity type products, where we believe we'll see limited competition from different types of business models. And as I mentioned earlier, some of the categories, which require research, know how, The front door of the store now sits in the customer's home.
And so you're going to hear from Hal about how we will connect with our customers on projects through the digital world, enhancing the shopping experience both online and in store as a result. The yellow circle represents real opportunity for The Home Depot. This area is highly penetrated by simple decor categories. And while we've improved in this area, we know that this is an area of opportunity for us as we expand online and carry key drivers in store. And this is also an area of additional growth categories for us.
Now finally, the red circle Our product categories that generally have high brand recognition, small cube, relatively low weight and high dollar value such as power tools and faucets. And we believe that these categories will shift over time and experience Greater impacts from online threat. There are businesses here that we intend to defend through all channels. Now, owning maintenance and repair categories involve simplifying the effort for our customers. One of the top barriers to starting a project is know how And feeling comfortable that you can use the products.
Our merchants have been focused upon bringing products to market that Simplify the experience of doing a project for the customer. So all the products that you see here are products that provide confidence to the end user. SharkBite products on the upper right of this chart is a wonderful example of innovation that drives real value For the customer and for Home Depot. The introduction of this product line was a major change in plumbing repair and installation. It eliminated the step of sweating the pipes and it's a real time saver for the pro and the DIY customer.
We sell $1.50 traditional kind of fittings, but there's lots of customers, I mean, a lot of them that are willing to spend significantly more for this kind of simplification and time savings. And while our merchants have been focused on bringing functionally simple products like SharpBike to the market in many product categories. They've also worked to do the same in commodity type products. We were first to market with innovative products and commodities like USG's ultralight drywall and lightweight joint compounds. And Owens Corning, Ecotouch Fiberglass Insulations, which is actually a formaldehyde free product with a 99% Organic backer and the highest recycled content in the industry.
But the latest addition is what you see here. Rumble stone is a product that significantly simplifies stone projects for the customer. There's literally no need to cut this product. To use the varying shapes available and the multiple structures that you see here can be created. Now product categories you see up here are examples of growth opportunities both in store and athomedepot.com.
In 2011, we went through an effort to rebuild our 2 inches blind offering in both wood and foil wood. This year, we're updating the balance of our assortment in our stores. Additionally, we'll be expanding our efforts to connect with our customers online where the shopping experience really begins. And we're building out capabilities to make the process simpler through tools like configurators. Lighting is also an area of continued investment for The Home Depot.
Over the past several years, we'd actually given up significant market share here. But we added cost back into our product, improving the quality, yet delivering huge value against lighting showrooms. And at the same time, we began a major expansion of product offerings online since breadth of assortment is really important. We can offer a wide range of products and effectively manage that breadth of assortment better online than we actually can in the store. Now the results of these efforts so far have driven significant business improvement here and real growth through our expanded assortment online.
Independent living is a business where we'll carry basic products in store, But it's probably not a business where we will go out and actually reconfigure our stores to carry a full range of product. Online, we can offer a wide variety of products that will create solutions for our customers, an expanded offering of products that's really closely connected to the Likewise, we do a good job of rugs in our stores, but we carry an expanded assortment through both homedepot.com and our home decorators collection site. And these represent real incremental growth opportunities for us in both of these product categories. Power tools is one of those categories that was in the red circle and where we believe vulnerability exists from online competition. Home Depot owns the leading market share position in this business overall, and it is a business that we will defend.
Our 2,200 stores are a convenience for our pro customers when they have a tool go down on the job site. And we're now executing the strategy to compete across all channels of business. Offensively, we have strategic relationships with key suppliers That bring innovation and brands to market exclusively with us. The in store experience solves immediate need, as I mentioned earlier, But we are also building the capabilities to leverage our assets for repair, as you heard from Mark. Rapid expansion of online assortments and brands has really produced excellent results for us in this channel as well.
We've actually grown market share in this category the last two quarters faster than the online leader. So we are spending significant Time building out our strategies to compete across all channels and working to leverage all of our assets to the benefit of the customer. An additional part of owning maintenance and repair is really establishing leadership positions in key technologies that are game changing. Customers are responding very positively to products that save them time or money. LED saves the customers up to 85% on energy usage.
And we are extremely excited about how this technology will evolve across product categories in the store. Lithium delivers performance and time savings on the job site for the pro customer. This tech category is in the store. Lithium delivers performance and time savings on the job site for the pro customer. This technology This quarter performance in cordless tools.
Lithium eliminates problems like cold weather issues that are experienced with NiCAD technology. And customers are finding lithium a good alternative to gas products by eliminating the need to store gas in their garage or by pull starting an engine. And so we now carry lithium products in tools, paint, flooring and garden. Water savings is also an area where you lower the operating cost of the home of the business. And likewise, it's good for the environment.
So the effort here goes way beyond just faucets and toilets. It includes products in repair, appliances, Seed uses 30% less water, plants that are genetically engineered to require less water like our sun patients. And these will remain key areas of focus within our portfolio approach as we drive product authority going forward. So now let's talk about our brand strategy. Home Depot was built on national brands that the consumers demanded And in particular, brands that our pro customers required.
These products provided confidence to our DIY customers that If they were purchasing them, they were actually getting the right products because the pros bought them in our stores. And we intend to carry continue to carry the national brands Customers demand. Adding appropriate exclusive products and brands that are meaningful and drive value helps Create differentiation in the marketplace. And here we have very powerful relationships that benefits Home Depot, our suppliers and the end consumer. An example of this is Behr Paint, where both Behr and Home Depot enjoy a leadership position in the marketplace with DIY customers.
TTi is another example, where Ryobi's leading brand and consumer products and we have an exclusive with Milwaukee and Rigid with TTi as well. Now our focus on private brands is to deliver a full end to end value proposition for the customer. The role of private brands will be to deliver on differentiation, innovation and quality. And certainly, it can assist us strengthening the financial performance within the category as well. This strategy is something we've been very clear about with our suppliers.
We want to be very open about how and when we'll implement a private brand inside of our overall strategy. Our approach to private brands has changed as well. We're dedicating resources to make sure that our private brands are enhancing to the Home Depot And not living off the Home Depot brand. And this is certainly an area of opportunity where we can do a better job compared to where we've been in the past few years. To deliver value needed for our customers, we're actually narrowing our focus to fewer more meaningful brands, while implementing strong benchmarking and rigorous testing processes.
Our approach will be necessary to build our back end to support the end to end customer experience for the entire time that they own one of our products. So let me give you an example of the type of effort that we're putting behind the customer experience with 1 of our private brands. What you're going to see in a video Is the product testing at an independent third party lab used to validate our specification requirements. So with that, let's please roll the video. I hope this gives you a real sense of how serious we are about delivering on real value inside of our private label products when we make a decision to go down But elements of our merchandising transformation focus are on capabilities needed in the changing retail environment That really has raised the bar.
The continued development of tools to assist our merchants in localizing assortments to leverage the proximity of our 2,200 stores is a key focus. Building competitive intelligence across all channels of business is also a focus. Our efforts today are candidly more siloed than we'd like, but providing enhanced visibility for our merchants to implement our portfolio strategy across all channels of business and commerce are what we're putting in play. Trend recognition and being able to separate noise from signal through intelligent clustering and attributes or capabilities we're being that we're building. Expedited decision making is becoming even more important in the marketplace today as a result of the digital world.
This chart shows you the status of our tool development inside of our merchandising transformation. The big picture is we're going from basic capabilities To an end state of automated alert based information flow with collaborative feeds to our suppliers. And while we have the basics of assortment planning and cluster tools, we're still significantly behind other major retailers Where we still have to implement a robust key item assortment planning tool that's completely integrated into planogramming, financial planning and Replenishment. For us, this is still a manual effort to connect all those dots across all the capabilities that we need. And as a result, it takes time away from our merchants that could otherwise be spent on product innovation.
Over the past few years, we actually completed automation of our clearance process with a rules based approach, and this saved our merchants hours worth of work each month. And we have that same opportunity with competitive price intelligence enhancements and of substitution modeling. Today, these efforts are manual feeds to our merchants because they then have to go work. And we'll build out a cross channel exception rules based approach, providing greater speed and analytics in the process. The changing market has caused us to rethink some of the aspects of our approach and for sure it's raised the stakes around our process and tools for our business.
So for the foreseeable future right now, we don't really see a finish line in sight on this effort. So I've talked to you about how the virtual world has transformed our thinking around portfolio strategy, Assortment and branding and new requirements within our merchandising transformation. After the break, you're going to hear from Trish and Hal about how what our customers expect and actually how we will connect with them going forward. The information available to the customer today is almost Today, the customer seeks input from other consumers sometimes before they look to a retailer or a manufacturer, And they expect relevant timely content and that raises the bar on us as marketers. So I thank you for your time today and I hope this gives you a real sense of both the work and the opportunity that still lies ahead in our merchandising efforts.
Thank you.
All right, ladies and gentlemen, we're going to take a 20 minute break. We'll start back promptly at 10:35. All right, ladies and gentlemen, please welcome back Diane Dayhoff.
Welcome back. And as a reminder, please silence your phones, but keep your smartphones handy. That's just a little tidbit here. I would like to now welcome our Chief Marketing Officer, Trish Mueller and our President of Online, Hal Lawton to the stage. Thank you, Diane.
Good morning. Hal and I are here today to share with you how we're working together to build customer relationships through our marketing strategy, online platform and in store. At the Home Depot, we know the customers in the driver's seat and it's our job to support them in their home improvement journey on their terms in order to build a relationship with them. That means we have to understand what they're passionate about and connect with them based on what they care about. Our insights show that our customers are passionate about doing.
So we've embraced the fact that it's not about us And we've used our data to better know who they are, to understand what they expect and to narrow our focus to be there anytime, anywhere to help them at key moments when they need us. Ultimately, we believe connecting with customers based on the things that they are passionate about helps us move from driving transactions to building relationships on their terms. One of the first things we took into consideration When we thought about building customer relationships was the macro climate we found ourselves in and the view on the horizon of how the macro picture evolves. As a result, generational spending was the first component of our strategic planning. Based on our research on population shown on the left chart, The size of the baby boomer generation is shrinking somewhat through 2020.
And Gen Y is already slightly larger than Boomers and forecasted to grow slightly
more by 2020.
When we to grow slightly more by 2020. When we assess the respective spending on home improvement, however, we get a different picture. As you can see on the chart at right, the forecast for generational spending on the home is still dominated by the baby boomers through 2020, With Gen Y growing over time, but not overtaking boomer spending. As a result, we think it's important to maintain our focus on baby boomers, while at the same time appealing to the growing number of Genwires. After solidifying our thinking Based on generational considerations, we focus on knowing our customers better using data segmentation.
We certainly did not stop there though And we have drilled down into our data to understand who we are talking to at an individual level. And we also understand what channels they use to interact with us. Our initial data segmentation told us that roughly 2 thirds of our sales come from consumers and about a third from pro But I'll come back to the pros in a bit. We learned that consumers are in our stores 4 times a year on average And 50% of their store visits involve online research. So it's critical that we know what they expect from us and that we get it right everywhere they choose interact with us.
