Good day, everyone, and welcome to today's Home Depot 4th Quarter 2010 Earnings Conference Call. Today's call is being recorded. Please note that any prompts before this point may not have registered in our system. Conference. Beginning today's discussion is Ms.
Diane Dayhoff, Vice President of Investor Relations. Please go ahead.
Thank you, Cindy, and good morning to everyone. Joining us on our call today are Frank Blake, Chairman and CEO of The Home Depot Craig Meniere, Executive Vice President, Merchandising and Carol DeMay, Chief Financial Officer and Executive Vice President, Corporate Services. Following our prepared remarks, the call will be open for analyst questions. Questions will be limited to analysts and investors. And as a reminder, we would 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 at earnings. Homedepot.com. The replay will also be available on our site. 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 risks and uncertainties.
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 presentation also includes certain non GAAP measurements. Reconciliation of these measurements is provided in the financial statements included with our earnings release. Now let me turn the call over to Frank Blake.
Thank you, Diane, and good morning, everyone. Sales for the Q4 were $15,100,000,000 up 2.8 percent from last year. Diluted earnings per share were $0.36 As Carol will detail, 4th quarter comp sales were positive 3.9 percent for the company and 4.8% for the U. S. We saw strength across the U.
S. As 49 of 50 states positively comped. The states that have been the most impacted by the housing crisis, Specifically, Florida and California performed in line with the company's overall performance in the U. S. So while they're not leading us out of the down Turn There at Lease No Longer an Anchor.
The markets with underperformance to the company average in the 4th quarter tended to be those with significant weather impacts during the quarter and particularly January, such as in the Northeast. Last quarter, we mentioned that we were seeing a tighter range of performance across our top markets. That continued to be the case in the Q4. So the overall picture is one of the stabilizing business. This is a source of some confidence for 2011 because it's occurring despite the continued weakness of the housing markets.
Private fixed residential investment as a percent of GDP remained near its 60 year low at 2.25%. We still look at this measure to help understand the pressures in the housing market and the fact that our performance has disconnected from it suggests that our business is stabilizing and can improve even as the housing market remains under stress. Operationally, We continue to make progress with our customer service initiatives. We've completed the rollout of our first phone and Marvin Ellison and his team Ended the year with 51% of store payroll allocated to customer facing activities. Since we started measuring our labor allocation, this Q2.
The first time we've crossed the threshold of having more hours dedicated to customer facing activity than tasking activity. We have a target of a sixty-forty ratio, and we believe we'll achieve that by 2013. As we drive this reallocation, we are seeing ongoing improvement in our Net Promoter Score, which is up 4.50 basis points year over year And is now over 73%. We achieved another significant milestone in the Q4. We opened our 19th rapid deployment center.
This completes our RDC build out at least for the next several years. Restructuring the supply chain of a business as large as Home Depot in Just 3 years is an enormous undertaking that touched almost every part of the company and required the work and dedication of the entire team. Both Mark Holyfield and his supply chain team merit particular recognition. We now have ahead of us continued opportunities to improve the RDCs themselves as well as the rest of the supply chain, particularly our stocking facilities. For the quarter, as Craig will detail, We had a very successful holiday selling season.
We saw continued growth in transactions and we also saw an uptick in our average ticket strong performance in Kitchens and Appliances. Over the course of 2010, we made significant improvements in our merchandising systems, predominantly focused on our in stock product and processes. For 2011, that will continue, But we will also intensify our focus on our special order product and processes. This has been an area of historic underperformance for the company. We know we have to make it easier for our customers to buy non stocked items, and Matt Cary and his IT team, along with our dotcommerchandisingandoperational teams will be making this a priority.
We will be digitizing our catalogs, upgrading our special order systems within our stores, restructuring our SKUs to accommodate shopping for coordinated items and continuing to improve the connectivity between our digital presence and our bricks and mortar presence. On the international side of our business, Mexico continues to perform well with positive comps for the 29th quarter in a row. Canada had negative comps for the quarter as they lapped last year's dramatic increase in sales driven by the expiration of the home renovation tax credit. In 2011, our U. S.
Businesses We'll be lapping the expiration of a series of 2010 tax incentives. The new homeowner tax credit, The cash for clunkers appliance credit and the $1500 energy tax credit. But we believe the growth in GDP and improving consumer sentiment will continue to lift our business in 2011. For the year, we are anticipating approximately 2.5% sales growth and 9.5% growth in earnings per share. We have some difficult comparisons in the Q1, but we expect each quarter to show positive growth with sales momentum gaining in the back half.
