Greetings, and welcome to The Home Depot's Quarterly Earnings Call. At this time, all participants are in a listen only mode. Brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Isabelle Jansy, please go ahead.
Thank you, Christine, and good morning, everyone. Welcome to Home Depot's 4th quarter and fiscal year And Richard McVail, Executive Vice President and Chief Financial Officer. Following our prepared remarks, the call will be open for questions. Questions 2,387. Before I turn the call over to Craig, let me remind you that today's press release and Presentations made by our executives include forward looking statements as defined in the Private Securities Litigation Reform and the SEC Act of 1995.
These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, The factors identified in the release and in our filings with the Securities and Exchange Commission. Today's presentation will also include certain non GAAP measures.
Thanks for joining our call this morning. We hope that you and your loved ones are safe and healthy. Our thoughts are with those that have been impacted by the recent winter storms. Fiscal 2020 was a year that we certainly will not forget. It was a year of great hardship and adversity for so many and our Thoughts and prayers are with the millions of people who have been directly impacted by the pandemic.
It is times like these that I have never been more Thankful for the culture that our founders instilled in our business over 40 years ago. We have navigated this crisis by aligning our decisions and actions that make us unique. Our ability to manage unprecedented demand in the business while navigating the global pandemic And supporting our communities through multiple natural disasters and moments of crisis is a direct result of our associates' extraordinary efforts. As a result, investing in our associates during this time was one of the easier During fiscal 2020, in addition to record success sharing payouts, We invested a total of approximately $2,000,000,000 on enhanced compensation and benefits for our associates. As we announced last Quarter, we transitioned from temporary COVID-nineteen benefits to permanent compensation enhancements for our frontline hourly associates.
At the beginning of the year, I would have never thought it possible for the business to grow over $21,000,000,000 in 2020. For context, it took us 19 years as a company to achieve the first $20,000,000,000 in total sales and we out Exceptional execution and cross functional alignment. COVID-nineteen and its impacts have forced us to change the way we live, work and interact And there are some key learnings. The first is that the investments we have made in the business over the past decade were the right ones. And the second is that those investments enabled agility and flexibility to execute on critical business decisions in a Investments in technology and infrastructure helped us to extend our in store BOPUS to curbside in a matter of days and convert a newly opened market delivery center facility to a direct fulfillment center Stream supply chain helped us to better flow products to our stores, while investment in tools for our store associates and met teams Help to get that product to the shelves for the customer more quickly and efficiently.
Our merchants leverage data analytics to collaborate with our supplier partners to make real time adjustments to our assortments as we work to prioritize the We continue to make progress with regards to our strategic initiatives. Key components of our One Home Depot strategy, Such as opening of various supply chain facilities, technology investments and enhancements to the digital experience remain on track. Have also restarted many of the in store investments that were paused at the outset of the pandemic. As customers engage with The Home Depot, We see a continued blend of both the physical and digital worlds. As a result, we believe that this distinct competitive advantages Our results for the year clearly indicate that for many customers, the home has never been more important.
Fiscal 2020 sales Grew $21,900,000,000 to $132,100,000,000 up 19.9% from last year. Comp sales were up 19.7 percent from last year and our U. S. Comps were positive 20.6%. Diluted earnings per share Increased 16.5 percent to $11.94 for the year.
We finished this year with another Exceptional quarter as we saw the continuation of outsized demand for home improvement projects. Sales for the Q4 grew 6,500,000,000 to $32,300,000,000 up 25.1 percent from last year. Comp sales were up 24.5% from last year with U. S. Comps of positive 25%.
Diluted earnings per share were $2.65 for
the 4th quarter.
As Ted will detail, both ticket and transactions were up double digits in the quarter And we saw strong double digit growth from both
the pro and DIY customers.
We had a record holiday season as our modified approach to Black Friday and gift center events clearly resonated with our customers. Our interconnected retail strategy technology infrastructure have continued to support record level web traffic on a consistent basis throughout the year. For the quarter, sales leveraging our digital platforms increased approximately 83% versus the prior year Approximately 55 percent of online orders were fulfilled through a store. For the year, sales leveraging our digital platforms increased Forms increased approximately 86% versus last year and approximately 60% of online orders were fulfilled through a store. We continue to invest in our digital assets, introducing new capabilities and different ways to engage with the Home Depot, all with the goal of improving the customer experience.