Next, we conducted extensive research and determined that customers expect us to deliver simple solutions to their home improvement challenges and they want it to be easy to do business with us. We also learned that consumers are passionate And they see The Home Depot is doing. They expect us to help them do more. We deliver on doing in a number of ways From our advertising to our website, which Hal will talk about and through our stores. We know consumers also want us to help them save more on the projects and products that matter to them.
And finally, as a result of this research, we understand that it really is all about them. And therefore, we target our communications to reflect things that interest them in the channels that they prefer to use. That's one of the reasons our team is building new ways to connect with our customers on homedepot.com, right Hal?
That's right, Trish.
We have over 12,500,000 registered users on homedepot.com. And table stakes with these customers is effective transaction management, Enabling them to manage all their touch points with Home Depot simply and easily. Our customers assume that they can access not only their online purchases, But also their store point of sale purchases and their special order receipts on homedepot.com. Our pros, They desire to sort these purchases by PO and projects so they can effectively manage their business and build their customers. And all our customers expect access to their credit accounts, 20 fourseven live chat and the warranties and manuals for all their purchases.
Additionally, they want to save their project calculations. They want to set reminders, create subscriptions and define their interest and preferences for communication. We'll enable this functionality behind the scenes through our investment in customer data warehouse rather than having our customer do the work. Throughout the remainder of the year, we'll be executing a number of releases that will Expand our capabilities in this area and enable our customers to simply and easily interact with the Home Depot. Craig shared this slide with you earlier.
As he mentioned, we have refined our portfolio strategy to consider the influence of a Category's propensity to be researched and purchased online. The online knowhowin store expertise category On the bottom right of the chart includes categories such as kitchens, HVAC and doors and windows. These are highly researched, Technical and complex projects that almost always require professional assistance. Online, we're focused on providing know how And then connecting our customers in a sticky like way to our stores so that we can close the sale by leveraging our associate expertise. For example, After researching online, customers have been able to schedule an appointment to meet with an in store kitchen designer from our website.
On the next slide, I will elaborate on how we're expanding online our project management capabilities to better serve this category segment. We often say at Home Depot that we sell projects, not products. It's for this reason that we view project management as a major of the opportunity in interconnected retail and as a means to building a deeper relationship with our customers. Online, we currently have over 2,500 Project and product videos. We have 400 project guides.
We've got 100 buying guides. And we've got numerous Calculators and checklists for our customers to use. For example, our kitchen customers are able to share information back and forth Digitally with our associates across all steps in the process without having to go into a store. Additionally, as Frank discussed, we have 30 plus associates supporting our community forums and providing ask and answer support to our customers. Throughout the remainder of the year, we'll be executing a number of releases that will significantly Strengthen and consolidate these project management offerings.
For example, we will enable customers to build robust shopping lists They can be co shopped or shared with their friends. Additionally, we will enable customers to build their own how to project library to support their do it yourself projects. And if Home Depot is providing the installation services, then they'll be able to track the project Step by step by step with real time updates and live customer support through our My Install section. But these aren't the only ways we're connecting with our consumers, right Trish?
Right, Hal. We're connecting with consumers on homedepot.com, But we're also connecting with them through our investment in subjects that our customers are passionate about. We're transforming transactions into relationships by engaging with them over the topics they're most interested in and by connecting with them and connecting them to other like minded folks who share the same passion. A great example of how we're building relationships is our Garden Club. The Home Depot has the largest Garden Club in the United States With over 5,000,000 members, we already know these gardeners and lawn Meisters and we know what they're passionate about.
More importantly, these consumers are in our stores 4 times more than non Garden Club members and they shop across the entire store. So this spring, we amplified our efforts to help this community do even more. We're connecting with these consumers across multiple platforms And delivering relevant information to them in our advertising, in our stores and online. We're Actively talking to them personally and locally on our Garden Club blog and we're answering their questions through our online community forums. In fact, just last month we were recognized by Fortune as a top 10 social media star for our outstanding work in the social media space.
We also build an emotional connection in our aisles with local events like the one shown at upper right, which happened in one of our Miami stores. Our garden expert in that store, Charlotte, put together an orchid workshop and over 300 people attended to learn more about growing and caring for these beautiful blooms. Thanks to great execution by our store associates like Charlotte, We have been rated the best retailer for home improvement clinics and workshops for 5 years running based on our survey data And our brand is becoming synonymous with Dewey. We're also connecting with our consumers by understanding their next likely purchase. One example of how we do this is with flooring install projects.
You may be aware that we recently acquired Measure Comp, a flooring measurement and quote building company. This acquisition will further our data set and as a result our understanding of what people do over time when they have flooring installed. By modeling prior consumer behaviors related to their interior projects, we've already learned that once they buy flooring, They're likely to purchase window treatments and paint at specific intervals to complete their room makeover. Now, we're able to talk Consumers when they have a need about products they are excited about at that right moment in time and they don't have to take any action for us to help them. We appear when they need us most, which we believe is the right way to build a relationship.
Based on the results we're seeing, we'll continue to invest approximately $15,000,000 a year in CRM to deliver actionable insights in sales. Being there when customers need us most also means we have to be accessible across multiple media channels that vary widely in terms of usage based on the project, the product and based on the individual consumer. Mobile and social media are exploding. TV is moving online and newspaper, for example, is declining. So clearly, Ours is not a one size fits all advertising program and our channel usage varies significantly based on the products and projects our customers are considering.
Today, the home improvement journey looks less like a funnel and more like a plate of spaghetti. And therefore, we need to be ready anytime and anywhere with the right content when they need our help with doing. This spring, we used our understanding of consumer behavior to drive our message across multimedia. We started by building 8 different spring projects consumers told us they were interested in. We built detailed how to instructions for the projects themselves, expanded that content into video, We placed printed project cards and signings in stores in the Garden area.
We placed downloadable project guides and video on homedepot.com And then we tied it all together using a TV spot with digital content embedded inside of it delivered via the Shazam mobile app. Okay. So get your smartphones ready now to activate your Shazam app because we're going to show you firsthand so you can see how we immerse TV viewers And an interactive mobile experience. So if you don't have the Suzanne app, if you're on a smartphone, it's an actual app you can download. If you don't have it already, it's You're not going to have time to get it done, but I'll tell you what happens so that you know in case you don't have it.
When users activate the app, it brings up a mobile landing page, Which lets them color in the vertical flower garden on the opening page, review the how to video and project guides I mentioned, Share the experience on social media platforms and even join our Garden Club and all without leaving their sofa. It's early days, but we're testing and learning all the time to understand how and where our customers want to interact with us, so we can be in the right place anytime, anywhere And anyhow, our customers want to get started. So let's roll the spot now so you can check it out.
Pull on those gardening gloves and let's see how colorful an afternoon can be. With the Home Depot certified advice to help us expand our pallet and prices that keep our budgets firmly rooted, we can mix the right soil with the right Ideas and bring even more color to any garden. More saving, more doing. That's
Pretty cool, Did folks try it out? Hey, again, this is Trish Ed. This is just another example of how we're testing of Technology within our marketing. And speaking of technology, in addition to marketing and technology marketing, we're also focused on conducting commerce anywhere, anytime. This means executing across a range of digital platforms, not only our main website, but also our mobilized website, our 2,100,000 plus app downloads, our in store kiosk and display and our call centers.
That said, while we do aspire to be best in class in e commerce, We're conscious that this platform only represents 2% of our company's sales. By comparison, we know that approximately 50% of Sales involve online research at some point in the shopping process. And another key fact is that almost 1 in every 4 store shoppers Had previously been on homedepot.com before purchasing in our store. It's for this reason that we often say we have dropped the e off of e commerce at Home Depot. As Craig talked about, a key role of our digital platforms is to support our strategy of product authority by enabling the endless aisle.
Our goal is to provide customers the ability to easily purchase from an extensive assortment as a complement to our in store offering. We currently offer over 500,000 SKUs online compared to our store assortment of approximately 35,000 SKUs. For example, in store, we have our high sellers of 200 faucets, but online, we have an additional 11,000 to complement. And we facilitate the shopping of these large assortments with simple selection tools like our patio and lighting galleries or our blinds configurator. Additionally, as Craig mentioned, online allows us to participate in new categories such as independent living, expand our presence in lighting And protect our position in categories such as power tools.
Within the context of our strategy on disciplined capital allocation, We've been investing in our interconnected retail experience for several years now. This year, we successfully replatformed our website on February 1, And we're going to continue improving on this site experience throughout the year with a number of technical enhancements, as well as the addition of 200,000 new SKUs to our assortment. Additionally, due to the growth we're seeing in our online business, we're investing in new infrastructure, Including 2 new call centers, 1 in Ogden, Georgia and another one in Kennesaw I'm sorry, Ogden, Utah and another one in Kennesaw, Georgia. And we're also building a new 1,000,000 square foot direct fulfillment distribution center in Georgia, which Mark Holyfield will discuss further in a moment. It's these types of investments that have enabled us to dramatically improve our online customer experience.
In fact, recently, we scored an all time high of 79 on the 4 seat e retail satisfaction survey, which is the online equivalent of the University of Michigan survey that Marvin referenced earlier. Furthermore, we are pleased with the report to be noted as the most improved eSight, having scored 10 points from a score of 69 in 2,008. One area that we're investing heavily in is in item data. Whether it be the beam labels on our shelves Or the product detail pages on our site, customers expect the same information. Most don't understand that we have different assortments in pricing by geography And they certainly won't tolerate pricing on our web or our mobile sites being different than what's in our store Or for that matter, the price on Google or in an email.
They want access to ratings and reviews online. They want it on their mobile phone And they want it in store. They want to begin building things like their custom blinds online and then finishing that order in a store. Simply put, customers expect not only to be able to buy anywhere, anytime, but they expect access to comparable content anywhere, anytime. And it's for this reason that data integrity is an imperative for a multichannel retailer and will be a key area of focus for us.
Another key role of our digital platforms is to enable multi channel functionality and reinforce our strategy of customer service. Over the past few years, we've implemented a number of features to improve our customer shopping experience. Examples include buy online return in store And buy online pickup in store. However, in line with my previous commentary on being focused on commerce versus e commerce, The more important features that we've implemented online are lookup of store inventory, store specific pricing An item location in the store. In fact, over 8% of our site visitors check store inventory at least once during their visit.
And we know that 1 third of these visitors then go to our stores to shop within 48 hours. Pretty powerful. Looking forward, we'll continue to implement additional features to enable multi channel. As an example, this year, we will roll out buy online, ship to store. And then other items on our radar screen include buy online, deliver from store and an integrated solution to buy online items inside of our brick and mortar stores.
And while it's early days, we're very excited about the potential to connect our pros and our consumers through the Red Beacon platform. And Trish, can you elaborate more on this opportunity?
Sure, Hal. Yes, we're excited about the opportunities with Red Beacon. And with that, let me start by providing an overview of the customer. We're building a great experience online for our consumers and pros and it's a critical component for turning transactions into relationships And PROs are particularly important to us. As you heard earlier from Marvin, our PRO relationships are a key focus for us Since they're only roughly 3% of our database, but about a third of our business.
