Good day, everyone, and welcome to today's Home Depot Third Quarter 2010 Earnings Conference Call. Today's conference is being recorded. Please note that any prompts entered before this time may not have registered in our system. Beginning today's discussion is Ms. Diane Dayhoff, Vice President of Investor Relations.
Please go ahead, ma'am.
Thank you, and good morning to everyone. Welcome to The Home Depot 3rd quarter earnings conference call. Joining us on our call today are Frank Blake, Chairman and CEO of The Home Depot Craig Meniere, Executive Vice President, Merchandising And Carol Tamay, Chief Financial Officer and Executive Vice President, Corporate Services. Following our prepared remarks, the call will be open for analyst questions. This conference call is being broadcast real time on the Internet at earnings.
Homedepot.com. The replay will also be available on our site. If we are unable to get to your question during the call, please call our Investor Relations department at 770-384-2387. Before I turn the call over to Frank, let me remind you that today's press release and the presentations made by our executives include forward looking statements As defined in the Private Securities Litigation Reform Act of 1995, these statements are subject to risks and uncertainties. These risks and uncertainties include, but are not limited to, those factors identified in the release and in our filings with the Securities and Exchange Commission.
Today's presentations also include certain non GAAP measurements. Reconciliation of these measurements is provided in the financial statements included with our earnings release. Now let me turn the call over to Frank Blake.
Thank you, Diane, and good morning, everyone. Sales for the Q3 were 16.6 $1,000,000,000 up 1.4 percent from last year. Diluted earnings per share were $0.51 This is the 4th quarter in a row of positive comps for our business and the 3rd quarter in a row of positive comps for the U. S, which had a comp of 1.5%. In the U.
S, over 80% of our top 40 markets positively comped. Compared to prior quarters, the variability of performance has narrowed so that we see less dramatic swings on the positive and on the negative side. For example, in the Q3 of 2009, the spread between the best And worst of our top 40 markets was about 35 percentage points. This year, that spread is cut almost in half to about 18 points. Our Gulf region is now exiting its year over year storm comparison, so its negative comps have turned slightly positive.
We saw strength in key markets, particularly in our Central and Mid Atlantic regions, and we continue to see positive results in Florida and California. So from an overall perspective, we see a stabilizing business. And as the business stabilizes, We continue to improve our operational performance. We are exercising good control over our expenses, But we're also investing in the business to drive improvements across customer service, merchandising and our supply chain. Let me give one recent example.
Our technology and operations teams have developed and implemented a new technology for our store associates. We call it the first phone because its core purpose is to reduce tasking time for our associates so that they can instead focus on customer service. It is a handheld device that provides several functions: inventory management, product location, SKU category and class performance analytics, A phone, a walkie talkie and a mobile checkout. What makes the first phone worth discussing are 2 general points. It was developed through close cooperation With our store operations and IT teams, perhaps the best collaboration we've ever had on a project like this.
And we see it as the foundational element of improving our service for our DIY and pro customers, putting knowledge and communication closer at hand to our associates Similarly, we are continuing the development of our new merchandising tools. As an indicator of that, we had another quarter of improved Our rollout of rapid deployment centers or RDCs remains on track to reach 100% of our U. S. Store base by the end of the year. And we are continuing the significant ongoing complementary work designed to get additional leverage from our supply chain.
Beyond the supply chain, we are building out a new set of analytical tools for our merchants across assortment planning, pricing and customer analytics. We'll discuss those at some greater length at our upcoming investor and analyst conference in December. But just as we have a goal to better enable our associates To deliver great customer service, we also have a goal to better enable our merchants to drive category growth in our business. And in both instances, technology is a critical enabler. As Craig will detail, we've seen continued growth in our transactions.
This quarter marks the 4th straight quarter of comp transactions growth. This provides some evidence that our market is steadying as customers focus on basic repair and maintenance activities. Average ticket continues to be a challenge Just as the macro housing environment remains under pressure, we have often referenced private fixed residential investment as a percent of GDP As an indicator of the overall health of the housing related market, this past quarter saw another tick down And another record 60 year low as the ratio is now 2.2%. While our comp performance has disconnected from this metric, At least directionally, we still think this presents a picture of continued pressure in our market. On the international front, Our Mexican business continues to deliver positive comps.
This is the 28th quarter in a row of positive comps. Not only is our Mexican business an important source of growth for the company, but also increasingly an important source of talent. For example, we have a district manager in Texas who began as a store manager in Mexico. We have comparable examples of the Mexican team being a source of talent throughout our organization. Our Canadian business, as expected, experienced weakness in the quarter With a negative of 5.6 percent in local currency as we began to anniversary the impacts of the Canadian government's Home Renovation Tax Credit.