1 of the customer enhancement tools that had to be completely reimagined In the COVID-nineteen environment was our in store workshop program. For years, we have offered a number of different in store workshops, including our kids workshops. Until COVID-nineteen, there wasn't an online option for these workshops, but in a few short months, We were able to successfully transition 100 percent of our workshop content online. The live streaming platform has allowed us to go from an average of 5 in store workshops per month to approximately 40 online live streaming workshops per month. These online workshops Change in fiscal 2020 is our disciplined approach to capital allocation to create value for our shareholders.
We remain Committed to growing our dividend as earnings grow. As a result, today we announced our Board approved a 10% increase in our quarterly dividend to 1 point $0.65 per share, which equates to an annual dividend of $6.60 per share. As we look to the fiscal year 2021, Richard will provide some perspective into the factors that have the potential to impact the company's performance. I'm incredibly proud of all we have accomplished in this unprecedented year and want to Close by thanking our associates for the way they have lived our values by serving our customers, communities and each In addition, I would like to welcome the associates from HD Supply back to The Home Depot family. As we close fiscal 2020, We have nearly completed our multi year accelerated investment program that has positioned us well to serve our customers in this dynamic and changing environment.
We have more conviction than ever that we have been investing in the right areas of the business and will continue to invest to extend our We believe that our scale combined with our low cost position and continued focus on the customer will help us win in a highly competitive marketplace and deliver And with that, let me turn the call over to Ted. Thanks, Craig,
and good morning, everyone. Want to begin by expressing my appreciation to our associates and supplier partners for their unwavering dedication to our customers over the last During the Q4, we continue to experience unprecedented levels of demand across our business. For the Q3 in a row, comps in have been approximately 25%. With remarkable consistency, comps in the U. S.
Were at or above 20% for 39 weeks. And as you might expect, this level of demand pressured our supply chain. But our supply chain teams and supplier partners while supporting massive sales volumes. While there's always room for improvement and there are some current port delays, we believe we are well Positioned as we head into our busy spring selling season. Moving on to comp performance in the Q4.
All of our merchandising Apartments posted double digit comps, led by our lumber and indoor garden departments. Our comp average ticket increased 10.8% and comp Transactions increased 12.6%. Similar to the last two quarters, the growth in our comp average ticket was supported by Strong project demand, customers trading up to new and innovative products as well as continued inflation in certain commodity categories like lumber. During the quarter, we continued to experience significant volatility in lumber prices. As we exited the 3rd quarter, Lumber prices were falling sharply off the historic highs seen back in September.
However, during the Q4, pricing Further from the double digit levels seen in the 3rd quarter. During the 4th quarter, inflation from core commodity categories impacted our average ticket growth by approximately 220 basis points. Additionally, our comp transaction growth was supported by the same persistent strength both online and in store transactions that we have experienced in the prior two quarters. During the Q4, big ticket comp Transactions or those over $1,000
were
up approximately 23%. We saw strong performance across a number of big categories including appliances, vinyl plank flooring and vanities. From a customer standpoint, during the quarter, we saw double digit growth from both our pro and DIY customers, with sales growth from our DIY customers once again outpacing that of our pro customers. DIY sales growth was very consistent with the strong double digit growth experienced in the second and third quarters. Sales our Pro customer, we continue to accelerate, posting the best quarter of growth in 2020.
As we've mentioned all year, our smaller Pro customers maintained consistent growth and posted strong double digit growth in every month of the quarter. Growth from our larger pro customers continued to accelerate, Also growing double digits each month of the quarter. While the operating environment is still recovering for many of our larger pro customers, From heightened engagement from both new and existing customers. As our customers continue to spend more time at home, they're times more complex projects with a renewed sense of confidence. During the Q4, our customers exhibited a lot of trends similar to what we saw throughout 2020.
For instance, we saw continued strength in outdoor living categories like Patio furniture, grills and outdoor power equipment as customers tried to extend the outdoor living season. We also Customer engagement in our annual Black Friday and gift center events was strong. As I previewed on last quarter's call, we took a different approach to our events this year to prioritize the health and safety of our associates and customers. We made deeper buys On fewer SKUs, we changed the way we use our lay down areas and end caps, and we extended our events over several weeks to avoid driving Too much traffic on any one single day. And we could not be more thrilled with the results.