I don't know of another retailer that has that much leverage from such a relatively small group. Since we see the pro 15 times more than the consumer, getting their experience right is critical. Through Stensive data mining, research and talking directly to our pros, we know what they expect from us and we're laser focused on delivering on those expectations down to the individual pro. We know from our research that pros want it to be easy to do business with us because time is money for them. They tell us get me in, get me out, get me back to my job site.
And as Marvin said, they expect us to be great business partners. They want us to know them and recognize them and they want us to give them great value for their dollar so they can run their business profitably. That's one of the reasons we bought Red Beacon recently. We realize the power behind connecting our consumers with our pros. Think of Red Beacon as the ultimate online dating service.
This platform helps consumers find qualified pros they can trust to help them complete their projects. Red Beacon enables us to deliver on consumer expectations by making it simple to get their jobs done, and It allows us to be a great business partner to the pros by helping them find jobs and it's one more way for us to build relationships with our customers. While it's early days, we believe RedBeacon opens up an entirely new data stream for us to know our customers and our pros even better. And that's why we also consider a critical component of our marketing strategy. In closing, the Home Depot helps consumers and pros Focus on doing every day in every channel.
We're transforming transactions into relationships by helping them do more and save more. We'll continue to deliver results by building relationships with our customers and providing the experience that they expect anytime, anywhere, anyhow. That's the power of the Home Depot. Thank you. And let me now introduce Mark Holyfield, who will talk to you about our supply chain transformation.
Thanks, Trish and Hal, and good morning, everyone. Our goal in supply chain can be simply put, supply chain leadership. We've made a lot of progress on this And we're pleased with the results that our supply chain efforts have driven. But given the new challenge and promise of interconnected retail, We don't think of our supply chain transformation as done. We think of it as still a work in progress.
Our efforts in supply chain are singularly focused on creating supply chain leadership, a competitive advantage in customer service and shareholder return. The deliverables of supply chain leadership are those shown on this chart. These metrics measure the progress of our supply chain, whether we're serving our store customers or delivering to our interconnected retail customers. First, we must be in stock. That's both in the store or for our online or direct customers having the product available to ship.
2nd, we must optimize our working capital, carrying the right level of inventory to be in stock for the customer, But at the same time, not having too much cash tied up in inventory. 3rd, we must land the right product at the right time in the right place And do this at the lowest cost in our industry. These remain true whether we're landing the product at the store or at the customer's chosen delivery location. And finally, we have to achieve all of these deliverables with a focus on our customers, whether those are our supply chain's internal customers, our stores, or providing our online and direct customers product anytime, anywhere they want it. Our efforts to create supply chain leadership over the past few years have been large and comprehensive.
But when you boil it all down, we really mainly only did 2 things. We centralized our distribution, bringing it in house and we centralized inventory management applying state of the art technology to our forecasting and replenishment. In 2007, only about 25% of our product measured as cost of goods sold passed through true central distribution. Today, around 70% of our goods pass through Home Depot distribution centers. The RDC program, our rapid deployment center rollout, Was the cornerstone of these efforts.
Our centralized distribution has brought with it many benefits. We lowered the cost of distribution and transportation. We eliminated vendor minimum order quantities that hamstrung our efforts to be in stock with a productive inventory. We reduced the number of trucks arriving at the back of our stores and that freed up store labor. And we've increased the velocity of product flowing to our stores, Improving our response to out of stock and our inventory turnover.
Now the other thing we worked on was centralizing our inventory management. In 2006, I was told about 37,000 people in the Home Depot had the ability to order product to our stores. And I'm pretty sure almost all of them did. Now well intentioned, This decentralized inventory management took lots of store labor, used primitive systems and led to wide variation in our results in in stock and turn. Now to change this, we set up a central inventory planning and replenishment function and we implemented state of the art forecasting and replenishment technology.
This has helped us to improve our in stock rates and our inventory productivity at the same time. It freed up considerable time for our store associates, allowing them to focus on customer service instead of just managing inventory. So now that the RDC program is complete, our comprehensive DC network has the core set of capabilities we need to flow product to our stores and achieve those supply chain objectives. For flow through distribution, about half of our flow, our RDCs provide fast In these facilities, product never gets put away into storage or into a pick location as it is in a traditional warehouse. And as a result, the RDCs are the lowest cost path to move carton goods to our stores.
For highly seasonal goods with spiky demand, our products with a long or unreliable lead time like some imports. We employ traditional stock and pick methods in our stocking DCs or SDCs. And for bulky goods that move best to stores like Via flatbed trucks, things like lumber and building materials, our bulk VCs are the optimal path. And finally, some products will remain optimal to move to stores directly, think about cement block, concrete block and locally sourced live goods. The rapid pace of our rollout of RDCs and their unique fast flow capability has put us in a leadership position in a couple of ways.
First, we're operating a standardized network of homogenous buildings for the most part built to the exact same prototype. If we were standing in one of our RDCs, we'd have a tough time knowing if we're in Topeka, Kansas, Valdosta, Georgia or Salem, Oregon. This standardization ensures consistent quality and higher productivity in our operations. 2nd, We work with Matt Carey and his team to leverage the latest technologies available, including our warehouse and transportation systems. We also use some of the latest and most effective material handling technologies, including our advanced mechanized conveyor system.
And through leveraging these advanced systems and processes, we've been able to achieve a much higher than typical penetration of about 50% of goods flowing through flow through distribution. This is a lower cost distribution model with faster inventory turn. Now looking forward, our efforts are focused on 4 key imperatives that we view as critical and our continued quest for supply chain leadership. 1st, we're working to optimize that network. While we have our store supporting DC network solidly in place, It's still quite new and we're continuing to improve our operations every day.
There's many opportunities to improve our productivity and efficiency. 2nd, there's still opportunities to improve our inventory management. We've not yet achieved our potential in terms of optimal in stock and inventory productivity. 3rd, there's new logistics capabilities that will take our network further And better enable our import logistics. And these are important particularly to our private brand products.
Finally, we must deliver on the promise of interconnected retail by building out our direct fulfillment capability and Proving our ability to deliver directly to our customers with speed and great value, whatever, whenever, wherever and however they want. Let me give you some examples of these four things. 1st, in the area of optimizing our network, the charts here Illustrate some of the key operating metrics and the level of opportunity that still exists in our logistics network. The way to think about this Is that getting our RDCs open was just the start and the level of opportunity that still exists in our logistics network. The way to think about this is that getting our RDCs open was just the start.
We now have a large DC network And we must work every day to continuously improve our transportation productivity, our labor productivity and increase the velocity of product flow through this network. Now as an example, you've already heard, we're working to drive transportation productivity higher through partnership with Mark Powers' team And rolling out fluid load to more stores in our network. This is simply loading product from floor to ceiling on the outbound trailers, Reducing the use of wood pallets to convey products. We began this as a test in our mechanized DC in Valdosta, Georgia. I know Some of you saw that on a visit we hosted there a while back.
At this point, we're live with Fluid Load in 20 stores, And we expect to be live in about 80 stores at the end of this year. As Mark mentioned, we'll roll this out further in the coming years. Now the takeaway from this chart is that while we've improved our supply chain performance greatly over the past few years, we're aggressively targeting further opportunities. Another key imperative for us is to continuously improve our inventory management through better systems, process and skills of our team. Let me brief you on something we call advanced service level.
And this initiative is focused on an inventory management problem That's particularly challenging in home improvement retail, the problem of adequate job lot quantity. Now job lot quantity is simply the amount of product that's needed to complete of the company. And what's challenging is that many of our products sell relatively infrequently, but when they do sell, they sell in large quantities based on the project. I think of a simple example, a cabinet knob from our hardware assortment like this one. Now some customers need just one, But many need large quantities and these needs vary considerably.
From a replenishment math perspective, the average weekly unit sales of these products Isn't very helpful at setting the target level of inventory. Also sales behave quite differently in different stores. So to solve this problem, we've engaged advanced mathematics to identify the patterns of sales for these job lot quantity sensitive products So that we can set inventory targets at the right level. Now going to the chart, for each of these two stores, We show the weekly sales pattern indicated by those vertical bars. Our old inventory target is indicated by the horizontal black dotted line.
And our new improved inventory target level indicated by the orange line. Now you can see on the left, can see that we actually had the opportunity to lower our target inventory there, which helped to fund additional inventory needed in Store A. So the power of this is the fact that we're using advanced masks specifically developed to solve this problem, and we're doing that at a store SKU level To drive optimal inventory management decisions. Now again, this is just one example of how we're continuing to leverage technology In optimizing our inventory management and our supply chain so that we can serve our customers better with in stock products, but improving our inventory productivity. And that is supply chain leadership.
The 3rd imperative we're pursuing is to build new logistics capabilities. Let me tell you about 2 of our most important projects in this arena, Transload and then 2 Tier. From a physical distribution point of view, Transload and 2Tier will further leverage our investment in our RDCs and create a much more responsive and efficient DC network. From a technology perspective, these initiatives further leverage our existing systems and provide greater functionality to drive supply chain leadership. Here's a diagram that illustrates how Transload works.
We now have 4 Transload facilities nearby our key U. S. Ports In the four corners of the country. And these are pretty straightforward facilities. They're operated by 3rd party logistics partners.
They simply take in product off of ocean containers, sort product as we direct them and then reload it onto trailers destined for our DCs. So this allows us to aggregate the forecasted demand for each of the 4 regions of the country, in this case, the Southwest. We placed an aggregated order to our import vendors and then reallocate that order once it arrives at the port. This allows more frequent orders that are larger And these can be reallocated several weeks after, even as many as 13 weeks after we placed that order to meet any changes in inventory needs that have taken place. Now on this simplified chart, you can see we placed a single order to a vendor covering 3 of RDCs.
And upon arrival at that transload point, This product got reallocated to where it's now needed. This means we place fewer but larger orders to our vendors, 4 as compared to about 13 over the same period previously. That's more efficient for our vendors and that's more efficient for us. The aggregation of demand allows more frequent orders, Improving our in stock and reducing our inventory. And as I've mentioned, we already have 4 transload facilities in operation And we're already seeing benefits from the capability of this as we ramp up their operations.
Much of our current year over year inventory reduction came in our DC, In part due to our implementation of Transload. We also recently closed an SDC operation in Phoenix, Lowering our overall logistics costs, in part a result of Translut. Now let's discuss 2 tier. Because of the relatively small store order sizes that come out of our stocking DC network, we can't efficiently provide more than 1 or 2 deliveries per week from SDCs to most stores. Now because our RDCs go to stores much more frequently, averaging at least once a day, our 2 tier is a way to provide more frequent delivery Efficiently for goods and stocking DCs, moving them through our RDCs.
And this initiative is too expected to improve our in Stock and inventory turn benefits for those SKUs, along with further lowering our logistics costs and moving our product more through our most efficient DC store to store platform, We're currently in development on this initiative and we expect to pilot it later this year. Now our 4th supply chain imperative is to transform and build our direct fulfillment or direct to customer capability Our network is a collection of disparate, mostly channel specific facilities here. And don't get me wrong, These facilities do a great job in serving our customers. And to a degree, we've leveraged their capability across our various channels to gain efficiency and improve customer service. But the opportunity here is somewhat like what we were faced with in 2007 as we surveyed the store supporting supply chain.
