Good morning and welcome to our 2010 Investor and Analyst Conference. Today's event will be recorded and will be available for replay on our website. This morning, you will hear from Frank Blake, Marvin Ellison, Mark Powers, Craig Meneer, after which we will take a 15 minute break. After the break, our speakers will be Hal Lawton, Mark Holyfield, Matt Carey and Carol Tamay. At the conclusion of the 2nd set of speakers, we will have our Q and A session.
I would like to remind everyone that today's presentation made by our executives include forward looking statements as defined in the Private Securities Litigation Reform Act of 1995. These risks and uncertainties include, but are not limited to, those factors identified in our filings with the Securities and Exchange Commission. It is now my pleasure to introduce our Chairman and CEO, Frank Blake to begin our presentation.
Okay. Thank you, Diane, and good morning, and many thanks to all of you for taking the time to join our 2010 Investor and Analyst Conference. This is a great opportunity for us to outline some of the progress we've made over the last few years and where we're going over the next several years. We see the investments that we've made in our business starting to pay off and we believe there are even more opportunities ahead. Let me start with an area where there hasn't been much progress and that's the housing market.
We started talking about private Fixed residential investment as a percent of GDP back in 2,007. We thought it would serve as a useful guidepost for the housing market in general. When we showed this chart in February of 2007, the main message was we're going to see a correction in the housing market. Then in 2,008, we showed the same metric, only by that time the market had dropped significantly below the 60 year average. And then by 2,009, the market had dropped below the previous 60 year low.
That unfortunately didn't mean the housing market was about to recover. During 2010, the U. S. Set another 60 year low and we're now at 2.2% of GDP. I'd note that when we started these charts, we used 2% of GDP as the bottom of the graph.
Maybe I hope we were prescient. In any case, the current environment has caused us to rethink our approach to forecasting and recalibrate the elements of the economy that best correlate to our results. Carol will go through that with you in some detail. The advantage that Home Depot has had over the last 4 years Our company has had the financial strength to invest in the business even during an unprecedented market downturn. And we're starting to see these investments pay off and position us for future success.
We've talked to you before about our 3 leg stool borrowing from Jim Collins, where we focus on what we're passionate about, customer service, What we want to be the best in the world at, product authority for home improvement and what drives our economic engine, disciplined capital allocation and productivity and efficiency. We've added a 4th element, which is represented on this chart as interconnected retail. We believe that over the next decade, the winners in retail will be those who deliver a best in class multichannel retail experience, allowing customers to buy how, when and where they want. Home Improvement retail is, In some ways, less vulnerable to online competition than other parts of retail. But we believe it would be a significant mistake to rely on that.
And we as we think about interconnected retail, it's not just about our customers' buying experience. It's also about how they gain product knowledge and project knowledge. And it's also about our associates, how we interact with our customers and with ourselves. We'll be making significant investments to build a strong interconnected retail offering and see information technology as a critical enabler for our future success. I hope that over the course of the morning, you'll get a sense of the content behind the concepts.
But before getting to the specifics of our strategic planning, it's important to start with the culture of the company. Both of these diagrams, the inverted pyramid and the values wheel have been foundational parts of the Home Depot since Bernie Marcus and Arthur Blank began the company over 30 years ago. The culture is summed up by the saying we use throughout the company, take care of your associates, take care of your customers and everything else takes care of So appropriately enough, we view the first step in customer service as taking care of our associates. We pay an hourly wage that is above market level. And even during this downturn, we've maintained annual wage increases, We've maintained 401 matches and we've maintained our success sharing program, which is our bonus program for hourly associates.
In fact, in 2009, despite the difficult economic circumstances, we paid out more in success sharing than we did in 2,008 in 2,007 combined. And we're on a path to maintain that level of spend in 2010. On taking care of our customers, we began on the path to customer service excellence by training every single associate in the company on our customer first program, Setting the standard for our expectations for customer service. Marvin and the store operations team have maintained the first program as the core element of our customer service efforts. You'll hear from Marvin and Mark Powers about the complementary effort to return customer facing hours to our associates.
We have enormous opportunities to take tasking hours out of the store and convert them into customer facing hours. We started with a forty-sixty ratio of customer service versus tasking hours. We're now at about fifty-fifty and we have a target of sixty-forty that we think is very achievable. And finally, Marvin will talk about our 1st for pro efforts. We're an unusual business since 4% of our customers, our professional customers, account for almost 1 third of our sales.
Yet our average pro customer spends less than $5,000 per year with Home Depot. So obviously, we have a very small share of the pro's wallet. And while we will try to broaden that spend, our principal effort will be on bringing the same simplicity and customer focus from the first program to the pros. To the pros for whom we are largely a store of convenience, We want to make that purchase of convenience the best possible experience. The digital world is already having a significant impact on how we think about customer service.
First, it allows us to give more content to the inverted pyramid. The Profound insight in the inverted pyramid is that many of the answers in our business lie with the associates closest to the customers. A few years ago, someone gave me a great physical demonstration of this. He showed a board with a set of interlocking gears arranged in a pyramid. If the gear at the top spins too rapidly, the rest of the gears spin wildly, which is it's a good visual way of showing why it's important to keep a limited set of initiatives if you want to make any progress.
But the more interesting visual was to show How hard the gears at the bottom of the pyramid had to spin to have any impact on the upper gears. The effort for us, and I think probably the effort for any business, is to make the organization more responsive to the associates who interact with our customers every day. And technology is giving us new tools for doing that. For example, we're using a salesforce.com like platform for a new vehicle for associates to make recommendations on business improvements. We've had analog versions of this in the past, but the difficulty was that the communication was unformed.
There was no way for associates to leverage the ideas of other associates and it was very difficult to identify meaningful suggestions. Now associates can vote on suggestions, make structured product recommendations and communicate more effectively around areas of opportunity. Let me give one example of this. We have over 2,000 master trade specialists, licensed plumbers and electricians have been in our stores for the past 4 years. We now have the tools to get their input on significant local code issues in an efficient and effective format.
Our 300,000 associates have to be a core competitive advantage and we think the digital world will play a significant role there. Similarly with our customers, we now have digital vehicles for communicating directly to them on how to issues, Leveraging the knowledge of our associates and our customers. We've set up a how to community that we think is unique in its use of in store associates. We are using store associates who are product experts, trained in social media and equipped with technology like flip cams that facilitate communication. This isn't something that will drive significant revenue in the near term or perhaps even in the midterm, But we think it reinforces Home Depot's position in product and project knowledge and also again allows us to leverage and in effect broadcast the strengths of our culture in a very genuine way.
On the second leg of our stool product authority, We are focused, as Craig and his team have been over the last several years, on improving our merchandising tools, building our supply chain into competitive advantage and driving our portfolio strategy. As those of you who followed Home Depot for a while will remember, We began on the road of improved merchandising tools with what we called scrappy tools, short term improvements that were necessary to build some of the basic competencies that we needed, but not sustaining improvements. Since then, With a coordinated effort from Craig's and Matt's teams, we're on the path of creating the long term structure for world class merchandising tools. While we're not all the way there yet, there are 2 important things to note. First, we're already seeing benefits from what we've done to date.
And second, we have a lot of opportunity in front of us as we establish the processes, tools and analytics of a first class merchandising organization. On the supply chain, we will have finished building out our RDC infrastructure by the end of this year. I don't think there are any retailers anywhere near our size that have built out a new supply chain in 3 years. We had some bumps along the way, But certainly one key sign of the progress to date is that we've had improving inventory turns in the business at the same time that we've had record in stock rates. And as Mark Holofield will outline, we still have significant improvements in the remainder of our supply chain ahead of us.
And finally, on our portfolio strategy, we know that our customers' view of their home is changing. It is no longer a short term investment or an alternate source of cash through home equity loans. But it is still the number one asset for most of our customers, still a source of emotional investment And we see continued interest in basic updates and particularly in lowering the operating costs of the home. Craig and the merchants make sure that we approach our overall portfolio with this changing dynamic in mind. This drives our investment decisions as well as our merchandising decisions.
One important area of investment for us is in our customers' project And we think this scenario, again, where new technologies will have a significant impact. As Hal Lawton will describe, We can use technology to simplify some of the most challenging and complex aspects of our customer interaction. And technology is also redefining our marketing strategy. In 2010, we made some significant reductions in our marketing spend on print and redirected that spend to online marketing. We will take that even further in 2011.
For sure, there's some risk to this and it certainly unsettles traditional ways we've gone to market, but we think that the more targeted marketing that is now possible through online ads and emails provides far better return for the business and a better way of communicating with our customers and we intend to be pushing this trend rather than being pushed. One of the significant changes at Home Depot over the last several years is that we recognize that the driver of our economic engine has changed. It is no longer square footage growth. It is disciplined capital allocation driving productivity and efficiency. But we're not looking for efficiency for efficiency's sake.
We are looking to establish long term competitive advantages. This is the case with our investment in supply chain, our investment in merchandising tools, our investment in information technology and our investment interconnected retail. And these investments have not just been in the U. S. We've rebuilt our supply chain in Mexico.
We are in the process of rebuilding our supply chain in Canada. And while we won't bring the new SAP IT infrastructure to the U. S, We're beginning to see the competitive benefits of it in Canada. Our position across the North American Continent, number one home improvement retailer in the U. S, Canada and Mexico is we think a long term competitive advantage as we build on the best practices from each area.
Our retail presence in China has been more problematic as we're still in the process of developing a profitable business model there. But we believe we're getting closer to that as we concentrate our geographic presence to a to key cities. Beyond China, there are opportunities for international expansion, particularly building out from our very successful presence in Mexico. But we will remain committed to a very disciplined capital allocation. Our shareholder return principles are straightforward.
As Carol will detail, we have a targeted dividend payout of approximately 40% of earnings. We will use excess liquidity to repurchase shares and we will maintain our high return on invested capital. Our 10 15 Long term financial targets that we set out a year and a half ago, 10% operating margin and 15% return on invested capital, Now seems less long term and more mid term. We think these are achievable targets over the next 3 years. Obviously, this assumes that we continue the pattern of positive comps that we've shown over the last several quarters.
We don't need dramatic comps to get to these targets, but we do need some modest growth in the range of 2% to 3%. Assuming that modest growth, we can achieve these targets. We have the financial strength to invest for competitive advantage. We have a limited set of clear objectives. We respect the changing environment in front of us and we have, and those you'll hear from after this, And experienced and aligned leadership team driving those objectives.
With that, let me introduce Marvin Ellison, our Executive Vice President of U. S. Stores.
Thank you, Frank. Good morning, everyone. As Frank pointed out, customer service is first leg of our strategic stool. And this morning, I'd like to talk to you about how we will continue to improve customer service at The Home Depot. Since the start of this great company, excellent customer service has been the foundation of store operations and one of the company's 8 core values.
And over the last several years, we have intensified our focus on service with the expectation of making customer service a competitive advantage for The Home Depot. As a project retailer, we understand that customer service is a key part of our value propositions and one that our customers expect. And our internal data reflects a direct correlation between our customer service improvement and our transaction growth. These reasons illustrate why we are so passionate about customer service at The Home Depot. We have a fundamental expectation that we will make Customer service a true point of differentiation for this company.
And in order to make this a reality, over the past 2 years, We have focused on 4 sequential steps to improve and sustain customer service as a competitive advantage. Those four steps are number 1, simplify the store environment number 2, clarify what associates should do number 3, leverage technology to build relationships with our customer and number 4, celebrate associate success. Today, I'm going to discuss each of these four steps. I will also discuss how we're going to use these ideas to improve our service for our most important pro customer. So our first step was to simplify the store environment.
We've done many things to make it easier for our associates to focus on helping customers. For example, having clarity around how we spend our store payroll is key to providing simplicity to the store environment. We have developed a customer service imperative to allocate 60% of our store based hourly payroll to drive customer service. As you can see from this slide, when we started this initiative in 2,008, approximately 45% of our store hourly payroll was allocated to service and selling, while 55% was focused on tasking. Now I define task as any associated activity that does not directly interact with the customer.
Activities such as unloading the truck and receiving, stocking shelves or working reports in the back office. We plan to end this year with 51% of Payroll focus on customer facing activities, which we see as a milestone. Mark Powers, our Senior Vice President of Operations will outline in more detail Some of the projects and initiatives that we have underway that will allow us to shift more payroll to customer facing activities. One expectation of this process is really simple and we are committed that we will improve customer service while concurrently Delivering productivity enhancements. The 2nd major step to making customer service a sustainable competitive advantage has to do with setting clear expectations for associates.
We want to make sure that our associates have a crystal clear understanding of what we expect. And for us, it's very important to clarify for each associate our expectations for customer service. As Frank mentioned, we took an unprecedented step and we trained every single associate in the company on our customer service expectations last year. This is our customer first initiative. We are committed to putting customers first in everything we do and each letter in presents a specific expectation we have for each associate.
In order to fully commit to changing our customer service culture in the store, We understand that customer service training cannot be a one time event. We have created a continuous process of customer service training for all associates. You can see all the different first initiatives listed on the screen. One initiative that we rolled out is called Solve, which is the S in FIRST. Or said another way, what will we do to solve the customer's project problem or concern.
So under the Solve initiative, our goal was to help our associates to become more comfortable assisting customers with project questions. Projects such as how do I install a toilet? How do I patch a hole in my drywall? How do I install a ceiling fan? So rather than rolling out a computer based training module, we simply identified top projects in each selling department in the store And selected one of our very talented associates to conduct hands on training of each associate that works in the department.
An example of one of these top projects in our flooring department was installing ceramic tile. So to accomplish the training on this project, one of our associates Provided each associate in the flooring department with hands on training to lay ceramic tile. Everyone in the department rolled up their sleeves and actually participated in the process. We determined that when you actually complete the project yourself, it gives you more confidence and knowledge when it comes to helping a customer with a question. You're also better equipped to assist and advise them on what accessories and tools they need to purchase to complete the entire project.
The same hands on project training was replicated in each selling department in the store. And one great thing about our company is that we have created a culture sharing best practices. And we love to share ideas with our divisions located outside of the U. S. So we partnered with both Canada and Mexico to develop similar customer service programs specific to their environment.
And this philosophy of sharing has been a big success for the company. We are also equally committed to serving our multicultural customers. I have a very simple belief. You can't effectively serve customers that you don't understand. Therefore, we are committed to ensuring that our store associates mirror in our community.
And we ask our associates who speak more than one language to wear an apron patch similar to the Espanol patch you see on the screen as a way to communicate to the local customers that they can speak their language. We're also very fortunate to have our Mexican division President, Ricardo Salvador, as a resource to help assist us in better understanding the merchandising and customer service needs of our Hispanic customers. An example, some of our southern market stores have revised their tile assortment to better match local needs mainly due to Ricardo's influence. And sales due to these changes have exceeded our expectations. A third step to making customer service a competitive advantage involves leveraging technology to improve our customer relationships.