The difficult year over year comparisons will continue through the 4th quarter.
At the
end of the Q3, 76% of our stores are eligible for success sharing, our bonus program hourly associates. Our associates are working hard to improve our business. We're proud of the progress we're making while recognizing that we're just at the start of a long term process, And we look forward to discussing our longer term plans with you in December. And with that, let me turn the call over to Craig.
Thanks, Frank, and good morning, everyone. The 3rd quarter represented our 4th quarter in a row of positive comp growth. We saw positive comps in 8 departments during the quarter and we're pleased with the sequential comp improvement we saw in the U. S. From the second to the third quarter.
The departments that outperformed the company's average comp were lumber, garden, electrical and lighting. Flooring and hardware performed in line with the company comp. Plumbing, Paint and Kitchen and Bath showed positive comps, while comps in millwork and building materials were negative for the quarter. As measured by consumer surveys, we gained consumer U. S.
Market share in units in 9 out of our 13 departments during the quarter. Our strategy remains focused on driving value and innovation in our stores And we see customers responding favorably to our efforts through increased transactions. Comp transactions were up 2.2% in the quarter. As expected, we have not yet turned the corner on average ticket. Comp average ticket was down 0.8% or $0.43 to $51.46 for the quarter.
Smaller ticket purchases were strong during the quarter, while the big ticket purchases remained under pressure. Transactions for tickets under $50 roughly 20% of our business in the U. S, were up 2.7% year over year. Transactions for tickets of $900 and above, Also approximately 20% of U. S.
Sales were down 3.4% in the 3rd quarter. The main drivers behind our small ticket performance were our maintenance and repair, seasonal and outdoor project businesses. As we've shared in past quarters, maintenance and repair continues to be an area of strength as customers spend money to maintain the investments in their homes. For example, categories such as sealers, plumbing repair, fasteners, water heaters and cleaning all had strong comp performance in the Q3. The seasonal business came late in the quarter as record heat across much of the U.
S. In August September kept many DIY gardeners indoors. In contrast, October presented an opportunity for fall planting and lawn repair. We took advantage of this opportunity and used the flexibility that we've built into our business through tools and process to delay our holiday sets and continue to drive our outdoor business through the end of October. We saw specific strength in seed, Chemicals and Live Goods.
For example, our Live Goods business swung from a low single digit negative comp in the second quarter to a positive comp in the 3rd quarter driven by a double digit comp in the month of October. Additionally, we saw Finally, we saw continued momentum in paint, hardware, tools, electrical and plumbing in the 3rd quarter. We've been working hard to improve our offering in these areas with a focus on our maintenance and repair customers and our efforts are paying off. On the other hand, we continue to see pressure in big ticket. The largest drivers of this big ticket pressure in the Q3 were softness in building materials and We continue to execute our portfolio strategy and drive results from our investments in merchandising category resets, new product introductions and the implementation of Everyday Great Value.
Let me share a few examples of this. During the quarter, we had an outstanding bath event called Vanity Insanity. We saw great results and terrific project selling from our associates during this event. We also introduced exciting new products such as additional LED bulbs in our EcoSmart brand, which can save customers up to 80% on their electric bills or lighting bills. Water savings products have also resonated well with We introduced Martha Stewart Kitchens, which is off to a fast start in our stores.
Looking ahead to the 4th quarter, We are well positioned to drive sales with a great seasonal lineup of heaters, fireplaces and snow removal equipment. We will also be rolling out several new product introductions, including the expansion of our Klein tools for professional electricians, USG's lightweight drywall panels are 30 percent lighter than regular drywall panels and a new line of epoxy grouts from custom building products that do not require sealing. Additionally, we leaned into the holiday season this year and increased our buys. Holiday decor is an inexpensive way for our customers to We have enhanced our offering with Martha Stewart coordinated decor items And launched the EcoSmart LED lighting, which features exclusive new technology, including fully water resistant, We also have outstanding values in our gift centers this year as well as an incredible Black Friday lineup. The early results from these categories have been strong, and we're confident that we'll And with that, I'd like to turn the call over to Carol.
Thank you, Craig, and hello, everyone. In the 3rd quarter, sales were 16.6%, a 1.4% increase from last year. Comps to our same store sales We're positive 1.4 percent for the quarter with positive comps of 0.7% in August, positive 1.1% in September and positive 2.9% in October. Comps for U. S.
Stores were positive 1.5% for the quarter With positive comps of 0.6% in August, flat comps in September and positive comps of 3.5% in October. Our gross margin was 34.3 percent for the quarter, an increase of 26 basis points from last year. Our U. S. Business contributed 20 basis points of margin expansion in the quarter driven by the following factors.
