Good day, everyone, and welcome to today's Home Depot First Quarter 20 12 Earnings Conference Call. Today's call is being recorded. Phone. Please note that any prompts entered before this time may not have registered in our system. Beginning today's discussion is Ms.
Diane Dayhoff, Vice President of Investor Relations. Please go ahead, ma'am.
Thank you, Christie, and good morning to everyone. Welcome to The Home Depot First Quarter Earnings Conference Call. Joining us on our call today are Frank Blake, Chairman and CEO of The Home Depot Craig Muneer, Executive Vice President, Merchandising and Carol Tomei, Chief Financial Officer and Executive Vice President, Corporate Services. Following our prepared remarks, the call will be open for analysts' questions. Questions will be limited to analysts and investors.
And as a reminder, we would appreciate it if the participants would limit themselves to one question with one follow-up, please. Conference Call is being broadcast real time on the Internet. The replay will also be available on our site at earnings.homedepot depot.com. If we are unable to get to your question during the call, please call our Investor Relations department at 770 3,842,387. Now before I turn the call over to Frank, let me remind you that today's press release and the presentations made by our executives include forward looking statements as defined in the Private Securities Litigation Reform Act of 1995.
These statements are subject to These risks and uncertainties include, but are not limited to, those factors identified in the release and in our filings with the Securities and Exchange Commission. Today's
Call. This presentation also includes certain non
GAAP measurements. Reconciliation of these measurements is provided in the financial statements included with our earnings release and on our website. Now let me turn the call over to Frank.
Thank you, Diane, and good morning, everyone. Sales for the Q1 were 17 $800,000,000 up 5.9 percent from last year. Comp sales were positive 5.8% and our diluted earnings per share were 0.6 $0.08 Our U. S. Stores had a positive comp of 6.1%.
This is the 2nd quarter in a row that we have posted a positive comp in the U. S. Of over 6%, something we haven't done in 8 years. This was well ahead of our plan for the quarter and as with the Q4 For 2011, unusually warm weather played a significant role. We had the 4th warmest winter in history and also had the benefit of comparison to a relatively cold winter in 2011.
Not surprisingly, the areas of strongest growth for us were in our Northern division, We had positive comps in our Southern and Western divisions. They were mostly in the mid to low single digits. In all, we had positive comps in 38 of our Top 40 U. S. Markets and Florida and California continued on the path to recovery.
Adjusting collective of broad GDP growth rather than a recovery in the housing market. While there are still some while there are some positive signs in the housing market, it is still under Pressure. Pricing is stabilizing, but not yet solid. Inventory is down, but shadow inventory remains a concern and credit availability continues to be constrained. In this environment, our customers are looking at DIY projects as a way to save money while they improve their homes.
As Craig will describe, we have focused on that need and are providing innovative products at great value to make home improvement Our business is obviously impacted by weather, particularly at this time of year and those tools are critical in making sure we We have the right product in the right place in the right quantity as the season breaks. Unusual weather such as this year's presents an additional challenge. As you know, over the last few years, we've rebuilt our supply chain and centralized forecasting and replenishment. This quarter was a real life stress test of These new capabilities. There are always opportunities, but overall we're very pleased at the response of our supply chain.
And we also leveraged our supply We had strong transaction growth in the quarter and at the same time we're able to improve our Customer Satisfaction Scores, which is indicative of the progress Marvin and our store operations team are making. We retrained all of our associates on customer service during the quarter as part of our continuing commitment to customer service improvement. On the pro side of our business, we have seen gradual recovery. To give this some context, at the height of the housing crisis, our pro business declined at a much Faster rate than our consumer business. Our hypothesis was that the Pro would be a leading indicator coming out of the housing crisis.
The reality has been more nuanced. We are in fact seeing recovery in our Pro business, but the strength within our Pro business Appears to be developing sequentially within different classes of customers. Our larger pro customers are growing at a faster pace than our consumer segment. But our overall pro business is moving slightly less than the general consumer. This suggests a thawing process with the larger customers covering first with hopefully stronger recovery spreading throughout the rest of our pro base over time.
Call. In the quarter, we upgraded our dotcom platform, enhancing the site's visual appeal and responsiveness. Our apps Conference. We reached a new milestone and have been downloaded over 2,000,000 times. We now have over 500,000 SKUs on our site, including our home decorators collection.
We continue to invest in the business and Matt and his team are providing new tools throughout of the company. For example, we have begun the rollout of what we call our First Phone Junior to all stores. This junior version of the First Phone provides our Associates, a tool that combines the communication features of the phone with the product and inventory lookup features of the first phone, but without the complex business analytics and product ordering functionality of the First Phone. This allows us to spread the basic functionality of the First Phone throughout the store for the fraction of the cost. On the international front, our Mexican business posted positive comps for the 34th consecutive quarter and Call acquisition we just completed.
This month, we acquired a flooring measurement and quote building company, Measure Comp. The company's business was largely dedicated to Home Depot and by in sourcing this service we can build a Seamless process for our flooring customers that we expect will provide a far better experience for them and a better close rate for us. As Carol will Discuss in more detail, we are raising our earnings per share and sales guidance for the year. This is based on our outperformance to plan and adjusted the estimated sales we pulled forward in the quarter. We remain focused on taking care of the customer and investing in our business and in our associates.