The foundation of our technology in the store is something we call the first home. This is a brand new handheld mobile device and it was branded the first phone after our customer service initiative. And we believe that this new in store technology embodies our focus on customer service and productivity improvement. This handheld device gives the user the ability to order product, locate product in the store or a neighboring store and to analyze sales trends. It also acts as a mobile phone, a walkie talkie and a mobile point of sale unit.
This integrated tool was developed in partnership between operations and IT. And you will hear much more about this best in class tool for Mark Powers. We are leveraging technology in all areas of the store. In our customer care department, we have gone beyond just answering calls and emails to deal with customer complaints. Last year, we started to search online sites like Twitter, Facebook, yep.com, mod3centsworth.com to name a few to find issues that customers were having with the Home Depot.
This team proactively addresses any concerns that a customer may have with the Home Depot. And rather than waiting for the customer to contact us, we contact them to better understand their issue and to resolve their problems. This has been very well received by our customers and by the online community. Technology also helps us to build stronger relationships with our associates. And as Frank mentioned, communicating with our associates is very important.
And in this age of social media, we felt it was to provide our associates with a more modern way to communicate with us at the store support center and with each other. So we have developed an associate warehouse. This is an internal associate social network that provides our associates with a medium to communicate with each other and with the store support center. It also provides them with a forum to share best practices and to discuss product and business process support. The warehouse has provided us with a great resource for open two way communications for all levels of our associates.
Technology has also allowed us to simplify how we communicate with our frontline associates. And in the past, The only method for getting a message to the frontline hourly associates was to send a blanket e mail or to push a report to them. And oftentimes, this would not target the correct person and would provide unnecessary information to a large group of associates and simply waste their time. Now we now have a new online tool we are calling MySuccess. When a department supervisor logs on to the system, their personal ID number will Automatically link them to relevant data and communication specific to their position.
As an example, if I was a hardware department supervisor, When I logged on to the system, I would get a daily communication from the hardware merchant making me aware of any product or promotion ideas that were coming online. I would also get any specific daily projects that I'm required to do from my district operations team. This site will also push to the associate the key sales and profit measurements specific to their department. This is a huge improvement for our store associates and one that will assist us in our journey to improve our efficiency and our store simplification. We are even leveraging technology to help us and help our customers with specific projects.
As I mentioned earlier, The use of social media has become an emerging trend in our society. And to capitalize on this trend, a few months ago, we launched our latest innovation, the Home Depot how to community on homedepot.com. Our goal is to make this the go to destination for home improvement product and project know how on the Internet. What differentiates our community from other peer to peer communities is our use of real store associates as our do it yourself experts. We selected and trained hourly associates from across the country to work a couple of days a week in one of our regional offices interacting with customers through this online community.
The rest of the week, they're back in their stores doing their regular jobs. We have trained and equipped these associates with the latest multimedia technology, including digital flip cameras, so they can bring their product knowledge to life in a way that fits this medium well and that's what our customers now expect. The average tenure of these associates is 10 years And these knowledgeable associates answer the same types of home improvement project and product questions that they get every day in the store. So let me show you a real quick video as an example.
Hi, I'm Patton Paine. And Mary in Idaho sent us an interesting question about refinishing her lawn furniture. We're going to take you through the steps. Mary, the first thing you're going to want to use is a steel brush. These are going to take off the Large flake and if you have a flat surface, you can use the larger brushes and this is going to take off the heavy Russ, you're going to follow that with steel wool or sandpaper.
Let's look down here. You've got Metal finished steel wool is in the 600 or 400 range that are going to give you a perfectly smooth finish for your prep and you're going to follow that with primers. Let's walk over and take a look at those. Mary, once you get the surface properly prepped, you're going to take a primer like this. Primer is like double stick tape.
It grabs the surface and protects the metal, but it also provides adhesion for the top coat. In our selection of paints, we've got a lot of different colors And textures that you can use on your lawn furniture. But basically, you're just going to choose the one that matches your decor. Finally, we get this question probably 4 or 5 times a day right now, and it's a great question to answer
for all of our do
it yourself customers. I'm Patton Pate, and we're here to help.
Late October, we've had more than 1,000,000 page views And hundreds of do it yourself discussions within the 1st 4 weeks of launch. This is one more way that we are leveraging technology to improve the service experience for our customers. The 4th step to make customer service a competitive advantage is to properly motivate our team members. It's important that we celebrate success and recognize our associates for their outstanding work. We've implemented numerous programs for our store associates to receive recognition.
The HOMA badge is recognition for outstanding customer service from a member of management to one of our store associates, While our Bravo Board allows store sources to recognize each other for going the extra mile on customer service. Last year, we created a new customer service recognition program called Home Depot Legends. Each Monday on our internal TV broadcast to the stores, I select 1 customer service story from hundreds of submissions. I recognize the associate to give a summary of their customer service story. I'll present the store and the associate with an award As a way of saying, thank you for providing legendary customer service.
Because we received so many submissions that were so outstanding, We decided to create a monthly winner. And for this associate, we fly them to Atlanta, we bring them live on the show and we produce a video Outlining their legendary customer service story and we broadcast this to the entire company. So let me take a quick moment and show you a short video from one of our recent
I was excited about meeting the different department heads in the store throughout the region. In this store, I Jessica, who is the department supervisor over Pro. And as we were talking, we talked about some of the initiatives. We as a region and company are striving to achieve. 1 of those initiatives was Bilingual associates behind the protest.
But one day, she noticed a customer came into the store who didn't speak any language. They couldn't communicate.
She had noticed a customer by the name of Chuck who frequently shopped in our store, but had difficulty. He's hearing impaired and had difficult Communicating with our associates on what his shopping needs were. He's a tradesman in the pro business and she wanted to find the way to serve this customer better and to meet his needs And to be able to speak his language.
While I was helping him, I told him, you know, I really want to be able to help you better. So I'm going to go and take a night course At the local college to learn basic sign language.
Every Monday night for 2 hours, she would take a signing class. Now it's a little bit more difficult Jessica because she's a single mom with 2 kids, but she had a great friend that would, babysit her kids while she went to school. As Jessica learned sign language, Chuck became really excited that they could communicate together. And as Jessica's sign language improved, Chuck would go out and tell his friends that with hearing impaired like he was, that there's a place we can go and shop where somebody can communicate with
It just felt really good to have been able to communicate with him to an extent that nobody else could.
This video represents one of many legendary customer service stories that occur daily in our stores. Now the person portrayed as a hearing impaired pro in the video is the actual customer, Chuck, from the legendary story. He was so overwhelmed by Jennifer's or Jessica's great customer service that he volunteered to participate in video on his own. Our sources make all the difference and we are proud of what they do to represent our great company to our customers. And finally, we're taking the same steps to create a competitive advantage for our professional customers.
And earlier Frank mentioned the importance of our Pro customer. And although this customer is critical to our success, candidly, We have not adjusted our in store customer service strategy to address the service expectations of this customer. And for many of our pros, we are largely a store of convenience and we need to make that purchase of convenience the best possible experience for them. We have been too focused on process, on metrics and reports on the Pro side of the store. And we were just simply not listening So our Pro customers are not adjusting our store operations to meet their needs to better serve them.
And we now realize that we have to have a more Unique focus on how we serve these customers and we're going to replicate our retail simplification and customer service philosophy for their professional customers. So recently, we developed and rolled out an overarching customer service strategy for our Pro customers we're calling 1st for Pro. We are implementing specific initiatives to give them differentiated service department. We're implementing unique power hours for Pro. We're designating A dedicated point of sale staffing.
We're providing lot loading assistance. We're going to better leverage our simplified returns process. And more importantly, we're going to train each and every PRO associate on their specific role to deliver outstanding customer service to the professional customer. And although we are very early in the rollout phase of this strategy, we anticipate much improved service in our Pro store environment. We are very fortunate that we receive over 72,000 Pro specific voice of customer surveys per month.
Therefore, we are eager to monitor the feedback of these very Value customers. So in closing, customer service will continue to be the most significant priority for the Home Depot and for store operations. And although we are pleased with our 670 basis points of year over year net promoter score improvement, We are fully aware that we have additional work to do. We have a well defined plan. We have a committed team and we fully expect once again to make customer service a clear point of differentiation for The Home Depot.
So thank you very much. And now it is my pleasure to introduce our Senior Vice President of Operations, Mark
Powers.
Good morning. In store operations, we are on a journey to reengineer the operations of our stores. Our tactics Are not only taking task out, thus simplifying the business for our associates and improving our customers' experience, But they are also laying the foundation for future channels of customer connectivity. As Marvin mentioned, in 2,008, we started working on what we call our sixty-forty strategy. At that time, out of the total amount of hours we allocated to store associates, roughly 60% of those hours had required tasks assigned to them.
This left the remaining 40% of the hours free for our associates to serve our customers. Since then, with an aspirational goal of flipping those numbers to have 60% of our stores' hours free to service our customers In what has proven to be a target rich environment, we have jettisoned several antiquated legacy processes and systems, Replacing them with efficiency gaining new foundational programs. In fact, as stated earlier, by the end of 2010, We will have turned the corner and over half of our store hours will be dedicated to serving our customers. Today, I'd like to share with you a few of the many opportunities we have just begun to capitalize on in this environment. The first project that I'll cover laid the foundation for several future projects.
We call this project base sequencing. The purpose of A sequencing is to make it easier to locate product for both our customers and our associates. Unlike most retailers, through the years, The Home Depot has matured with many different store layouts, meaning that our department's locations and the locations of general product categories could be different across hundreds of our stores. In fact, individual product locations and their space allocation could be different across well over 1,000 stores. Needless to say, this has been a challenge for our customers whose number one question is, where is the product I'm looking for?
And just as big of a challenge for our associates who had to operate in this environment. With base sequencing, We have electronically mapped the individual locations of each product within each individual store. With this information, any associate can quickly answer our customers' question of where is the product I'm looking for. We have also started using this data to assign our associates tasks by routing them through our stores to complete those tasks in the most efficient manner. In addition, we are leveraging this information to place location data on product that is flowing through our RDC network, so that we can quickly and efficiently move it from our receiving area to the shelf.
In the future, we will use base sequencing to increase our customers' connectivity, which Hal Lawton will speak to later. The next project I'd like to share with you is my best example of our target rich environment of antiquated legacy processes and systems. Ladies and gentlemen, I give you the mobile cart. We are replacing this relic with our new customer service tool, the first phone. In 1995, we rolled out about 5 of the Carts to every store.
This fine piece of equipment consists of a laptop screen and a printer, both powered up by a 12 volt volt battery. True. The cart was used to process all sorts of complicated algorithms that supported our replenishment systems. It also supported the execution of many tasking processes such as hanging little worn stickers on our out of stocks, Which you might have seen in the past in our stores. Now I'd like to show you a video of the first phone, our new customer service platform.
This device is the associates device. It's been designed by the associates.
So one stop shop for customer service because everything is in your hand.
It's so easy to use. You just tap and it's there.
Anybody that's used a cell phone today will probably be able to adapt this
How many pairs did you need today?
I need at least 2. As a 23 year associate of this company, this is by It
empowers our
To be able to look into the system Right on the spot in front of the customer, let them know, in real time, this is what you can find at that store. They appreciate that. They love it.
Do you need me to call on that? It's a phone. It's a walkie talkie. It's your order. It's an IMA cart.
It's your computer. You don't have to go back to another central computer to go
The my store walks with the leadership team.
0 on hand, 24 on order. The department supervisors don't have
to look at 3 different reports to get the information. They can just
Do a
quick check here on the device here.
Being able to load rapid register, if you see a line on the front end, take care of that customer, scan the cards, get them in and out.
Very helpful.
Thank you.
Thank you.
It helps you with every step of 1st. I mean customer service, that and safety are number 1.
Everything I need to run my department in one box. It's really cool.
The impact our customer service and associate engagement on customer service is immediate, and You're going to love it.
It's just going to be a great milestone for the Home Depot.
The first phone is Truly a new foundation. Indeed, it is a phone, a walkie talkie, a mobile computer and a mobile register. But more importantly, It is a customer service platform. We have just begun to leverage this tool by enabling it with product locations such as base sequencing, which are being used by our associates to serve our customers. In the future, The majority of the first phone applications will be used by our associates to enhance the customer's experience.
In addition, we will also leverage the 1st phone to support our store leadership. To begin with, we created an application which provides our leadership with real time intelligence down to department, aisle, bay and even SKU level on sales, Inventory and gross margin productivity. For the 21 years, I worked in the stores as a Store manager, a district manager and a regional vice president. The only reporting I had just drilled down to department level And it was 2 weeks old when I received it. To have this type of data down to aisle, bay and SKU level, Real time is truly best in class.
The 3rd project I'd like to cover with you also leverages the First Bone platform. This project focuses on our customers' payment experience, yet another area where our legacy processes are being reengineered. One such process involved assigning a cash drawer to an individual cashier, who would then place that drawer in an individually Signed register. At this point, neither our systems nor our policies would allow anyone else to run that register. That meant if that cashier happened to go on break and customer lines would build, no one else could jump on that register to help our customers.
We have now implemented new processes and system enhancements, which allow any qualified associate to ring on any register at any time. With these enhancements, we have seen an immediate increase in our voice of customer survey ratings pertaining to wait to checkout. We are also leveraging the First Phone's ability to convert to a mobile register to further reduce our customers' wait time on our front ends And to conveniently take payment in remote locations, such as in our Christmas tree areas. You might have seen this being executed in our stores on Black Friday, where from our customers' point of view, it greatly enhanced their experience. We will also use the first phone in our buy online pickup in store process, which Hal Lawton will also discuss later.
Now, I'd like to discuss 2 additional projects that are designed to enhance our customer experience while delivering operational excellence. The first project addresses payroll optimization. We are rolling out a new system to improve our Store payroll process. Earlier, we implemented the store checkbook, giving our store managers visibility into store expenses. However, their biggest expense, payroll, had not been addressed until now.
We have been very pleased, if not proud, of our store managers' ability to enhance their customer service while managing their payroll expense. This has been especially gratifying Given the fact, believe it or not, our financial systems do not link to our stores, sales forecasting, scheduling and hours management system. This means that in every store, every week, Our store managers forecast their future sales and then pay a 40 hour a week associate to produce And then manage all of their fellow store associates' work schedules. Our store managers repeat this process every week with no real visibility to their payroll expense until the end of the month when they receive their individual stores profit and loss statement. With our forecasting and scheduling project, we are rolling out a new system, which ties each individual store's financial plan, their current sales run rate and their weekly payroll expense all together and displays it to the store manager real time on a daily basis.