First, 5 basis points of expansion came from lower deferred interest due to a lower penetration of private bank card sales. 2nd, approximately 5 basis points of expansion was due to commodity price inflation. Finally, through our portfolio approach and leveraging our products, we enjoyed another 10 basis points of net gross margin expansion With some departments like hardware and plumbing reporting margin growth and some departments like kitchen and bath reporting margin contraction. Our international businesses, principally Canada, contributed 6 basis points of gross margin expansion in the quarter, due primarily to a change in the mix of products sold. Operating expenses as a percent of sales decreased by 74 basis points to 25.5 percent and total operating expense dollars were $61,000,000 less than last year.
Our operating leverage reflects positive same store sales as well as lower expense in the following areas. First, depreciation expense was $28,000,000 under last year due to a lower asset base arising from fully depreciated assets. 2nd, net debt was $20,000,000 under last year due to a number of items, including a lower number of enrollees. 3rd, we settled several real estate matters for a net $20,000,000 benefit. And finally, we had a number of other expenses under last year, offset by expense increases in categories like credit card discounts.
These items net to a $7,000,000 increase in expense from last year. At the end of the second quarter, we told you that we expected to see strong expense leverage in the back half of the year. Year to date, on an adjusted basis, Our expense growth equaled approximately 30% of the growth in our sales. As we look to the 4th quarter, We expect continued expense leverage such that for the year expenses will grow at less than 30% of the growth in our sales. Interest and other expense for the Q3 totaled $142,000,000 down $22,000,000 from last year, reflecting lower levels of outstanding indebtedness.
Our income tax provision rate was 36.1% in the 3rd quarter. For the year, we expect our effective tax rate to be approximately 36.5%. Earnings per share for the Q3 were $0.51 up 24.4 percent from last year and reflect about We were operating 2,244 stores and selling square footage was 235,000,000 Reflecting the sales environment, total sales per square foot were $2.81 up roughly 1.7%. Now turning to the balance sheet. We continue to effectively manage our inventory.
At the end of the quarter, Inventory was approximately $11,000,000,000 up $176,000,000 from a year ago. About half of that increase is attributable to foreign exchange rate fluctuations. Inventory turns were 4.3 times, up from 4.2x a year ago. We ended the quarter with $41,700,000,000 in assets, including $1,400,000,000 in cash. Year to date, this reflects cash generated by the business of approximately $3,900,000,000 offset by $2,000,000,000 used for share repurchases, dollars 1,200,000,000 used for dividends and approximately $700,000,000 of capital expenditures.
Note that for fiscal 2010, we expect our capital expenditures to be approximately $1,100,000,000 Now on the capital structure front, a few items of note. First, in the 3rd quarter, we repurchased $800,000,000 for 26,300,000 shares of outstanding stock. 2nd, during the quarter, we repaid $1,000,000,000 Senior notes that came due on August 15 and subsequently refinanced them on September 7 for a weighted average maturity of 20 years with an average coupon of approximately 4.7%. Finally, computing on the average of beginning and ending long term debt and For the trailing 4 quarters, return on invested capital was 12%, 2.50 basis points higher than the Q3 of fiscal 2,009. Given that we've got 9 months of performance behind us, we're going to tighten up the sales and earnings guidance we gave you at the end of the second quarter.
Looking ahead, we are projecting positive comp sales in the low single digit area in Q4. Remember that we guide off of GAAP. We are calling for fiscal 2010 sales to increase by approximately 2.2% with earnings per share from continuing operations increasing by approximately 25 percent to $1.94 Within this guidance, we expect our operating margin to be approximately 8.4 for the year. This guidance includes the benefit of our year to date share repurchases, but doesn't include the impact of any additional share repurchases. It is our intent, however, to use excess cash to repurchase shares throughout the remainder of fiscal 2010.
We look forward to covering our business prospects, including our thoughts on 2011 at our Investor Conference on December 8. We thank you for your participation in today's call and we'll be happy to take your questions. So, Abdullah, we are now ready for questions.
Thank you. And we'll take our first question from Chris Horvers with JPMorgan. Thanks and good morning.
Good morning.
Given that, I know it's only a couple of weeks into the quarter, but we do always get a lot of questions on How November is looking so far, you had some events on LED light bulbs and focusing on everyday value. So I was just curious how The quarter is shaping up so far, albeit early. And then secondly, on the gross margin, can you talk about whether RDCs have been A drag or kind of neutral to merchandise margins this year? And then if so, are we still thinking maybe 30, 40 basis points of potential gross margin expansion in 2011? Thank you.
Well, on the sales front, as you pointed out, it is early days, but we're very pleased Our gross margin performance this year and as we look to 2011 and we'll share more details with you at our investor conference, but as we look to 2011, we expect to see Benefit coming from the RDC.