I'd like to thank our associates for their hard work and dedication in the Q1. Based on this quarter's results, over 98% of our stores would be eligible for Success Sharing, our profit sharing program for our hourly associates. We're very proud of that result. And with Call. Let me turn the call over to Craig.
Thanks, Frank, and good morning, everyone. We had a strong first quarter driven by continued strength in our core business and enhanced by record setting weather in February March. Warmer than expected weather allowed customers to complete exterior projects and begin spring projects early. We estimate weather positively impact U. S.
Comps by 300 basis points of which between 8,801 100 was an Estimated pull forward of activity that otherwise would have occurred in the Q2. While Northern Regions benefited from a strong seasonal business and an easy compare in the Q1, we are also pleased with the positive performance in Southern and Western regions where the weather was more normal. Total transactions grew by 3.9%, while average ticket also Leased 2.2 percent for the quarter. Transactions for tickets under $50 representing approximately 20% of our U. S.
Sales were up 2.4% for the Q1. Transactions for tickets over $900 Conference also representing approximately 20% of our U. S. Sales were up 6.7% in the first quarter. All departments Supper II posted positive comps for the Q1.
The departments that outperformed the company's average comp were indoor Positive Comps. Comps in plumbing were flat and kitchens were slightly negative. Sales in the Q1 were driven by double digit positive comps and seasonal product categories like walk behind mowers, riding mowers, lawn accessories, soils and mulches, which is chemicals, grills, watering and planters. Fertilizer, exterior lighting, live goods and and Landscape Lighting delivered solid comp performances as well. We also saw double digit positive performance in the Following outdoor project categories decks, pressure washers, exterior stains, siding, gutters, portable outdoor Exterior Projects and Seasonal categories.
As I've shared in the past, simple decor categories continue to gain strength. Within our hard surface Call. The combination of wood and laminate categories led the way with comps in the high teens. We are also pleased to see comp growth in other decor categories like window coverings, bath accessories, vanities, interior paint and ceramic tile. Finally, due to our continued emphasis on providing value for our customers and offering innovative products, the core of the store continues to Form.
And we saw positive comps in fasteners, electrical repair, portable power, door locks and pipes and fittings. Call. We continue to offer our customers great values. For the professional electrician, we are introducing new Larger load centers meet the increasing demand for electronics in the home, while allowing for better customization per project for our pro customer. We're also expanding plumber.
We launched new brushless motor technology and power tools from Makita and Milwaukee. Brushless Day. For our do it yourself customers, we're introducing new products into core, including a significant update of our in stock faucet assortment. We're also announcing the addition of 1 inches blinds from Bally complementing our home decorator collections premium full wood blinds. For outside of the home, We have new weatherproofing wood stains from Behr and new Masonite and Feather River Fiber Glass Doors.
Call. Also for Father's Day, we have a strong product lineup in our gift centers. And at the end of the second quarter, we will have a storage event, which will feature products from Apartments across the store and from our home decorators collection. I'd also like to mention the work of our consumer insights team. As Call.
Frank said, we're beginning to see a recovery in our pro business and this recovery appears to be sequential, but by only a certain class of pro. This analysis This is a direct result of the team's efforts to bring our consumer analysis in house. The ability to see customer purchase patterns on product and frequency has enhanced our shift from mass marketing to personalized communication. In addition to seeing broad turns in our business, Conference, we are now able to analyze specific customer behavior. We can look inside customer segments, for example, page for electricians and the data helps our CRM tools and as a result led to more productive and successful direct marketing campaigns.
As we continue to enhance our attributing capabilities inside our enterprise data warehouse across product, customer and geographies. We will drive efficiency in our response to trend recognition and actions with our CRM team. Finally, this was a demanding quarter and I'm proud of the hard work by our stores, merchants and supply chain as they did a great job to meet the needs of our customers. And with that, I'd like to turn the call over to Carol.
Thank you, Craig, and hello everyone. In the Q1, sales were $17,800,000,000 a 5.9% increase from last year. Comps or same store sales were positive 5.8 percent for the quarter with positive comps of 6.2% in February, of 6.1% for the quarter with positive comps of 7.2% in February, 5.8% in March and 5.6% in April. Call. Our total company gross margin was 34.7 percent for the quarter, an increase of 8 basis points from last year, of which 7 basis points came from our U.
S. Business. In the U. S, the gross margin expansion can be solely attributed that's arising from our supply chain transformation. Excluding supply chain benefits, the gross margin for the U.
S. Was flat to last year due primarily to a change in the mix of products sold. For the year, we continue to expect moderate gross margin expansion. In the Q1, operating expense as a percent of sales decreased by 109 basis points to 25.1%. Total operating expenses grew at a factor of 24% of our sales growth, better than our original guidance due principally to the sales environment.
For the quarter, our operating expenses were within $8,000,000 of our original plan. Based on our Q1 results, we now expect total expenses to grow at approximately 40% of our sales growth rate on a 52 week basis. Turning to interest and other expense. You may recall that we had guaranteed a $1,000,000,000 senior secured term loan issued by HD Supply and established a $67,000,000 fair value liability related to this guarantee. In the Q1, our guarantee was terminated and as a result, we reversed the liability.