In addition, our scheduling system will be enhanced to produce our store associates' work schedules with very little management or associate activity required. The system will then post those schedules online where our associates will be able to view them from either within their stores or from a remote location such as their home. Finally, the system will also have a component which will provide store managers with some insight into individual associates' sales productivity. The last program I'll cover today is our merchandising execution teams. These teams are designed to provide consistency and merchandising presentation and execution across all stores.
Historically at The Home Depot, we were supported by hundreds of third party service groups. As you might expect, the level delivered from these numerous organizations very dramatically. We have now in sourced virtually all of this activity. Our merchandising execution teams or MET have been given clearly defined roles and responsibilities. Their consistent execution and results have provided a significantly positive impact on our customers' experience with regards to in stock and store appearance.
Also, through the close alignment of the store operations and met teams, We are beginning to realize efficiencies by ensuring there is minimal to no overlap of tasking efforts in our stores. Finally, the merchandising execution teams have proven to be very efficient in delivering consistent execution of opportunistic sales events across all of our stores. These are just a few of the many opportunities we have only just begun to capitalize on. So in closing, to reiterate, as we execute on our sixty-forty strategy, we are not only taking task out, Simplifying the business for our associates and improving our customers' experience, but we are also laying a new foundation for future channels of customer connectivity, which Hal Lawton and Matt Carey will speak to. Thank you.
And I would like to introduce Craig Meniere, our Executive Vice President of Merchandising.
Good morning, everyone. It's great to have the opportunity to be here with you. Today, what I want to do is I want to answer the key question of how we're going to build on the progress that we've made in our merchandising transformation and deliver on being number 1 in product authority for home improvement. There's 3 key topics that I'll cover. 1st, the journey over the past few years and where we're headed for the next 3 years.
2nd, how our point of view is being shaped by where we believe the customers' mindset is today and for the foreseeable future. And finally, how we're working on the key components of product authority to deliver on the commitments we've made for the business. So first, let's talk about where we've been and where we're going. Our major focus over the past few years has really been to restore the Competitive advantage of Home Depot. We needed to get customers returning to our stores, getting back to a strong value proposition And turning around the decline in customer transactions that we had been experiencing.
It was important to build out The capabilities with new tools and infrastructure that would drive efficiency as we managed in a centralized environment. As we look forward for the next few years, it's all about strengthening our product authority, Truly leveraging the process tools and infrastructure, enhancing and creating meaningful Differentiated product offerings in our business. And we'll be supplementing the art of retail with enhanced analytics to create even greater value for our customers. Home Depot will become the best in class at blending the art and science of retail. We must create the capabilities to allow our customers to shop when, where and how they want in the new interconnected retail world.
And finally, we must focus on deepening the understanding of our customer And we believe that this is a critical core competency and you'll hear more about that later from Matt. So let me spend a few minutes, really setting the stage around how we're going to be establishing what we believe we need to be best in the world at And that's product authority for home improvement. The initial building block in our journey was our merchandising transformation. And we've been building the tools and processes necessary to run the business in a centralized world, yet retain the flexibility to take advantage of localization. We needed to improve the efficiency in the business to deliver a consistent financial performance.
We saw a real need to simplify how we assorted below market level and we created The foundation for clustering in our assortment planning. We needed to improve our forecasting capabilities to drive inventory productivity and improve in stocks. And a significant element was to transform our supply chain to improve our overall inventory flow and seasonal management. Now better analytics around the business help us begin to transition back to an everyday great value for our customers and eliminate promotional discounts in most product categories. The next step of our journey was to implement our portfolio strategy.
This really became the decision roadmap for our merchants. From this, we formulated tactics around assortment, price, space, inventory and marketing. And it really helped us define what we stood for, for our customers. The second thing our portfolio strategy did for us was to Create a framework for resource allocation. And the final building block was to understand the key drivers from the customer's viewpoint of establishing product authority.
And the key components are a combination of innovation, assortment, Value and the shopping experience. And this is what I'll cover in detail today. So let me step back to the first block of the journey our merchandising transformation. This is not a strategy, but in fact the foundation Tails, the efforts are underway, but what you see here is the roadmap to enhanced analytics and planning for our business. We've been building the foundation to approve assortment planning, line structure development, pricing, Integrated space planning and ultimately collaborative planning both internally as well as externally with our suppliers that will drive efficiency not only for Home Depot, but also for our vendors.
We've advanced progress in each of the areas of our transformation. And on average, I'd say that we're about 45% of the way complete. In many cases, we have the tools fully implemented, but the execution of that is truly an iterative learning process. For example, our forecasting tools for department sales, margin and inventory are in place. This Summer though, we upgraded our centrally replenished item level forecasting capabilities.
Additionally, all categories Ted been onboarded to our assortment management tool by the end of 2,009, but this year we began advanced work on clustering with the tool. And I'll provide an example of this clustering in just a little later. We feel good about the progress that we've made, but there's plenty of work to be done that will allow us to further improve the performance as we go forward. This slide serves as a reminder of what we're trying to get accomplished. We're driving for sales productivity.
We have now achieved a level of performance in both transaction and comps that supports the fact that we're making progress and we believe that we're on the right track. It is critical to drive efficiency and expand our profitability. And as you'll hear from Carol, we're delivering on that commitment as we work through information. And finally, we want to achieve market share growth as a measure of the customer's perception of our relevance in the market Let me shift now to the second topic, where we believe the customer's mindset is and how that's shaping our point of view going forward. There's many aspects of the customer that have changed in the past few years.
Overall, the customers view of the home has changed. In the past, it was considered an investment, a source of cash. The decrease in our home values that we've seen over the past few years has changed this viewpoint. The home is still a valued investment, which the customer wants to maintain, but it is not the ATM of the past. The customer is more focused today on lowering the operating cost of their home and less likely to think about major remodel projects.
The first spend that they'll make are on those items that are essential to maintenance or impair
in their home and business.
Value has always been important to the customer, but in today's environment, it's an even greater factor in the decision to spend. Customers are time pressed. They're looking for anything that can help simplify their lives. We've had great success with products such as our Behr Premium Plus Ultra Paint, which is a paint and primer all in one that cuts time and money out of the project Or Scott's Smart Seed, which is engineered to retain water, improving the germination process, Truly simplifying the seeding of your lawn. And these are just two examples of many of the products that have done extremely well.
There's also a theory that the customers will stay
in their home longer. And therefore, they want products that are of high quality and will last. And for sure, the customer is looking for great value before they're going to part with their hard earned money. And we're working hard to provide those great values in our stores. So as we step back to take the customer's viewpoint into account.
We then used our portfolio strategy to drive our resource allocation as we plan for 2011. The customer will shape our category focus on both the management of the category, the investment in the category and the marketing in 2011. Our budgets will then line up to the business opportunities. And you can see from this chart that we have lined our category plans with the wants and needs of our Customers. We've seen success in categories like flooring and paint and lawn and landscape as customers really focus on small projects that improve their home and we expect these trends to continue in 2011.
Let me give you an example of how portfolio strategy works in real life. We know that major renovation has been in decline for the past few years. The kitchen industry is down approximately 50% from 3 years ago. In our stores, we have on average 500 square feet devoted to showrooms and kitchens, as well as a commitment to providing a designer on staff. And as we look at the role of our kitchen business in our portfolio strategy, There is an opportunity to reallocate resources.
So we're piloting the removal of up to 40% of the space dedicated to kitchen showrooms. In cabinets, for example, we modified our assortment to include more space for assembled cabinets. We enhanced The value proposition for the customer with the addition of a brand and we focus on building our refacing programs. The goal here is to retain and or expand the current sales in the category with a more efficient use of our resources. And you'll hear from Hal about new tools that are being developed to assist our designers and our customers in the process of designing And buying a kitchen.
This is a multi step process that we're engineering or reengineering, I should say, with simplicity in mind for the customer. Now reducing our kitchen space in showrooms allows us to make better utilization and productivity of that space. These are just a few examples of programs that we've implemented that are driving improvement in sales productivity with that space. Vanities are a project starter in a bath remodel, and this is a much smaller project than replacing an entire kitchen. We have also expanded lay down areas in our flooring departments to drive increased offerings and special buys in floor and wall tile.
Both of these are simple to core update projects that customers are willing to take on in this economy. We will also use the same logic in other areas of the store to shift space, for example, to our cleaning business, where we have a better opportunity to serve a customer segment with an expanded offering in the category. Now I'll turn to the 3rd part of our discussion, The key components of product authority, innovation, assortment, value and the shopping experience. The first component is innovation. Our objective is to be truly innovative and in products that are represented in destination categories and emerging technologies.
Winners over the past few years have been products that have brought innovation to the customer by either solving a particular problem, making it easier to complete the project or simply saving the customer time. The customer is truly looking for innovative product and Home Depot is putting resources towards building a robust pipeline and innovation. Innovation is also a motivator to get the customer to make a purchase, but at the same time a driver behind financial improvement and performance in the category as well. So let me share a detailed example. The HydroRite Dual Plus conversion kit was an innovation award winner at our recent annual supplier conference meetings.
This product applies to multiple customer segments that we serve and drives value for the customer on many levels. It's simple to install. It takes less than 15 minutes. It saves the typical customer 15,000 gallons of water per year And it retails for less than $20 and has a 3 to 4 month payback for the customer. From Home Depot's perspective, the HydroRite drives improvement in average ticket for the category, which improves comp sales and gross margin dollar productivity for the entire subclass of toilet repair.
We're selling more than 10,000 units a week of this top of the line product because the customer sees the value in the innovation. And just like Home Depot has been a leader in lithium technology for tools, we are a leader in LED technology. We're partnering with best in class manufacturers. And the first area of significant impact will be in light bulbs and light fixtures. The market for both of these categories is emerging from a business that is just starting in 2010 to where both will be over $1,000,000,000 each within the next 5 years in the categories.
The bulbs and light fixtures are just the beginning of where the technology will play in the building material space as you can see from the examples on this slide. The most exciting part about LED technology is the energy savings that's achieved and how it can be married up with solar or wind technology going forward. The second component of product authority is assortment. Our portfolio strategy helps us determine the breadth of assortment that will be carried in a product category. Home Depot has always been a brand house, but we will differentiate with private label and proprietary brands.
Our private brands will be leveraged across our business in the U. S, Mexico and Canada. I'm often asked how will we choose to use a private label brand. And what I'll share with you is what I've shared with our supplier community. There's really 4 triggers, if you will, that will help us drive the implementation of a private label product.
The first is lack of brand relevance. If a brand doesn't carry its weight with a customer, the category could very likely become private label. The second is if there's a lack of innovation coming in the category. The third, If there's a financial issue inside the business that we need to solve, that could certainly lead to private label. And finally, if there's a quality problem or if we have a significant opportunity to improve the quality and also drive a stronger value proposition for the customer, we'll look to private label or exclusive product.
So today, we think about differentiation as a combination of our proprietary and private label brands. The combination of these brands represent about 14% of our business today. And while control brands represent an opportunity for The Home Depot, The customers' wants and needs will ultimately determine the growth in these categories over time. The next part of our assortment component is really leveraging our tools to create the appropriate localization in the assortment. And we're in the early stages of store clustering in our assortment.
And this slide shows an example of the performance in grills where we've utilized capabilities to better address our customer needs. We refined the store clusters for both high volume and low volume stores as well as various demographic segments and then offer different combination of grills in each of the store clusters. In the high volume upscale stores, we added grills at higher price points, which drove sales, units, Gross margin dollars as well as average unit retail improvement. In our lower volume and standard stores, We offered a core assortment of 12 grills, which included great opening price points and we also drove sales, Gross margin dollars and strong unit improvement at the cost of average retail in those stores. But both of these examples are we're showing Improvement in our overall performance in the category as well as improvement in GIMRI.
And this is just an example of how improved analytics will help us engineer performance in the business. The 3rd element for product authority is value. We have been working to reestablish everyday great value for our customers. The first step was to implement our portfolio strategy, which set the tactics for a category. Then we began to eliminate promotions that were simply pulling sales forward at lower margin rates.
Then we put more marketing around the fact that we're actually lowering prices for our customers with our new lower price campaign. And this effort has been part of what's turned our transaction growth back to positive. In the process, we have saved our customers $900,000,000 in purchases since we began our new lower price campaign. Value can also be generated for the customer across the entire line structure of
a product
category. The trap that a merchant can get into is thinking about value as an opportunity only in the opening price point. The reality is it can span across opening price point, mid price point and the upper price point of a line structure. Value truly is a quality price combination equation. In our recent Vanity and Sandy event, We drove both the good and the better price points and we actually saw great results because of the quality of products that we're offering and the better price point and made them outstanding values as well.
In our Husky soft sized storage program, Here, we have incredible quality at both our better and our best categories in the segment of the assortment and we're experiencing strong comp growth as a result. In our Martha Stewart Kitchen program, here we're bringing the features of the best Quality offerings at price points of the better quality and our customers are responding to the value proposition here as well. The final component is delivering on the entire shopping experience. This means understanding and their needs. And you'll hear from Matt shortly about how we're building the capabilities for consumer insights and analytics in house.
We believe that this is critical to our success, especially as mobility and connectivity play an increasing role in our customers' daily lives. In 2010, we'll execute a pivot on our approach on how we reach customers with our marketing program. The customer is consuming information in very different ways today. The world of print is losing its effectiveness. We're reaching customers today on platforms that didn't even exist 4 years ago.
The customer is empowered in the new world and We're driving change as a result of this. You'll also hear shortly from Hal about driving multi channel capabilities to lead in the new interconnected retail world. It's all about letting the customer shop when, where and how they want. It means that we need to connect all of our assets to create the ultimate shopping experience for our customers. So in summary, we're investing to own the technology and process around connecting with our customers.
We'll drive product authority by creating differentiated product offerings and attaining price and value leadership in the market. And all of this will be presented to the customer in a way that empowers them to control when, where and how they want to shop. So I thank you very much for your time and interest.
Ladies and gentlemen, we're now going to take a 15 minute break.
Our conference will resume at 10:30.
Ladies and gentlemen, please welcome back Diane Dayhoff.
It's great to be back. Sorry that our, break went a little long. We had lots of great talking Going on. But please turn off your phones and put all of your electronics away. I would like to now welcome Someone that most of you have not met yet and that is our President of Online, Hal Lawton, to the stage.