Okay. Fair enough. Thank you.
Thanks, Chris.
And we'll take our next question from Matthew Fassler with Goldman Sachs. Thanks a
lot and good morning. Good morning. My first question relates to credit and your credit cards. Can you talk about the impact of your ability to use 0% financing as a lever and also just consumers' appetite Credit be it from your proprietary card or from other sources and how you think that might tie in to the big ticket side of the business and some of the soft trends you're seeing there?
Yes. Well, it's interesting. As we look at our private label credit card, we saw about a 300 basis point contraction In terms of the penetration of our private label card dropping from about 26% last year to about 23% this year. And of that 300 basis point contraction, about 150 basis points was in the deferred financing fees. In other words, This is over 299 where we every day we offer a deferred financing option.
So what we are seeing is a change in how consumers are using credit And we think a lot of it is a headset change because of the Card Act, which as you know, Matt was inactive back in February. Before the Card Act, our everyday value proposition was if you spent $2.99 in our stores, it was no interest, no payments for 6 months. It's now no interest minimum payment. The customers are looking at that minimum payment and albeit it's a small payment, but they're looking at that minimum payment and saying, I'm not sure that value proposition works for me anymore, and so they're switching out to bank cards, and we've seen an increase in our bank card penetration accordingly. But if you step back from it, if you look at the savings rates in the country, you know that the savings rates now are over 4%.
And historically, the savings rates in the country are around 2%. So We continue to look at our private label card as a way of driving sales. The approval rates for our card is north of 74%, so The average line that's been approved is over $5,000 The average line for the existing cardholders is close $6,000 but there's only 25 percent utilization. So it goes back to this sort of savings mentality that we see with consumers in our country. They're just delevering.
So that's a long winded answer to your question, but hopefully that's helpful.
And I guess I'll ask my follow-up on the same topic. Are you able to map The trends that you've seen in big ticket and some of the categories that you cited has been under pressure like, for example, the kitchen category To the deferred financing dynamics in particular? And if so, I know the card act is passed in February. When do you cycle those changes in your business?
We see some of the pressure surely in our big ticket items like kitchens and appliances, as a result of the lower penetration of these deferred financing. We will hard act in February.
Got it. Thank you so much.
You're welcome.
And we'll take our next question from Scot Ciccarelli from RBC Capital Markets.
Good morning, guys. How are you? Good morning. In the past, I know it's been a while, but you had given us some J.
Rice:] You
have been giving us some information regarding the difference in geographic
areas. Hello? Yes. Hello.
Still there, Tom. We hear you. Okay. Sorry. In the past, you gave us some information regarding the difference in sales performance in various geographic areas based on kind of foreclosure activities.
But now that you guys are seeing more uniform performance kind of across the country and positive comps in 8% of your regions, is there anything you can point to as kind of a common denominator in your best markets and then your softest markets?
Well, as Frank pointed out, private fixed residential investment As a percent of GDP dropped to a historic low of 2.2%. So we would say that housing's grip on the economy It's as loose as it has been in 60 years. So it's really interesting as we look at the drivers of private fixed residential investment, for example, housing turnover. When we do our regression analysis, we see the R squared between housing turnover and our sales at 0.58, that's not a strong correlation and there's about a 4 percentage point standard error in that calculation. So housing metrics are becoming less relevant as a measure for our And as we look at it, we're sensing that GDP is more relevant.
And that is, I think, one reason why we're seeing less The spread has narrowed in terms of the performance across the country. And Frank would
Yes.
No, I think that's exactly right. And Scott, I mean, that was A bit to my point of the variability among the markets kind of compressing, so that you see just as Carol said, The more general economic impacts going across our business rather than the We found either a foreclosure rate or housing crisis in a particular market as we've seen in the past.
Do you think it's more of an employment issue at this point or a consumer confidence issue?
Well, I
think there again, just as Carol said, I think it's We're seeing some broader economic things. It's how we track to GDP, unemployment. So it is The savings rate, the more general economic environment seems to be a better predictor.
Okay.
Thanks a lot guys.
Thank you.
And we'll take our next question from Deborah Weinswig with Citi.
Thanks so much. So just a few questions focusing actually on growth. So number 1, can you update us on your thoughts on homedepot.com and social media and how you're using them for holiday and also mobile in your stores?
So it's a great question, Deborah, and we'll be spending some time on that in December at our conference. Hd.com is a very important part of our business. It's Not just and we really don't the sales part of it is obviously something we focus on, but even more important, We know that customers in some categories as much as 70% of our customers research the categories online before coming into the stores. We have a variety of things underway on our social media, including our own Home Depot community now That we're very proud of where we've actually taken associates from our stores. They've worked for a couple of days online answering Questions from associates on a how to basis.