We continue to focus on disciplined capital allocation and increasing shareholder return as we have laid out for you in the past. And our intent is to increase our dividend every year. So today, the Board of Directors and I are Pleased to announce that we are increasing the quarterly dividend 6% to $0.25 We will continue to use excess cash to repurchase our shares. The hard work and dedication of our associates will make the difference in 2011 as they did in 2010. We're very proud that 93% of our stores qualified for success sharing for the back half of twenty ten.
Conference Call.
And now let me turn the call over to Craig.
Thanks, Frank, and good morning, everyone. Looking at our 4th Quarter Results. We are pleased that the focus areas we shared with you on our last earnings call met or exceeded our expectations during the quarter. We saw excellent results from our gift centers, seasonal and Black Friday offerings and new product launches. The 4th quarter represented our 5th quarter in a row of positive comp growth.
We saw positive comps in 9 departments during the quarter, and we were pleased with the comp improvement we saw in the U. S. From the 3rd to the 4th quarter. The departments that outperformed 4th quarter. We leaned into the holiday season and increased our buys.
The outstanding values in our gift Centers as well as our incredible Black Friday lineup led to a very strong November. In fact, the tremendous response by our customers to our appliance values led to double digit positive comps for appliances in the
month of
November. The expiration of a tax credit in the U. S. For the purchase of energy efficient windows, doors, Skylights drove increased sales in Millwork and Home Services during the 2 months 1st 2 months of the quarter as customers made purchases ahead of December's 31 deadline. We also saw continued strength in our gift centers and our decorative holiday categories throughout the month of December.
While January was impacted by heavy snow and ice, position product for our customers. As a result, we saw double digit positive comps in power snow removal equipment, Chemicals and Snow Tool Categories. As we shared with you previously, our focus over the past few years has been to restore the competitive position of Home Depot and to drive everyday great values for our customers. As a result of this effort, We have seen improved customer transactions for the past 5 quarters and our overall company comp transactions were up 1.3% in the 4th Quarter. Total company average ticket was up 2.6% or $1.30 to $51.31 for the quarter.
Transactions for tickets under $50 Roughly 20% of our business in the U. S. Were up 1.8% year over year. Transactions for tickets of $900 and above, also approximately 20% of U. S.
Sales, were up 9.6 2% in the 4th quarter, certainly contributing to our overall company ticket performance. Drivers of this big ticket increase include the sales of appliances, millwork, windows and HVAC. While customers responded to the great values we offered in the quarter and took advantage of tax credits, we believe They still remain cautious on making big ticket investments in their homes. During the Q4, we saw some commodity price inflation. In the last 45 days, we have seen a number of requests from vendors for price increases as a result of elevated raw material costs.
We review each of these requests on an individual basis and our portfolio strategy drives our go to market actions as it has done for the past several years. The ongoing development of our assortment and value offerings for our customers through the implementation of our merchandising transformation continues to pay off to the market share growth. As of December, according to the NIACS 4,441 U. S. Census data, we gained 19 basis 2 points of market share on a rolling 12 month basis.
Additionally, based on independent third party tracking of consumer activity, We gained unit share in 7 out of 13 departments during the Q4, including building materials, tools and hardware, Plumbing, Electrical, Indoor Garden, Outdoor Garden and Appliances. As we look to 2011, We are well positioned to drive both sales and transactions. We kicked off the New Year with great values on several interior projects, including bath remodels and paint. We are currently offering round 2 of our outstanding event called Vanity Insanity, and we are seeing terrific project selling from our Associates as well as great overall results from the event. In our paint category, we're excited about the fact That a third party leading consumer publication recently ranked our Behr Premium Plus Ultra Paint as its Best Buy across all dominant sheens for the 2nd year in a row.
Our Behr Premium Plus and Glidden brands were 2. We're also ranked highly across all scenes, reinforcing the fact that we have an incredibly strong offering for our customers in the DIY paint space. We also continue to focus on innovation and services for our professional customers. At the most recent builder show in January, Bear announced the introduction of Kihl's Pro X, a product line designed with a professional paint contractor in mind The entire Kihlz Pro X line has been formulated to optimize spray, roll and brush application As we rollout Kihls' Pro X, we are also implementing new POS enhancements that allow us to better serve this customer segment. In addition, we are rolling out a new line of Milwaukee Red Lithium tools powered by the leading lithium technology available.