Good morning. As you heard in the previous presentations, a key priority of ours is to leverage technology to create interconnected retail experiences for our customers. Our goal is to let our shoppers shop when, where and how they want by stitching together all of our assets, whether it be our 2,200 stores, our 300,000 associates or the hundreds of special order catalogs in our stores. To deliver an interconnected retail experience, we're focused on 5 key areas. 1, website excellence 2, becoming the special order engine for the company and making it easier for customers to purchase goods not stocked in our stores.
3, building multi channel capabilities such as buy online, pick up in store. 4, Creating new growth and accessibility platforms such as mobile phone applications. And 5, Simplifying complex projects such as kitchen installations, again making it easier for our customers. And now I'll go into a little bit more detail on each of these. We're committed to having a best in class website and are pleased this year to have been named as a most improved website for customer satisfaction by ForeSee and to the Hot 100 by Internet retailer.
As we define it, The first component of website excellence is to serve as a marketing medium. Homedepa.com averages over 8,000,000 visits per week And it's imperative that we provide seasonally relevant messaging and reinforce the Home Depot brand. But we also want to do so in a way that's consistent with what our customers an online experience.
So as you can see
on the slide, we've embraced functionality like video to create a rich, deeper experience. As well, we rolled out a recommendation engine throughout the site to provide a more personalized visit. The second strategy of our website is to serve as a digital apron, which means providing how to information to our customers to build their confidence to take on projects and purchase products. This includes expected features like ratings and reviews, blogs, buying guides and videos. As referenced previously by Marvin and Frank, to be distinctive in this area, we rolled out a community that is staffed by knowledgeable associates Who are equipped with the latest equipment such as flip cams.
They are a differentiator on our website and off our website and they facilitate forums and discussion groups to answer product and project questions. The third strategy of our website is to drive sales. We have over 350,000 SKUs on our website property compared to the approximately 34,000 in an average store. The key to enabling the purchase of these items is a seamless customer experience. As an example, in appliances online, We sell 15 times the assortment online that we have in a store showroom.
But more importantly, we assure a Quality end to end customer experience by doing things by confirming the inventories available in our warehouse, Ensuring the customer purchases the necessary parts and services to complete the job and allowing them to select a date for delivery. The final strategy is to serve as a transaction driver for our 2,200 plus stores in the U. S, Mexico and Canada. We know that the next step for approximately 45% of our website visitors is to visit 1 of our stores. For each store manager, that means that on average, 2 25 customers per day are walking into their store that have recently been on our website.
So we want to make it very easy for our customers to research online and get to our stores. And one way we do this is with our store locator, which provides directions to our closest store as well as details such as the operating hours and phone number. But it also goes a step further and provides additional details such as whether the store offers tool rental, truck rental and or propane refills. Easier and more satisfying for customers to buy non stock goods in our stores. The average store, as I said previously, has Approximately 34,000 SKUs.
In chandeliers and pendants, the average store will have maybe 30 to 40 options with a limited variety of finishes and coordinating items. Online, we have over 1,000 chandlers and pendant lights with a broad range of finishes and coordinating items. And we're not stopping there. We're in the process of digitizing the special order catalogs in our stores. By the end of 2011, we will have added another 150,000 SKUs to our site.
In addition to the dramatic increase in assortment, we will also be launching significant enhancements to our project experience to enable project selling. So let's talk about building multichannel capabilities. Multichannel is not simply the existence of multiple channels. It's about being channel agnostic and fulfilling an endless assortment. It's about enabling actions such as buy online and return in store or buy in store and have the product shipped to your home or buy online and have it shipped to the store.
We're making the investments to build these capabilities we'll be rolling out buy online, pick up in store next year. As Mark referenced, the initiative will be tightly integrated with base sequencing and the first phone to deliver a top notch customer service experience. As well, it will also be integrated with other technical investments such as our mobile applications. And we expect buy online pickup in store to drive meaningful sales with both our pros and consumers. Our 4th area focuses on building a broad range of mobility and accessibility platforms to allow customers to buy products from The Home Depot virtually anywhere at any time.
Customers are increasingly using 2 or more points of contact To discover, research, evaluate and purchase products. They conduct research online before going into the store. They'll stand in the store reading ratings and reviews on their cell phones. They socialize with friends to get retailer and product recommendations. With over 100,000,000 smartphones activated in the U.
S, mobile phones are a strategic channel and they bridge e commerce and brick and mortar retail. We launched our first iPhone mobile application about a year ago and we recently released version 2.1, which you can see on the left side of your screen. And for those in the audience with an iPhone, I encourage you to go to the App Store and download the Home Depot app. And for those with an Android or Windows Mobile 7 phone, We'll be releasing apps for those platforms very early next year. These rich applications not only include the ability to shop, but they also have additional features like an interactive toolbox, in store maps, over 400 how to videos and the ability to purchase and check gift card balances.
In the middle of the slide, you can see our mobile optimized site, which can be used by those who choose not to use one of our mobile applications. It's accessed through the browser on your mobile phone and takes into consideration factors such as screen size and bandwidth to enable a fast and easy access to the key needs of an On the Go shopper. In November, we launched commerce functionality on our Facebook site. This feature is designed to allow customers to purchase seamlessly for product directly from their Wallstream and Facebook. We used it extensively this holiday season during Black Friday and Cyber Monday to offer our Facebook fans exclusive holiday offers.
These enhancements combined with the customer service efforts discussed by Marvin are key reasons why we're consistently ranked as a top social retailer. The final area we're focused on is simplifying complex Customer projects such as special order blinds, water heaters or generators. One category that we're very excited about is kitchens. Currently, the average purchase cycle of a kitchen is 90 days and requires 12 to 14 visits to our stores. The boxes shown here represent our existing store based offerings of in store displays, Kitchen designers and checkout registers of course.
In the Q1 of 2011, we will launch a number of additional features that augment kitchen purchase process end to end. Pre purchase, we're attempting to recreate a digital version of the Manila folder that everyone uses during a renovation. Our customer will go online and create account, then they'll be able to view inspiration galleries, post pictures of their kitchens and other folks' kitchens inside this account. They can chat with a live designer and they can also schedule an appointment to meet with a designer in the store. During the purchase process, a customer will be able to fully collaborate online through their customized account with the designer.
As an example, when the designer completes an initial design in our store, it will be saved and uploaded to the customer's account. The customer can then view the design on their PC from the comfort of their home. They can share it with friends. They can even make modest updates like the cabinet color And or they can leave a change request for the designer similar to how you might leave a comment in a Facebook Wall Street. If a customer does leave a change request, the designer would then receive a notification that a comment has been left.
They would review the notification, make the requested update and save the new version for the customer to review. Once this back and forth process is complete, The customer will then have an additional option of not only paying in our stores, but they can also pay right there online for their kitchen and therefore making it easier to purchase. After the purchase, they will then be able to track their project and provide ratings and reviews once complete.
I hope this gives you some sense of
how we're approaching interconnected retail. Again, it's our goal to fit together all the assets of Home Depot to enable customers to engage and purchase from us when, where and how they want. And now I'd like to introduce Mark Holyfield, our Senior Vice President of Supply Chain.
Thanks, Hal, and good morning, everyone. We're incredibly excited about The supply chain initiatives and working with Hal on the supply chain enablement for interconnected retail. But let me give you an update on supply chain transformation. As you know, about 4 years ago, we began the journey of transforming our supply chain. At that point, we realized that while our supply chain had served the well over its growth years, it had become a competitive disadvantage due to underinvestment in state of the art supply chain systems, facilities and processes.
And our mission was defined as transforming our supply chain, not merely to close that competitive gap, but in fact to actually create a competitive advantage in our supply chain. We're pleased with our progress on this. And while we're nowhere close to done with our full transformation, Thanks to the rollout of our RDCs and our improvements in inventory management, we do see a competitive advantage emerging. But first, what defines competitive advantage in a retail supply chain? The key deliverables of a best in class Supply chain are superior in stock for customers, superior inventory management results, low logistics costs and high service to our stores.
Now there are many underlying dimensions and metrics that are operative in a supply chain, including lead time, Supplier performance, forecasting accuracy and so on. But the real measures of best in class performance will always be in the results. As a mentor of mine used to say, if it doesn't show up in the numbers, it didn't happen. So let's look at how we're doing against some of these dimensions. Here are some results showing our progress over time.
1st, in the area of in stock, looking at our internal measures, You can see a clear improving trend. The trend has flattened a bit recently, but the closer you get to 100% in stock, the harder the progress becomes. But we do still see opportunity in this metric going forward. Let's also look at in stock from an external perspective and we use our find and buy metric for this. In our Voice of the Customer surveys, we ask our customers about their experience in finding and buying all of the products that they came in for.
You can see here a clear trend of improvement from our customers' point of view. Another key deliverable of a best in class supply chain is to serve our stores well, so our store associates can focus on selling, not dealing with freight and inventory management. One metric we've established to track this is the quality of the load on the truck that our DCs deliver to our stores. During the receiving process, using the handheld scan gun used for in store receiving or every single DC load received at the store, We asked the receiving associate about the quality of that load. Was it on time, accurate and stacked properly?
As you can see on the chart, we continue to improve on this metric as we increase central distribution. And finally, one of the best metrics Evaluating the supply chain's effectiveness is the inventory turnover trend, thanks to its clear visibility in financial reports. We've now shown year over year improvement in our inventory turnover for 4 consecutive quarters. And taken in the context of improving our customer facing in stock, The results of our supply chain transformation are becoming clearer. Our turns are nowhere near historical highs, But we've established a clear trend of improvement and a developing competitive advantage.
There have been 2 keys to establishing this trend. The rollout of our RDCs or rapid deployment centers, which represent an advanced approach to flow through distribution and the employment of best in class inventory tools and processes. So let's step back a bit, provide some perspective on our overall supply chain transformation, where we started and where we're going. When we started our transformation, one of the key issues was how freight was moved to our stores And particularly, our emphasis on direct to store distribution for the majority of our goods. And this is how our network looked in 2,007.
In the middle, you can see the various flow paths for our product from vendors to stores. This was dominated by direct to store distribution. And this pass is absolutely right for many of our product flows, but not for anywhere near 60% of our COGS. We operated 10 transit facilities, which consolidated and cross docked less than truckload shipments or LTLs to create freight savings. And while these created those freight savings, Because they simply cross stock purchase orders that had been written as single store orders, they did not assist in in stock or inventory productivity.
They were subject to vendor minimum shipment quantities, so we often didn't place orders that we actually needed to be in stock because of those minimums. So 80% of our COGS was ordered in individual store orders creating no inventory or in stock leverage. We also operated import DCs, but only for import goods and often with a limited mix of product departments. We operated carton DCs, but only for domestic goods and a limited seasonal product range. Between the two, we operated about 25 of these stocking locations.
Due to the number of them, we didn't gain much leverage from productivity as their volume was relatively low. We also operated 26 lumber DCs that handled goods distributed to stores on flatbeds. And these operated very well for the 200 to 250 Exclusively lumber SKUs that were carried there. So summarizing, direct to store distribution dominated our network, Ten transit facilities provided freight savings, but little in stock and inventory leverage. Where we did have stocking DC capabilities, they were fragmented in their scope And we had a nice little lumber at work, but with a limited product range.
So one of the first supply chain transformation tasks was to develop a comprehensive network model that would guide our distribution infrastructure decisions going forward. The result of that model told us that we needed to grow our central distribution radically. In fact, where previously 60% of our goods were ordered direct to store and 20% through transit facilities, that needed to change to about 75% to 80% of goods moving through central distribution. To get there quickly, we developed the RDC or the Rapid Deployment Center model and began migrating to that rapidly. As the cornerstone of our optimal flow network, the RDC was the logical place to start.
Because of handling efficiency, low fixed costs and inventory efficiency, RDCs represent a competitive advantage compared to a network based heavily on traditional big box DC operations. We call our RDCs rapid deployment centers because they're quite different than those traditional big box DCs. And they're a superior model, thanks to their focus on flow through distribution. In these flow through centers, product never gets put away into storage or to a pick location and that saves DC labor, nor does the product simply cross the dock in a store ready order requiring the vendor to pick orders upstream often days in advance of shipment time. Thanks to employing best in class IT and product movement technology, these rapid deployment centers create logistics And inventory efficiency through intelligent aggregation of store demand and reallocation upon receipt.
They also consolidate our shipments for more efficient transportation. So the RDCs, thanks to last minute allocation and flow through of inventory, They provide the inventory management advantages of a stocking DC coupled with the logistics cost advantages of flow through. And since RDCs don't stock goods, they're rapidly accretive to company inventory turnover. They're low in capital investment compared to big box stocking DCs. Now the results of our RDC program have been better in stock at our stores, faster response to out of stocks, improved inventory turnover and simplified store operations.
We're currently serving 1678 stores and we flow over 41% of the COGS for those stores. 64% of SKUs in RDC served stores come from their RDCs. Over 600 vendors are on the program and we continue to add more each week. We're opening 2 RDCs next week in Westfield, Massachusetts and Ontario, California. We'll open the 19th RDC in Salem, Oregon in January, at which point we'll be serving 100 percent of our U.
S. Mainland stores from RDCs. We're on track to deliver the RDC business case, including an expected 40 basis points of gross margin improvement. The speed of this rollout continues to impress. In January, the Home Depot team will have achieved the feat that few other retailers can match, setting up an entirely new advanced DC network, serving almost 2,000 stores in a little more than 3 years.
As I mentioned previously, we're following a strategy that defines the optimal flows of product to our stores. And here's what that in state network looks like. The model provides 4 distinct flow paths for product to our stores: direct to store, flow through via RDC, stocking DCs and finally bulk DCs for flatbed product. We've rationalized and combined our previous import and carton DCs into now 14 combined stocking DCs. These create logistics efficiency and inventory efficiency.
Our last two transit facilities are in the process of closing now. We've more fully leveraged our lumber bulk DC network with additions of other bulk products and plan to do more of this going forward. In 2011, our next steps will be to continuously optimize and rationalize our network around these 4 flow paths. One example of this is our import transload program we're piloting for our imports that arrive in Southern California ports. This program will allow us to aggregate our import purchases more efficiently and utilize postponement to make better inventory decisions when imports arrive in the U.
S. Now another differentiator of our supply chain results has been our focus on inventory management. Over the past 4 years, we've increased our central management of inventory from about 20% of store SKUs to over 80%. We've implemented solid merchandise financial planning processes and tools and we've improved our seasonal inventory management. And let me take you through an example that highlights some of our most recent work in implementing best in class forecasting tools.
In 2010, we implemented Teradata's demand chain management forecasting software. In the upper left corner, you can see the seasonal profiles used by our legacy house forecasting system. The process was pretty course and did not get down to SKU level. Essentially, Our seasonal profiles were based upon 9 U. S.