This reduced other expense by $67,000,000 and provided approximately $0.03 of earnings per share benefit in the quarter. Our income tax provision rate was 36.5% in the Q1 and for the year we expect our tax rate to be approximately 36.5%. Diluted earnings per share for the Q1 were $0.68 an increase of 36% from last year. Moving to our operational metrics. During the Q1, we opened 2 new stores in the U.
S. For an ending store count of 2,254. At the end of the Q1, selling square footage was 236,000,000 Total sales per square foot for the Q1 were $304 up 6% from last year. Conference. Now turning to the balance sheet.
At the end of the quarter, inventory was $11,600,000,000 down approximately $100,000,000 from a year ago. Inventory turns were 4.3 times, up from 3.9 times last year. We ended the quarter with $43,300,000,000 in assets, including $3,200,000,000 in cash. We are about $500,000,000 ahead of our cash plan due in large part to in the money stock options that were exercised in the quarter. In the Q1, we repurchased 1 point Company.
We have approximately 19,400,000 shares of outstanding stock, including 2,100,000 shares through open market repurchases and 17 13,300,000 shares through an accelerated share repurchase program. The shares acquired under the accelerated share repurchase program are an initial calculation. The final number of shares repurchased will be determined upon the completion of the program in the second quarter. Computed on the average of beginning and ending long term debt and equity for the trailing 4 quarters, return on invested capital was 15.4 percent, 2.40 basis points higher than the Q1 of fiscal 2011. As you've heard, the warm spring weather Continued strong performance in the core of our store drove 1st quarter sales ahead of our internal expectations.
But it's our point of view that the fundamental assumptions behind our 2012 financial plan haven't changed. As a result, we are simply raising our guidance for fiscal 2012 to reflect 1st quarter outperformance, offset in part by the sales we believe we pulled forward into the quarter. On a 53 week basis, We now expect fiscal 2012 sales to increase approximately 4.6%. For earnings per share, Call. Remember that we guide off of GAAP.
Based on our Q1 results, we now project fiscal 20 12 diluted earnings per share to increase approximately 17% to $2.90 on a 53 week basis. This earnings per share guidance includes Share repurchases completed in the Q1 and our intent to repurchase an additional $2,400,000,000 in shares over the course of the year. Our guidance assumes that share repurchases will contribute about 0 point 0 $7 of EPS accretion in 2012, offset by 0 point 0 $2 of dilution coming Call from shares issued in association with stock option exercises. We look forward to sharing with you Conference on June 6 in Atlanta. We thank you for your participation in today's call.
And Christie, we are now ready for questions.
Thank Pad. Star 1. And we'll go first to Gary Balter from Credit Suisse. Your line is open.
Thank you. Just one question, just a follow-up. Your current guidance is to about a 10% operating margin and that's with no strong with nothing really in the housing market as you mentioned and just the beginning of the contract business coming back. In a stronger market, as you look at your at what you've done internally, what type of margin assumptions
where do
you think you could get to?
Well, Gary, we have an investor conference coming up on June 6. Call.
Am I
going to run the conference now?
So thank you for teeing it up for us actually. We'll talk about our longer term margin opportunities. Call. We're not stopping at 10%. We have an opportunity we believe to grow our margin.
If you remember our peak margin back in 2,005 was 11.8%. We'll give you a lot More color on June 6.
Okay. So that doesn't count as a question. Could you Talk about share gains this quarter. Your comps were much stronger than your one of your competitors, the other one obviously hasn't reported. What do you think you did in terms of market share Call.
So Gary, we look at share 2 different ways. We obviously look at The census data from the NIAX that would actually indicate that we lost share, although there are companies in there that much smaller base that have huge gains, which affects the number. And then when we look at the consumer side Independent tracking, which doesn't include our Pro business. We gained in 4 departments out of our total that would have Lighting, Lawn and Garden, Kitchens and Millwork. When we try to triangulate the data.
Working with our suppliers, we do feel that we're gaining share in a number of our business categories, but those two indicators Are what they are.
Thank you.
And we'll go to our next question from Colin McGranahan from Bernstein. Inc. Your line is open.
Good morning. Thank you. Wondered about pull forward to demand. It's It's going to be a little confusing, but if I look at the 4th quarter, your 5.7% comp, I think at that point, you said weather was a benefit of 200 basis points to 2.50 basis points. So and I may be getting a little too nuanced here, but if I were to back that out, I'd Day the 4th quarter weather adjusted comp then was maybe 3.2% to 3.7%.
If I look at this quarter, you comped at 5.9% and said 300 Points. So again, a little nuance, but backing it out with suggested 2.9% weather adjusted comp. So I guess my first question is, is that reasonable? And do you think the underlying business actually decelerated by something about 50 basis points or so?
Well, these are it's an art as much of a science in terms of what's weather impacted. Conference. And obviously for us, the Q4 is a little bit anomalous because it's our lowest volume and heavily driven by How we perform on our the seasonal holiday, which was very strong for us in the Q4. I would tell you it didn't feel like the business decelerated, but whether I mean as Craig mentioned and Marvin's Here for the store side, boy, our stores were very, very busy and we had huge transaction growth in the first quarter. So I understand your point, Collin, on weather adjusted.