These tools deliver 40% longer run time and 20% more torque than products powered by current lithium technology, in addition to providing superior performance in cold weather conditions. And finally, we have a lineup of some incredible special buys and innovative new products for our outdoor categories during the 2011 spring selling season. We will kick off the spring season with an outstanding spring Black Friday event. Spring Black Friday will include some of our most popular outdoor categories such as live goods, lawn care, outdoor power, Eco Friendly Gardening Products, Patio and Grills. And in addition to our spring Black Friday event, we will also be introducing several great products for our customers' outdoor projects such as Armaguard decking and expansion of our Green Garden chemical products by both Behr and Ortho, A new lineup of tractors from John Deere and continuing innovation in cordless garden tools building on the benefits of lithium technology.
We're excited about these new product rollouts for 2011 and we feel confident that our customers will recognize and respond to the great values being offered at The Home Depot this spring. And with that, I'd like to turn the call over to Carol.
Thank you, Craig, and hello, everyone. We exceeded the guidance we gave you at the beginning of December due to stronger than anticipated sales growth and a couple of expense good guys. In the Q4, sales were $15,100,000,000 a 3.8% increase from last year. Comps or same store sales were positive 3.9% for the quarter with positive comps of 7.5% in November, Positive 5.1 percent in December and negative 0.7% in January. Comps for U.
S. Stores were positive 4.8% for the quarter, with positive comps of 8% in November, positive 5.8 percent in December and positive 0.7 percent in January. For the year, our sales increased 2.8% to $68,000,000,000 Total company comp sales were positive 2.9% for fiscal 2010 and comps for U. S. Stores were positive 2.5%.
Our gross margin was 34.7% for the quarter, an increase of 25 basis points from last year. Our U. S. Business contributed 24 basis points of margin expansion in the quarter, Conference Call, principally because we had lower levels of clearance inventory in our stores. Clearance inventory is down 32% from 1 year ago, and our inventory has never been in better shape.
For the year, we experienced 40 basis points of gross margin expansion. Turning to operating expenses. In the 4th quarter, operating expenses as a percent of sales decreased by 161 basis points to 27.8 percent. And total operating expense dollars were $80,000,000 less than last year. Our expense leverage was primarily the result of positive same store sales, but also reflects the following significant items.
First, depreciation expense was $18,000,000 under last year due to a lower asset base due to a lower than anticipated cost of private label credit. And third, management bonuses were $34,000,000 less than last year. Relative to our financial plan, we had a good year, but not as good as what we experienced in 2,009. Finally, we did incur some expense associated with the announcement of 6 store closings in the quarter. But that expense was about the same as the expense we incurred last year for similar actions.
For fiscal 2010, Operating expenses as a percent of sales was 25.7%, a decrease of 93 basis points from last year. Call. As detailed in our press release, we had some charges associated with HD Supply and our business rationalization in 2,009 2010. Adjusting for those charges, we leveraged operating expenses by 75 basis points for the year. As we've discussed, we've experienced great expense control due to the introduction of new tools.
During the year, we also recognized some one time expense benefits totaling about $70,000,000 that we do not believe will repeat in 2011. In the Q4, interest and other expense was $87,000,000 On an adjusted basis, Interest was down $71,000,000 from last year due primarily to the following factors. First, We had an unexpected $44,000,000 benefit related to favorable IRS guidance and the corresponding reversal of an interest accrual. 2nd, the cost of outstanding indebtedness was lower than last year. And third, we had some interest benefit arising from certain State Tax Settlement.
For the year, interest and other expense totaled $566,000,000 Our income tax provision rate was 38.2% in the 4th quarter and 36.7% for the year. Earnings per share from continuing operations for the 4th quarter were $0.36 an increase of 100% from last year. Q4. For the year, earnings per share from continuing operations were $2.01 up 29.7% from fiscal 2,009. On an adjusted basis, earnings per share from continuing operations increased 22.3 percent to $2.03 compared to last year's adjusted earnings per share from continuing operations of $1.66 Now moving to our operational metrics.
During the Q4, we opened 5 new stores and closed 1 store in China for an ending store count of 2,248. At the end of the year, selling square footage was $235,000,000 flat to last year. Reflecting the sales environment, Total sales per square foot for the 4th quarter were $2.55 up 4.3% from last year. For fiscal 2010, sales per square foot were $2.89 up 3.5% from fiscal 2,009. Now turning to the balance sheet.
At the end of the year, inventory was $10,600,000,000 up $437,000,000 from a year ago. This reflects higher sales levels as well as a pull forward of certain spring inventory buys. In the Q4, we repurchased $600,000,000 or 17,600,000 shares of outstanding stock. We ended the year with $40,100,000,000 in assets, including $545,000,000 in cash. Call.