Department of Agriculture climate zones. These were applied to all SKUs on central replenishment as though these climate zones applied to virtually everything. Helpful, better than nothing, but not at a level of granularity that state of the art forecasting works So as an example, let's talk about tomato cages from our outdoor garden department. In our old system across the climate zone And for all SKUs in the class that includes tomato cages, the same seasonal profile was used. In one store in that zone, the peak sales might occur in March And in another store, the peak might be in April.
In 2010, we implemented the Teradata DCM package. This immediately gave us the capability to manage at a more granular level, both regionally and at the product level. This tool manages seasonal profiles more effectively. It's updated for every store SKU every night and we can easily track our forecast accuracy. The system uses up to 4 years of store SKU sales history, automatically manages calendar shifts, adjust for sales dilution due to out of stock, manages outliers effectively and separates regular demand from promotional demand.
As we go forward into 2011, we'll continue to leverage the advanced capability that this tool provides. In 2011, we plan to use advanced clustering of seasonal selling patterns at the store SKU level. For example, here, We can see that the same product, tomato cages, performed differently in different geographies, and they performed differently than other products in their class. With the new tool, we're able to identify this and develop unique seasonal profiles for any given product in any geography, resulting in better in stock and inventory management. Our next step in 2011 will be to implement Distribution center level forecasting and replenishment, leveraging our Teradata platform more fully.
We're making similar progress on our supply chain in Canada and Mexico. In Canada, where we have the most opportunity at this point, we're pursuing a strategy similar to the U. S, Increasing our central inventory management and our central distribution. In terms of central inventory management, we are leveraging the forecasting and replenishment capabilities of the SAP tool. From a distribution perspective, our target in Canada is to achieve 75% to 80% of our flow through central distribution, where only about 15% flows that way today.
In Mexico, we've already made quite a bit of progress in our supply chain. In 2,009, we opened 2 greenfield distribution centers, 1 in Monterrey and 1 outside Mexico City. We currently leverage these DCs to handle about 70% to 75% of our COGS flow for our stores there. In terms of central inventory management, in Mexico, We manage virtually all SKUs using centralized inventory management today. We expect to continue to gain leverage from these capabilities.
And similar to the U. S. And Canada, we expect to flow about 80% of our goods through central distribution. So you can see that the supply chain at the Home Depot is not limited to the U. S.
As we build competitive advantage in other markets as well. Our supply chain transformation continues to be quite comprehensive. We're addressing literally every part of our supply chain. As we think about where we are on the roadmap, a lot's been accomplished, but a lot remains to be done. We've established the disciplines of solid merchandise financial planning and installed advanced forecasting tools.
We're continuously increasing our central replenishment and central distribution penetration. We're in the process of establishing leading supply chain execution tools such as warehouse management systems and transportation management systems. But there remains much to do. In 2011 beyond, we'll leverage our existing capabilities further and more fully utilize and optimize our new network. We'll implement improved DC level forecasting and replenishment, import transload capability and create better visibility and analytics around our supply chain flows.
One of our most important initiatives will be developing our direct to customer supply chain so that we can deliver on our interconnected retail objectives that Hal just talked about. We're on track to deliver the expected 40 basis points of margin improvement from our RDC business case and achieving the objectives on this roadmap will allow us to deliver more. Our supply chain transformation continues. We're executing against our 2010 plans and meeting our objectives. Our momentum in supply chain is increasing as we enter 2011.
We're leveraging and optimizing our logistics network, completing the RDC rollout and continuously improving our inventory management. We're on track to deliver margin improvements and competitive advantage, and you should expect to see further improving results from our supply Thanks very much. Now I'd like to introduce my IT colleague, our CIO, who has put in place much of the technology that drives this transformation in supply chain, Best CIO in Retail, Matt Carey.
Thanks, Mark. Kind words. Good morning. Is everybody awake? Good morning.
At our last investors conference, I gave you an overview of where Home Depot's retail capabilities were compared to World class retailers somewhere around 1991. Some of you might recall this slide. Today, I'd like to update you on the plan that we discussed at our last investor conference. I will also share with you some of the key focus areas we have for the next 18 months. And finally, I'd like to update you on Some new capabilities that we think will create a competitive advantage for The Home Depot.
So let me update you on what we're doing. While we still have a lot to accomplish, we've made great progress towards modernizing The Home Depot's systems and technology. This timeline was a great measure of what was a baseline of the gaps that we had in our retail technology. However, we no longer use this timeline to measure ourselves. As we began to implement these capabilities With state of the art technology, we are finding that we are actually leapfrogging best in class retailers' capabilities.
One example of this would be our First Phone implementation. Mark Powers discussed the functionality it provides our store operators and it's pretty significant. We are the only retailer with that functionality enabled across our entire U. S. Store base.
And we think about each of these retail capabilities, such as auto replenishment or store mobility in that way. We not only modernize the systems, technology and capabilities, but we also find ways to take it to the next level and create a competitive advantage. We do this by partnering with our business leaders and living up to one of our core philosophies of being retailers first and technologists second. Mark, Craig, Marvin, Hal and Mark Powers have all spoken about examples of where we partnered with the business leaders to solve tough business problems and create efficiencies or new capabilities. We've added numerous capabilities in the last 18 months and many of our core capabilities are maturing nicely, while others are in early innings of development.
The full green circles on this slide are completed projects that we have delivered and have implemented. Our goal is that all of these capabilities are best in class when we are complete with our transformation. You've heard Mark Powers discuss how base sequencing has improved customer service and reduced cost. We have enhanced assortment management for our merchants and started down the path of integrative forecasting. As you can tell, we're making excellent progress towards our 5 year goal of having best in class retail capabilities.
In the next 18 months, we plan to complete several projects and enhance our competency in several areas. I'll talk to you about our multi channel integration or interconnected retail. Craig also discussed what Additional merchandising transformation abilities the merchants will have in the future. We have a clear path to deliver best in class tools for our associates at The Home Depot. But the bigger picture is the next level of our evolution, Developing and applying superior analytics.
While we have a lot to do, we have shown that we can successfully implement hardware and software programs at the Home Depot and obtain strong return on investment. In retail today, leveraging the data assets In the enterprise, by applying superior analytics is a necessity in delivering better decisions. This chart is a framework for how we think about analytics at The Home Depot. It represents the need for more creativity balanced by the need for more rigor and discipline. We have areas in our business with different levels on this spectrum.
Some of our analytics abilities will move up the line as we enhance our competency. Some, we do not need to move up the line. An example of a capability that requires the need for more creativity would be our customer analytics. On the other end of the spectrum would be our labor forecasting analytics, which requires much more discipline and rigor. Both of these are in early innings.
Previously, we had outsourced our customer analytics here at The Home Depot. Now we believe that customer analytics is a capability we must have in house. So we began the journey of creating a world class customer analytics capability inside The Home Depot. We think there is value to unlock by understanding our customers at a very detailed level. To help you understand how we look at this, let's go into more detail.
Previously, we have had the capabilities to analyze our market baskets and segment our customers at a high level. But we think there's additional benefit in further understanding our customers And then connecting this insight into our assortment and space management tools. For example, we want to know more than if a customer is a professional contractor. We need to know if the Pro is a roofer with less than 5 employees or a master electrician with no employees. We think this capability will be more and more critical as the importance and prevalence of digital marketing and advertising Gain's acceptance by our customers.
And finally, we will be increasing our competencies through superior analytics And building a competitive advantage through the science of retail. Thank you for your time, and it's now my pleasure to introduce The best CFO in retail, Carole Tomac.
Good morning, everyone. Thank you for joining us. Our last investor conference was in June of 2009 when we were in the middle of the Great Recession. While economic recovery has been modest, it's good to be speaking to you when sales and profits are going up, not down. Looking towards 2011, we aren't projecting robust economic growth.
But as you heard partners, there's a lot of internal momentum at The Home Depot. The actions we are taking position our company for solid financial performance and shareholder value creation in the years to come. Today, I'd like to cover 5 topics. 1st, quickly update our 2010 financial guidance 2nd, share with you our point of view on the U. S.
Home improvement market 3rd, give you our 2011 financial targets 4th, update you on the progress that we're making towards our long term financial targets and finally, wrap it up with a discussion on capital allocation. So let's get started by taking a quick look at our 2010 forecast. November turned out to be a great selling month for us. Further, we are projecting some additional cost favorability in the quarter. As a result, we are updating the guidance we gave you in November and now project that our sales will increase by approximately 2.3% for the year and that our earnings per share from continuing operations will increase by approximately 27% to $1.97 Now remember that we guide off of GAAP.
Ordinarily, we wouldn't lift guidance early in a quarter, but our sales trends continue to be very good. So we are more than comfortable with this guidance. Turning to our view of the U. S. Home improvement market.
In 2011, we believe we will grow in the 2 ish percent area, and let me tell you why. I want to start with how we think about sales forecasting. As you know, we've been around for 31 years. For our 1st 20 years, we used GDP growth as a proxy for comp sales growth and would add to that sales from new stores to develop an annual sales forecast. We then shifted gears and started using type of spend.
In other words, housing turnover, home prices, credit availability and other items as the basis for comp sales growth. And we would add to that projected sales from new stores. For the last 4 years, we've used private fixed residential investment as the basis for sales growth with very little growth coming from new stores. As we stand today, We're going to revert to using GDP as a proxy for sales growth. And over the next several charts, I want to explain our rationale.
Let's start by reviewing housing turnover. Over the years, there's been a lot of emphasis placed on this metric as a good indicator of home improvement sales. Well, it was a good indicator. But in today's environment, it's just not that relevant. The R squared or correlation to our comp sales is now 0.58, down from 0.86 in 2,007.
Looking to 2011, The housing turnover forecast shows fairly large percentage increase, but actually very small nominal movement. Further, turnover is less relevant to the overall housing market as it is less than 5% of housing units. So we don't think as a singular measure, housing turnover is a good indicator of future sales. Now credit used to be a pretty good predictor. But as we see it, the credit picture is nothing but a puzzle.
There has never been a more affordable time to take out a mortgage. Principal and interest payments have fallen to less than 20% of monthly income, but also never a more difficult time to get a mortgage, which you can see by looking at the change in underwriting standards. 88% of all mortgages underwritten in 2,009 were low risk. We looked at both foreclosure and home prices to see if they may be good sales indicators. And again, we saw they just aren't that relevant, not a major driver of comp sales.
Now when we look at the age of housing stock in this country, where 60% of all homes are older than 28 years. We don't see age as a predictor of sales growth, but rather as an indicator of the type of spend. This is further supported when you look at home improvement spend by occasion. We all know that the home improvement market is smaller than it was in 2,007. It's interesting to see what type of spending drove the decline.
Renovation and major repair spending, the bottom two boxes on this chart will have dropped the most. The dollar spent for simple repair has remained about the same and dollar spent on consumables has actually increased. All of these factors, along with the factors that Craig described, suggest that we will continue to see relative strength in our core repair and remodel business. Now as Frank described, the change in private fixed residential investment has had a pretty tight fit to a change in our U. S.
Sales. So it's been a very helpful tool in explaining what happened. But of late, our comp sales have disconnected from this metric, at least directionally. Further, we haven't seen a very accurate source for PFRI forecasting. So we don't think, as a singular measure, this is a good predictor of growth.
So when we step back and look at this broadly, we know that housing's grip on the economy is as loose as it has been in 60 years. We believe our former approach to sales forecasting needs to morph and that going forward, our sales will be more correlated with the broader economy, population growth, job creation and consumer spending. Working with advisors, our current thinking is that our business will grow at the rate of GDP As discussed, we also believe that certain indicators like the age of housing stock are helpful in determining the type of spend in our stores. In the U. S, 2011 GDP forecasts range from 1.8% to 3.9% and there are some beliefs that the high end will get revised downwards.
So for planning purposes, we are working with a 2 ish number for 2011 GDP growth. Given that 90% of our sales are in the U. S, our view on U. S. GDP is the most important aspect of our 2011 sales growth forecast.
So turning to our thoughts on 2011. The majority of our sales growth will come from comp sales. In 2011, we are planning to open 10 stores with 7 of those stores opening in Mexico. From a sales growth perspective, we are projecting sales growth in the range of 2% to 2.5% with low single digit comp sales. We've got some tough comparisons in the first half, So we think our sales growth will be stronger in the back half than the first, but we are planning positive same store sales in the first half.
From a gross margin perspective, we are projecting moderate margin expansion as we start to reap the benefits from our RDC deployment and continue our merchandising transformation. From an expense perspective, we are projecting modest expense leverage and I'll talk about expenses in a minute. A few other items, we are projecting operating margin expansion of 30 basis points to 40 basis points, at tax rate of 36.9 percent, resulting in earnings per share growth of 7% to 9% before share repurchases. This EPS guidance is based on our outstanding share count as of the end of Q3. For fiscal 2011, we are targeting about $2,500,000,000 in share repurchases.
Assuming we purchase the shares ratably over the year And coupled with the shares we expect to repurchase in the Q4 of 2010, earnings per share after the impact of share repurchases should grow in the 11% to 13% area. We've done a good job of managing expenses, And we will continue to employ best practices to drive productivity. For example, you heard Marvin and Mark Powers talk about their sixty-forty initiative. This is a key productivity driver. Looking to 2011, we do see some cost pressure in a few areas.
First, we've got about $50,000,000 of expense good guys in 2010 that won't repeat themselves in 2011. 2nd, we are projecting large state mandated increases in payroll tax, rising medical costs and higher credit card discounts due primarily to higher bank card fees. As a result, we expect Expenses will grow at about 70% of our sales growth rate in 2011. Now moving to our 2011 capital plan. We plan to spend roughly $1,300,000,000 in 20.11, up about $200,000,000 from our 2010 forecast.
Our capital spending will support the various initiatives you've heard us talk about today. In 2011, we are projecting depreciation expense of about $1,700,000,000 down slightly from 2010. Now I'd like to pause and talk about our store investment philosophy. From an overarching philosophical perspective, we view our stores as working warehouses. Therefore, you should not expect to see major overhauls, but rather investments to maintain and periodically refresh our stores.
We look at vesting for both a capital and expense perspective. And as you can see, the investment in our existing stores is increasing. We are targeting over $1,000,000,000 of reinvestment dollars in 2011. From a working capital perspective, we've seen 4 consecutive quarters of inventory turnover improvement, and we expect to see improvement in 2011 and beyond. We project the change in net working capital to be a small source of cash in 2011.
Moving to our debt capital structure, we have staggered debt maturities across 30 years. $1,000,000,000 of outstanding indebtedness comes due in 2011 and it is our intent to refinance that indebtedness next year. As for incremental financing, as you know, it is our intent to maintain our strong investment grade, which ensures access to the A2P2 commercial paper market. We use adjusted debt to EBITDAR as the guidepost for our rating and plan to maintain our debt levels such that our adjusted debt to EBITDAR does not exceed 2.5 times. We are projecting an adjusted debt to EBITDA ratio of around 2x in 2011, which suggests we have about $4,000,000,000 of additional debt capacity.