We're very pleased with the reaction to that. So Yes, it's growing importance across our business, what we call interconnected retail, how we stitch all those things together from our Bricks and mortar to the dotcom to the social media.
And also continuing to focus on growth, with the growth in customer transactions, is that More foot traffic from existing customers or gaining new customers?
So I'll be honest, I'm not sure we have a very good way of Dialing into that, right now, yes, I mean, that's it's a great question, but I we Really don't have a metric that looks at, hey, this is a brand new customer and we feel confident that it's a brand new customer.
Because you're devoting more of your labor hours To customer facing activities. So wouldn't that speak to improving customer service and
I think it's worth keeping in mind that our typical customer visits The Home Depot, What, 4 times a year. So every single visit is an opportunity to increase Frequency and get the conversion. And Marvin, you might want to comment on that as well.
Yes. Deborah, as we've said in the past, We have a real simple equation of compelling value from the merchants, improved service from the associates in the store on the engagement piece and we think that creates Transactions, which turn into dollars and for this past quarter, our net promoter score increased 580 basis points and that's on top of a 500 plus Basis points improvement last year to the same timeframe. And again, when we get excited in the stores Around products and around great offerings, our associates are just focused on service in a much more aggressive way. And as we have noted in the past, we have this Philosophy of transferring our payroll hours from task to service and we're on this mission to get a greater percent Of our payroll on service and we'll end this year at roughly fifty-fifty and we've never been there before, but our goal is to have a significantly more hours Dedicated to the service component versus the back office tasking part of the business. So we're making good progress, but we still have a lot of work to do.
Okay. And then last question, given the importance of the pro customer to your business, what trends are you seeing with that customer right now?
So as we've said in the past, Deborah, I mean, a couple of comments on the Pro. The first is we changed our way of measuring it. So as we would have previously measured it, which would be on our own credit card or sales through the ProDesk, We're seeing better than company growth from the segment. As we got a more Fine. Look at it though, we actually saw that that pro customer shopping across the store as measured by shopping behavior It was actually down and it looks to be we're in the flattish range now.
But it's still not It is still not the engine of growth for us.
Great. Appreciate the color and best of luck over the holidays.
Thank you. Thank you so much. And we'll take our next question from Gary Balter with Credit Suisse.
Thank you. These are, I guess mostly follow ups or just expansion on things you talked about. But Carol, you talked about the 58% VR or 58R number To go with the housing turnover, could you talk about just remind us again of your mix of business in terms of How much is maintenance and repair and how much is dependent on housing turnover, etcetera?
Gary, there's no bright line here and there never has been a bright line, Rob, because our customers, Regardless if they are pro or DIY or they shop across the store?
Yes. The last time we took a look at it and we get the question Sure enough that probably we ought to do a deep dive again. But the last time we looked at it, we're about 25% driven by turnover, 25% That was strictly had to repair kind of spend and then 50% that you put in the discretionary bucket. But The last time I want to say was kind of in 2006. And so odds are that 25% that was turnover related Has gone down significantly and the percentages would look quite different.
Okay. With the repair probably up.
Yes,
Exactly. Could you talk about the Durbin Amendment impact on your business or how you see that playing out?
Well, yes, the Durbin Amendment gives the right to the Federal Reserve to set the fee for debit cards, as I think you all will recall. And as we looked at it when the Durbin Amendment was passed as part of the Dodd Frank bill, we modeled, well, if the Fed follows what other countries like Australia or New Zealand It should be a benefit for us in 2011, and we estimated it could be as much as $30,000,000 What we're hearing, Gary, is that the Federal Reserve is struggling We've got to go about that. So as we build our plan for next year, we're not building any benefit in today because we need more clarity.
Okay. Thank you.
Thanks. And we'll take our next question from Alan Rifkin with Bank of America.
Thank you very much. With the RDC program now essentially over and certainly it looks like your turns at the corporate level I've certainly benefited from that. Can you maybe provide some color on the impact of the RDC program on the stores supported Earlier in the program versus later?
And then I have
a follow-up.
So the first comment and then Mark Holofield is here and I'll Kim to address that, but the first comment would be the RDC program, I mean there's the building the physical assets. The build of the physical assets will be over by the end of this year. But truly, that's Sort of the start of the overall process because you have to ramp up the amount of product that's going through the RDC. There are continual improvements and Mark can talk to this of where we're back porting mechanization into existing RDCs and Mark and his team continued to improve just the internal operating rhythm of the RDCs. So I want Our work on the RDCs is really just I mean, we're not at the starting line, but we're early on into the race.