For the year, this reflects cash generated by the business of approximately $4,400,000,000 and $1,100,000,000 of capital expenditures. Computed on the average of beginning and ending long term debt and Equity for the Trailing 4 Quarters. Return on invested capital was 12.8%, 213 basis points Higher than the Q4 of fiscal 2,009. Now as we look to 2011, we expect another year of sales growth, in line with U. S.
GDP Growth Expectations. We've detailed our guidance in our press release, so let me just hit the high points. First, Let me remind you that we guide off of GAAP. For the year, we project that our sales will increase by approximately 2.5% with low single digit same store sales growth. We plan to open 10 stores in 2011, 2 in the U.
S, 1 in Canada and 7 in Mexico. We expect sales growth to be stronger in the second half than in the first half of the year with growth rates fairly Consumer to what we reported in the U. S. For fiscal 2010. We are planning positive same store sales growth in every quarter, But we expect the Q1 to be our lowest comping quarter given the timing of spring's arrival last year and Tough Year Over Year Commodity Price Comparisons.
For fiscal 2011, we expect earnings per share from continuing operations to increase by approximately 9.5 percent to $2.20 Included in our earnings per share guidance As I mentioned at our December Investor Conference, we expect some discrete cost pressures in 2011, And we have some operating expense benefit in 2010 that won't repeat. So we anticipate operating expenses will grow at approximately 20% of our sales growth rate for the year. Given year over year expense comparisons, we project that our earnings growth will be stronger in the first Half of the Year and in the back half of the year. For fiscal twenty eleven, we project cash flow from the business of roughly $5,700,000,000 This forecast assumes we refinance $1,000,000,000 of senior notes that come due in March. We will use our cash to invest in our business and return capital to shareholders.
Our 2011 capital spending plan is $1,350,000,000 reflecting $585,000,000 for our existing U. S. Stores and supply chain, dollars 370,000,000 for IT, $300,000,000 for new stores and $95,000,000 for our non U. S. Businesses.
We just announced a 6% increase in our annual cash dividend to $1 per share and we'll use cash to fund our dividend, which for the year approximates $1,600,000,000 This leaves approximately $2,500,000,000 of excess cash, which we intend to use for share repurchases. Depending on the timing of our repurchases, we should see some earnings per share benefit arising from this activity in 2011. Assuming we repurchase the shares ratably over the course of 2011, we expect our earnings per share growth from continuing operations to be approximately 12% for the year. So we thank you for your participation in today's call. And Cindy, we are now ready for questions.
We'll take our first question from Brian Nagelow with Oppenheimer.
Hi, good morning. Good morning. Congratulations on a nice quarter.
Thank you.
I just wanted to ask the first question about weather. In your prepared comments, you addressed the weather in January. And we've heard from a lot of other retailers talking about weather, but and you gave us the progression of comps Through the quarter. So I guess the question I have is, as you look at the weather in the markets, was it overall positive or negative? And then to what extent?
And what extent either way?
Well, so if you went through the monthly comps that Carol set out,
For the
month with strong positive comps, November December, I wouldn't say that, that was Because of weather or unless you want to put it, well, there wasn't weather that stopped people from being able to get to the stores. I mean, that was really the weather issue in January was, I mean, for example, here in Atlanta, I mean, the city was shut down for almost 2 week. So I'd say if you look at it from that perspective, weather was more of a negative for us.
Okay. And the second question I had with respect to the ticket information you gave in the press release, we saw a nice uptick there. And again, my math is correct. It looks like one of the strongest Growth in Ticket in a Few Years. As you look at that, was that do you think that was more reflective of something, particularly the 4th quarter?
Or was that something that's more
The key drivers of ticket in the quarter were obviously growth 2nd categories like millwork, HVAC, some of the categories that actually benefited from Tax Credits as well as a terrific response from our customers on our appliance offerings that we had as part of our Black Friday event and a solid performance in our kitchen business overall.
And as we built our plan for 2011. We assumed more growth would come from transactions in the first half of the year and more from ticket in the back half of the year.
Perfect. Thank you. Congratulations again.
Thank you, Brian.
We'll take our next question from Peter Benedict with Robert Baird.
Hey, guys. Thanks. Just following up on some of that. Craig, you mentioned kind of some of your plans for the spring, specifically interested in the outdoor power equipment category. How do you plan that category going forward, the riding mowers?