Over the holiday season, our customers said they wanted a sense of normalcy. They told us they wanted to decorate for the holidays and make the most of the season while spending more time at home with family. So they bought Big and they bought early, and we saw a record level of sell through with our decorative holiday assortment. During the quarter, our interconnected and digital assets Continue to perform well. Over the last several years, we've rebuilt our website and invested across our platforms to upgrade our infrastructure and improve the shopping experience.
These investments allowed us to handle the enormous growth in web traffic and convert more of that traffic into sales. During fiscal 2020, homedepot.com had more than 3,600,000,000 visits and our conversion rate increased Double digits across all platforms, including our app, mobile and desktop. Turning our attention to the Upcoming spring season, I could not be more excited about our comprehensive lineup of products, including our number one Position in outdoor power equipment. As we've discussed, the cordless outdoor power market continues to outpace growth of the gas market. Cordless tools are easier to use, more environmentally friendly and have the power in runtime to get most jobs done.
Like we've done with our tool department, we are resetting our outdoor power equipment base by branded battery Customers can now shop our leading and exclusive lineup by platform, including Makita, Milwaukee, Ryobi, Toro The new Ryobi HP high performance brushless product was introduced in our tool department last year. We are now Expanding it into cordless mowers, trimmers and blowers. The cordless mowers come with 70 minutes of runtime and we are Excited about the additional innovation coming in the product pipeline. As we look forward to spring, we know that now more than ever, The home has never been more important. We feel great about our position as the number one retailer for home improvement, and we look forward to serving Customers in the busy spring selling season.
With that, I'd like to turn the call over to Richard.
Thank you, Ted, and good morning, everyone. In the face of what was a difficult year for many, including for many of our associates, I am proud of the actions we took to an increase of $6,500,000,000 or 25.1 percent from last year. Our total company comps We're positive 24.5 percent for the quarter with positive comps of 24.4% in November, 22 point 4% in December and 26.5 percent in January. Comps in the U. S.
Were positive 25 In January, all 19 of our U. S. Regions as well as Canada and Mexico posted double digit positive comps with sales growth of $21,900,000,000 versus fiscal 2019. For the year, Total company comp sales increased 19.7% and U. S.
Comp sales increased 20.6%. In the Q4, our gross margin was 33.6%, a decrease of approximately 30 basis points from last year. Gross expenses were approximately 20.9 percent of sales, representing an increase of approximately 25 basis points compared to last year. Let me take a moment to comment on a few of our expense items. First, We incurred approximately $110,000,000 of non recurring expense related to the completion of the HD Supply acquisition, creating approximately 30 basis points of operating expense deleverage.
2nd, during the quarter, we continued to support our Associates with enhanced benefits in response to COVID-nineteen and transitioned our temporary support programs to permanent compensation enhancements, which we announced last quarter. These expenses totaled approximately $340,000,000 during the 4th quarter, resulting in approximately 105 basis points of expense deleverage. 3rd, $55,000,000 of operational COVID related expenses, including personal protective equipment for our associates and customers and enhanced Cleaning of our stores, resulting in approximately 20 basis points of operating expense deleverage. 4th, we recorded expenses related to our strategic investment plan of approximately 325,000,000 an increase of approximately $45,000,000 compared to last year. And finally, during the Q4, we showed Strong expense control in other areas of the business and drove approximately 130 basis points of expense leverage.
Included in this 130 basis points of leverage is approximately 80 basis points of pressure, driven by Crude bonus expense primarily related to our outperformance for our biannual store success sharing program and Store and field based management bonuses for the second half. Our operating margin for the Q4 was approximately 12 Spence associated with the completion of the HD Supply acquisition, our operating margin would have been 13% for the 4th quarter and 13.9 percent for the year. Interest and other expense for the Q4 grew by $35,000,000 to $327,000,000 due primarily to higher long term debt levels compared to 1 year ago. In the 4th quarter, Our effective tax rate was 23.9% and for fiscal 2020 was 24.2%. Our diluted earnings per share for the 4th quarter were $2.65 an increase of approximately 16% compared to the Q4 of 2019.