And I'd say Just as a general comment for our stores, it would be the stores we have been very pleased as the program has rolled out In terms of the benefits our stores are seeing in our in stock rate, because along with the improvements in the inventory turns that we call out, What we don't call out at every call, but is the case, we are at a record high performance in terms of in stocks. So we're very pleased with how the RDCs are impacting our stores. Mark, I don't know if you want to add some comments or Marvin to that.
Yes, sure. It's Mark Holofield. We will be wrapping up the RDC program in January. We've got 2 openings coming in December and 1 in January. As Frank said, we certainly are in the early days of these RDCs.
If you think about it at this point, only 6 of our 16 open RDCs have been open more than a year. So It's still very early in the history there. Lots of opportunity to continuously improve our operations. We're at about 41% of COGS going through the RDCs at this point. We think ultimately about half of our COGS will roll through there.
The results that we've seen are the continuing improvements in in stock that Frank has talked about. Our RDC served store SKU Combinations get back in stock quicker once there is an out of stock and we are seeing lower inventory levels to maintain that in stock level at But as we say, just getting rolling, really an immature network that we've got lots of
So, Al, this is Marvin. From a store operation perspective, 80% of the product that we order from RGC goes directly to the shelf. So from a payroll productivity standpoint in the stores, that's a big deal. If you think about in the past, product went from receiving to the overhead, then it had to be taken from the overhead to the shelf, which Now 80% straight to the shelf, which means you have more time to serve customers and more time to use payroll from a more productive perspective. So it's been a big win for us in the stores.
Okay. And one follow-up, if I may, for either Carol or Frank. I know that you've said that you will continue to use excess cash to buy back stock. Our cash flow projections would suggest that there's a capacity to buy back $3,000,000,000 for the year, which would leave $1,000,000,000 in the 4th quarter alone. Is our line of thinking in that, that much stock in the 4th quarter loan could potentially be bought back if your Projections are met.
The way we'd like you to think about this is that we'll buy back in the 4th quarter about what we bought back in the 3rd.
Okay. Thank you, Carol.
You're welcome.
And we'll take our next question from Greg Melich with ISI.
Hi, thanks. Congrats on the quarter. The I have two questions. One is the inflation and what that did to the comp. You gave us the gross margin impact, but do you have the comp number?
About 19 basis points Comp was impacted from copper. So copper was really the driver behind comp inflation in the 3rd quarter. Saw a pretty significant ramp there.
Okay. And as you go forward, we would just given what you're seeing today, that should Continue and even accelerate in the Q4?
Cover prices are running, aren't they? Yes.
Who knows where they go? But yes, at this point, you'd say it probably continues.
Great. And then Carol, you said the CapEx guidance of $1,100,000,000 but that would imply about $400,000,000 in the 4th quarter. How should we think about that? Is the $400,000,000 sort of a new run rate for CapEx as we go into next year? Because I know there's been some moving around in terms of the timing of CapEx.
We're going to give you a lot more color on our capital plan for 2011 when we get together on December. Right now, we're looking at a capital plan next year of around $1,300,000,000 But I will tell you there's $100,000,000 of that more or less that's unallocated at Point. So you can model it however you want.
Got it. And then a last one sort of bigger picture, Frank. If you look at the stabilization That spread going from 35% to 18% over the past year. Is it the traffic that's really been Stabilization factor or has it been the people that are in the market being able to spend a more consistent amount? So really, is it all traffic driven or is there some ticket stabilization as well?
Traffic clearly for us has been the significant thing that's happened over the last several quarters is the growing traffic.
And as you look forward, is there anything you would say as you cycle that, you're not concerned if there's any sort of one offs that made that traffic shift Anything other than a good building trend?
Greg, I think the when you look at as I mentioned, we look at our paint department, our hardware department, Plumbing or Electrical kind of the core center of the store. We've continued to see improvement in those businesses As we've worked on them and I think that's the real foundational base that's helping us to drive the core business Overall, in the traffic growth.
And it sounds like that's true even in the housing markets that might still have down turnover and sloppy pricing. Is that fair? Yes.
Yes.
Yes. Great.
Thanks a lot.
And we'll take our next question from Mike Baker with Deutsche Bank.
Thank you. So I want to focus quick on the sales. So the full year sales guidance plus 2.2. I think on the last quarterly call, you said full year sales up 2.6%. Sounds like you had a pretty good Q3 here and the trend is good.
So why the downtick? That's the first question. And then the second question is, I know you guys do benchmark some of your sales results Against the government sales statistics, building material, garden equipment and supply stores, number 444, where that actually more positive in the Q3 versus the Q2, whereas your comps didn't show the same acceleration. So Any explanation for that would be helpful. Thanks.