And what are your forecasts telling you in terms of the timing of spring? Because I think spring was real early last year. When do you guys expect that to kind of set in?
Yes. Peter, we did have a early spring last Cheer, which was a very nice benefit in Q1. I think this year, if you buy into the forecast, it's more of a normalized Spring this year. And so we actually anticipate that it provides a little bit of headwind in the Q1. And then we're excited about our overall outdoor power equipment lineup for this year, Excited about the value propositions that we have in riding mowers and walk behind mowers.
We have an outstanding program in walks. And then As I mentioned, we're expanding with some new product in outdoor power as it relates to continued expansion of lithium, Which did very well for us last year. So looking forward to the spring selling season.
Terrific. Thanks. And one quick follow-up. On the international comp trend, When should we expect kind of a turnaround in particularly in Canada? Are you guys expecting that to be positive next year?
And if so, when do you expect that swing?
Yes. Canada so you continue to have a little bit of headwind in the Q1 just as you Get through all of the tax credit compares and then it should start to turn positive.
Okay, great. Thanks so much.
We'll take our next question from David Schick at Stifel Nicolaus.
Hi, good morning.
Good morning.
Frank, you
said at the beginning of the call excess cash to buy back shares. Carol, you said Priorities are return cash and investment business, but just I guess more details on your thoughts if you beat guidance. How do you think about movements on the balance sheet, buyback, the dividend? What are the priorities that you would use excess operating income for us.
Well, hopefully, we've set out our guiding principles pretty clearly over time, which is, first, we invest in the business to support and sustain And then second, we do look to excess cash for buying back shares and we have an objective of Increasing our dividends annually as we approach a payout ratio of 40% -ish. And we're Kind of slowly, as you saw from the announcement this morning, we're kind of trending down in that direction.
So it's not one big next thing, you would continue the balance of things. Right. Okay. Great. And then just any comments on what you're seeing in the rollout of the first
Well, Marvin's here, and I'd ask Marvin to comment on it. I'd just say at the start that It's really been a program just extraordinarily well received by our associates and a great job both by our operations team and our IT team.
So, Marvin? Yes. David, very successful. We've had really a couple of key things we're focused on. Number 1, Simplifying how we look at data.
This device gives the associate real time data on sales, gross margin and inventory. Also In Stock. Simplifies the in stock process, which is big for us. But one thing that's been a pleasant surprise checkout. We had almost 1,000,000 transactions in the 4th quarter on the first phone and checking customers out at point of sale.
So a mobile point of sale checkout is big for us because we have a huge focus this year on speed of checkout and the Results and the feedback have been terrific. Great partnership between Matt Carey and his team, Mark Tower is my lead of operations and we feel like that we have a lot to build on for the rest of the year.
Great. Thanks.
We'll take our next question from Chris Horvers at JPMorgan.
Thanks and good morning.
Can you talk about your thought process on bringing the inventory in a bit earlier this year for spring? I think you Made that same decision a year ago and was very successful. Just curious what the drivers were this year?
Yes. We did have success with that last year. You are correct. And so we're following on that success. Given every all the data that we looked at, we said we wanted to be prepared to capture anything early That we could, given the fact that the projections right now for The later part of the quarter are not all that strong from a weather standpoint.
Who knows how that will exactly play out, but That's the decision that we made.
I got you. And as on Carol, on the gross margin, did you see any pressure in 4Q related to commodity cost pressures and are you baking in any for 2011?
Well, as you can appreciate, in the gross margin, there were lots of goes ins and goes outs related to product mix and there was some inflation in there as well, but nothing material or else we would have called it out. As we build our plan for 2011, it is a Commodity Neutral Plan. Craig mentioned in his comments that over the past 45 days, we've been getting some requests for price increases and we deal with those
We'll take our next question from Michael Lasser at Barclays Capital.
Good morning. Thanks a lot for taking my question. So there's been a lot of noise in the housing market over the last year. And as you look into the category detail of your recent performance. Is there anything to suggest that the strong 4th quarter results weren't just due to the upturn in housing turnover that occurred early in 2010, especially in light of the historical 6 to 9 month lag between that metric and home improvement demand.
Michael, We can't see it. I mean, it's an interesting question because you might think, gee, you saw just as your As you said, you saw this spike kind of in the spring and was that coming through more in the 4th quarter. But if you look at where the strength was, I think you'd say, it was a combination of areas where we had great offerings and took some share and other areas where you had improvement through the tax credit items that we called out and then a very, very strong seasonal holiday season selling that we really don't think was related to uptick in the housing market as a whole.