The one time expenses related to the completion of the HD Supply position of approximately $110,000,000 negatively impacted our 4th quarter diluted earnings per share by Approximately $0.09 Diluted earnings per share for fiscal 2020 were $11.94 an increase of 16.5% compared to fiscal 2019. During the year, we opened 5 new stores and ended the year with a store of 2,296. Retail selling square footage was approximately 2 39,000,000 Square Feet. For the fiscal year, total sales per retail square foot were $5.44 The highest in our company's history. At the end of the quarter, merchandise inventories were $16,600,000,000 An increase of $2,100,000,000 versus last year and inventory turns were 5.8 times, up from 4.9 times from the same period last year.
Moving on to capital allocation. Our long term principles for how we think about deploying capital have not changed. We will continue to invest in the business. After investing in the business, invested approximately $8,000,000,000 in the acquisition of HD Supply to enhance our capabilities and drive Accelerated sales growth in a highly fragmented MRO space. We completed this acquisition on December 24.
During the year, we paid approximately $6,500,000,000 of dividends to our shareholders. We look Quarterly dividend by 10%. In mid March, we suspended our share repurchases as part of several Steps we took to further enhance our strong liquidity position. Prior to that suspension, we repurchased approximately $600,000,000 Or 2,500,000 shares of outstanding stock in fiscal 2020. We expect to resume share repurchases in the Q1 of fiscal 2021, And we will also maintain an enhanced cash position of at least $4,000,000,000 during fiscal 2021.
During fiscal 2020, we raised approximately $8,000,000,000 of staggered maturity long term debt to enhance our liquidity position, partially fund acquisition of HD Supply and repay approximately $2,750,000,000 of senior notes. Computed on Average of beginning and ending long term debt and equity for the trailing 12 months, return on invested capital was approximately 40.8%, down from 45% in the Q4 of fiscal 2019. This decrease primarily reflects our decision to temporarily enhance Our liquidity position, including the suspension of our share repurchases back in March. Now I'll to our outlook for 2021. The strong and consistent demand environment we've seen over the past 9 months has continued Into February.
Our customers tell us that their home has never been more important and that they will The housing environment remains strong as increased demand for single family homes has driven housing respect to the course of the pandemic, the distribution of vaccines, short term fiscal policy and how these developments will impact Broader economy and ultimately consumer spending. Given these uncertainties, we are limited in our ability to forecast demand for the year, particularly as it relates to the back half. For this reason, we are not providing guidance for fiscal 2020
While
we are not able to predict how consumer spending will evolve, if the demand environment during the back half Of fiscal 2020 were to persist through fiscal 2021, it would imply flat to slightly positive comparable sales growth. We calculate this by assuming the sales dollar level of demand that we saw in the 4th quarter continues throughout 2021 adjusting for historical seasonality. In this demand environment, we calculate our Our operating margin and investments for fiscal 2021. During fiscal 2020, we experienced Some pressure in gross margin as we continue to build out our 1 supply chain network. Remember that the majority of the costs Associated with opening and operating our supply chain facilities are accounted for in our cost of goods sold.
As we transition from 2020 into 2021, our operating expenses will reflect the move away from temporary COVID related Pay and benefits to permanent wage investments, the continuation of strategic investments in the business and the impact lapping areas of underspend such as understaffed stores that we realized last year. In fiscal 2020, We incurred approximately $2,000,000,000 of expense related to enhanced pay and benefits for our associates. Last Quarter, we transitioned away from our temporary support programs in response to COVID and increased permanent compensation for our frontline hourly associates by approximately $1,000,000,000 on an annualized basis. In addition, We also incurred approximately $240,000,000 of expense related to COVID operational costs During fiscal 2020, primarily in the form of personal protective equipment for our associates and customers of COVID related operating expenses on an annualized basis for fiscal 2021, primarily related to PPE, additional cleaning, as well as extended leave for associates who are directly impacted by COVID-nineteen. During Fiscal 2020, we chose to defer some of our in store strategic investments, both capital and expense, to prioritize the safety of our associates customers.
We expect to complete these investments in fiscal 2021. As we look back on our investments from 20 to 2020. We believe that we focused on the right areas, improved the customer experience and grew significantly faster than our market. Driving growth faster than the market in any environment. And second, to further strengthen our position as the low cost provider in home improvement with a relentless focus on productivity and efficiency.