Taking a page from that playbook, the first thing we've done is to develop a distribution network model, identified all the planned product flows for this business from vendors through direct fulfillment DCs and on to customers. And the results of that effort have outlined a new network that we're starting to build and migrate to. First, we've announced the development of a new state of the art direct fulfillment DC to be based here in Georgia, which Hal mentioned earlier. When this facility opens in 2014, this facility will replace our Baton Rouge facility and will be multi channel in its scope. The facility will encompass about 1,000,000 square feet.
The mission of this facility will be to serve our Southeastern U. S. Customers with direct fulfillment. We're targeting a similar facility to be built out west following the Georgia facility. Now aside from our direct fulfillment DCs, We're also focused on other methods to fulfill customer orders from the most efficient points in our network.
As discussed previously, we now have buy online, pick In store available in all U. S. Stores. Later this year, we'll enable buy online, ship to store capability. And in this case, customers will be able to have SKUs they purchase online that are not part of the store assortment shipped to their local store for free pickup.
Following that, we'll enable buy online, deliver from store. And this capability will leverage the store assortment And the delivery capabilities that Marvin talked about that already exist in our stores. The goal here is to achieve supply chain leadership and direct fulfillment. Now let's leave the U. S.
For a moment to discuss how we're developing supply chain leadership in Canada and Mexico. In Canada, we're very pleased to announce that we've launched development of the first Canadian RDC in the Greater Toronto Area And this has a planned opening in 2014. This development is leveraging the same RDC prototype systems and processes utilized in the U. S. A second RDC is planned for Western Canada and that will complete the RDC development there.
Once these two RDCs are complete in Canada, We expect to enjoy similar benefits to those we've achieved in the U. S. From this implementation. We continue to optimize our existing supply chain system and network of DCs there. There we operate 2 distribution centers, 1 in Monterrey and one outside Mexico City.
These DCs handle over 70% of our COGS flow to our stores there. Key supply chain initiatives in Mexico include further onboarding of vendors to the DCs, optimizing our logistics, improving our inventory turnover And further developing our e commerce capabilities. So to wrap up, I hope you get a sense for the potential yet to unlock in the Home Depot supply chain. We've made a lot of progress on the U. S.
And Mexico supply chains, but work remains. Our Canada supply chain And our import supply chains are being overhauled now. And we're just beginning to build out our direct to customer fulfillment and delivery capability. We're pleased that we've made rapid progress in our supply chain previously. But given the opportunities ahead, we're not letting up on the gas And we expect to continue to accelerate our supply chain leadership for our customers and for our investors.
And now, I'd like to turn it over to our CFO, the best CFO in retail, Carol, who will take us through our financial overview.
Well, thank you, Mark, very much, and good morning, everyone. Thank you for joining us. As you heard from my partners, there's a lot of internal momentum at The Home Depot. At the same time, housing remains challenged and the retail world is going through a fundamental transformation. We believe the actions that we are taking position for solid financial performance and shareholder value in the years to come.
So today, I'd like to cover 4 topics. 1st, quickly discuss our 2012 financial guidance. 2nd, share with you our point of view on the U. S. Home improvement market.
3rd, highlight our new 2015 financial targets. And finally, wrap it up with a discussion on capital allocation. So let's get started by taking a quick look at our 2012 guidance. As you know, we had a solid Q1 with sales and earnings ahead of our internal expectations. May was a good month as well.
But it is our point of view that the fundamental assumptions behind our 2012 financial As a result, we are confirming the guidance that we gave you during our May earnings call. On a 53 week basis, we expect fiscal 2012 sales to increase approximately 4.6% And for earnings per share, we project fiscal 2012 diluted earnings per share to increase approximately 17% to $2.90 Turning to our view of the U. S. Home improvement market. While there are some positive signs in the housing market for sure, The signs are offset by negative pressure coming from a number of areas.
So we think that housing will remain under pressure for a while. On this page, we are showing 3 data points. The red line is private fixed residential investments. The green line is U. S.
GDP and the orange line is our U. S. Comp sale. When private fixed residential investment was a larger part of the economy, it drove ourselves. And you can see that from 2006 to 2,009, the contraction in housing as represented by PFRI was the largest contributor to our sales decline.
When housing bottomed up, as measured by PFRI, our sales started to be more influenced by GDP Growth. As you can see by looking at the tight fit of the orange and green lines beginning in 2010. This doesn't mean housing doesn't matter, because it does. It just doesn't matter that much today. And these charts make the point.
Take housing turnover. Between 2,004,007, the R squared or correlation to our comp sales was 0.87. It's now 0.16. We've also seen a decline, albeit not as radical, and the statistical significance of home prices to our sales growth. So as we look at the data, we're left with 2 questions.
What is it going to take to see housing really recover? And when it does, what's the impact to our comps? Our point of view on housing and the home improvement recovery is that it will be a staged recovery. And I'm going to take you a few minutes to walk you through our thinking. We formed our point of view by starting with macro inputs and housing outputs.
Macro inputs include items like household demand, affordability and the interest rate environment, rental rates and vacancies and financing or credit availability. Housing outputs include housing inventory, turnover, prices, starts and remodeling and repair activity. With these items as the basis for projecting recovery, We've defined where we are as current state. And in current state, you can see some good news, like a high affordability index And some bad news, like very tight credit. As we think about the next phase of housing, we think there are 3 stages of recovery.
Stage 1 is workout, stage 2 is recovery, and stage 3 is stability. Starting with stage 1 or workouts, We think this is the stage we are entering and that we will remain here for a couple of years. 2 critical areas of the workout phase our household demand and the relationship between rental rates and vacancy. 2 housing outputs to watch, our inventory and turnover. We think the workout stage will be hampered by credit availability.
Here is one alarming statistic. If you have a FICO score of 620 and you want to put 10% down and borrow money to buy a house, you are 83% less likely to get approved than you were in 2006. In this workout We don't see housing have a major impact to our sales growth. And at the bottom of the page, you can see that in the workout stage, we project that the home improvement market will grow in line with GDP growth. Now stage 2 is recovery.
And in this stage, the magnitude of recovery is highly dependent upon credit availability. Our internal analysis suggests that credit availability will have a significant impact on the shape of the recovery. In moderate recovery, where credit is starting to ease. You see inventory returning to normal levels, turnover increasing and home price appreciation. In moderate recoveries, we would expect the home improvement market to grow at GDP plus 1% to 2%.
In a sharp recovery, Where credit loosens quickly and we actually have a shortage of inventory, we would expect the home improvement market to grow at GDP plus 2% to 4%. Now as we think about sales growth potential relative to GDP growth, we note that housing recovery will fuel some of GDP growth. So we want to be careful that we don't double count the upside sales potential. Looking back to the last housing bubble, Our historical analysis shows that the peak outperformance to GDP was 4%. Now finally, our point of view is that stage 3 is stability.
And to put stage 3 into perspective, here we would Expect to see annual housing turnover at 4% to 5% of housing units, average home price appreciation of 3% per year and the home improvement market to grow more or less in line with GDP growth. So with that, let's turn to our 2015 financial targets. And to kick this off, we thought it might be helpful to review where we've been. In 2,009, we announced a long term operating margin target of 10% and return on invested capital target of 15%. Given that we were in a recession when we announced the targets, we weren't certain as to when we would reach them.
But as you know, we are now confident that we will reach and slightly see these targets by the end of fiscal 2012. The path to a 10% operating margin is a bit different than we originally planned. Our gross margin expansion is slightly less than we thought it would be, but we've enjoyed more operating expense leverage than we originally planned. Of the 100 basis points of gross margin expansion, roughly 42 basis points came from our supply chain transformation and the rest was due to benefits from our new merchandising tools and from our portfolio approach. Through cost out efforts, our stores are more productive and we will generate a 10% operating margin on fewer sales per square foot than we originally targeted.
This chart sets forth the annual basis points contribution coming from gross margin expansion and expense leverage, Walking our operating margin from 6.1% in 2,008 to over 10% by the end of fiscal 2012. Today, we're announcing our 2015 targets, which are to grow our operating margin to 12% and our return on invested capital to 24% by 2015. We expect operating margin expansion to come from both gross margin expansion and expense leverage. While return on invested capital will benefit from higher earnings and our disciplined approach to capital allocation, including share repurchases. So let's take a deeper dive at the targets, starting with our sales growth assumptions.
As we build our 3 year sales targets, we used U. S. GDP growth forecast as the starting point for the plan. The most recent blue chip U. S.
GDP forecasts are 2.3% in 2012, 2.5% in 2013 and 3% in 2014 and beyond. To the GDP growth forecast, We added about 50 basis points of sales growth coming from new stores and we assumed some market share gains for a total of 3.5% sales growth per year. Essentially, our base plan assumes that housing will remain in stage 1 for the workout stage over the next 2 years. And as you saw from my previous housing recovery chart, we don't exactly know when we'll hit stage 2. But for the purposes of setting today's targets, we aren't planning for recovery.
Now turning to gross margin. We have identified approximately 100 basis points of gross margin expansion that will come in 3 big buckets: Merchandising, Supply Chain and Operational Excellence. We're using the term excellence as an organizing term for all of the actions that you've heard about today. Roughly 60 basis points of gross margin expansion will come from merchandising excellence, including margin gains coming from a higher penetration of proprietary products and benefits from our new merchandising tools that will drive better localized assortment. We will also continue to enjoy gross margin expansion from our supply chain efforts and estimate supply chain excellence will contribute about 20 basis points of gross margin expansion over the next 3 years.
Finally, as we discussed previously, we've had some pressure from shrink And through some changes we will make to our operational processes, we should see about 20 basis points of gross margin benefit coming from operational excellence. Of this 100 basis points of gross margin expansion, we are planning to reinvest 60 basis points back into the business. The key message here is more savings, more investing as coined by one of our analysts. By 2015, our gross margin rate will be approximately 35%, and we think that's as high as it should be. Further, as you've seen in the past, we are willing to make gross margin trade offs.
So if we see reinvestment opportunities that allow us to take market share and are value creating, we will make those gross margin investments. Now on the expense side, we will have natural expense leverage in a 3.5% sales growth environment and that natural leverage should drive 130 basis points of expense leverage over the next 3 years. In addition, we will be attacking a few expense opportunities like workers' comp expense and this operational excellence will drive 20 basis points of expense leverage. Now I'd like to point out that the expense leverage we are setting forth on this page ignores the impact of healthcare legislation as there's just too much uncertainty right now to build it in. Ignoring healthcare, a good rule of thumb for us going forward is that expenses should grow at less than 40% of our sales growth rate.
Now I'd like to wrap up the session by talking about capital allocation. And let's start with working capital. Working capital, principally increased inventory productivity, will be a source of significant cash generation by 2015. We are on a path to grow our inventory turns from the 4.3 times we reported in fiscal 2011 to 5 times by the end of fiscal 2015. As we continue to drive productivity in our supply chain, we can get more sales without increasing the level of inventory dollars in our company.