Yes. I mean, Mike, the first thing is, to be honest, I mean, if you look at the NIAX Numbers through the year, they've been stronger than ours. And we know that they changed their way of measuring it. We don't know exactly what it is. It's Your comment is right.
We don't have a lot of insight into exactly what's Going on with that number and our comparison to it. We did we felt in the spring that it was driven heavily by The lawn and garden business, that seemed to be the case on the numbers that we saw in NIAX. Less Clear, in the fall, we just don't have that breakout yet, but that seems to be the case.
And on the sales question, We were pleased with our performance in the Q3, but Canada was softer than we have projected. Now Canada relative to the competitors did very well, But relative to our plan was softer. And as we look to the 4th quarter, we know we're up against tough comparisons. So we've just tightened up our guidance accordingly.
Okay. So the biggest change sounds like Canada, does that make sense? If I could ask one more question on the SG and A. I think historically, You said expenses growing at 50% of sales. You're obviously going to do a lot better than that this year.
Looking ahead, how do we think about that? Was there something specific in 2010 that has enabled you to beat that? Or is that So the new run rate, close to 30% or less?
Again, we'll have an opportunity to talk to you about this in December And give you every year is its own plan. And Frankly, we want to be able to lay out for you in a coherent fashion what we see as our headwinds and Issues and how we're going to be addressing them in 2011.
Okay. We'll look forward to that. Thank you.
Thank you.
And we'll take our next question from Michael Lasser with Barclays Capital.
Good morning. Thanks a lot for taking my question. So the home improvement market is becoming less connected to key housing metrics and more connected to broader economic factors. Does that change The competitive set with Home Depot potentially competing more against traditional retailers such as the mass merchant?
No, I don't I mean, I wouldn't put it that way, Michael. I'd say it's more, and this is just I mean, we have a theory of the case and this is The theory of the case is that if you look at some of the traditional guideposts in our market like Housing turns and you see that, that doesn't correlate as closely with our results anymore. A theory is, look, as Carol was saying, that's now such a small number overall that the larger economic forces are really The stronger driver on the correlation, but it doesn't change our competitive set.
Okay. I guess The composition of the business is changing with a greater portion of sales coming from small ticket items.
Does it alter how
you think about your promotional stance with the possibility of being more aggressive on those small ticket items and less aggressive on the big ticket stuff, which which are proving to be somewhat inelastic perhaps?
No, that's really not how we're thinking about it. We're working to drive The basics around what the customer needs to maintain their homes and businesses, so that maintenance and repair is really, really important. But the customer still is doing the core updates. It's just not at the rate that they were doing them before. And we focused a little bit on smaller projects.
As I mentioned, our vanity and sanity event, great way for a customer to update the bathroom in their home. They have take on that project
Okay. One quick last question on the Carol on the D and A, how much further is there to go from to benefit from that? How much of the asset base is fully depreciated at this point?
We're working through that model right now. We'll give you a new D and A forecast 2011 when we get together in December.
Sounds great. Look forward to seeing you soon.
Yes. Thanks so much. Thank you. And we'll take our next question from Eric Bauschard with Cleveland Research Company.
Good morning.
Good morning, Eric.
Craig, can you talk a bit about Your thinking and strategy in terms of promotions and what you're bringing in and the events you have planned for 4Q, it seems like you've done a good job of Managing inventories in a rational promotional environment and a sluggish sales environment this year, how are you thinking about those variables as we move into 4Q.
Well, Eric, I mean, I obviously can't go into detail in terms of what we're doing later in the Q4 for Don't want to educate the world on that. However, what I will tell you is we're continuing to focus on trying to Our business to everyday great value for our customers. As I mentioned in several occasions in the past, we're not right there by any means. There's still Activity out there promotionally that takes place that we have to address in the market. As I look in the Q4, again, We're focused on bringing new product introductions to market.
We do work with our suppliers and it's been historically something we've done to create Great special buys where we can leverage the productivity in the factories, pass those savings on to our customers. So we feel really good About the buys that we've made for the holiday gift season, the Black Friday events, as I mentioned, so I think We feel that we're well positioned to compete in the marketplace. We do believe that we've gained ground in Things like holiday decor and the seasonal businesses around fireplace and snow removal in the northern Sector of the country over the past couple of years and we've worked hard to position ourselves well for that in the Q4. So we think we've got a great offering for our customers coming up in the Q4 to keep driving traffic to our stores.
Strategically, as you look at your effort, I think the flyer last week was a bit or was meaningfully more aggressive year over year in appliances. I'm trying to get a sense of are you trying to do are you trying to stay at the same level in terms of promotional intensity? Was that just a category or is that reflective A bit of a step to a more aggressive level for 4Q.