This approach will result in a steadier level of investment in both Capital and expense going forward. For fiscal 2021, we estimate capital expenditures of approximately 2% of sales. It is our intent to make those investments on a steadier cadence and to drive operating expense leverage, while preserving the ability to adjust Our investments as needed. We estimate that our fiscal 2021 effective tax rate will be similar to what we reported in fiscal 20 As we begin 2021, we believe that we've positioned ourselves to meet the needs of our customers in any environment. The investments we've made in our business have enabled flexibility in our operating model as well as our financial model.
As we look forward, we will continue to Invest to strengthen this position and extend our scale and low cost position to drive growth faster than the market regardless Thank you for your participation in today's call. And Christine, we are now ready for questions.
Thank you. We will now be conducting a question and answer A confirmation tone will indicate your line is in the question Thank you. Our first question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question.
Thanks. Good morning, everyone. My first question is on the expense line. Richard, if I heard right, I think you said there was about $2,000,000,000 of costs That were present in 2020. I think about $1,000,000,000 of them become permanent.
And then I think you said 250 I don't know, temporary costs related to equipment, etcetera. I think and then you said we also need to think about Into 2021. Is there any way you can quantify that? And then does that mean that at some point, there's, I don't know,
There are a lot of ins and outs. And so that was actually the intent behind the sort of Margin case that we put forward. And so again, just to sort of recap how you get to a 14% margin in that Case that we provided. Let's start with operating expense side. You have a few primary drivers and I'll tick through those.
First, you have the permanent investment And wage for our hourly associates as we transition from temporary support programs in the Q4. You have the continuation of COVID related expenses to keep our stores and our associates safe. You have the overlap of some expense benefit from under staffing in the first Last year as sales ramped up. So, the period as we were growing staff to meet the sharp acceleration in sales. So that is the year over year overlap that you asked about.
And then if you look on the cost of goods side, just to cover income all the way down to 14, We're expecting to see continued pressure from transportation costs, continued pressure from shrink. You'll see pressure reflecting the opening up of our 1 supply Chain buildings as we ramp up capacity utilization in that network and return to a more normal stance And finally, the last comment getting us to the 14 in that case You'll see slightly higher non cash amortization related to the HD Supply acquisition. That's about 10 basis points of an impact Operating margin, but that's non cash. So that's the bridge to 14%.
Okay. That's helpful. And then my follow-up Maybe for Craig and for you Richard. If we go back to 2017 realizing that a lot of things have changed, the 1 HD investments, I think were slated somewhere of a I think we're slated somewhere of a 20 basis point hit to margin and a benefit as up to much as 40 basis points. If that's still the case, and then we do have COVID costs rolling off, it feels like margins are being held back a bit, meaning they could be a good amount higher.
Are you I don't know if your commitment or your philosophy has changed in some of what you're speaking about regarding continuing A certain level of investment to maintain that growth ahead of the market? Or will you allow margin to go up, not gross per se, but more SG and A leverage If you retain a lot of the sales from this period going forward?
Simeon, our overall philosophy hasn't changed From the timeframe that we started the accelerated investment, we said that we needed to do that because we had to get Ahead of where the customer was taking us and that's why we made the investment that we did in terms of the 11,100,000,000 And the intent behind that was twofold. Number 1, we wanted to be able to grow faster than the market, gaining teen through 2018 to 2020 and market share is a little elusive in our market, but based on the best data we can get, We believe that we've captured about 2 75 basis points of share growth during that timeframe. And so that has During the whole investment, we're taking share. And so going forward, our approach is to make Sure that we are investing on a more steady cadence. What we need to in the business to make Sure that we can stay ahead of the customer and we can continue to gain those kind of accelerated share growth opportunities going forward.
And our focus is around really optimizing op Margin dollars. And if we can do that and drive incremental op margin dollars, we'll let rate fall where it falls. And just
To add to Craig's comment about market share capture, if you take that 2 75 basis points and translate that into dollars, That share gain represents $10,000,000,000 of incremental sales annually to our top line versus where we were in 2017. So as you heard from Craig, scale matters, our position as low cost provider matters,
Our next question comes from the line of Scot Ciccarelli with RBC. Please proceed with your question.