So sales growth is the largest driver of inventory turns improvement. On top of that, we have a number of inventory management initiatives like no inventory in the overheads, no racking above 12 feet and other initiatives that we expect to drive turns another 20 basis points. Moving to our capital spending priorities, we thought it might be helpful to start with a philosophical perspective. Today, you've heard about the changing retail environment and how we are reacting to that change. Our capital spending will be deployed to defend, maintain and grow our business.
It's our point of view that unlike some retailers, we don't need to shrink our stores or look to relocate our stores to urban areas. In the U. S, our stores are working warehouses, So we aren't planning any major store remodels or new store formats. Our new store openings will be few and far between. We will likely average no more than 12 per year and most of those will be in Mexico.
But we will maintain our stores. We will continue to invest in supply chain enhancements and to overweight spending at technology in support of sales and productivity initiatives. Now outside of the United States, our capital spending will support a necessary supply chain transformation in Canada, support new store growth in Mexico, We've earmarked some capital for our business in China. China is a market too big to ignore and we are testing a few new formats to see if we can't get a model that will work. Now as you've heard us discuss, we've made a couple of small enabling acquisitions this year, Red Beacon and Measure Comp, and we will continue to look for enabling acquisitions going forward.
To put some numbers behind our capital spending approach. We think our annual capital spending will be in the range of $1,300,000,000 to $1,400,000,000 Over the next 3 years on a cumulative basis, the largest area of spending will be in store reinvestment as we chair for our aging store base with the 2nd largest area of spending in IT. From a new store growth perspective, We're planning to open approximately 36 stores over the next 3 years at a capital cost of approximately $700,000,000 but we will only open these stores if they're value creating. Our target IRR for new stores is 12%. We are committed to returning capital to our shareholders in the form of dividends and share repurchases.
Our dividend principle is to target a payout of about 50% of earnings. While we review the dividend every quarter, it is our intent to raise the dividend in February of each year looking back on the prior year's earnings performance. Our share repurchase principle is to use excess cash to repurchase shares as long as it's value creating. And finally from a return on capital perspective, our goal is to maintain a high return on capital, benchmarking all uses of excess liquidity against the value created for our shareholders through repurchases. Now moving on to our debt capital structure.
We have staggered debt maturities across 29 years with an average adjusted swap coupon of 5%. $1,300,000,000 of outstanding indebtedness comes due in 2013 and it's our intent to refinance that indebtedness. As for incremental financing, as you know, it's our intent to maintain our strong investment grade rating, which ensures access to the A2P2 commercial paper market. We use adjusted debt to EBITDAR as the guidepost for the rating and we'll maintain debt levels such that our adjusted debt to EBITDAR does not exceed 2 times. We have an adjusted debt to EBITDAR ratio of about 1.8 times, which suggests we have about $1,900,000,000 of additional debt capacity today.
Our debt capacity is expected to grow as our earnings grow from a projected $2,800,000,000 by the end of fiscal 2012 to over $7,000,000,000 by the end of 2015. So we've got a lot of flexibility here. Our point of view is that interest rates aren't going to move much in 2012. So we aren't planning any incremental financing today, but we will remain opportunistic. Given our cash generation projections, we to complete our share repurchase authorization during fiscal 2013 and we'll look to increase our authorization at that time.
We've been purchasing our shares since 2002 and through 2011 had repurchased 931,100,000 shares for $33,600,000,000 or an average price of $36.09 per share. At the beginning of 2012, we had targeted $3,500,000,000 in share repurchases and completed $1,100,000,000 in the first quarter. We're ahead of our cash plan and so we're now targeting $4,000,000,000 for the year and we'll complete the remaining $2,900,000,000 over the balance of the year. Because of the timing of the incremental $500,000,000 it won't have a material impact to our 2012 earnings per share guidance. This chart showcases the magnitude of capital that could be returned to shareholders from 2012 to 2015.
Based on our 12% operating margin targets, we are projecting cumulative free cash flow generation of $26,500,000,000 and this is after cumulative capital expenditures. Using our targeted 50% dividend payout, we look to pay cumulative cash dividends of $8,600,000,000 Using excess cash and with additional authorization from our Board of Directors, We project the ability to repurchase $17,400,000,000 of our shares by 2015 and this is the basis for our targeted return on invested capital of 24%. Now if we layer in incremental debt, the amount of shares repurchased could increase to $24,700,000,000 or about 1 third of today's market cap. So in closing, the power of the Home Depot will be seen in our financial results. So we thank you your time today.
And we're going to break now into our Q and A session. So I'd like to invite my partners up to the stage. Just give us a few minutes to get settled here, and we'll get into your questions. Thanks very much. So for our question and answer period, we have also invited up Matt Carrie, our Chief Information Officer to join our presenters.
We have 3 associates with microphones moving around the audience, Barbara, Wendy and Sheryl. So if you have a question, please raise your hand and wait until the microphone gets to you. We want those joining us on the web to be able to hear the question. Also, please state your name and the firm that you're with before asking questions. So with that, let's start with you, Laura.
It's Laura Champine with Canaccord. Carol, I've got a 2 part question for you. The first is, Why is 35% the magic number for gross margins long term? And the second part is, although I understand not wanting to bake in health care costs, I'm sure you've done some scenario analysis and anything you're willing to share with us around that would be helpful. Well, right.
As you've seen us In the past we've reinvested a lot back into the business. In fact, when we showed the 100 basis points of gross margin expansion that we've enjoyed over the past several years, We actually grew our gross margin 165 basis points. We've reinvested 65 back into the business. And as we look ahead, we want to continue to have ability to reinvest back into the business to drive what we've seen in terms of market share growth. So we collectively talked about the gross margin.
We're thinking 35% seems like the right number. And by the way, if we see other reinvestment opportunities, we're going to make those reinvestment opportunities. On the health care front, Laurie, it's just too early to know. And there's just so much uncertainty. Let's get through the Supreme Court decision and then we can come back and give you a little more color on that.
Thank
you. Hi. It's Greg Malik with ISI.
Not really.
Craig Malik with ISI. We'll
How about if I yell? Carol, it's
running down the lane right for you right now. It's right behind you. Thanks.
Hi, that's much better. The 2x debt to EBITDAR, that you mentioned it's a limit. You want to manage it below that. If I remember correctly, last time, 2.5% was a limit that you didn't want to exceed. Why do we want to keep taking leverage down given that the business is quite stable, appears to be bottoming Longer term, why less leverage today than 3 to 5 years ago?
There's something to be said by having a strong investment grade rating. We have an incredible financial model that generates a ton of cash. The borrowing capacity that we have with an adjusted debt EBITDAR ratio of 2 times. As you've seen over $7,000,000,000 over the next several years. We think that's powerful and we don't need to add any more leverage in that.
We think that's powerful.
Like it could stay at 1.7 for a while you're comfortable with that, that that's optimal?
We're there's a question about the optimal cost of capital and a question about financial soundness. And there's always a trade off, particularly in an environment where the economy is still fairly soft. We're happy where we are right now. We don't think there's a hurry to raise debt capital, but we got a lot of flexibility here. And we want to make the balance sheet work in the best interest of all shareholders, all stakeholders.
So think about the opportunity that we have going forward to buy back almost $25,000,000,000 of our shares will lever up
the slot. If I could
have one follow-up. There have been so much changes in terms of driving online. I think it's clearly a message you guys Maybe Craig, if you could touch on some of the things we heard there. How is that changing the vendor agreements and how you're working with vendors To make sure that they fully appreciate the importance of that pricing being the same, not only online for you guys in the store, but Also with other online only guys. Thank you.
So as Hal mentioned, in our thinking, we're dropping the E from E Commerce, and we're thinking commerce in total. So we're actually taking the same approach, working with our supply base to talk to them and work with them Across all of our elements in terms of commerce in total. So we're looking at it as one unit for Home Depot, Whether that be in our volume rebates, you name it, we're going after it as one entity.
Michael?
Michael Lasser from UBS. Carol, Frank, whoever might be able to answer this question. But On the gross margin over the last few years, you generated 165 basis points, you've reinvested 65. Has that been your decision? Or have you had to match the market?
And then what type of sales lift Has that led to? So what sort of return are you getting on those investments? And then I have another quick follow-up for Mark.
I'll give a general answer and say it's both really. Sometimes we like to be ahead of the market as much as we can be, but sometimes frankly you got to take moves competitively.
And just looking at our performance relative to our next largest competitor, outcomped them 11% of 13% prior quarter. So we think that's working.
But it's been a little you've had to be a little more aggressive than you've expected because The gross margin performance between 'nine and 'twelve was a little bit both below your expectations.
So I mean, I would just take these Targets as targets and we're trying to give you our thought process just as we were in 2,009, give you Here's the thought process of what it's going to look like over 3 years. Just like we're giving you now, here's the thought process of what it's going to look like over the next 3 years. But just as Carol said, when we see opportunities to do something different that will create value for our shareholders, we'll do it. And I fully anticipate I think we all fully anticipate that 3 years from now, we're going to be sitting down and the topography is going to look different than what we laid out here.
And then a quick one for Mark. What are the impediments to rolling out the ability to ship from store? I mean, Chuck, you Put in a whole new supply chain in the last 3 years and it seemed pretty easy to throw out the capability to ship from store. Thanks.
I'm not really sure which Mark you're asking.
Well, I think a lot of those impediments are being removed really. Ship from store, We ship over a 1,000,000 orders a year from our stores today. So we do that today. What we don't do yet is take orders online, Drop them to the store and then ship them from there. We think that the buy online, pick up in store rails that we've laid Will be what we ride on the way to deliver from store.
Was that your question?
Thanks. Peter Benedict, Robert Baird, Carol. If we're fortunate enough to get into a recovery phase at some point in the next couple of years, how would that benchmark of expenses growing at 38% of sales growth Fluctuate at all. And then secondly, on the buyback, you said you'd do it as long as it's value creating. If we're fortunate enough that it's not value creating, what do you do with that excess cash?
You pay a bigger dividend or do you save it for a rainy day? Thanks.
Well, first on the leverage question, if we were to grow sales say in the 5% area, expect expenses to grow at 30% to 35% of our sales growth rate. If we were to grow sales let's say in the 6% area it would be more like 20% to 30%. About 47% of our expenses are fixed today and the rest are variable and the biggest variable piece is payroll in our stores and hasn't it really does naturally lever, even though I know it's a lot of hard work, but it really does naturally lever. On the Buyback question. We have a point of view of the value of our company as you all do.
We use a simple discounted cash flow analysis, 2% terminal value and 9% WACC. We come up with an intrinsic value for our company. We're not there. We've got a long way to go before we reach that point. We are all betting we'd like to hold on to that last year to be the one who the last one that we buy from The Home Depot, but we've got a long way to do.
