Greetings, and welcome to The Home Depot fourth quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Isabel Janci. Please go ahead.
Thank you, Christine, good morning, everyone. Welcome to The Home Depot's fourth quarter and fiscal year 2022 earnings call. Joining us on our call today are Ted Decker, Chair, President, and CEO, Jeff Kinnaird, Executive Vice President of Merchandising, Ann-Marie Campbell, Executive Vice President of U.S. Stores and International Operations, and Richard McPhail, Executive Vice President and Chief Financial Officer. Following our prepared remarks, the call will be open for questions. Questions will be limited to analysts and investors. As a reminder, please limit yourself to one question with one follow-up. 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 Ted, 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 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 presentations will also include certain non-GAAP measures. Reconciliation of these measures is provided on our website. Let me turn the call over to Ted.
Thanks, Isabel, Good morning, everyone. Fiscal 2022 was another record year for our business, as we achieved $157.4 billion in sales. We added over $6 billion in sales and increased diluted earnings per share 7.5% versus last year to $16.69. Over a three-year period, we have grown sales by over $47 billion and delivered diluted earnings per share growth of over 60% while investing in the long-term health of our business. Throughout fiscal 2022, we continued to face reduced friction for our customers to improve the shopping experience. As Anne will discuss, we invested in an improved customer and associate experience in our stores by implementing a new store leadership structure.
We also drove productivity within the four walls of our store through our Get Stores Right or GSR space optimization initiative. We've implemented new tools and technology in stores to reduce complexity for associates and improve customer service. We're also pleased with the traction we are seeing in our interconnected business. We've seen increased app engagement, downloads, conversion as we've rolled out several enhancements, including an improved online experience for our Pro loyalty program, seamless connectivity for our military program, and the launch for our new store mode feature, which makes store navigation and product interaction easier. We are very pleased with the continued progress on our supply chain build-out as we reached an important milestone earlier this year. All our appliance delivery volume is now managed through our market delivery operations, significantly improving the customer experience. In the near term, we continue to navigate a unique environment.
Throughout most of fiscal 2022, we observed a resilient customer who is less price-sensitive than we would have expected in the face of persistent inflation. In the third quarter, we noted some deceleration in certain products and categories, which was more pronounced in the fourth quarter. This, along with the negative impact from lumber deflation, led to fourth quarter comps that were slightly softer than anticipated. We are closely monitoring our elasticities and trends across the business and believe we have the tools, team, and experience to manage in any environment. This team has been effectively navigating the unprecedented growth of the last three years, I have full confidence in their ability to execute as we go forward.
The investments in our associates, stores, digital platforms, supply chain technology, and other strategic initiatives have strengthened our business and enabled us to grow share and deliver exceptional shareholder value over the long term. The most important investment we can make is in our people, which is why we are announcing that we are increasing annualized compensation by approximately $1 billion for our frontline hourly associates. We believe this investment will position us favorably in the market, allowing us not only to attract the most qualified talent, but also retain the exceptional associate base that is already in place. Today, our board approved a 10% increase in our quarterly dividend to $2.09 per share, which equates to an annual dividend of $8.36 per share.
Turning to 2023, we are targeting approximately flat comp sales in a mid-single digit % decline in diluted earnings per share compared to last year. Richard will take you through the details in a moment. While we expect this to be a year of moderation in demand for home improvement, we believe that the long-term underpinnings of our market remain strong, and we are well-positioned to leverage our distinct competitive advantages to capitalize on compelling growth opportunities in our space. I could not be more pleased with the resilience and strength that our associates have continued to demonstrate, and I want to thank them and our supplier partners for their hard work and dedication to serving our customers and communities.
Now I'm gonna turn it over to Ann-Marie Campbell, Executive Vice President of U.S. Stores and International Operations, to share a little more on how we are taking care of our associates and continuing to enhance the customer experience.
Thanks, Ted. Good morning, everyone. I'm very excited to have the opportunity to spend a few minutes talking about the best team in retail and the many ways we are investing in the associate experience at The Home Depot. We know that our associates are a key differentiator, and they are essential in helping us sustain the customer experience we strive for. In order to provide the best customer experience in home improvement, we must focus on cultivating the best associate experience in retail. What does this mean to us? This means not only investing in competitive wages and benefits, but also providing tools, training, and development opportunities that make working at The Home Depot an enjoyable and rewarding experience. As Ted mentioned, we are making a significant investment of approximately $1 billion in compensation for frontline hourly associates.