Did we decelerate? But I would say it didn't feel like that.
Okay. That's fair. And again, I know it was a very nuanced kind of thing, just trying
to
make a little bit more science out of it that probably is worthwhile. But then if I think about pull forward demand, I guess my second question is, Call. How do you measure that? How comfortable do you get with that 80 to 100 basis point estimate? And if that's the right number, Should we think about this quarter being something kind of around a 3 comp the Q1 being something around a 3 comp on a weather adjusted basis And then back out 80% to 100% to think about 2Q comps something more like in the 2% range?
Well, let me just share with you Call. The math behind or the science behind the art, because we do try to apply some science. We will take 5 years of Garden Business, looking at the relationship between the 1st and second quarter. And we'll come up with against our plan and that's how we determine what we have pulled forward. Again, 80 to 100 basis points of our Total comp growth pull forward, that's about $120,000,000 to $150,000,000 We then call and do an eyeball test And we look at the categories where we saw sales growth that would be one time categories be it a riding lawn tractor or a walk behind mower that sort of thing, where typically you're only going to buy it once in a season to give us some comfort that our math is more or less correct.
And that's in just Craig is just asking me to make sure it's clear that when we say weather impacted of 300, The $80,000,000 to $100,000,000 is in that $300,000,000 number.
Correct. It's not additive.
Okay. Okay, that's fair. And then my follow-up question, Carol Waldo, I've got you here. Just on OpEx, you said you were within $8,000,000 of the plan from the beginning of the quarter. It seems like obviously you probably hadn't planned for comps this Conference.
So were you able to just deal with the labor as it was because the productivity is so much better? Or did you add labor as sales picked up and found other places to take out.
Well, we leveraged payroll in the Q1, but the stores did an awesome job of staffing Up to meet the sales demand. And Marvin, you might want to comment on that.
Yes. Gary Colin, we put in a new labor system, scheduling system last year. It was part of our sixty-forty initiative work with Matt and his team to get this in place. It was a big undertaking, but it really paid dividends this quarter because we're able to have our labor meet our sales demand and schedule and forecast to that in a more effective manner. For the first Our store managers were able to track their labor versus their sales performance on a daily basis.
We've never been able set before. So that enabled us not only to meet the demand, but also to make the right investments in departments like live goods, where for the first time, We actually experienced a customer service score increase in the live goods area during season. Typically for us, Q1, we take a A really big decline in service scores in that seasonal area. So we made a labor investment based on the new system And we actually saw improved sales as the numbers reflect. But in addition, we saw improved customer service scores.
So we feel good about Call. The process and we feel good about the leverage we were able to create because the leverage was created on top of increased sales and top of increased customer service
Call. Great. That's an impressive result. Thank you for that insight.
Thank you.
And we'll go next to Chris Horvers from JPMorgan. Your line is Open.
Thanks. Couple of questions. So first, on your pro commentary, the largest customers recovering faster and sequentially, but the rest really Day. Not recovering. What's been the discussion internally on what you think that represents and what customers are on the other side Transaction and what projects that they're doing.
So Chris, I'll give you a hypothesis, but again recognize this is just a working Hypothesis and we'll have to see as this goes forward. The first just comment to make is, I was in the commentary differentiating between the Pros, our larger Pro spend customers and our smaller Pro spend customers. Call. Overall, so in both segments, it's recovering. Where we're seeing outsized recovery versus our consumers with our larger pros.
I'd give a hypothesis that credit has something to do with that, that those are the larger You're more creditworthy firms. And as you think about kind of a thawing process, it Sort of makes sense that they start picking up business in advance of some of our smaller customers. That's a theory. As Craig said, we've got a lot more analytics that we now have at our disposal to put to the question and Hopefully over time we'll get more and more refined on exactly what's driving that difference.
And we can give you some numbers behind the comments that Frank just shared with you. If we look at the insights, consumers grew about 7% in the quarter, pros grew about 5%. Sales. Thank you, and their sales growth. And then our larger pros, those who spend more than $10,000 with us annually, they grew around 11%.
Day. That's about 12% of the probe base.
So Chris, this is Marvin. The additional point to that, probably the Vast majority of the older growth, as Frank mentioned, came from those large customers. And so in addition to credit, it's also moderate demand. When demand And is moderate. Those smaller pros don't get the subcontracting jobs that they typically get.
And what happens when there's high Call. Man, is that the large pros can't handle all the work that they get. And so residual work kind of falls down to some of the smaller GCs In the marketplace, but when demand is moderate and as Frank mentioned recovering, those larger pros can Take those jobs and it meets their work schedules and their capacity. So we feel good about the moderate recovery, but until we see Every pro in our demographic start to benefit, then we stay a little cautiously optimistic That is recovering, but not fully.
So does larger pros imply larger products like new builds versus Innovation.
And then as No, Chris, it's not. I mean, this isn't a sign of, hey, home buildings coming back and remodeling,
no. We're actually seeing with those PROs an improvement in the number of transactions. So they're just they're getting More repair jobs and we're seeing that type of business.