Our goal, as you've heard us from a Principal's perspective is to try to make sure we continue to generate higher returns on invested capital. In this environment the last thing we want to do is keep the cash in the bank This low interest rate environment. But play it out, if sales were to start to really grow because the economy is growing, maybe the interest rate environment would be better too. So Lots of unknowns in the future, but you've seen us in the past and our commitment today is to continue to try to do the very best thing for our shareholders. Hi.
Thank you. Kate McShane from Citi Investment Research. We heard a lot today about the changes that you're making in your stores and also a lot of the E commerce initiatives that's going to drive business to your stores as well. And I wondered if you could address how you are addressing the labor situation in the store with regards to the new initiatives and the services. Are you adding more labor and how does that translate to your guidance?
I'll take the first part of that and I'll let Mark Powers take the second part. And Mark mentioned in the sixty-forty initiative we've identified and then really reallocated the equivalent of 10 full time associates to every store To increase our service standards on the floor. The great thing about that is that you layer on top of that the new labor system fast we talked about, The system gives us the ability for really the first time to accurately put that labor in the right departments for the right days and the right times and the right season. In addition to that, the system has the ability to understand where an associate is trained. As an example, If an associate has the training in their schedule or in their background that they can work garden hardware and they would like to work more hours, the system Can staff them in both compartments intuitively based on what we put in the system based on the associate profile.
So it not only allows us to reinvest on the But the system allows us to invest in the right locations to drive sales and service during the right days and the right times of the year. So we're excited about that. Mark, I don't want anything to add
Yes. So we have a lot of projects in the queue to go ahead and execute on to drive in further productivity, Which is really what I was referencing, this virtuous cycle of driving productivity in our labor or out of our labor in our stores and being able to reinvest. We've reinvested, as you've all seen, greatly in our sixty-forty effort to customer service. In the future, The definition of customer service might be a little different depending on who the customer is. If it's an online.com customer who expects to take place inside our stores and meets their or exceeds their expectations out of the Home Depot.
We inside the stores operation, we have to be ready for that. So as we generate this productivity going forward, we'll take a close look on whether it makes more sense, Although it might look like adding some of that productivity into tasking, it really is towards a customer service aspect, maybe a different customer demand And maybe some different type of operations inside of our stores that we aren't currently doing. So to be specific
on that one, think about buy online, Ship to store, when we invest labor into pulling that product, leveraging the first one and shipping that product, it may feel like task, but really a service Because we're providing service to an online customer that's different from a traditional in store customer. We see that as the right investment. And so going forward, It's going to be all about fulfilling the customer expectation and fulfilling their needs regardless of how they shop in store, online. It's all about investing in labor to make it a seamless customer experience.
Thanks, Mayo. It's Aaron Rubinson at Nomura. Thanks for this day. Two questions. One, just wondering, I know you said that you weren't interested in starting any new concepts or new formats.
We've kind of been there, done that. But as you think about growth beyond the recovery and we look at retail formats across the globe, very few big stores are kind of comping with any consistent basis. It seems The smaller stores, the dollar stores, the auto parts, the vitamins, the others. So I'm just wondering whether or not you view that as a trend, whether or not that's something you think is worth And then I had a follow-up.
Yes. As Carol commented, we're really not into an effort to develop new formats. And we think our footprint is a good footprint. Also as Carol referenced, we're not planning to cut it down. And I'd say in the interconnected environment in which we're working, we have so many opportunities To enhance the sales productivity on the floor of our store without putting more bricks and mortar in place.
But that's really where we're focused. Anybody want to add?
I might just add to comment on China. We did say that we had earmarked a little bit of capital for China. We've been in China since 2,006, we went in with a 12 store acquisition. We now have 7 stores. The stores we have are not the right stores.
But we are testing a few new formats. A few weeks ago, we opened up a standalone paint and flooring store inside of a home improvement mall. These are with our controlled brands, Behr Paint by And sense of flooring. It's about 1300 square feet. It's early days, but we like the sales and we like the margin coming off of that format.
And as you know the Chinese market, many of the Chinese customers shop inside these home improvement malls. I'll head over to China in a couple of weeks where we have taken one of our existing stores, Cut it in half and we are creating a furniture store inside of our home improvement store with our control brand, of Home Decorators Collection. This product is made for us in China today, it's shipped to the United States. We're like, well, heck, why don't we just keep it in China and sell it in China? Who knows?
Who knows if it's going to work, but we're trying a few things there because China is just too big to ignore. And can
we just follow-up on Greg Melick's Question earlier just about pricing online versus offline, how you're kind of dealing with that. And also with the vendors like Target and others in terms of strong arming vendors Not to sell products to the Amazons of the world, etcetera. Where are we in that regard? And how effective is that at combating e commerce?
So from a pricing standpoint, the decision we made early on is if we actually stock an item in store And obviously sell that item on homedepot.com. We never want to put Marvin's associates in the middle of a process problem for us And the customer. So those items will always be the same and we'll use localized pricing to make sure that the customer Gets the same price in store as they get online. So that is a process that we've had in place. As it relates to our vendor community, again, what we're doing with our vendor community is working to Really drive the advantage of Home Depot for our supply base in total, having them think about e commerce in total with the store volume that we bring as well.
So we're working with our suppliers to make sure that we're bringing innovation to the market first. We want to be launch partners with our suppliers, whether that be in our stores or through the digital world. Want to make sure that our suppliers understand the value that Home Depot brings to their financial models. We're doing that as well. But we're really trying to work in a partnership way with our supply base to Drive leverage for them and drive leverage for us in the marketplace.
Cheryl?
Hi, Dennis McGill with Zelman. Frank, you made a comment earlier saying you've done decor type remodels in the stores before with limited success. Could you just maybe highlight what some of the biggest challenges Work in the past and why those concepts might not have worked. And then a quick one for Carol. On the 3.5% sales growth, how should we think about the volatility of Pro versus the DIY are within that forecast.
Okay. First on our store remodels, a couple of things to bear in mind with our store Is moving steel around in 100,000 square foot plus store is a major activity. And so two things would happen to us on the remodels. First, they would take 6 to 9 months. They're also very expensive.
So that's just on the doing side of it. And then during that period that you're remodeling, you're Really significantly dislocating your customer base, most specifically your pro customer, who as Marvin said, pro customer wants to come in and get out quickly. What you do when you start shifting stuff around in the store is that the pro customer comes in and says, oh, no, you move lumber outside, where's lumber today? That frustrates them and we would actually track on major remodels losing a significant percent particularly of our pro customers during the remodel Then we'd have to fight like hell to bring them back after the remodel was done. And then the all in, when you go all in, did we make enough of a difference To justify the investment and what we've seen is no.
On the sales forecast, we base our forecast on GDP growth, which suggests each year we'll get a little bit better than the previous year. So we would expect that would grow than the Pro as the economy is growing the Pro would Grow as well and we would start to see more growth in the Pro than we had seen. Remember we bifurcate our Pros into those who spend $10,000 or More with us than those who spent $10,000 or less with us. In the Q1, while the pro as Marvin pointed out grew 5% which was less than the company average, Those proceeds spent $10,000 or more than us actually grew faster than the company. So we would start to expect to see that trickle down over time as the economy starts to show some momentum.
Overall, we should expect within that guidance that the Pro outpaces The consumer over that period?
Well, as we've just said, they're not outpacing today. The larger pros are, the pro is So we won't think they'd really outpace towards the latter part of the guidance. There's Barbara.
Okay. Colin McGranahan at Sanford Bernstein. Two questions. First, thinking about the gross margin and the trade off for market share, understanding that's always an audible Call in the field. When you think about the opportunity for competitive dislocation and especially thinking about Sears that has some very Strong market shares in some of your categories.
How do you think about the potential benefit of really reinvesting more of the Improvements you're making to try to dislocate more of the share out of there. And I'll have a follow-up.
Yes. I'd say again, you're right I characterize it, Collin, as really this is something that you take case by case and we understand and we try to get As intentional as we can get about how we're investing in our business and what we're going to get through that investment. Don't want to make a comment on any particular competitors, but if you look across our store, we have lots of competitors. And Wherever it is, whether it's in flooring or kitchens or elsewhere, we are always on the point of how do we go and grow more share through what we're doing in the This is a whole. Okay.
And then second question, it sounds like the natural leverage your leverage point of the business It's pretty low, low single digit comps you're going to lever.
And as hopefully the economy and the market in housing and home improvement continues To grow. Does that continue? And I guess the question is, is 1224 kind of the end or in 2015 when we're back in If we're all still here. Is it going to be $18.50 or something? Or do you start to act more like Costco or a Walmart where you're saying like this is an adequate return and we're just going to drive productivity.
Now when we get to 1224, we'll come and I was thrilled that you all think that there might be that that might be just what's the next chapter. When we get there, we'll talk about that then, yes.
Thank you. David Strauss or Jenny Montgomery Scott. Two questions somewhat related. I guess the first one, you talked a lot about pricing online being equal to the stores and so on. If you saw a shift in your business To say 5% or 10% online.
Do you think overall your business would the overall enterprise would be more or less profitable, Basically the relative efficiency of that of those different channels. And then somewhat related to that, you have about 500,000, I guess, SKUs online versus 35 And in the store, as you look at that, are there are you starting to see opportunities where maybe you're not using the most productive SKUs in the store and that maybe there's potential shifts within the store That can give you actually much better productivity there.
Yes. I'll address the second part of the question first. We absolutely are beginning to Utilize that data flow, not only from a global standpoint where we might have items that can be added Across the company, but also regionally specific, where we can see particular things selling in particular areas and we might add As it relates to how does that affect the profitability going forward, as we look at it, there's Different business models for different types of product flows, right? There's different elements inside the entire value chain. And candidly, there's Some elements where we can probably at the end of the day do a little bit engineering, do business maybe more profitably online than you can in Sort in certain product categories and then there are certain product categories where for sure the store is a better business model and probably will remain a better business model going forward.
Let me expound a second on Craig's first point. I'll give you a specific example. We had a vanity event and the initial event we had, the assortment Had quite a few opening price point SKUs and ran the first event very successful. We worked with Hal's team and found out in the IP address of certain store locations that the top Upselling vanity online was a much higher price point. So in the next iteration of the vanity event, Craig's merchants took that data And by location, by regions, we actually added in higher price points because we knew that online customer, that IP address, That was really their desire and we had great sell through.
And that's just one example. We can give you countless other examples and we're continuing To create those examples and that's why Craig's comment about removing the E and really looking at it from a commerce standpoint is really the right way To view online and store basically serving the customer the way they want to be served. So a lot of work to do, but we're making some early successes on that.
Thanks. Chris Worvers, JPMorgan. I don't know if you had a chance to look at Amazon Supply, But I was curious if you Amazon Supply.
So I was curious if
you could talk about how that effort perhaps changed or changes your view on The encroachment to maybe the needs based categories or potentially the pro customer?
So, obviously we're Aware of the launch of that. That adds another competitor in our space and we look at That as a competitor like we do as Frank mentioned, we have lots of competitors across a whole bunch of different categories. And as a result, we look at the marketplace, we look at what we bring to the marketplace from a value proposition to the customer. And if we need to in any product category, we'll make the necessary adjustments. Candidly, for example, in the big ticket categories, Over the past couple of years, if you look at what we've done in terms of tickets above $900 we've actually had growth in that over the past Several quarters.