This is a meaningful investment that we believe will position us favorably in the marketplace. This is just one component of the associate investment story. We know that the key to an engaged and committed workforce is investing in the person, taking an interest in them and in their development. To that end, we began the year with a new store leadership structure, the first time we have changed the structure since our company was founded. The driving forces of these changes were customer service and associate development. We created new management positions focused entirely on the customer service experience, increasing the number of managers on the floor at any given time. This frees up time for other store leaders to devote to associate training and development.
The net result of all this is both an improved customer and associate experience while also creating new career paths for our associates. Another important element of a best-in-class associate experience rests on simplification. How can we simplify processes and systems in our stores to enable associates to deliver a better customer experience? How can we simplify and streamline tasks so that an associate can spend more time serving our customers? One example we have talked about before is the work we've done to simplify order management in our stores with the Order Up initiative. Historically, our associates had to navigate dozens of systems, but with Order Up, we have been able to streamline multiple systems into one that is simpler and more intuitive. We took simplification even further this year with the introduction of the new hdPhone and associated applications, such as Sidekick.
The rollout of our hdPhone was a direct result of associate feedback on the limitations of our first generation in all devices known as First Phones. For the first time ever, every associate on the floor will have an hdPhone in their hands with enhanced communication features, tools, and training capabilities. This increased accessibility to real-time support is significant in helping our associates better serve our customers. In addition to enhancing the customer service experience, the new hdPhone provides real-time access to tools and applications such as Sidekick that helps associates prioritize the highest value task more effectively. Powered by machine learning, Sidekick directs associates to key base where on-shelf availability is low or outs exist. The hdPhone empowers our associates to provide a best-in-class customer experience, increases operational efficiency, and generally makes an associate job much easier.
These are just a few examples of the many ways we're investing to enhance and improve the associate experience at The Home Depot. Our associates are trusted advisors for our customers and are the heartbeat of our company. I wanna thank them for all they do to take care of our customers. We will continue to invest in them with a focus on listening to their needs, maintaining competitive wages and benefits, and continuing to enhance our tools, training, and development opportunities. With that, let me turn the call over to Jeff.
Thank you, Anne, and good morning, everyone. I wanna start by also thanking all of our associates and supplier partners for their ongoing commitment to serving our customers and communities. During the fourth quarter, our comp average ticket increased 5.8% and comp transactions decreased 6%. The growth in our comp average ticket was driven primarily by inflation across our product categories, as well as demand for new and innovative products.
Inflation from core commodity categories positively impacted our average ticket growth by approximately 15 basis points during the fourth quarter. On lumber specifically, during the fourth quarter, we saw a significant decline in lumber prices relative to a year ago. On average, lumber prices were down over 50% year-over-year. Given this dynamic, comp sales were negatively impacted by approximately 70 basis points in the fourth quarter. Turning to our department comp performance for the fourth quarter, 7 of our 14 merchandising departments posted positive comps. Build materials, plumbing, millwork, hardware, tools, outdoor garden, and paint had comps above the company average. Big-ticket comp transactions, or those over $1,000, were up 3.8% compared to the fourth quarter of last year.
While we saw big ticket strength across pro heavy categories like portable power, pipe and fittings, and gypsum, we did experience softness in other categories like laundry, soft flooring, and roofing. During the fourth quarter, pro sales growth outpaced DIY. Pro backlogs still remain elevated compared to historical averages, and we saw positive comp performance in our build materials, plumbing, and millwork departments, as well as in certain bath-related categories. Turning to total company online sales, we are very pleased with the performance of our digital assets. Sales leveraging our digital platforms increased over 4% compared to the fourth quarter of last year. This was driven by our continued investments, which are resonating with our customers.
For those customers that chose to transact with us online during the fourth quarter, approximately 45% of our online orders were fulfilled through our stores, a testament to the power of our interconnected retail strategy. During the fourth quarter, we held our decorative holiday gift center and Black Friday events. 2022 was our record sales year for these events. We are the product authority in home improvement and together with our supplier partners, we continue to offer the best product at the best value for our customers every day. A great example of this is our recent partnership with Ecolab, a global leader in water, hygiene, and infection prevention solutions and services. The Ecolab Scientific Clean product line offers the cleaning solutions for commercial, industrial, and residential use that Ecolab is known for to both our pro and DIY customers, giving them access to innovative cleaning technology.