To put it in perspective, the benefit we enjoyed from the sale of energy related products was about 50 basis points impact to our comp in the quarter.
That's helpful. Follow-up question. Consumers have shown a clear desire to want to reengage in home improvement over the last few quarters. So the next big headwind the business might face is pressure on discretionary budgets from Rising Food and Gas Prices. Does that influence how you think about the portfolio pricing strategy as we move through this spring and through the rest of this year.
Yes. I mean, certainly, we know that if you look over the past couple of years, there's been cycles where the customer has been under Serious pressure with discretionary spend. That's why we are incredibly focused on trying to drive great values for our customers every day and focusing on making sure that we're putting the offerings out there that continues to drive our positive comp transactions and really helps drive customers to our stores. So it's a key focus for us as we move forward.
Okay. Thanks a lot and best of luck with the spring.
Thanks, Michael.
We'll take our next question from Colin McGranahan with Bernstein.
Chief Financial Officer. Good morning. Thank you.
Good morning, Colin.
First question, just back on gross margin. I'm going to go out a limb here and say that you probably get a few more requests from vendors for Price Increases Over the Next 45 and Probably 400 Days. How do you think about passing that Drew, in what categories do you think you have some pricing power? In which categories might you need to be a little bit more careful? And historically, what have you seen?
And how do you think this might be similar or different?
Colin, look, I I wouldn't agree there is certainly been pressure in the last 45 days. I don't think that's going to subside. And but we deal with those on an individual one off basis. Our first and foremost approach is Try to figure out how to work with our suppliers to either leverage our supply chain, leverage how we do business together to try to mitigate The pressure that they're seeing so that we can continue to hold the line the best we can. And really, in In terms of our go to market approach, that's driven by our portfolio strategy.
And we are guided by our portfolio strategy in terms of how we think about applying pressure in the marketplace and what we really want to stand for.
Okay. And then just separate follow-up question.
I know it's hard to
do, but is there any way you can quantify What you think the impact of the energy tax credit in the appliance, your strong performance in appliances in November Did to the comp in November?
Well, we can tell you for the quarter what we think it is.
That would
be fine.
Okay. So we think the impact of energy was about 50 basis points to the U. S. And appliances was about 120 ish basis points.
Okay, great. And Carol, just a final follow-up on that. Given your expectation that comps improved through the year, should we Your toughest compare now is the 4th quarter. Would we assume that you'll do something similar to in the appliance category next year? Has this become kind of an annual event?
We're not going to share
our secrets with you today.
All right. Good luck then. I guess I'll have to watch and see.
Thank you.
Team. We'll take our next question from Laura Champine at Cowen and Company.
Good morning, guys. So today. We're very pleased to see the increase in big ticket purchases, and it looks like you gained some share there. But Craig, you made a statement that you thought the consumer was Still cautious on big ticket. What's your evidence there?
And what's the outlook for the bigger ticket spending in 2011?
Well, I think, 2 things. Number 1, when you look at the categories that had positive growth that were tied to the tax credits. So we look at that and go, okay, that's not necessarily repeating. So that makes us a little bit cautious as a result. I think and then the second piece of it It's not seen a lot of evidence of major remodels going on in homes at this point.
So that's really the two things that we're looking at from a caution standpoint.
Thanks. And then just a clarification on the last answer. The 120 basis point impact on Q4 from appliances, Was that from your own promotions or from stimulus programs for Energy Star appliances? That was the impact of appliance sales in the quarter. Right.
Got it. Okay. Thank you. You're welcome.
We'll take our next question from Wayne Huynh with BMO Capital.
You need to get some thought about
When we missed your first party question.
Yes. For some reason, it blanked out.
Okay. Can you hear me now?
Yes.
Okay, terrific. So my question was to Craig, and I guess you are sitting at record gross margin levels From where we are today and over the next 12 months, are we an inflection point where you begin to give some consideration to reinvesting more into price In areas like appliances, to drive growth and market share and let your gross margins kind of flatten out In 2012 and 2013, and instead of having modest increases, maybe it's slight.
So, as it relates to our strategy, 2. 1st and foremost, what we're trying to do is continue to lower prices for our customers on a day in, day out basis and drive greater value for them. And we're trying to manage, obviously, the bottom line by driving improved efficiencies in how we run the business. So things like the 32% reduction in clearance inventory, which saves the margin line, obviously, How we've been able to deliver the improvement to date and still be able to lower prices for our customers. And that's our continued focus.