Today. We don't plan any incremental financing at this point. Now from a cash flow perspective, We are projecting cash from the business of about $5,400,000,000 next year. After capital spending and dividends, We expect to have about $2,500,000,000 of excess cash, which we intend to use for share repurchases. Moving to our long term financial targets.
Our long term financial targets are to deliver a double digit operating margin of 10% and a return on invested capital of 15% or higher. We call this our 10, 15 target. Based on our 2010 guidance, we are making good progress towards this target as we project an operating margin of 8.5% in 20 10% and return on invested capital of about 12.6%. Looking ahead, our ability to reach the 10% -fifteen target is dependent upon a number of requirements. And given our performance, we've been able to tighten up those requirements.
In other words, today we're providing you with a road map for hitting our 10, 15 target. Clearly, our business performance won't stop improving once we hit the target. But today, we just want to talk about the target, which we believe we will hit by 2013. Now you've heard us talk about a target of $3.50 sales per square foot. That's a good target, but it's not necessary to reach a 10% operating margin.
We believe we can reach a 10% operating margin at closest to $3.10 sales per square foot. Our return to double digit operating margin is also dependent upon gross margin expansion and continued operating leverage. So let's take a deeper dive into each of these requirements. 1st sales, we need a sales per square foot increase of roughly $22 to hit our 10% operating margin target. We believe some of the increase will come from market growth and some from market share gains.
Between now and 2013, a $22 square foot increase represents a compounded annual sales growth rate of approximately 2.5%. From a gross margin perspective, I thought it would be helpful to give you a historical perspective. At our June 2009 investor conference, we projected a 2,009 gross margin rate of 33.7%. We actually delivered a 33.9% rate in 2,009. This year, we anticipate another 40 basis points of margin expansion, so that our ending 2010 gross margin will be approximately 34.3%.
To reach an operating margin of 10%, we need an additional 50 basis points of gross margin expansion. Looking ahead, we are comfortable that we can grow our gross margin by another 50 basis points by 2013. This gross margin expansion will come from our new merchandising tools from the benefits we will gain from our supply chain. Over the next 3 years, we are projecting 40 basis points of margin expansion from our supply chain and 10 basis points of margin expansion from our new merchandising tools. Now here's the math of the future gross margin contribution coming from our supply chain.
Gross margin expansion will come from a higher penetration of product flowing through our RDCs, coupled with a lower cost of supply chain expense as a percent of flow. By 2013, we believe we will see 40 basis points of margin expansion coming from our supply chain. On the expense side, Our business model defines operating leverage. In other words, higher sales more leverage. We've also done a nice job of managing expenses.
As discussed, we've got some expense pressure in 2011, but over time, we believe expenses will grow at about 50% of the rate of our sales growth. So when we add it up, the path to our 10, 15 target is clear. We will grow shares with the market and capture share. We will grow operating margin both through gross margin expansion and expense leverage driven by higher sales per square foot. And we will grow return on invested capital through operating margin expansion and by carefully allocating our capital.
Now turning to a quick discussion on capital allocation. First, let me speak to longer term capital spending targets. We think our annual capital spending will be in the range of $1,300,000,000 to $1,500,000,000 Over the next 3 years, on a cumulative basis, the largest area of spending will be in store reinvestment as we care for our aging store base. The 2nd largest area of spending is IT and supply chain as we continue to invest in our multichannel interconnected experience. From a new store growth perspective, We're planning to open approximately 44 stores over the next 3 years.
Of that, 20 are planned to open in Mexico. We are committed to returning capital to our shareholders in the form of dividends and share repurchases. Our dividend principle is to target a payout of about 40% of earnings. Today's payout is higher than 40%, And we're willing to maintain this higher payout given our earnings current earnings compression. Over time, we will earn into a 40% payout.
It is our intent to raise the dividend every year. Our share repurchase principle is to use excess cash to repurchase shares. And finally, from a return on capital perspective, our goal is to maintain a high return on capital, benchmarking all uses of excess liquidity against value created for our shareholders through our repurchases. We've been repurchasing shares since 2002. In total, we have repurchased 817,000,000 shares for $29,500,000,000 As of the end of the third quarter, we had 10 point $5,000,000,000 remaining in our share repurchase authorization.
And by using excess cash generated by the business, we can complete our share repurchase program over the next several years. As mentioned, we are targeting $2,500,000,000 of share repurchases in 2011, funded with cash generated by the business. We could raise debt capital to complete a portion of the repurchase authorization. The credit markets are robust and interest rates are low, but it is our point of view that interest rates will remain low for the foreseeable future. Further, our business is just showing signs of stabilization.
So we're not in a hurry to raise that capital. In closing, today you've heard us talk about our 3 legged stool, customer service, product authority and disciplined capital allocation tied all together through an interconnected multichannel approach. We have been employing a consistent strategy and delivering exceptional value. Looking ahead, the power of the Home Depot will be seen in our financial results. So we really want to thank you for your time today, and we're now going to break into our and A session.
So I'd like to invite my partners to the stage for questions.
Thank you.
We're going to let Frank say something.
Just before we get started with the Q and A, I want to recognize one of our colleagues here in the room. On Monday, Eric Peterson, who's our Senior Vice President of Merchandising for Building Materials, Announced his retirement from The Home Depot effective March 2011. Eric has been with The Home Depot over 17 years. He's been in the home Improvement industry about 40 years. I think every single one of us here on the platform would echo the view that there is no one in the business that better Our culture and our values.
And Eric, thank you. Thank you just very much.
Now we'll continue with our question and answer period. We have 4 people in the audience: Tammy, Jeff, Barbara and Anna. So if you have a question, if you would please raise your hand And wait until the microphone gets there so that the people on the web can actually hear the questions as well. Also, if you'd please state your name and the firm you're with before asking a question, that would be great.
Good morning. It's Matt Fassler from Goldman Sachs. A question about your framing of the new paradigm for the home and the way customers are thinking about their homes. First of all, Craig addressed how you're adjusting your merchandising In this context, can you also speak about things like space allocation, inventory allocation and labor dollar allocation As consumers' priorities are changing. And then related to that, you didn't address home price declines, which I guess are part of what's changing consumer psychology.
That seems To be a part of the macro backdrop that unlike almost everything else isn't getting better. If you could address how that factored into your macro thinking? Thanks.
Okay. Great, Matt. And I'll let Craig and Marvin and Mark address the question on how the view of the consumer Ripples through our merchandising decisions, space allocation and labor allocation. But just as Craig was outlining, you go through different parts of the And you say, gee, we can approach this in a different way and change space allocation just as we do that on the physical space. Marvin and Mark also do that on our capital allocation our labor allocation as well.
And then maybe Carol will address the question on home price decline.
Amit, when we look at the space by category, first of all, our portfolio strategy drives the decision making that we'll do on space. And as I shared, when you look at what's transpired with the customer, again, you pointed out home value. In the Past, the customer would potentially think about putting the kitchen in as a result of the fact that it would raise the home value. And that's certainly changed going forward. So things like moving space from our kitchen showrooms, putting it more into vanities, for example, are the Type of moves that we'll make as we look forward, to begin to continue to adjust our presentation And the breadth of assortment in a given category to really look at where the customers' needs are going forward.
And Matt, from a labor Allocation standpoint, and we talk a lot about alignment. And so when Craig and his team focuses on driving specific categories, We, in turn, will make sure that we allocate the proper labor to ensure that we can drive the category from a customer service expectation. As an example, we know in our stores we have categories that are what we call high assistance categories where customers require us to help them with the project in certain categories that are more self serve. But as we look at priorities for the Q4, for the first half of next year from a merchandising perspective, It is my responsibility and Mark's responsibility to ensure that we allocate labor effectively to those areas to support the sales initiatives and the service initiatives for Those specific categories.
Mark, do you think that?
No, I would just add to that. Upfront, absolutely, what Marvin said is 100% accurate. Also, our labor system is a transactional based labor system. So as transactions take up in certain categories, the labor then is thus Allocated to that category that keeps us current where we are deploying the labor wherever the demand is.
And by its absence, it doesn't mean that we didn't take housing prices into consideration. There are a number of other things that we looked at, Matt, housing prices, permits, and on and on and on. Broadly speaking, we just believe that housing's grip on the economy is as loose as it's been in 60 years and therefore we think broadly speaking, at least for 2011 will be much more correlated to GDP growth. Jeff?
Colin McGranahan at Sanford Bernstein. A philosophical question. Given that a big chunk of the margin expansion So far and going forward is on gross margin and thinking about the legacy of Home Depot where the gross margin is kind of limited and any savings We're driven back into special buys and to drive market share and transactions. How do you think about balancing that off between Reinvesting back into new lower prices and reinvesting to really drive market share gains and transactions in what's going to be a fairly stagnant environment.
Yes, Colin, great question. And one shouldn't interpret from the chart that the gross margin Expansion that we've represented going forward in 2011 is all the gross margin I mean all the benefit that we see in the business. We see a continued need to reinvest that in terms of pricing. Craig and the merchants have a very robust new lower pricing program that's Going on for quite a while now and that we see actually gathering steam within our stores. Greg, do you want to add anything to that?
Yes. No, I mean, it is a great point, and it's been historically a value proposition for the company. Where we look at the gross margin opportunity is where we're truly creating a competitive advantage like in the supply chain, Well, we're taking real cost out of the business in a way that's differentiating us from the competition. When it comes to the merchandising tools that we've implemented, it goes right back to what Frank said. Much of that is being reinvested to continue to lower prices for our customers.
Good morning. Michael Lasser from Barclays. It would seem like a lot of the Initiatives that you provided great detail about this morning will ultimately manifest at least partially through share gains. So can you provide some more quantification about what your expectation of the course of share gains is going to be over next year and then over the next couple of years? And secondly, on the new labor planning integrated labor planning, how much Of that, are you going to like to fall to the bottom line?
And how much are you going to reinvest in more labor hours? Thank you.
So Michael, I'll comment and then my colleagues may want to add. On the labor savings, on the forecasting, Really, that's part of the journey on the forty-sixty and turning that to sixty-forty That we'll take those hours that we're tasking hours, in effect behind the curtain and turn them to customer facing Ours. And the first part of the question was? Share
gain.
Share gain. So to be honest, Michael, we don't it's hard to Start a year and say, okay, we're going to gain X points of share. We have a hard time, frankly, with the external data on share as it is. For every category, we obviously we have objectives to gain share, but it's not laid out sort of by category. Here's the number of points to share we want to pick up.
From a labor standpoint, sixty-forty is an initiative based on where we believe we should be from a service standpoint to our customers. It's not a magic number. It is a goal that we're marching toward. We have a very detailed project plan where we know specific initiatives, specific technology enhancements. We can tell you The amount of hours per week, per month, per year that we're going to get from a productivity standpoint.
That being said, every quarter, Frank and I talk about the decision to allocate more and to make a decision of at what point will we take it to the bottom line. We think we can do 2 things. We believe we can drive service improvement and concurrently create productivity. To remind you, we Created 35 basis points of payroll leverage in the Q3. We think as long as we grow the sales line, we can continue to create leverage and we plan to do that.
But what we do is we evaluate this on a week to week, month to month, quarter to quarter basis. And the moment we believe Then we've met the value proposition for the customers from a service perspective, then we will start to allocate more to the bottom line. We're not there yet, But we still can be productive within that same framework.
It's Mike Baker from Deutsche Bank. How are you?
So I have two questions. One, for your pro business, have you tested it all? Are you thinking about it all doing the in home service model? We have a Home Depot employee come into the home and help sell the project rather than, as Ronny said, the customer needs to go to the store 10 or 12 times. And then the second question, for Hal, you had said that about 225 customers come into a store every day on average who have been online.
What percent of that is total customers who are coming to this store? In other words, how many of your customers are shopping online beforehand? Thanks.
Al, why don't you address that first and then I'll on the in home selling.
Yes, absolutely. So the 200 we think about 45% of our website visitors each day are coming online, researching, getting additional product and project information and going to our stores that equates to about 2 25 customers a day per store. And I think roughly that's about 15%, 20% of total store transactions per day.
Thank you. And we do have an in home selling model. 1 of the businesses that Marvin runs is what we call our roofing, siding and windows business, RSW, W, where we send sales consultants directly into the home.
So continuing on the pro conversation, Deborah Weinfood from Citigroup. Frank, continuing on the pro conversation, you gave a specific dollar amount in terms of how much the pro currently spends with you at this, I think it's about $5,000 Can you talk about the opportunity there and where else you think they're spending? And then I think Marvin, you laid out a specific initiative. And then Mark, if you can talk about any customer analytics You've already done around the Pro customer and where you are with that right now.
Okay. Thanks, Deb. I hope we'll remember all of the questions. On the Pro spend, the first thing, just For clarification, we weren't saying that the Pro spends $5,000 each Pro spends $5,000 but that on average they actually spend less. And when you think about a pro customer, you know he or she isn't living off of less than $5,000 spent.
So from that, the first conclusion is they
got a big share of
wallet outside the Home Depot, which we know. And then there's a second part of that, which goes, you can spend a lot of time thinking about how you gain that share of wallet. And we do spend some time thinking about that. But what Marvin was articulating was we think for our business, We've got a lot more opportunities making sure that the folks that are in there now who are using us as a store of convenience Have an even better experience as they shop in the store for convenience. And then address some additional questions around the customer knowledge,
Yes. So Deborah, to Frank's point, I think the most compelling fact for us was that the pros shop us for more convenience than what we had Believe in the past. I think we had a self developed idea of what we were to the Pro customer, but the more time we spent with them in focus groups in Town halls, we started to understand it. But really the key for us was the deeper analytics. If you look at the Pro business, the way we measured it in the past and the way Our competitors measure it.
They look at primarily Pro debt sales and commercial credit sales. If you take those two measurements Pro has outperformed retail this year. But if you think about that for a second, intuitively it just doesn't make sense in this environment. So the moment we start to go deeper in the analytics, we understood a couple of things. We understood How pros shop, the number of departments they shop in, the amount of times they come in the store, the number of stores they shop.
And when you layer the characteristics Onto all the data we had on file, we realized that our pro business was actually down. And it was down almost to the month when the financial crisis occurred and liquidity dried up in the marketplace, which makes a lot of sense. Now that business is back from negative to now virtually flat. But that's how we measure it because we believe that's a more accurate measurement. So that's the deeper analytics to really understand that The value proposition we thought we were providing wasn't really working.