That's because we went in and reengineered some of our bigger ticket categories like kitchens. And even though the markets were in decline, We're actually gaining share from the marketplace and we're able to drive that kind of performance. So we'll view that as another competitive Situation that we have to address going forward.
Is there something about you brought up the innovation example around plumbing fittings. I mean, is there something about the supply category that maybe it doesn't just work quite as well and perhaps you do have an advantage there?
I think that the advantage we have in a lot of those product categories is The customer is looking for a sense of urgency of the product. Something breaks, they need to fix it. They're not going to wait to fix it. And having 2,200 stores with close proximity to the customer, I believe is an advantage in those type of businesses.
Yes. If I could just pile on, we owned a supply company. Making this warehouse was part of H2 Supply. So we know that business very well. And the one thing we know is that same day is critically important to that customer.
And then as a follow on, can you compare and address My account versus Milo's, maybe just the summary points of the differences and so forth.
Thanks. Yes.
I mean, I think on Two things on that. 1, I guess I'd just say the vernacular my is obviously a common vernacular used across the industry. If you go to Amazon or you go to homedepot.com or you go to Best Buy, it's my account. So there's no intention to do any compare and contrast there. What I'd say is it relates what we're trying to do to create a broader relationship with our customers, we're trying to focus on the things that our customers tell us that are important to them.
And as Trish laid out, it's around simplicity And relevance is what they want. And so for us, that simplicity is around effective transaction management. We know they want to be able to interact with us anywhere, Time and online as a means that more and more folks are looking to do with that. The second thing is around projects. We know that our customers Engage in projects.
They don't buy products from us. And so whether it's the pro or the consumer, we're going to enable their projects. It can be in our installation service businesses where we help them step by step, Could be in their own do it yourself or could be in a pro if they're building a project for a consumer. The third thing I think that's very differentiated from us is around community. We really do feel like, you heard at Marvin's, you heard at Carol's, that we have a variety of communities that do business with us And we have a means to be able to galvanize those communities and build a relationship with them, help them think about their projects and their hobbies, the work they do and then that drives home improvement business for us.
Hi. It's Dan Binder at Jefferies. Frank, I think in the past you've told us that about onethree of the store can be sold online. I'm curious In this Internet slide, where you have the red bubble that you define as defensive, What portion of your sales do you throw in there? Sure.
Craig, do you want to take a bubble for that? I'll define the bubbles for you. So if you start with the green bubble in the lower left, That bubble is slightly north of 40% of the business. If you look at the bubble on the lower right, More complex projects that Hal addressed. That bubble is slightly north of 30% of our business.
The upper right hand quadrant of that chart then represents
in
the neighborhood of around 26% of the business, Of which in total the red would be about 15%.
And then from a product
And price position standpoint today, where are you sort of in that game? If you put it in baseball terms, what inning are we in In terms of getting to where you want to be, particularly in those upper quadrants. Yes. It really varies by category. So Candidly, we had an opportunity to move a lot faster, add a lot more product, for example, in the power tool example that I gave you.
We did that by adding product, by adding brands that really we weren't playing in, in the Online side of the business have seen tremendous results from that and kind of growing share at a very nice rate. Likewise in store, we continue to focus on innovation. In categories like lighting, we've added a number of Products into Aladdin, but we've got a long ways to go there. We're in early innings, for example, in that business. We still have more brands and products to So it really does vary by product category.
And the only thing I'd add is one of the things that's unique about Home Depot is that Our core merchandising organization is accountable for all channels. So we do have online merchants, but they sit, reside and report into our merchandising vice presidents. Our Merchant House and Vice Presidents have accountability for their pricing across all channels. They have accountability for their margins Across all channels. They have accountability for their turns across all channels.
They have accountability for their assortment and their vendor management across all channels. So This isn't like a side venture that just sits out there in a siloed way. It's very much an integrated way, the way our merchants work each and every day. We've got intelligence built around all those elements just like we would in localizing our assortment and pricing.
And part of the Tools that we had to go build was to begin to give them visibility so that they could see all those pieces of their business kind of in one format, right? Previous, you're seeing pieces separately and they had to begin to think about how they came together. So that's part of the work that's going on right now is To make sure they have a seamless look at all of the pieces coming together. So it's one financial picture that they're looking. Thank you.
Thanks. It's Matt. The pieces coming together, so it's one finance the pieces coming together, so It's one financial picture that they're looking at. Thank you.
Thanks. It's Matt Vassler from Goldman Sachs. Two questions both related to online. First of all, within the context of your financial plan, can you talk about where that 2% of sales Ultimately goes. And then secondly, as you've collected more data and done more targeted marketing and outreach to your consumers, Can you talk about the ROI that you've seen from that kind of spend?
What sort of results you've seen from that 1 on 1 marketing, if you would?
So I can take the second part, Matt. So basically when we market in a relevant manner To a consumer, it goes up 10x. So in terms of just blasting out an email to a general audience that says, hey, Home Depot's message, We go to a targeted message to Matt Fassler about something we know that you're passionate about or in the case that I showed where we know that you're about to buy paint, It's 10x the return. So it's far more efficient to understand who they are based on their behavior and then target those messages to them. They're highly engaged And highly inclined to respond.
And on the first question, remember, we look at this as commerce, not as segment. But if I look at Hal's plan, it would be to increase the penetration slightly by 2015.
Zohit Sariq, Gabelli Asset Management. I have two questions. 1 on the Healthcare, Frank, you touched on the cost potential cost. Conceptually, what is the issue at HEN? Is it The fact that the associates don't have insurance and you will be required for them to have it?
Or is it something different? Conceptually I understand.
So conceptually the issue is as of 2014 You would have a requirement for everyone, right? There's the individual mandate and then the employer has an obligation to provide health care insurance For all full time associates. As I said, we have a lot of associates. So that's something we need to understand the impact of that. And there are various penalties built into the legislation if you choose not to provide Health insurance and instead have your associates covered through the state exchanges.
And there are a whole set of issues around the I mean, there's just a lot that still needs to be worked through on this even aside from the court decision.
Of the 250, how many don't have insurance today?
Well, so we won't I mean, I don't want to get into the specifics. When we get to talking about the impact of the health care legislation following the Supreme Court Decision whichever way it goes, we'll give specificity around here's what the impact will or won't be and here's why.
Okay. And Carol, in response to someone else's question, you said you have a view for the value of Home Depot stock and that's why that's one of the reasons you have been buying back shares. Today, what is the value where you'll stop buying? Is it $60 a share or $0.65
or what is the value?
You think I'm going to I think I'm going to tell you. We're not. But we're not there obviously.
Hi. It's Brian Nagel from Oppenheimer. A quick question, I want to ask a couple Around the Pro business and specifically refer to it Marvin's presentation. So Marvin, you mentioned in one of your slides you said that Pro sales Currently represent about 35% of total sales. Now that seems higher than the number we had pre housing downturn.
So I know you guys You're looking closer to
the pro business and maybe you're calculating it differently. So the first question I have is that higher and then how would that compare to The levels we saw pre downturn? It's slightly higher. But remember, we in sourced our data set. So we went from a 3rd party that we use to really help us to understand our customer segmentation and Trish's team stood up A really robust CRM organization that's allowing us to look at our pro specifically.
So we went through a Pretty rigorous process of understanding who these customers are, how they shop, where they shop and what the characteristics are. So we believe that number It's accurate and it is slightly higher than within the downturn.
Okay. Then a follow-up on that. I mean, obviously, a lot of A lot of the presentation was in the pro business. So as we look at what would be as we look at the potential recovery over the next several years kind of within your financial plan, How high could pro sales get as a total sales? Then as a follow-up to that, as you look in the marketplace, has anything significantly changed structurally Within the you say your competitive set to allow Home Depot to ultimately capture a much bigger share of that pro business?
Thanks.
Well, I don't know that I can give you an intelligent answer on How it can go, but what I can tell you is this, we want to be on the right side of the growth. So we're spending a lot of time today on understanding what our pros Desire from us to get a greater percentage of spend and we are spending, as I outlined, a ton of time on the service component. We understand that in certain Pro categories we are a convenience store. A Pro is on the job site. They run out of drywall.
They run out of fasteners. They run out of roofing materials. They want to make a run to us and get those supplies. We're perfectly okay with that. We want to be The best retail outlet, the way the customer wants to be served as a primary source for some of the smaller Pros and from a convenience source from a larger Pro.
What our goal today is to focus on what our customers have been explicit to us that they desire and that is service. In and out, convenience, great in stocks at competitive prices, all the things I outlined. So we're working hard To position ourselves right there so when the pickup or the business starts to increase, we want to be positioned to get a Greater share of that increase versus the competition. I don't know if that answers your question.
Brian, I'd also say just structurally obviously there are a lot of businesses Particularly on the serving the pro that we're highly I mean, if you look at lumber and building material yards, for example, a lot of closures over the last 3 to 4 years. But by the same token, that's not a huge capital spend to open them back up. So there is some opportunity maybe In a temporary frame of timeframe to pick up some share, but I'd say temporary.
And maybe just one other comment on this. Our pros do shop across the store. So if we did have an increasing penetration of our pros, it wouldn't have a margin implication because they shop across the store.
Carol, I believe you said that roughly 47% of your expenses are fixed. My question is, for the balance of the expenses and specifically for employee compensation, do you have Inflation assumption that is implicit in your expense guidance.
Yes. We always use a CPI Point of view when we build our plans and so we're looking at a CPI rate of around 2%. We also try to drive productivity to offset some of that inflation that may come at us, particularly for those of us who are G and A. We don't let our expenses grow, Regardless of the fact that we like to pay our people more year on year, we don't let our expenses grow, we drive productivity.
Budd?
Couple of questions. Budd Bugatch with Raymond James. Marvin, you recognizing there's some definitional differences in the tasking versus customer facing, You had a sixty-forty goal for a while. Any update on that or any thought about how that might go over the next couple of years?
We expect to reach our sixty-forty goal in the 1st part of 2013. So we're excited about hitting that What we're going to do at that point is transition. Mark talked about that virtuous productivity loop. We're going to transition our focus after we achieve the sixty-forty goal into driving continuous productivity and making those right investments. As we mentioned earlier, We're going to make different types of investment in payroll over the course of the next couple of years that at first blush may appear to be task, but in essence it's going to be service We're going to be supporting the online business and that customer in a different way.
We're also going to make sure that the investments we make will simply Focus on creating a seamless environment for the customers. But again, we're very pleased with the progress. And more than anything, you talk about adding The equivalent of 10 full time associates every store. The only way we could make that happen is that our stores went through massive change management. We pushed some enormous projects and process changes down to the stores and we were very nervous about that, but our associates stood tall, Accepted to change management and as a result of that, we're pleased with the customer service improvement.
We are pleased with the transaction improvement. Craig and I know There is a direct correlation between service improvement and transaction growth. And so we're pleased with that as well. But again, we're going to make Investments in productivity improvement and we're going to focus intensely on how do we continue to be a more productive store environment.