We shared at our analyst meeting that as we moved into 2011, we'll Again to see benefit from our supply chain and much less of it comes from our merchandising.
Okay. And just a follow-up
for you too, Craig, 2Q. Where do you think your inventory will be by the end of the second quarter and the end of the year? And then Carol, where are you thinking the payables to inventory would be for the year, just So we can take a look at your cash flow.
So why don't we put it in terms, if I could jump in, Craig, put it in terms of net working capital. So that would be receivables inventory and payables. As of the end of 2010, net working capital as a percent of sales was 10.3%, And we project based on the guidance that we've shared with you this morning that it will drop to 9.8% by the end of 2011.
All right. Thank
you. You're welcome.
We'll take our next question from Greg Melch at International Strategy Investments.
Chairman. Hi. Thanks for asking for taking my question. I wanted to get into the SG and A a little bit more and the earnings progression. I think you Mentioned that first half earnings growth should be better than second half, given some of the comparisons on SG and A, Yes, the comps would be weaker in the first half than the second half.
Could you take us through the logic behind that? What's driving it? And also, do you have the Durbin amendment and the benefits and your guidance for this year.
Yes, absolutely. Well, as I mentioned, we have about $70,000,000 of expense benefit that we don't believe will repeat in 2011. That expense benefit took place in the back half of twenty ten. You'll recall in the Q3, we told you that we had $20,000,000 of gains from real estate sales. We don't believe we'll have those gains next year.
In the 4th quarter, we just called out a $24,000,000 year over year benefit related to our private label credit. The gross benefit was $44,000,000 That won't repeat next 2. So that takes us to $64,000,000 of expense benefit that won't repeat, and then there was about $6,000,000 of other items That won't repeat. And all of that took place in the back half of the year. So that's why the year over year earnings It's different than the year over year sales growth estimates.
On the Durbin side, as you know, the Durbin amendment Ask the Federal Reserve to determine what reasonable and proportionate fee you should be for debit, and debit makes up about 17% of our Tender Penetration. Based on the Fed's draft regulation, we think the benefit to the Home Depot could be $35,000,000 a year. Now because it hasn't been implemented, clearly the benefit to us would be less than $35,000,000 in 2011. And because we don't know when it's going to be implemented, We haven't put any of that in our
plan. Great. That's very clear. And then if I could follow-up on commodity Inflation. You said that's a neutral environment in your gross margins.
But what did commodity inflation actually impact comp in the 4th quarter and what do you expect in the top line for commodities this year? Thanks.
So between lumber and Copper in the quarter, it was approximately 50 basis points of impact.
And in the guidance for this year.
We basically plan for flat.
Great. Well, thanks. Great quarter, Earl.
Thank you so
much. We'll take our next question from Steve Chick at FBR Capital Markets.
Hi, thanks.
I guess, question on, I guess, weather and kind of with the storms you're seeing and the commentary you made about January. Is there a way to, I guess, plan or assess what the restoration might be if you might get a benefit of that 2nd quarter. In terms of recovery and restoration, and have you seen any kind of pickup as you move beyond January and I guess you could say thought out or gotten further into February here?
Steve, this is Craig. I really don't have a way to quantify it. There's no way for us to do that. But what I can tell you is that we certainly believe that folks will have To repair things, when you look at the amount of ice and snow that existed, you'll have roof damage, you'll have live good damage in terms of shrubs, bushes. Their gutters will need to be replaced.
So we're certainly prepared for that and anticipate that.
And as we look at our business in February, the 1st couple of weeks of February, the weather was horrible, but it's gotten better and February comps are running better than our January comps.
Okay. Thanks.
Thanks, Steve.
We'll take our next question from Alan Ryskin at Bank of America.
Thank you very much. Frank, with big ticket up So strong and obviously a significant contributor to comps. Could you maybe shed some color on how good of a leading indicator you believe Big ticket strength is in other parts of your business, even including repair and maintenance?
Well, so let me start with the repair and maintenance. Again, we've and we've shared on past calls that, that has been a to strengthen our business and certainly repair and maintenance categories continue to perform positively. So the customer is still focused there. Team. As we look at the big ticket, particularly around the Q4, certainly the drivers behind that, Again, where the great values that we had in our appliance offerings, it's a good appliance time in the industry in total, and we kind of went after that with Great values and did very well.
But then you look at the categories that were impacted by tax credits and those performed extremely well. And certainly, that environment obviously has now changed. So we think that, that adds Some pressure going forward and don't really anticipate the same level of big ticket performance as we move through the first half of the year.