Got
you. And then just quickly on the monthlies. April saw To follow-up on Colin's question, April saw a pretty big decel if you look at it on a 2 year basis. So guiding to that 2% to 3% for 2Q, How are you feeling about May? Is that within the range?
Is that above the range? Any comment there is appreciated. Thank you.
May is performing as we expected.
And we'll go to our next question from Kate McShane with Citi Research. Your line is open. Thank you. Good morning. I'm wondering if you could update us A little bit more on what you're seeing in the competitive environment and if you had any commentary around the introduction of Amazon Supply.
Amazon, it's Scott. So Kate, I would say from a competitive perspective, first, no, I mean it would be Really very early in the day to expect to see anything from Amazon supply. Obviously, it's Call. We're very aware of and focused on, but no competitive impact from it. Conference.
Across the board, as Craig was saying, it's always worthwhile recognizing we compete in all our different business segments across a broad range of Competitors. We believe talking to our vendors that we're picking up share, but that's always just because our various markets Are so different, it's always hard to track precisely.
Okay, great. And one of your competitors is I'm doing a pretty extensive line review right now. I wondered if that was having any impact at all with some of your conversations with vendors and maybe your relationship with your vendors and what you're getting into your stores.
I mean, again,
we're in constant communication with suppliers. Our focus is on driving the business with our suppliers and we're always talking to Folks in the market who we do business with and we don't do business with. So really no major change to how we're approaching things.
And you would say that growth is a Great thing to deliver to our suppliers. We grew ourselves in 2011 and we started off the year pretty strong.
Okay, great. Thank you.
Question on
the gross margin line. Carol, you mentioned that the gross margins were aided mostly from improvements in supply chain. But compared to the last few quarters, It looks like those improvements are moderating. Can you maybe give us an update on where you think future Improvements from the RDC initiative are likely to come and what those benefits may be?
Well, sure. We were actually very pleased with our supply chain performance in the first quarter. It was better than our plan. And given the sales spikes that we had across the country, we needed to do amazing things to move products. So kudos Kudos to our supply chain team for doing such a great job and for delivering the leverage that they did deliver.
A couple of other points, Alan. First, we did have some fuel headwind come our way in the first quarter that cost us about 3 basis points. So the supply chain benefit would have been 11x foot fuel. And if you think about Year over year, last year we got about 32 basis points of benefit coming off of the supply chain. This year we'll We get about a third of that for the year and that's consistent with the plan that we laid out.
And then as we look longer term and again we've got an investor conference coming up in June, We'll show you even more benefits coming off the supply chain.
Okay. Thank you. And one follow-up if I may. Just going back 2 of the difference on the pro side between the larger pros and the smaller pro business. What opportunities are there For you to try to stimulate the smaller pro customer including credit?
So Conference. The biggest opportunity we have with our pro customer, which is what Marvin and his team are focused on is doing a great job Getting them in and out of the store fast and having the product that they want in the right quantity at the right price. And that's segment. We're focused and that's where Marvin's focused his team. I don't know Marvin if you want to connect.
So we're not thinking a new program on our side on credit to try to stimulate activity.
But we do approve 70% of all applications that we receive from our PROs. The average line that we grant is about $6,600 So we will provide credit to those who qualify and All fine. The 70% approval rate is a pretty good approval rate.
Yes. And Alan to the service point that Frank made, our net promoter score for the pro segment increased 4.53 basis points in the quarter. It's the largest improvement in service we have in the entire Store. And when you dissect that service score into components, the most improved component is the speed of checkout and And how the pros feel about our price and our product. So for us, we've asked a lot of questions.
We spent a lot of Call with these customers both small and large. And we asked those customers what can we do to facilitate a better environment for them. And the service In and out fast is important, the right products at the right price is important. And as Carol mentioned, I mean, we're we feel really good about our credit Day. So we're just very hopeful that we'll continue to do these things and that business segment will continue to improve.
Okay. Thank you. And then just one quick Point of clarification. Did I hear you correctly in saying that the larger pros who spend $10,000 or more represent 12% of your pro base?
Yes. Right.
Okay. Thank you.
Call. And we'll go next to Michael Lasser with UBS. Your line is open.
Good morning. Thanks a lot for taking my question. During the script, you alluded to some stress within the supply chain that you handled well over the quarter. Do you think that had the impact of restraining your Sales and are you able to quantify that during the period?
So, Maher, I don't think we can quantify it for you, but for sure and Craig and Mark Olafield, our Supply Chainer here. This was a very unusual winter and we got hit with some very unusual demands And we were really pleased at how our supply chain responded, but the reality is you're always a little bit chasing in that kind of a spike environment.
Yes, we had regions of the country, Michael, where we had product categories that drove comps in excess of 50%. Call. Certainly, our suppliers didn't plan and anticipate that nor did we at the beginning of the season, but everybody rallied to scramble. Really hard to tell if you miss sales. I mean in most product categories we carry a multitude of products to choose from.
So whether you actually missed a sale or not is a question that's pretty hard to get your head around. But we certainly know we had opportunities within the quarter in those kind of high spiked areas.