So what we're going to do is that we're going to accept the reality that we are a store of convenience. We have a lot of locations, great locations, And our goal is to take advantage of those pros that come in and shop us to get them in and out faster. And that's why a lot loading, designated cashiers, focusing on service during peak times, Very similar to what we did on the retail side. So the way to sum it up, we're taking the things that worked on the retail side of the business, simplicity and service, we're transporting those things to the Pro side of the business, but specific to the needs of the Pro customer. And we believe by doing that and staying as committed to it As we have on the retail side, we're going to start to see improvements.
Matt, do you want to talk about the customer analytics at all? Do you want to add?
No. I mean, Marvin's point, we got under the covers and really understood what was going on. And we'll have more insights as we go through time. We're discovering new things constantly. So to get the information, Deb, in terms of
Inside a Pro segment, the differences in terms of how we service a Pro, if they're running multiple crews versus, as Matt pointed up in his presentation, A single master trade specialist who is doing electrical work on his own, to be able to get that understanding then helps us from a merchandising standpoint Understand how we're actually fulfilling the needs of those different type of pro segments within a category. And that becomes valuable to us in terms of establishing Both the product as well as working with Marvin's team to figure out how we then better service that customer.
And wouldn't you agree that owning the data allows us to be much more nimble in this regard?
That's right, Carol. Absolutely.
It's Laura Champine from Cowen. And Carol, On the SG and A goal after 2011 to grow dollars at about half of sales, that looks like a pretty powerful goal given that your sales assumptions don't appear aggressive. And I'm wondering what is driving that. It seems like payroll management could be the biggest driver. But to the extent that you're comfortable, Can you rank and quantify the opportunities for savings on SG and A expense over time?
Yes. Let me just start with 20.11. If we back out $50,000,000 of good guys that won't repeat themselves in 2011. And if we didn't have these discrete cost pressures that we're faced with in 2011, Our expenses will be growing in 2011 at 50 ish percent of our sales growth rate. So what we set forth for 2012 And beyond is really what a more normalized 11 would look like.
And as we look at 2012 and beyond, clearly, what Mark and Robin are doing in terms of The sixty-forty initiative and driving productivity is a key piece of this. We can cover our merit increases with productivity enhancements and yet drive more hours to selling than tasking. So that's a big piece of the equation because payroll is about 50% of our sales.
Thanks. Chris Horvers, JPMorgan. It seems like in 2011 you're implying At best, a similar level of gross margin expansion as you're going to see in 2010. As you think about your progress in the merchandising and supply chain journey, When should we expect gross margin to expand at a faster rate in 11% versus 10%? Is there some discrete items That occurred in 10 or 11 is an investment on the pricing side, perhaps it's driving that down.
As a second question on the financial leverage side, Is part of your patience maybe thinking that it's more cost efficient to go to the market in March when you have to do the overall $1,000,000,000 refinancing and save some costs there.
So first on the gross margin, I do go back to Colin's comment. We have a view on what we also need to do to continue to drive great values for our customers. So you should expect that. I mean that's all of these things are a bit of a balance. And I'll let Carol talk on the I wouldn't take the implication that you had in your question on the debt market.
Right. As we said today, we're not in a hurry to access the debt capital market for any incremental financing.
Hi, Brian Nagel from Oppenheimer. I do want to focus on gross margin, specifically, the RDC comments. So today you talked about the 40 basis points of improvement from RDCs. The first question is, does that compare with what we've heard from the 20 to 40 for a while, you're taking to the high end. Then also, so if you look at the 40 basis points improvements through 2013, you have almost your whole network now built out this year.
So what improvements we've seen thus far as far as from the RDCs?
Well, to answer
the first part of your question, on the Previous guidance of 20 to 40, we feel really good about the 40, and so that's why we commented on 40 today. And really, it's just increasing the penetration. You saw Mark's Chart of about 40% of COGS running through RDCs today, increasing that penetration to closer to 70% and then dropping the expense as a percent of flow by about 1%. And if you do the Roll throughput math you get about 40 basis points of margin expansion.
I mean as you can imagine every one of these buildings as you build them there's a path For them to kind of ramp up in terms of the COGS flow through. And so that's what you have some initial expense, A lot of initial expense and then you make it up as you have greater utilization of the facility. Mark, do you have anything
you want to add?
That's Pretty much it. I think we're very confident that we'll be able to deliver on what we said. We've delivered on other things we said, including the 3 year rollout here. So we feel great about the RDC delivering going forward.
Now what's not in the guidance, if you looked at Mark's road map and lots of solid green checks, some dotted green checks and then some open boxes. But it's not in the guidance that we've given you, the margin benefit coming from the completion of those open boxes.
So maybe some specifics on the store. The stores, I mean, we have a lot of wait and see if this is Good as advertised leaders in the field. What I will tell you is you will be hard pressed to find a store manager or district manager That has an RDC servicing their environment that they're not just overwhelmed with the service. No vendor minimums, which is a huge deal from an ordering standpoint. We went from being overstock or out of stock as a decision to order to being able to get exactly what you need based on your volume.
Not only that, but from a productivity standpoint, we have roughly 80% of the product that's unloaded goes straight to the shelf. And in the past, it's In the overhead, you wait, safety stock, you get it down, payroll use that has nothing to do with driving sales and service, But also roughly 99% in stock percent on products from the RDC to the stores. So all of those things create confidence in the store. And this is another one of those initiatives where you have stores actually saying when is my RDC coming online. So it's a pool, which is very uncommon Bar store environment when you have a big initiative, but it proves that the business case has really worked exceptionally well from a store environment standpoint.
Thank you. Carol, you
sounded more positive on sales today than you have in a long time, recognizing it's only 1 month of data. But can you maybe Give more color around what you're seeing in November, specific product categories, and it's been consistent through the month.
Well, we've seen strength across the store. Now and our November results were not unlike many retailers who had a good November, but it's the strength of the store across the store that we are most encouraged by. We had a strong Black Friday, good Cyber Monday, but it's a strength throughout the month of November and continuing into December that caused us to lift our guidance today and gives us real Comfort with this guidance.
Maggie Gilliam. I have a question for Craig, please. Given the Change in the home value proposition, it would appear that the core business would have greater potential. And I think when you closed down Expo, you were More seriously at that. Could you bring us up to date there and also tell us how you're doing with Martha Stewart and the plans there?
Sure. So, you're right in terms of the decor has an opportunity, and we've been seeing recently a strengthening in what we call the small update projects. And that is a continued strength that we believe will take place going forward As the customers are actually in their homes longer based on home value decline where they might have thought about shifting and moving, they're no longer Doing that at the same rate. So now they're saying, Hey, look, let me update my home and get it the way I want it to be as I'm now Committed to live into it longer. So that we see as a strength moving forward, and we're shifting appropriately to that.
Part of that effort, was in fact the introduction of Martha into our stores across multiple programs. And that has been extremely well received by our customers. The misnomer, if you will, in our business is we have about 50% of our customers historically at the Home Depot have been female shoppers. And what we are trying to get accomplished is, A, getting her to spend more time in the store and then, B, grabbing a larger share of wallet from her spend. And the Martha program is one of the programs that we have out there, again, as I mentioned, across multiple segments that helps her Coordinate the design inside the home in a much easier fashion and we're seeing great results from it.
So we're pretty excited about that.
Greg? Thanks. Greg Malek with ISI. Kind of a question on traffic and ticket. You guys this year, even though housing numbers have been pretty rough, the traffic has come back nice, So up 2% and better than a lot of the peers.
How much of that is driven by what you're doing yourself do you think as opposed to the store Of convenience, basically your real estate and your store locations and geographic mix as opposed to the things, Craig, that you were mentioning and maybe You're trying to give us a mix of that 2%, how much of it is just where your stores are as opposed to what you're actually doing? And then Carol, on the ticket side, give us the update on credit? I know you're doing some tests there in terms of driving loyalty with the credit program, where the penetration is and if you're getting any traction
So let me just make one comment on the traffic growth and then Craig can jump in and Carol deal with credit. But our stores have been convenient for a long time. This isn't our stores didn't become convenient in the next 2 years in the last 2 years. So the good thing about this metric is it looks year over year. And we're very encouraged at the traffic growth.
And we think it's a direct result, frankly, going back to some of the earlier discussions on the new lower pricing And the great values that Craig and the merchants are driving to our stores and the great customer service in the stores.
Yes. I mean, I would say that, look, it's a combination of all these things coming together. We shared with you that we changed how we're talking to our customers. We put a different approach to We put a different approach to communication. We've been working hard on our assortments, using our portfolio strategy, updating our assortments, Really trying to understand the value proposition for the customer, working very hard to coordinate with Marvin's team to be able to then deliver on that value proposition with awesome service in the store and our merchants trying to make Easier for associates to be able to do that by delivering better programs for the stores upfront.
Our transaction growth has been a real bright spot for us. We knew that in order to get this business where it needed to be, We had to invite more customers back to the store. And that's why we'll continue to invest in value. And value comes in many different aspects, including price, including service, including the features and benefits that you bring in the programs.
Let me add one point and give you an example. We've talked a little bit about November. Typically on a busy Sales weekend, especially an event like a Black Friday, we will staff our customer care department because historically we get questions around running out of product, being out of stock, Long lines, we won't always measure that. But because the merchants did such a great job of driving value, the supply chain team did such a fantastic job of getting product to the on time and quantities we need. And the store team, the division presidents of store associates did such a great job of speeding up checkout with the first one Mark talked about and being staffed.
The majority of our calls for customer care were thank yous. That never happened before. Thank you for great value. Thank you for in stock. Thank you for having something on ad that when I showed up Actually still there and you didn't have a handful of quantities.
And thank you for accelerating my checkout process and making it a really good experience for me. And when you hear that, then that tells Craig, Mark and myself along with Matt, Mark and the store team that it is a collaborative effort to drive transactions. And Craig and I say it all the time, there's great value combined with outstanding service and an equal to transaction. When you have great value in a rude service, People walk out empty handed. When you have good service and bad value, they don't show up in the 1st place.
So for us, it's a collaborative effort and we're very proud of it, but we know we still have a lot of work to do And we continue to push forward.
And if I may, on the credit side, as I think you all know, we've seen a compression in the penetration of our private label credit card As of the end of Q3, it made up about 23% of our sales. That's down about 300 basis points from a year ago. We've seen that 300 basis point go to bank cards. So within our private label card, the question is, well, why, why are we seeing that compression? And we think there are a couple of reasons.
One, there was a change in the value proposition that was mandated by the CARD Act earlier this year, where before we used to offer no interest, no payment programs for any purchase over $2.99 With the CARD Act, it's now no interest minimum payments. So consumers, when they have a choice, they're like, I have to make a minimum payment or I can put it on a card that gives me points, You see them switching over to the card that gives them points. Also, as we all know, the savings rates for consumers is up in the country, so that's impacting the overall uses of credit. So we said, okay, what are we going to do about this because this is a very important product that we offer as it's the cheapest form of credit inside of our stores. So we started offering what we call everyday savings, which is when you use your private label credit card and you're in our stores and you're purchasing everyday items like batteries or trash bags or light bulbs, that sort of thing, furnace filters.
It's every day 10% off. And what we've seen since we've launched that program, which is back, I think, in June of 2010, We've seen about 110 basis point shift in penetration onto using our card when those purchase occasions are made. So that's good. It's a good start, particularly when you think we haven't supported it with a lot of marketing. If you think of another retailer who's headquartered in Minneapolis, They've got a 5% program underway.
They've got huge marketing, full page ads in New York Times, full page ads in Wall Street Journals, etcetera. We haven't had that kind of marketing. So Early days really, but we're pleased with the 110 basis points shift in penetration that we've seen.
Scott Ciccarelli, RBC. I just have another follow-up on the sales guidance. I understand that the correlation between your business and the PRI to GDP ratio is broken down. I think we all recognize that. But does it intuitively make sense that your business is decoupled from the housing market?
In other words, I guess if Are you looking at GDP because you're not sure what else to look at? Or is there some sort of an emerging correlation or more recent correlation with GDP that you've I've been able to identify.
It's our point of view, the housing metrics are just not that relevant, just not that relevant. And so if you think about, well, where do you kind of anchor in terms of the Phelps forecast, we think GDP is the best place to put an anchor.
Let me put it another way too just as a thought process. If you go back to those PFRI charts So you see how far down it's gone. So it's now down to 2.2%. There's a risk in both directions, It's up and down. So if you said and we've seen the risk down.
So PFRI has actually gone down as our comps have gone up. So that tells you, gee, there's a decoupling there. But also that may spring back I mean, just the percentages are so low. It may spring back at Higher rate than would be implied in our sales forecasting. So that's why we just look at GDP, the number of things that it encompasses and say that Looks like and has been over the last few quarters a better predictor for our results.
This is Budd.
Budd Bugatch with Raymond James. Marvin, I would love to get an update on the Overall health of your Pro customer and another question would be when is the rollout of First for Pro going to be completed? And Carol from you, you talked
a little bit about the expense growth as a percentage of sales and 70% for the 2011 and then 50% for the overall 3 year period. And then you confused me a little bit by saying that it would be normally at 50% for 2011 without the $50,000,000 are good guys. What does
that imply for 2012 and 2013?
So if
you can Budd, on the health of the Pro customer, we describe it as improved but not yet recovered. When we look at where we came from in the depths of the financial crisis at a double digit negative, we are now what we consider to be roughly Flat. So we recovered, meaning improved but not yet recovered. We don't see a big full recovery, but we do see improvement. The improvements we believe are based on great offerings from the merchants and ensuring that we're better understanding what our pros need from us to make our stores a more convenient shopping experience.
So improved, not yet recovered. As we look at the first initiatives, we have Two components left of the rollout. What we do and we're very fortunate to have stores in every state in Most demographic markets, we can pilot a lot of different things. We pilot a lot of things on the West Coast. Joe McFarlane, our division President, has taken a lead To really try a lot of different things for us.
We've piled things with Anne Marie Campbell in the South and Jim Cain here in the North. And so we're taking The best idea is that really show some sustainable results from a financial standpoint and we've aggregated those into the Pro Rewards And we'll see probably the 1st referral initiative finish as we end this year. We want to have it finished, get some continuity before spring break And to have execution in spring and hopefully reap the benefits when our traffic picks up during that very busy season for us.
And I'm sorry I confused you on the expense comment. I thought it was being helpful, let me try again. In 2011, we've got about $50,000,000 of expense Goodguys that won't repeat itself. Then we've got discrete cost Pressure coming from payroll taxes, medical and higher credit card fees of about $85,000,000 So if you were to back those out, expenses wouldn't be growing at 70% of Next year, but something more like 50 ish. So that's a good number going forward.