Good morning, guys. Hope everyone's well. Can you provide some incremental details regarding HD Supply? Specifically, how do you guys plan to integrate it with Interline or Your existing MRO business and then how are you guys thinking about kind of the market opportunity from here?
First of all, we're thrilled with the acquisition of HD Supply. They are clearly a leader in the MRO space And it really strengthens our position in a $55,000,000,000 fragmented market opportunity. And so we're super excited about that. We're going to take our time and look at how we encompass all the assets that exist between The formally Interline and now HD Supply and we'll put a plan together that will allow us to use all that asset base To be able to grow and capture share in the MRO market, we're super excited about that opportunity.
Given the fragmentation of that market now that you have, let's call it, 2 of the bigger operations kind of joining hands, if you will, you should have about We're estimating about 10% market share in MRO. Does your growth potential actually accelerate just because you Basically answer the bell to so many more customers. I
mean that's clearly why we made the acquisition. We want to Accelerate growth in that space and it's a great space and allows us to penetrate into A housing segment that was more difficult to penetrate with the orange box. So we're super excited about the opportunity.
Yes, Scott, the capability set of those 2 combined companies far and away the strongest Distribution network, I mean, this is a distribution business and looking at integrating the 2 supply chains to by far the leading National distribution network and then increasingly digital, transacting digitally and being able to put that we have built with our digital assets for the consumer business are B2B assets And HD Supply starts with a very healthy and well performing site as well. And then add the Sales force and thousands of folks on The Street with by far the largest distribution sales
Our next question comes from the line of Chuck with Gordon Haskett. Please proceed with your question. Mr. Ram, your line is live. Our next question comes from the line of Michael Baker with D.
A. Davidson. Please proceed with your question.
Hi. A couple of follow ups. First, on the gross margin, you talked about a lot of pressures. I didn't hear anything necessarily that would improve year over year. So Can we infer from that that you expect gross margins to be down next year?
And then I wanted to ask you about inventory. I think it was up about 14%, which clearly shows a better in stock position than it had been, but how does that compare to where you had planned it to be at the end of The quarter. Thanks.
So on the inventory position, Michael, as I made comments in my prepared remarks, we feel great About going into the spring, our in stock positions have been gaining ground While we've supported that $21,000,000,000 of comp growth, you just think of the physics of moving that much cube through our network. We were able to do that while continuing to improve our in stock levels. We Our store inventories are, as you see in our release, about $2,000,000,000 over LY. And we have plans to increase that further. As we went into the pandemic last year, we He took some very aggressive actions, as we've said, with a focus on safety for our customers and our associates.
We backed off A lot of promotions and when we backed off those promotions, we also backed off inventory. We are now preparing For a more normalized spring and we're putting that inventory back into our forecast. So we'll have an even Stronger inventory position, where we sit today as we go into the height of spring. So we just feel great. The supply chain teams, our supplier partners, our merchants have worked hand in hand, to get that type Flow into our building for the spring season and we'll be in a much better position than we were last year to capture that demand.
On gross margin, Michael, today we're not providing guidance. I can tell you we're focused on driving Gross profit dollars and driving operating expense leverage.
Okay. Thanks. Appreciate the color.
Our next question comes from the line of Christopher Horvers with JPMorgan. Please proceed with your question.
Thanks.
I had a follow-up on the investment side. You talked about 2% of sales for CapEx, that's about $2,700,000,000 rough math here in 2021. Do you stay at that 2% level of sales as you go beyond 2021? And then on the OpEx side related to investments, will investment dollars be in OpEx be down in 'twenty one and down further in 22, maybe the best way to frame it is how are you thinking about that core ex COVID SG and A versus sales Growth metric as you look in 2021 2022?
Chris, we're using the CapEx expand of approximately 2% of sales is kind of a rule of thumb. We clearly have flexibility in that, But the most important thing is we know that in today's world, retailers have to continue to invest to be able to Stay with customer needs and expectations and those that haven't done that over the years, unfortunately, the roads littered with retailers that didn't do that. And so we'll never put Home Depot in that position and we believe that that 2% is a good rule of thumb for us to think about. And then embedded in our operating margin going forward Is the associated expense with capital spend and that varies depending on what type of expense you have. But our focus Now that we're past our large part, past our accelerated investment period, we're going to get back Operating leverage from this point going forward.