So it's probably safe to assume that supply chain always acts As a bit of a bottleneck in such a spiky and seasonally changing business, do you think it was any more intense Given the patterns you saw during this quarter than it has been in the past, especially given the newness of the supply chain?
I would say actually I think the supply chain allowed us to react faster than we would have been able to before. Absolutely.
Okay. We did as I
said, this was an interesting real stress test on a new system and we were really pleased with how it responds.
Remember the last time we saw these kind of comps was the Q4 of 2003 and the Q1 of 2004. And back then, well, we didn't have much of a supply chain.
And Michael, speaking as the guy that run the stores and take the calls and emails from the stores when we're not performing well in any part of the business, they were very pleased. You look at the northern parts of the country, high volume markets, Accelerated spike sales. The supply chain did team did yeoman's work and we were very pleased with our ability to get products to the market Call. In some cases, before our competition and we feel good about that. So we think that Mark and his team deserve a ton of credit for helping us to facilitate the sales that we were able to to the table.
I want to switch gears just as my follow-up. In the past, the relationship between Home Improvement and Housing has been that home improvement has tended to lag behind at least the velocity of housing turnover. Are you seeing any evidence to suggest that the relationship Call. Maybe a little different this time where home improvement may be picking up before housing and if that's the case could take Some wind out of the sales as the housing market recovers.
So I would say, Michael, if I understand your question, the first thing I'd say is that the home improvement, the repair remodel business Has obviously been more stable than the The housing market, particularly the new home build. And so you're seeing some more elevated growth Compared to homebuilding. If I'm not sure the second part of your question, which is
could that So if consumers are feeling better about that, the sentiment has improved and that would normally occur or at least in the past, it would have Conference occurred concurrent with housing a lift in either prices or the velocity of turnover. Now it seems like sentiments are improving actually faster than the fundamentals of the underlying housing market. Call. So maybe home improvement is getting a little bit more of a lift ahead of time that would take some of the benefit, I guess, Essentially pulling it forward.
Okay. Well, so here's how I'd answer that and again, we'll see how it responds. So this is kind of new territory for all of us. But I'd say, the story for all of us. But I'd say, the important thing to look at is both on housing, existing home turnover And on repair, remodel activity, just think about the number of mortgages that are underwater.
So you've got almost a quarter of the people who Home Mortgages that are underwater. That's both stressful on a turnover that kind of puts a bit of a break on existing home Turnover and it's stressful on repair and remodel activity. You do some basic repair activity, but You're less inclined to do large remodels when you're underwater. And we'll talk about this more Conference. But I'd say what you'd hope to see is pricing improving, credit availability improving Call.
And a lift across both segments. So if I understood the kind of basis of your question, which is with Home Improvement Repair Remodel actually kind of decelerate into the improving housing picture. We don't think that's How it will play out.
Okay. So there still could be good days ahead. We certainly think so. Yes.
We think so.
Good luck. Thank you so much.
And we'll go to our next question from Greg Melich from
Thanks. I want to follow-up on earlier question and I have one on inventory and cash flow. The follow-up is the ticket which was up to 2 in the quarter. It sounds like a lot of that was driven by seasonal projects and also these large contractors. So does that That mean as we decelerate in the 2nd quarter that will be more ticket you think or do you think it's really traffic that's driving that deceleration?
So if we look at ticket above 900 dollars. The big drivers in this quarter for that were writing lawn equipment. We had a solid quarter in appliances and then interestingly the in stock kitchen business, which largely focuses on our pro customer.
And Greg, we had $329,000,000 transactions in the Q1. That's the highest in our company history. So we would think that would start to slow down as we move into the Q2.
So basically it sounds like both are going to slow when you see it in 2Q. And then on the cash flow, inventory was down, but payables were up 9% and your cash balance ended up over $3,000,000,000 which is very heavy. I guess if I take your guidance, I guess your leverage moving down to around 1.8 times debt to EBITDAR by the end of the year. Would you go to the debt to try and keep that at 2% or are you sort of happy with it being at 1.8% if that's where it ends up? But just give us some thoughts on the working capital and the coverage.
Sure. Well, 1st on the working capital side, the payables ratio is really a reflection of how weak sales were in April of Fund. As you recall, we had a negative comp in April. Our purchases were down. We had a positive comp this year.
So it's just a timing matter year on year. We are about $500,000,000 ahead of our cash plan, but that's because of stock options that were exercised in the Q1 that we hadn't planned on. Our stock hit a 10 year high. Many of our optionees elected to exercise their options, and we got some cash in. As we think about then what Conference.
What do we do with the cash and what do we do with our capital structure? I don't mean to kick the can down the road, but I'm going to kick it to our June conference, At which time, Will will give you more color about any additional share repurchases we might do in 2012 as well as a longer term perspective on share repurchases, debt capital raising, etcetera.
And I guess just lastly, do you think the inventory now is at the right level? Or are we still a little light given Day.
If you look at our inventory down $100,000,000 year on year on a per store basis down a little over 1%, the majority of the per Call. Our decline as of the end of the quarter was in Canada. And last year, our Canadian inventories were bloated in all candor. So we feel segment about where inventory is.