No, I mean, when we look at our appliance business, we're roughly kind of doing what we did last Here, we obviously assess our value offering for the customer and try to make sure that we're competitive in driving business in the market.
Okay, very good. Thank you.
Thank you. Thanks, Eric.
And we'll take our next question from Dan Binder with Jefferies.
Hi, good morning. Now that you're seeing business stabilize and you look at new business opportunities, I'm just curious, What's sort of top of mind? You've mentioned MRO quite a bit for home and business. I'm curious, is that an opportunity to go after that more aggressively, Not just within store, but out of store type prospecting. And then how that may how the stabilizing environment may change the way you think about Store growth as well going forward.
So it's
stabilizing is the word. I think the way we think about our business is really driven off of the portfolio strategy and there are areas That are important for us to continue dynamic, be the absolute destination and Other areas that we deemphasize, but this isn't, if I understood kind of the context of the question, it's not like we're saying, okay, now. We're all set. Now let's go launch a new effort in some other area. This is we're going to keep doing what we've been doing and hopefully Do it better and better.
And as you know, our economic engine is driven by productivity and efficiency. And if you look at our return on invested capital, up 2 50 basis points year on year to now Our store deployment strategy is working. This year, we're opening 7 stores. Next year, maybe 10. So we are going to continue to drive the productivity in our existing boxes.
Okay. Yes, I guess what I was trying to drive at is now that you're seeing some stability and That adds confidence to the type of investments you're making. Are there other types of opportunities outside of the core stores that would make sense to you?
It's still our I mean, we are focused on our core business.
Okay, great. There are Several $1,000,000,000 over the past few years that we gave up that we need to go get.
Great. Thank you.
Yes. And we'll take our next question from Peter Benedict with Robert Baird.
Hey, guys. A couple of
quick ones. First, can you remind us what percentage of the business is the installed sales business and how has that been trending? Any regional color, particularly on California and places like Florida?
Installed business is a pretty small piece of our business. It's less than 10%. And if we look at the performance in the Q3, it was down just slightly.
Okay. And I don't know that we have a regional Hi, sweetie. It's Jeff.
Okay. And then Carol, just on
the leverage ratio, leverage cap, you've been saying 2.5 times. I know you're running below that, about 2.1 at this point. What do you need to see to kind of trend yourself back towards that 2.5 ratio?
Well, Frank used the choice word stabilizine. Stabilizine would be good, stabilizine. We're just early in the recovery, Peter. So we're just watching the business pretty Obviously, things are going in the right direction. We're pretty opportunistic, and we look at the interest rate environment, which is Really attractive, of course.
But our point of view is that interest rates will remain low for a long period of time. So there's no hurry for us to go in and lever up to buy back more shares.
Okay, fair enough. Thank you.
We have time for one more question, Abdullah.
And we'll take our last question from Budd Bugatch with Raymond James and Associates.
Good morning and thank you and congratulations as well. Just a quick question, if you would. The kitchen area has been an area of difficult performance all throughout this situation, particularly with housing and All of that issue, what are you thinking, Craig, about the way to maybe generate some better performance out of Out of the kitchen business, out of the cabinet side of it?
Well, I mean, you're right, Budd. The industry over the past several years has Been in dramatic decline. And so we're really focused on making sure that we can address all the customers' needs in that area for those customers that actually are looking at cabinets. So we've worked hard to improve our overall assembled cabinet business for those customers that want To get going and do it right away, we have the capability of redoing the fronts of the cabinets It's a program that actually is doing well for us. We obviously can replace the customers' cabinets.
We've worked on expanding our offering in our countertops. If a customer wants to make an update without We've got a greater offering there. And of course, we've added the Martha Stewart line into our kitchen cabinet business That is off to a terrific start. So there's a number of things that we're doing to drive productivity in that area. While the industry has been shrinking, the numbers that we are able to look at shows that we're actually gaining share in the category.
And I'm seeing some indications at the upper end, they're starting to see some more, at least rumblings of business to come. Are you seeing that as well? Are you getting more Potential customers to lay out plans for?
Well, we just added the Coraline into about 6 of our stores. It's Pretty early. We really don't have a clear read on that yet.
Okay. And final question, just if you could, is Do we know the actual net promoter score that you had? I heard 580 basis point improvement. What's the score in the 3rd quarter?
I've got it. Just a second here, and I'll give it to you. The net score was 71.6.
Okay. Congratulations. Thank you.
Thank you,
Well, thank you, everyone, for joining us today. And for most of you, we'll be talking to you on December 8 in Boston. Those that To not join us, you can actually listen to us on the web. And those who just listen to our earnings call