Okay. Thank you. And one follow-up, if I may. With the RDC program completed last month, can you maybe just Give us an update on what you think the gross margin benefits will be as well as the benefits to turns. And would it be unreasonable to That that 2011 should be the year where, you realize the maximum benefits from the RDC rollout now that the expenses are behind you?
So Alan, I wouldn't say that it's the year of the maximum benefit, but it is the year it starts to turn to a benefit. As we've been describing this all along, there's Investment and then the benefit starts to come forward. And as we talked about in December, We saw overall 40 basis points with 30 coming from the supply chain and the RDCs as it picks And you start to see that benefit as we go forward in 2011.
Okay. Thank you very much.
And we'll take our next question from Deborah Weinswig at Citigroup.
Thanks so much and congratulations on a great quarter. Thank you. Carol, you mentioned great expense control due to some new tools. I'm pretty well versed in your merchandising tools, but can you please expand on the tools that deliver the company's great expense results in the quarter and what inning are we on these tools?
Well, I think we've talked in the past about, a new checkbook that we introduced in the stores that really helps the stores manage their operating expenses like their personal bank account.
And
they have great visibility now where they can Pull up images of invoices. It's just really helping them get their arms around our expenses. We also have cost out teams here at the store support center, And these teams go aggressively against cost. We do a lot of cohort analysis, just superior analytics, something that's really getting underneath the cost. There's a sense of enthusiasm.
We're really enthusiastic about sales, but there's a real sense of enthusiasm about cost Control 2, and we recognize people who drive out costs. You might say, are you done? We're not done. If you think about the expense plan that we put together for 2011, Expenses will be growing faster if we didn't have expense control in place. So we've still got opportunities to drive productivity in our business for sure.
And a lot of that is coming from the technology initiatives that Matt and his team are driving in our business. With technology, boy, lots of costs can go out.
So, Devin, to give you a perspective on the P and L checkbook, before we roll this out, We still would have to wait until the 15th of the month to see the expenses from the previous month. So it's impossible to really manage it effectively. Now you have basically a real time view of what you're spending based on your budget by line item. So to Carol's point, it just it gives the store team Just a much better handle and tremendous visibility and transparency around what they're spending, how they're spending to the rate of plan and it just allows us to be a much
to be more efficient in managing that overall expense line. Great. Thanks so much. And staying on the technology theme, can you talk about how much of your sales were online in 2010? And how do you see that growing in 2011?
And maybe some of the initiatives behind that as well?
So, Deb, we've kind of said on online that we're not going to talk about it as a 2 separate business for a while yet. It's still we needed to get to be a more significant and material part of our sales Before we break it out.
Which means I was trying.
I know what you said, Frank, but
I was trying. But can you just please help us with the initiatives that
we're going to play?
We're very pleased with the improvement we've seen on online. And again, for us, just So as I say, we're making a lot of investments in it and we're very pleased with the progress.
Great. Thanks so much and congratulations again. Thanks, Dick.
Cindy, we have time for one more question.
Our last question today will come from Matthew Fitzgerald at Goldman Sachs.
Just under the wire. Thank you so much. My question relates to market dynamics. I believe you alluded to gaining share and roughly half of your categories as measured by units. If you could give us a sense as to where those share gains were?
How that trend compared with Prior Quarters. And then as part of that discussion, what you've seen in terms of promotional dynamics in the space, particularly in to some of the hotter categories, if you will, like appliances.
Sure. This is Craig. We gained share And building materials, tools, hardware, plumbing, electrical, lawn and garden, both sides of that, as well as Appliances. And quarter to quarter, again, that's unit share based on Consumer activity. So quarter to quarter, those can fluctuate a little bit.
But when we look at it on a rolling 12 month basis, Those are areas where we're continuing to show progress over time. And I think as it relates to the marketplace, Again, we feel that we're applying a significant amount of pressure in the market in terms of Really offering our customers outstanding values. History of our company has all been about Finding special buys, working with our suppliers to come up with something that helps them drive volume through their factories. We can pass along savings to our customers. It creates urgency to bring the customers into the store.
And I think we did a really good job of that in 4th quarter, which helped our numbers. And so we'll continue to follow that strategy.
And any comments on just the competitive dynamic? Did you see competitive responses or competitive aggressiveness particularly in November, December?
Seems somewhat similar to previous quarters.
Great. Thank you so much.
Thanks, Matt.
Well, thank you,