And I think the other piece of the inventory, Greg, is with the investments we made in our DCF and R programs. We've actually been able to leverage our inventory investment in our DCs while maintaining a good position overall. So we feel good about Call. Great. Thanks.
Thanks.
And we'll go next to Matthew Fassler from Goldman Sachs. Your line is open.
Thanks a lot. Good morning. Two questions and the first revolves around some of the merchandising efforts. Obviously, team. We've been working on building localization, regionalization of inventory.
Can you help us understand how that might have impacted You're in stock and it might have benefited margin above and beyond the direct supply chain benefits.
Well, Matt, you're right. We've been working hard to make sure that we Adjusting our assortments to the local markets and the demographics in those markets. We certainly think that that is part of what has helped us drive the overall business and deliver the comp performance not only in Conference not only in this quarter, but kind of where we've been for the past few quarters. And certainly when you get the product in the right location, You then benefit from particularly if they're in seasonal businesses, you don't have the same liquidation Notes that you might have like we did a few years back when we weren't leveraging or didn't have the capability of the tools that we have. So certainly having the right product The right place benefits you in terms of the ability and the amount that you sell at full price.
Matt, this is Marvin. I don't We can overstate the importance of product coming from receiving to the sales floor versus in the overhead. Mark Holofield and his team in the supply chain along with Mark Powers and the operations team have really done a good job of partnering on the whole receiving and freight movement process. You follow The Home Depot for a while and just take a look at the overheads in our stores versus years past and what you'll see is product where it needs to be and that's on the floor where we can sell it. Our payroll is a lot more productive and we don't need to carry as much safety stock because of Day Supply Chain Improvement.
So I think you take what Craig said, you think about the efficiencies on the supply chain and in the receiving being an in stock process and that's benefiting us as well.
Is there any way to quantify that year on year or just we know that it helped?
It's It's pretty tough to add.
It's pretty tough.
It's pretty tough.
Got it. And then on the numbers, this is maybe a bit of an academic exercise since we have a sense of where Q2 is tracking. But within The Q1, the cadence obviously was driven by better weather in part for the 1st couple of months and then you had This presumably a lot of pull forward within the quarter then it's very subdued compare given the rain a year ago. Any sense of how much February March Call forward from April just as we do look at the monthly multiyear trends.
We didn't do that regression. We should have, but we didn't do that.
Okay.
And then finally, Carol, you spoke at the outset of the year about your anticipation for comp cadence over the year as a whole. Clearly, I guess the Q1 probably at least in your outlook is a high watermark, but any update as we think about The ensuing quarters and what kind of cadence you might anticipate as part of that guidance?
Sure. So because of the pull forward, the 2nd quarter comp should be lower than the 1st quarter. The comp for the first half should be higher than the back half, not a big difference between the half, but clearly first half will be stronger than the back half.
And the second quarter versus the rest of the year, if I could try to parse it that finally?
I would say the second quarter would be the lowest comping quarter of the
year. Despite the 4th quarter compare.
Despite the 4th quarter compare, because as you know, every year we tend to outperform the previous year since Craig call. The merchants and the operators are doing a matchable job of growing our seasonal business. This is a business that we are very low penetrated in that we continue to show year on year growth.
Markets. Your line is open.
Hi, guys. How are you? Good. You guys have been pretty adamant for quite a while that there isn't a recovery in the housing market Kit and that you expect to fluctuate with GDP. But you have been comping in the 4% to 6% range last 4 quarters.
And I Day. The weather has helped the last 2, but I guess the question is, if we were to get a housing recovery, what kind of comps do you think you guys could generate on what's called a multiyear basis.
So Scott, first, it's not I don't want to misinterpret it as saying that There is no housing recovery. I think that housing market is definitely better. The question for us is, Is it better enough to kind of push us off the general GDP growth connection that we've been seeing for the last couple Call of Years. And we go, yes, it's better, but it's not yet that much better. When we get together in June, Hopefully, we can lay out for you a little more clearly how we think our business improves depending on your point of view on the degree of the housing market Call.
Strong recovery when it occurs and whether it's a strong recovery or just kind of a very gradual fall.
Okay. That's fair. And then just curious in terms of mix, I don't know if you had mentioned this or not, but With the stronger sales of outdoor products because of the weather, was there a negative impact on the gross margin from mix at all?
Yes. As we said, the gross margin ex supply chain was flat year on year and that really was a mixed story. Craig, maybe you want to give Yes.
I mean, categories Like par, outdoor par equipment, dirt, mulch, all those carry lower than average margins. So it certainly had a mix impact.
You may recall, last year, Scott, we had 14
basis points of gross margin
Call. Last year, Scott, we had 14 basis points of gross margin benefit in the Q1 from mix because we had a lower penetration Consumer Category spend.
Got it. All
right. Thanks a lot, guys.
And we'll go next to Mike Baker from Deutsche Bank. Your line is open.
Thank you, So Frank, you said that Florida and California continue to recover. Can you Okay. I'll quantify that relative to last quarter where I think you said Florida was ahead of the comp average and California was about in line.
Right. Call. And this quarter as you might expect given just the weather impact Florida and California were below the company average.
Okay. And so then I guess therefore
But it's still good.
I mean it's a good recovery, still positive and a good recovery.