And what it means for the next 3 years, next year up 70%, 12%, probably up 40%, 13%, up 50%. So it averages. My numbers are pretty close there for averaging are averaging around 50%. Does that help? Yes, sir.
Okay. Thanks. Hey, Theresa. Hi. I'm still curious after everything you've talked about this morning, what in your mind are the big Opportunities you've seen that give you incremental confidence in the margin forecast and accelerating the bottom line targets even as you seem to have clearly backed away from housing recovery is contributing any help to the top line?
I'd say the first thing that gives us confidence is the results we've had to date. So I think what you heard a lot this morning was both Here's a snapshot of what happened in 2010. You saw the results and how that translated in terms of improved Performance 2009 to 2010. And then you heard and we got more specific things going forward in 2011 and beyond. So it's not like I mean, there's practically there is nothing where we go done.
It's That's it. We're set. In every single area with every single person who talked this morning, we've got more opportunities. And we think we've I mean, I hope also you got a sense that we've specifically identified them. We have Specific projects underway on every single one of these things where it gives us confidence on improving our business And being able to improve our performance for our customers, driving value and for the business as a whole.
And in terms of the if your second question was confidence on the sales growth side of it, Again, that goes back to Carol's discussion around changing our point of view on the forecasting and seeing a broader correlation with GDP. Anybody want to add?
Jeff.
Peter Bannick, Robert Baird for Craig.
On the space reallocation efforts in the kitchen area, how many stores are piling that? And if it's successful, how quickly can you roll it out?
So it is a pilot. I don't really want to give into the details of the number of stores because there's multiple pilots going on. And in terms of whether it moves into expanded vanity programs, expanded flooring programs and so on, I'd prefer not to Sure. That information will the world. But we can move on that relatively quick.
These aren't major Remodels that have to take place, there are modest shifts of space within the store that can have a pretty significant payback on the utilization of the sales per square
Barbara? Good afternoon. Pete Wahlstrom with Morningstar. You talked
and spent a little bit of
time about the decision and the opportunities surrounding the proprietary offerings and sitting around 14% today. If you look to expand this, How are you thinking longer term about contributors to gross margin as well as operating margin? Can this be meaningful? And are there specific product categories that you're targeting? Thank you.
So again, I think from the categories let me start with the categories that we're targeting. It's what I laid out in terms of how we'll actually side when we use a private label and or a proprietary brand. But it Has to really be driven off a need that comes back to addressing a customer challenge, right? To go out and set a target, if you will, by itself, can really create not the appropriate behavior. If I'm targeting a number, does then that send the wrong message to the merchant team that You miss the opportunity that might exist going on with something in a brand because you're more focused on trying to drive To a number.
That's not the kind of behavior that we want to have. We always want to have the merchants thinking about it from the customer perspective and whether or not We have an opportunity to improve from their viewpoint first and then obviously drive financial performance for the Home Depot as well. On average, there is opportunity to improve when you drive to a proprietary program. But at the same time, the proprietary program many times actually helps you improve with the branded product as well.
Anna? Thanks. Dennis McGill with Zelman and Associates. As it relates to the maintenance Tivi, through your analytic tools, do you have any ways of quantifying how much of the purchase activity is maintenance driven nondiscretionary type product categories? And if so, do you have a view on with GDP and comps looking similar over the next year, does that imply that we've approached a level of Sustainable activity and spend that needs to happen to maintain the housing stock,
in the near term at least.
Right. Well, if you recall that type of spend chart that's in your book, spend by occasion, We bucket that into a pie chart: activity based spending, refurbishment based spending and then discretionary. We think today about 12% is activity based, which would be housing turnover. That's down from 20% a few years ago. About 40% is refurbishment.
That's really age of housing. That's really maintenance spending. That would have been about 24% a few years ago. And the rest is discretionary. What's that?
About 48% is That's down from about 54% a few years ago. Barbara?
Dan Bender, Jefferies. I had 2 separate questions. The nominal store growth that you outlined over the next 3 years, You commented that I think there's 20 of them in Mexico.
I
was curious how many of those would be in China. And as you answer that question, if you can give us a little bit of Color around Home Depot's plans in emerging markets, whether it's China or beyond Mexico? And then a separate question was around special order. You talked about really upping the SKU count online. I'm just curious what you can do about the special order process in general.
It's very frustrating as a consumer to go into And really find the product you want, get it ordered and it turn out the way you thought. And Maybe as you talk about that, how far up the quality spectrum you're willing to go?
So let me segment that. I'll talk a little bit about China. Carol, who does all our Strategic planning will also talk about other international opportunities. And then probably we've got a lot of folks who can weigh in on our special order Because that's a big area of opportunity. So in our in what we discussed this morning, there is no implied store growth in China.
I think as I commented, I think first off, we got a great leadership team in China. So Bill Lenny, who works for Craig, is running our China business and he's got somebody on the ground there who we have a lot of confidence in. China has been a journey. I don't think we're alone in having it take some time to figure out how to build a Profitable business model. We've said from the start that we're not there to drive square footage growth.
We're there to figure out a profitable business model and then move. We think we're making incremental progress on that, But that's an opportunity above and beyond what we're talking about this morning.
And from a global expansion perspective, we've studied the world. And we are, as Frank pointed out earlier this morning, really pleased with our position as number 1 in U. S, Canada, Mexico. As we study the world, we think the opportunities for us could be to leverage the great business that we have in Mexico into Central and South America. Those countries are very, very interesting to us.
They're very growthy. It's something we're going to take a hard look at.
And on special order, Greg, why don't you find that word? Yes.
So totally agree with you. It is a complicated That's inside of our stores. It starts with the system that we have to actually execute on special order. And as Hal talked about, really going forward, the platform that we can simplify this whole process for, for the customer is to really drive this and leverage our technology in our e commerce world. It is a significant opportunity to be able to Offer an enhancement to the customer with a much broader spectrum of product in a simple, easy way to be able to select And to then deliver that product to the home, which as Mark referenced, we have a lot of work underway as to how we think about the multichannel supply chain to be able to make that a seamless, easy process for the customer in total.
The work that Hal showed as it relates to how we're actually going to present the product and be able to expand the offering, yet show it in a way that lets the customer Get through that kind of opportunity in terms of breadth of assortment is important in this whole process as well. And then as we see it, we'll see how far that takes us up the spectrum in terms of product. I think there is opportunity for us to expand the range of offering as we nail the special order process going forward.
The last point I'll make is the leader of our services or install business was formerly a leader on Matt's IT team. He is Managing a cross functional team on the special order initiative. It is the first time that we've had a leader with the unique skill set of having A strong IT acumen as well as understanding the services side of the business in the store. So he's working in a Cross function way with Mark Powers' operations team, with Hal from an IT standpoint, with Mark's team from a supply chain and definitely with Craig's team. And because he brings the IT knowledge, he we believe that we have our best shot at accelerating the solutions To the problem you outlined that we live with every day and get resolved.
We're definitely going to apply the technology to this problem. It's in bad need of it. So we've got some incremental things we can do on the short term, and I think We're all aligned around doing that. And then there's some tougher things we've got to go get at, including getting our vendors kind of plugged into this as well. We got to kind of bring them along as well.
And I would just chime in the short term. It's one of those as it's as big a Headache on our associates to try to execute as it is our customers. Just a bad experience. So the incremental piece We're already working on the in store user interface, trying to make it simpler for our associates to process the special order while Matt And how we're working on the behind the scenes really infrastructure to go ahead and deliver with Mark on the supply chain piece.
Anna?
Hi. Joe Feldman, Telsey Advisory Group. Wanted to come back to the Traffic and ticket, obviously traffic has been a good driver and looks like it will be the primary driver of the comp next year as well. But I guess as far as the ticket goes, How should we think about that going forward given that it seems like some of the assumptions you've made from in the future are that Maybe there is structural pressure on the ticket. There's a new normal for the ticket.
And is that why the sales per foot The 310 came down. And if you could just discuss that.
Well, so first on the ticket discussion, I'd say, we look at it, remember both that our pro customer impacts that as well as higher decor item impacts that. And one of the things we certainly planned in 2010 that hasn't really occurred as we thought it would, but that we think will be happening in 2011. Is the eventual growth Just the Pro coming back and adding some year over year growth. As the Pro comes back, those are larger tickets and that drives the ticket So if you think about how we plan in 2011, as we're thinking about it now from a framework, we see Just as Carol said, we know we've got some stress in the first half of the year, but we see that ticket growing in the back half of the year As the pro comes back into the store. So that's we do see some growth in ticket going forward.
And if I could just comment on the sales per square foot. We all talk about Project 3.50, sales per square foot of $3.50 all the time. But to hit the 10% operating margin, we only need $3.10 So that's really a differential there. We're moving ahead charging towards those higher sales per square foot, but we only need $310,000,000 Barbara?
Hi, thanks. It's Steve Shaeke at FBR. I had a question actually on the chart, Craig, in your presentation and related to the departments, the 13 departments that make up the low single digit comp in 2011. And it looks like 5 out of 13 will lag or I guess implicitly maybe be negative. Can you share with us what percentage of sales Those 5 are.
And then as I look at them, they look like they're very pro intent. So are you right now baking in The assumption that Pro will be pretty flat for 2011 at this point for the year?
So when you look at the departments, Certainly, as we've shared, there's more pressure still in the pro segment of the business and the big ticket segment of the business is what You see represented in there as well as if you look at lumber, for example, we've got the first half of the year. There's some pretty tough compares when it comes to lumber pricing overall. We're looking as we look at the plan right now In lumber, for example, we think the year will play out roughly about where it is right now, but that means there's pressure in the first half of the year. And that's really part of what's driving that particular department's numbers. But yes, when you look at in total So step back to tickets greater than $900 driven by Pro, driven by large project business like Kitchens, Okay.
That are roughly 20% of our sales overall, gone from double digit negative for almost 3 years running to now low single digit negative, as I shared on the last earnings call. And we see that As they progression through 2011, as Marvin mentioned, improving but yet not totally recovered. So that's really what's driving that. We think that it will lag, if you will, the continued progression of The customer and the smaller projects and particularly around those things where simple decor and maintenance, which is where you see the growth in the numbers of the departments.
Okay. And then in addition to that, so kitchens is a category in here. Can you clarify with I think you said a 40% reduction in Space.
Up to, yes.
Up to, but are you would the sales be otherwise the same? Or do you expect a sales impact with Of space de emphasizing space.
As I mentioned, we expect to have equal to or greater sales than what we have this year with that kind of change. And that's because of the additional work that we've done around assortment, the offering, the value proposition with Martha, The things that Hal is doing, working with Matt and the team to help reengineer the technology around how the customer buys, We actually believe in the best information we can gather, we're gaining share in the kitchen business, and we see that going forward. And we think it's an opportunity to actually drive the sales with less resources physically in the store through all these other efforts that we're making. Thanks.
Wayne?
Wayne Hood, BMO. Craig, you were talking earlier about product cost and how you're going to Bring that down as best you can. There's also the labor piece, right, which in these big projects typically represent a bigger piece of it and that seems to remain elevated. So my question is, have you explored with your installers about bringing them more into the Home Depot fold in some way or fashion, a health care plan or whatever it might be, you can actually lower the labor cost of projects, which seems to be pushing people back. It's sometimes not necessarily the product cost.
And then I had a question for Hal around You mentioned 45% of the online visits you're driving into the stores, which would mean over 50%. You're not driving into the stores and the feedback you're getting of why that Conversion or close rate is not higher. Could you discuss that?
So on the labor side, let me share a couple of things. Number 1, our team that works on this is working hard with all of our supplier base to find ways to help them take cost out. There's multiple efforts underway. There's things that we can do that can make it easier to do business with them that help them drive cost out of the business. So there is effort underway from that standpoint to go after it.
The second thing that I would tell you that is Probably equally as important is we're really our merchants are trying to look at this as a holistic project from the customer's viewpoint. Customer, quite frankly, doesn't really care about what portion is product, what portion is labor. They're just looking at the total cost of what does it take to get the job done that I want to have done. And so we're changing the mindset in terms of how we look at that to really take it from the customer's viewpoint back And then blend all that together to drive the right value proposition. I think the best example that I can give you in terms of How we've actually been able to effectively do that on both of those elements is in our flooring business.
And we've seen a very nice return in that business over the past few years and feel real positive about where that business is and the share growth we've been able to gain in it.
And Wayne, the only thing I'll add to that is the install side of the business reports into my team. And what Craig and I made the decision on Earlier this year, late last year was to create a really bright line between roles and responsibilities. In the past, the at home services or install team tried to manage The labor, cost, quality and selling project ideas and you can't do all those things effectively. So Craig's team drives the program ideas, what are we going to go after, whether it's flooring or whether it's kitchen installs, cabinets, countertops, etcetera. My team is really focused on 2 things, focused on quality and cost.
And so we work with our service providers in the markets. And if we want to do a special type of install in California, Texas, New York, my team's responsibility is to go out there, Find a service provider network that can accomplish it, negotiate the right cost, make sure the quality standards are in place and also respond to any service issues that may pop up. So it's more of a back office operational execution, while Craig's team drives the sales, the program ideas and the value. And by having a bright line between who owns what, we now can dedicate expertise on how to do those things. And so we believe that Long term that will give us benefits because our leaders will gain skills and gain competencies that they can replicate and we can continue to get better and better At both sides of that.
As it relates to the 40%, first, let me clarify the fact. We use a leading third party surveyor to exit our to survey our site visitors as they exit our site. Specifically, 45% of our site visitors, the over 8,000,000 we have a week, Say that their next step, immediate next step is to head to a Home Depot store. When we talk with that 3rd party leading surveyor, They tell us that's well above average for any multichannel retailer. So we're already pleased with those numbers.
The remaining 55% Could be doing a number of things. They could be checking their order status. They could be going to our how to community for additional product and product project information. They also could be just browsing And shopping is and window shopping our site as long as with other sites as folks will do. What I will say is we're Constantly focused on that 45% number and looking to move it higher, whether that be putting in things like the ability to do a kitchen appointment online.
We also like you to schedule your flooring measures online and have them come out to your home. We also have lead generation forms for all of our services And install businesses online, and we're constantly looking for ways to work with Mark and Marvin and the division presidents and the team to better facilitate and tie our online shoppers and online visitors to our stores.
Great. I'd like to thank our presenters today Frank, Carol, Craig, Marvin, Mark, Mark, Matt and Hal. Also, I'd like to thank the Investor Relations team, Lauren, Tiffany, Daryl, Tammy and Lauren. And also thank all the Boston associates that we had here today, as well as Anna, Jeff, Barbara and Tami. This concludes our presentation and we hope you join us next door for lunch.