Got it. That's very helpful. And then just a follow-up quick follow-up on the gross margin. How are you thinking about the potential impact of lumber? Are you baking in a headwind there given where our pricing is right now?
And then is Home Depot Supply a Potential good guy offset as we think about the puts and takes on gross margin.
So, Chris, on supply, the margin actually isn't a good guy. I mean,
It's on a like for like basis. There's this is immaterial to the company.
It's immaterial.
They don't. But what they've been reporting, they don't include the supply chain expenses. So we'll make that, like Home Depot with supply chain 4 wall distribution in the gross margin, not as an operating expense. On lumber, we don't plan lumber commodity price moving up or down. It's obviously been a huge impact in 2020.
It's about $1,700,000,000 of sales Was attributed to lumber price inflation over the course of 2020, but we don't even Shoot it at what that might do. We just assume that the levels will stay as They are as we exit the year. And as you know, we have a very flexible supply chain, particularly in lumber. We have Our bulk lumber DCs where we're taking product in, from our supplier partners and shipping those real time daily lumber deliveries So we never have huge quantities of inventory to get trapped with a good guy or a bad guy. So it's pretty Fluid in mark to market and again don't make any sort of predictions of whether that's going to go up or down and help or hurt.
Understood. Have a great spring, guys. Thank you.
Thank you.
Our next question comes from the line of Stephen Forbes with Guggenheim. Please proceed with your question.
Good morning. Richard, I wanted to focus on the outlook for strategic spending. So maybe both my questions will really be focused here. You mentioned the $325,000,000 of quarterly spend, and I think that's been consistent for the past two quarters. So any color on how we should be modeling The quarterly investment spend, especially given your prior commentary, right, that I think we should expect the absolute level to be neutral on a year over year basis?
I'll go back to Craig's comment on this. Now that the investment program is substantially complete, you're going to see us If you're talking about modeling, what that means, we had a 3 year period where in many periods expenses grew faster than sales Because of the expense component of the plan and CapEx obviously was elevated. What we're telling you today is going forward, we are moving to that steady and consistent Cadence. And so as Craig said, capital expenditures will approximate 2% of sales And then expenses associated with it are assumed within the margin case that we laid out. And from this point going forward, We intend to deliver operating expense leverage on a consistent basis.
And maybe just a follow-up on that comment. Again, if you can, right, if we think about what transpired over the past couple of years, right, the quarterly level of Investment spend, I think, ramp from 75, which was considered business as usual to this 325. So are your commentaries implying that we should expect, maybe not this year, but over a multiyear period to return to those prior levels Of investment spend or normal case investment spend? Or should we anticipate a return to a above right that 75 level Given just the incremental needs of the business, any more detailed commentary would be helpful.
So I think it's important to remember the context that when we kicked this investment program off, we were $100,000,000,000 in sales and now we're over $130,000,000,000 in sales. And so, getting it talking about Dollars versus percentages, I think becomes less relevant and meaningful. So what we're trying to do is provide you with sort of our Stance going forward, which again, is going to be steady and consistent. And so if you take Case that we laid out, which is simply a case, where we would expect at least 14% operating margin
Craig, could you talk a
bit more about the 2 20 basis points of share gains you called out as 2020 was clearly a big year and you called out the impact of your strategic initiatives. But given that your investments are ongoing and the benefits are still early days, Could you talk about why you think share gains can further accelerate in 2021? And where do you think the most opportunity is across your various DIY
2018 through 2020 was roughly 2 75 basis points of share gain that we saw. And Again, the intent of the investments, both the previous 3 years where we needed to kind of jump start and get ahead of The customer and what we're building out and the capabilities going forward, we believe will position us well We continue to gain share really in all of the segments that you just called out, DIY, Pro and in the MRO space. That's our focus. That's what we're trying to get done. We are Investing in what we believe the interconnected element of how the customer is engaging in retail today It's hugely important, particularly in our space, the project business, where the customer is blending both the physical and digital worlds To be able to complete their project, we're seeing that ongoing.
We are excited about the engagement that we've had with new customers Into the business with the expansion of the millennial generation in home improvement and home ownership And we believe that these investments ongoing will allow us to be in a position to continue to capture outside share. That's why we made them.