Sure. Okay. And then you said 38 out of 40 regions were positive, so 2 were negative, surprised that any were were negative.
Can you just tell us what areas were negative?
So 38 out of our top 40 markets, not I mean, we don't have 40 regions. The negative One's worth for what it's worth it was Phoenix. And then we also were negative in New Orleans and there are some very specific Conditions in both of those markets that explain that.
Particularly the year over year comparison. Yes. Last year in the Q1, those two markets were some of Our strongest performing market.
Okay. Okay. Yes, I was just more curious than anything. And then one Call. Last question.
The commentary that you talked about the large pro versus small pro, I don't think you've talked about that before. So Call. So I'm just wondering why you call it out now. Is it a change in trend that you're seeing? Is that sort of dynamic where the large is doing so much better than the small pro?
Is that something you've seen consistently? Call. Or does that really just sort of pop up early this year?
No. So I'll tell you why we called it out in Call. First off, because I do think it's an interesting way of thinking about our business and thinking for us, it's a tool for thinking about the recovery of the business, Because we've been talking to everyone for quite a while about how our pro and consumer businesses, how they're differentially Release. And second thing was as Craig said and for those of you who followed us for a while, you know we've been sort of on a journey To build in some of this customer insight capability, we had it outsourced And then we brought it in house and it's taken a while for us to get comfortable with the tools, get the data together. And so we were kind of giving you a Here's what those tools are showing us.
Here's what we think the implications are.
Okay. So it's not necessarily it's just You're starting to look in now, but it's not necessarily that the large pros all of a sudden gotten a lot better than the small pro or anything like that?
I would Day as we called out that we saw some good sized growth on those large pros, which is encouraging.
As I said, you can have a theory of
the case on how the pro market as a whole will fall and we'll be giving periodic updates Conferenceure on how that hypothesis is playing out.
Got it. Fair enough. Okay. Thank you, guys.
Thank you.
And we'll go next to Peter Benedict from Robert Baird. Your line is open.
Hey, guys. Thanks for taking the question. A few quarters ago, there was a lot of concern in the market about the potential uptick in promotional activity across the space. Can you talk about how the promotional tone was during the quarter and how it was versus Expectations. Yes.
I mean, to be honest with you, we didn't see any major shift in promotional activity during the quarter at all.
All right.
Perfect. And then Regional color on this pro recovery trend, not the beat a dead horse here, but particularly those larger pros. Are there any markets in particular where that recovery by the larger Pro is particularly strong?
Yes. Peter, this is Marvin. It's no coincidence that the North and the Northeast was very strong, really due to the ability of pros to get out and do jobs they typically would not be able to do this time of the year.
Okay. Thanks, Varun. So more of a weather thing. Thanks very much.
Christy, we have time for one more question.
Thank you. Our last question comes from David Strauss Room from Janney Capital Markets. Your line is open.
Thank you. I'm going to change the topic a little bit. Can I talk a little bit about online and private label? 2 I've noticed a lot of recently is, it just seems you've been really expanding online as you've talked about a lot, particularly into the seasonal patio furniture. I was just Curious how that's gone and sort of this home decorator concept that you've had.
I think it's direct. I think it's Through Groupon and I don't know if it's exclusively Groupon. And then I guess the last question somewhat related is the HDX, I'm seeing that brand pop up a lot in Stores. So I was just sort of curious what as you think about that, it seems to be a somewhat rather diverse group of product offerings in that and How you're thinking about that? So I guess 3 somewhat different questions, but I hope you can at
least answer 2 of them.
So Day. Let me start with the online. And as you know, we've been investing in our online business. We put new WebSphere 7 in place to enhance our is going. We're seeing both sales growth that obviously exceeds the company and we're seeing traffic growth In that space.
And so it's an area of business that's important to us. It's still Around 2% of the business in total, we've seen some nice external Call. Recognition of the work that we've done as well in terms of the 4CE Retail Satisfaction Index. We got above 79, which is a new place for us, which is a very positive result and As the most improved since that index began at over 10 points. So we're pleased Call.
With where that space is going and overall how it's helping us to satisfy the customers' needs to be able to shop when, As it relates to the private label business, we've Talked quite openly with our supply base in terms of when and why we'll go after Label program. We are expanding the opportunity that we have To continue to drive value for our customer and be able to deliver strong value propositions Well support the overarching strategy that we have in place to compete in all channels. So you'll see us. We'll Talked more about that at our investor conference, but that is an element of the business that we're focused on as part of our portfolio strategy.
Just one follow-up on kind of once again the 2 of them related. As you look at sort of a lot more Free Shipping and you're offering it even on some patio furniture over 3 I think $3.99 The impact to that on Gross margin and then sort of I guess the positive impacts on sort of the HDX, is that even big enough to have any impact at all today?
I mean, we do look at the business in total in terms of how we look at both sales and The contribution margin both in store and online and how those businesses come together. So that is something that we're focused
on. But your point about size is the right point. Today our dotcom sales is about 2% of our total sales.
Okay. All right. Thank you very much. I appreciate it.
Thanks, David. Thanks, David. Well, thank you to everyone who has joined us this quarter and we look forward to talking to you
Q for your participation.