Okay. And for Craig, on the sourcing issues, is there any change in the process with the vendors? What are you seeing in the sourcing arena over time? Obviously, there's been some movement because of the costs in some of the Asian countries or Between China? Sure.
Yes. There definitely is obviously some rising pressure offshore. But what I would tell you is that over the past several quarters, we've seen stabilization. I think A year ago or so, we were telling you that we were seeing pretty steep increases in the number of incoming requests because of the rising raw Material and commodity costs. That has in fact stabilized at this point.
So feel pretty good about that. And then we're continuing to work. Our focus is on making sure that to deliver the best value for the customer, we have to be able to start with the best cost. And so part of our merchandising transformation is focused around making sure that we're developing the tools and the processes necessary to support our merchants And that type of effort giving them visibility into what's happening in the marketplace around raw materials, around the types of changes that might Take place in manufacturing processes and so on, so that we can actually deliver on the best first cost. Okay.
And lastly for Matt, I didn't want him to feel Alone or ignored. Other than the merchandising Projects that I think are still in place for Craig. What can you tell us about what's next in IT and what processes or programs you may have in place? Bud,
part of what these folks talked about today are really kind of my roadmap for the next 3 years. And We've got a substantial amount of work to do in merchandising. We've come a long way in stores, but still think we can get better. And supply chain, Mr. Holyfield always keeps us challenged.
So it's And I can't go without saying the amount of work that we've accomplished in the last 3 or so years. We've got a great team, but I mean, Kara Kinsey is in the back there, but she also has helped me partner a lot with that. But I got to say, in online, we still have ways to go. I mean, we want to be world class there. And we know we have to build a lot of seamless experiences with no complexity added to our store associates.
And we got to deliver that in a way that we can all afford it and hit the numbers that you guys expect. A
lot of progress.
Merchandising is going to get a lot of focus. And what you see up here is really what
we got to deliver, There's no rest for Matt.
Dave Gover for Morgan Stanley. I also wanted to touch on the pro market and particularly within the context of the framework That Carol laid out in terms of the home improvement recovery. As we enter into stage 1 of the workout here, it seems like you are expecting increased Demand for household more household formation, but also more rental properties. I was wondering if you could maybe dig into the composition of those pro customers that Spend $10,000 or more every year. Are you seeing more MROs within that mix?
Or is it just larger contractors that are doing Normal contracting type jobs. How does that impact the mix within the store? And maybe for Craig, how does that impact the merchandising of
the types of products you have to carry?
It's a combination of both, but what we're not saying is that anything dealing with new home construction, Framing packages, it's nothing like that. It is simply customers with larger businesses getting more work And more jobs that are very broad across a lot of different construction, remodel, maintenance and repair categories. I think that's why, as As Carol mentioned, our pros shop throughout the entire store. So we're seeing a little bit of everything. And our goal Candidly is to make sure that we continue to leverage Trish's organization from a CRM standpoint, leverage our field sales team and pro And our ProDesk associates to communicate with those customers to really understand what their needs are.
So then Craig's team can respond accordingly From a merchandise assortment standpoint and we can stay competitive. So it's very broad, but again no one specific area that's driving the growth And our goal is to provide the service and all of the other elements so that we can continue to get as much of that business as we can.
The thing I'd add
to that is during this Downturn. A lot of our Pro customers have taken on kind of more than what they were doing prior to the downturn. And so they might have been a specialist in an area and now they're trying to do more across the store. So from a merchandising standpoint, the thing that we have to stay focused on is How do we actually bring products to market that are simple and easy to use? That's why the SharkBite is such a great example Of how that virtually kind of puts anybody in the capability of working with plumbing products maybe where in the past They wouldn't want to tackle that, but it's so much easier to use.
It helps the Pro not only in terms of Being more confident to use products that maybe they weren't doing before, but saves them time, money in the process. So that's really how we're focused From a merchandising standpoint to make sure that we can deliver on their needs as they branch out into other projects.
Just let me expand on the In the past, a pro would come in to, let's say, remodel a basement and they would subcontract the painting. In some cases, a subcontract hanging the drywall. Now that one contractor will handle all those jobs themselves Because they're trying to control their spend and trying to leverage their profitability. And so to Craig's point, we have to deal with these customers more holistically And not in a specialist category the way we used to.
Maybe just a quick follow-up and I guess around kind of some of the Amazon supply Questions that were asked before. Are you seeing a change in the way that the pro customer wants to interact with the Home Depot? Are they you mentioned a number of different potential selling channels and direct shipping of products. Are you seeing more online interaction, more online planning and other types of interaction that you haven't seen in the past?
Not really, but what we're seeing and Trish maybe can speak to this is that when we communicate with the pros effectively By using our online tools, we're seeing the same type of response that we get in some cases from the general consumer. It's part of our responsibility To help to educate our Pro customers on how they can leverage technology more effectively. One example is buy online pickup in store. If you think about it, it's a great tool for a pro to order product on Sunday night to pick up on Monday morning to start the job. But we're in the process of educating our pros on how they can better leverage some of these new technologies that Hal or Matt Have stood up to make their jobs more effectively more effective and more productive.
So we own part of that, but we hadn't seen a major Shift of transformation and their desires to go online. We have to educate them to leverage it more effectively.
Right. And to tag team from Marvin's comment in terms of the Marketing to them, understanding who they are and using the data appropriately, we get a high relevancy to them in terms of messaging. And Specifically, a couple of years ago, we would have looked in our database and said, oh, this guy's got an SIC code that says he's And so we would serve him an e mail that had junction boxes and copper wire. Well, guess what? That electrician is painting houses right now.
So we're looking at his behavior, her behavior and saying, hey, you know what, this person would respond well to a paint offer. And so by doing that, there again, we're building a relationship with them that we understand what they're doing instead of them opening an email and then looking I'm going, why are they sending this to me? I'm painting houses right now. So it's much more effective in terms of having brought the data in house and understanding who those folks are
Gary Balde from Credit Suisse. First of all, Trish, I want to thank you for This is Shazam. I used it when he told me
to do it. We're
great. Question
for Frank and then a follow-up for Carol. Frank, Carol mentioned that you beat your competitor 11 of 13 periods. What was what happened in the other two periods? And what was your reaction?
That's an interesting question. So To be honest, it's we got a great competitor. It's a great competitor and we expect every single quarter to be a dogfight. And we're very proud of our performance, but we also understand they're really good. And we don't take it for granted that we're going to win any day, any week, any
I see the same management teams up there, so there are no changes after those 2 quarters. Carol, on a more serious basis, You did a test with PayPal. And could you kind of quantify for us the benefits of doing that PayPal? And then how that compares to your private label Credit card and then Visa or Mastercard, what are the savings? What are the opportunities from that side?
And what you're thinking about it going forward? Thank you.
Sure. Well, we have PayPal rolled out to all stores in the United States. And we're very pleased with the results today. We just Started to market it in April. We've had PayPal transactions in over 60% of our stores and the transactions per week are exceeding our expectations.
We viewed it first as a customer convenience. We had associates who worked for us who said I want to tender with my PayPal account. So we knew that first we had to take care of what the customer demand was and that's why we rolled it out. But working with PayPal who also I think wants to grow this business, we cut a pretty nice financial deal for us. I don't know if this is their financial deal going forward, but for us the cost of acceptance for PayPal is lower than a bank card, I.
E. A Visa or Mastercard or something like that. And it compares favorably to our private label card. Now PayPal is a form of tender not a form of financing. Our private label card is a form of financing for us and we're really pleased that we think we've seen a contraction in our private label card as you know.
A lot of that was because of the economy. It's bottomed out we think now at about 21.4% of total sales. We have a goal to grow This year by about 200 basis points and ultimately we would like to see our private label card at about 25% of our total sales. The way we're growing it is by offering extended financing programs. We're really pleased with a tier financing program we've got underway right now.
So if you The more you spend, the more you finance. In other words, your tenure kicks out a bit. So we're pleased with that and we'll continue to try to grow it. So we have time for one more question, Michael. Oh, I'm sorry.
Thank you.
Thank you, John. Mike Baker from Deutsche Bank. Two questions. 1, on market share, you talked about a bunch of competitors. This has been asked in the past, but I'll ask it again.
When you compare your sales to industry sales as defined by NAICS Code 444, You guys do grow less than that. So if you could remind us why you think that is, what's in that data that's not captured? One other question is going to be, as you talked about in 1st quarter call, you thought there was a pull forward of sales of $130,000,000 to $150,000,000 2 weeks later, does that still look like the right estimate in your mind? Thanks.
Well, any insight that you could give us on the census data would be greatly appreciated, because it is a conundrum. What we try to do is this, We pulled apart all the publicly traded companies who are included in Niox to look at their relative sales growth to ours to say does this give us any sort of color. And there are publicly traded companies in Niox that we really don't compete with like Fastenal who are growing faster than we are. There are also companies who sell chemicals for golf courses. Those companies are into NIAC.
They're growing faster than we are principally because of the weather and golf course extension. So It's not the best competitive set sadly, but it's something that we try to work with and try to better understand. Right now what we're doing candidly from a market share is we're looking at people that we know. Are we outperforming them? And these would be the usual suspects.
This is an indication to us whether or not we're gaining share. So I've changed my mind. We'll have one more question. On the sales call. On the sales call, Board, our estimate in the Q1 is as good then as it is today.
It's hard to tell. The good thing is May was good for us. That's the most important thing.
Thanks John Zolaitis from Buckingham Research. I actually have a follow-up on the question about the credit cards. About a year ago, one of your competitors introduced a 5% discount across all their transactions. And so my question is, have you seen any noticeable change in your applications for cards? Do you feel any inclination to respond competitively to that?
And in particular, if you look at the Pro segment where you would think that that offer might be somewhat more appealing since they're coming to the stores much more frequently and 5% over the course of the year on 50 trips might add up a lot more quickly in their minds than a 4 times per year visit. Is there any particular Comment you can make about the Pro and that offer relative to Home Depot's offers.
Well, I'll start and then Marvin you can add. In the Q1 we opened 540,000 new accounts that was right on our goal. So we haven't seen any impact to new account openings as a result of any competitive We view our cards very differently than some of our competitors. We view them as a financing tool. We also have a match program inside of our stores.
So if a customer walks in and they say, hey, I can get this offer at Lowe's, what will you do for me? We'll match them as long as they spend it on our card. They've got to use our card to get the match. But I don't Marvin, do you want to add anything to that?
Carol answered the Pro question. We have a competitor match. And if we have a loyal Pro customer that feels compelled to shop at a competitor based on their offer, we will match that if they use our proprietary And we've been able to do that and we feel as though that we haven't had massive defections. Our numbers reflect that.
Thank you.
Well, I'd like to thank our presenters today, Frank, Marvin, Mark Powers, Craig, Trish, Mark Holyfield, Matt and Carol. Many thanks to the Investor Relations team, Daryl, Tammy, Ryan, Tiffany, Ben and Dan, and also thanks to Laurie and the corporate events team and Barbara, Wendy and Sheryl and all of the associate volunteers that we had with the demonstrations and this now concludes our presentation.