Ted, can you talk about your base case for inflation this year, both in terms of pass through commodity prices and that Impact on ticket, but also what you anticipate from vendor cost increases and how you think about passing on these increases Versus offsetting the portfolio pricing and other productivity initiatives.
On general Inflation, again, today, we're not providing guidance. Economists' views vary. And so the case that we laid out To you today is simply a mathematical extrapolation. Ted, maybe you'll talk about on the fender side.
Yes. I'd say that there's no doubt Commodity prices are on a tear right now. We were just talking about lumber prices and we hit All time record highs over $1,000 1,000 board feet last week, which is up a staggering 140 odd percent from the prior year. A stick of lumber that was 2 odd dollars is Now over $5 Similarly copper hit $4.11 yesterday. I believe that's a 12 year high.
Those type products, copper and wire, lumber, obviously, in all stick goods, those are priced to market By virtually everyone in the marketplace. So we don't have a lot of anxiety around costs and suppliers who are obviously seeing some cost pressures. We've managed that For 41 years, there's been periods of hyperinflation. There have been periods of muted inflation. We run this as a portfolio.
We work closely with our supplier partners to be the advocate for value for the customer. And as I think about all that Going on now, I reflect back to the tariffs and I guess I'd long for that was our biggest issue When we were managing tariffs, but tariffs in now the commodity environment is just One more in a string of market dynamics that our merchant teams have worked through for
I don't know if it's all just telling me that in the context of kind of The market to market moves that represents roughly 18% to 20% of our volume that moves as
Our next question comes from the line of Michael Lasser with UBS. Please proceed with your question.
Good morning. Thanks a lot for taking my question. So can you calibrate the scenario that you laid out For the year ahead, if your comp is flat to slightly up, you would have at least a 14% operating margin. What happens if your comp is down 5%? Can you still have a 14% operating margin?
We're not going to speculate, Michael, we do retain a good degree of financial flexibility, but Our actions will truly depend on the circumstances that are present at the moment.
And just I mean remember Largest cost in the business is our cost associated with payroll and that is driven on a transactional basis. It flexes Okay.
A more longer term question. Prior to 2018, Home Depot typically had a 20% to 30% incremental margin on additional sales. In the last few years, owing to the tariffs, owing to the strategic investment plan and owing to COVID, the Contribution margin has been in a single digit, maybe low teens range. Looking past 2021, do you think you can get back to an incremental margin that's in line with your historical Sensitive today than it's been in the past and why would that be the case?
I would disagree with your last statement, but I can And we do that everything we do eventually directs itself towards driving sales productivity or cost productivity. And so that's what we're focused on. At the end of the day, it's about operating profit growth and that's what we're focused on.
Okay. Thank you very much and good luck with the spring.
Thank you.
Christine, we have time for one more question.
Our final question will come from the line of Karen Short with Barclays. Please proceed with your question.
Hi. Thanks for squeezing me in. A big picture kind of question and then just a follow-up on some of the components of guidance. But I guess, is there any way to And then is there any way you could frame how you think about the DIY versus the Pro comp in 2021? And then on your Guidance with respect to shrink lingering in 2021, I guess I was under the impression that, that would be something that we you would cycle as we got to the end of this year.
So any color on that would be great.
Yes, Karen, it's really Call to try to quantify a Pro backlog. The only thing we can share with you is what our Pros tell us and that Their jobs are building. We've seen an acceleration of the Pro business from quarter to quarter. And as it was called out in the Q4, we actually had our best quarter of the rolling 12 with the Pro. I think the thing that is really interesting is the fact that on the DIY We've seen the acceleration of the millennial generation engagement with home improvement and homeownership.
And over Time, the thing that will be interesting to watch is has that in fact expanded the market? That's an interesting question that we don't know the answer But we're watching carefully. So we think there's a lot of opportunity as we go forward.
Okay. Thanks. And yes, and On shrink, we saw pressure on a year over year basis in 2020 and that pressure was pretty consistent across quarters. At this elevated level of sales, though, it's harder to tell the degree of the impact we've made. So we're going to keep watching it and working the problem.
Great. Thank you.
Ms. Jansy, I would now like to turn the floor back over to you for closing comments.
Thank you, Christine, and thank you all for joining us
This concludes