This partnership is exclusive to The Home Depot. It marks the first of its kind in Ecolab's 100-year history. We're looking forward to the year ahead, particularly with the spring selling season right around the corner. We have a great lineup of products from live goods to outdoor power equipment. We continue to see an industry-wide shift from gas-powered to battery-powered tools. As we've been discussing for some time, we have been leaning into this trend, offering a broad assortment of outdoor power equipment with cordless technology. We have the brands that matter across tools and outdoor power, including RYOBI, Milwaukee, DEWALT, and Makita. In our spring gift center event, we are expanding our assortment to include cordless innovation in mowers, trimmers, blowers, and chainsaws. As an example, our Makita XGT platform will have over 125 professional-grade cordless tools.
I'm particularly excited about our new 40-volt XGT mower that delivers gas-powered performance with high vacuum lift for premium cut quality. The XGT mower can cut over an acre in less than 60 minutes on 2 40-volt XGT batteries. These Makita tools are exclusive to The Home Depot in the big box retail channel. One of our key focuses in the spring is to provide great value and innovation for our customers within our live goods offerings. We continually work to strengthen our relationships with key vendors throughout the industry, providing the best value, innovation, and garden performance for our customers. We have expanded our offerings in national, regional, and proprietary brands such as Vigoro, Rio, Proven Winners, Southern Living, and Knock Out Rose, just to name a few.
Our teams continue to look for better garden performance varieties that provide solutions for our customers. We are excited about the upcoming spring season. With that, I'd like to turn the call over to Richard.
Thank you, Jeff. Good morning, everyone. In the fourth quarter, total sales were $35.8 billion, an increase of approximately $100 million or 0.3% from last year. During the fourth quarter, our total company comps were essentially flat at -0.3% for the quarter. As Jeff mentioned, lumber prices in the quarter negatively impacted comp sales by approximately 70 basis points. We had comps of -1.3% in November, +0.8% in December, and -0.1% in January. Comps in the U.S. were -0.3% for the quarter, with negative comps of 1.4% in November, +0.7% in December, and -0.1% in January.
For the year, our sales totaled a record $157.4 billion, with sales growth of $6.2 billion or 4.1% versus fiscal 2021. For the year, total company comp sales increased 3.1%, and U.S. comp sales increased 2.9%. In the fourth quarter, our gross margin was approximately 33.3%, an increase of 7 basis points from last year. For the year, our gross margin was approximately 33.5%, a decrease of 10 basis points from last year. Gross margin was in line with our expectations, reflecting planned investments in our supply chain capabilities. Throughout the year, we continued to successfully offset significant transportation and product cost pressures, as well as increased pressure from shrink during the back half of the year.
We did this while maintaining our position as the customer's advocate for value. During the fourth quarter, operating expenses were approximately 20% of sales, representing an increase of 32 basis points from last year. Our operating expense deleverage is driven largely by charges unique to the quarter related to litigation in California, storm-related expenses, and an unfortunate fire in one of our stores. For the year, operating expenses were approximately 18.3% of sales, representing a decrease of 13 basis points from fiscal 2021. Our operating margin for the fourth quarter was approximately 13.3%, and for the year was approximately 15.3%. Interest and other expense for the fourth quarter increased by $85 million to $408 million, due primarily to higher long-term debt levels than one year ago.
In the fourth quarter, our effective tax rate was 22.6%, and for fiscal 2022 was 23.9%. Our diluted earnings per share for the fourth quarter were $3.30, an increase of 2.8% compared to the fourth quarter of 2021. Diluted earnings per share for fiscal 2022 were $16.69, an increase of 7.5% compared to fiscal 2021. During the year, we opened six new stores and lost a store in California due to a fire, bringing our store count to 2,322 at the end of fiscal 2022. Retail selling square footage was approximately 241 million sq ft at the end of fiscal 2022.
Total sales per retail square foot were approximately $627 in fiscal 2022, the highest annual figure in our company's history. At the end of the quarter, merchandise inventories were $24.9 billion, an increase of $2.8 billion versus last year, and inventory turns were 4.2 times, down from 5.2 times from the same period last year. Moving to capital allocation. During the fourth quarter, we invested approximately $900 million back into our business in the form of CapEx. This brings total CapEx for fiscal 2022 to $3.1 billion. During the year, we paid approximately $7.8 billion of dividends to our shareholders.
We look to grow our dividend every year as we grow earnings. As Ted mentioned today, we announced our board of directors increased our quarterly dividend by 10% to $2.09 per share, which equates to an annual dividend of $8.36 per share. Finally, during fiscal 2022, we returned approximately $6.5 billion to our shareholders in the form of share repurchases, including $1.5 billion in the fourth quarter. Computed on the average of beginning and ending long-term debt and equity for the trailing 12 months, Return on Invested Capital was 44.6% compared to 44.7% at the end of the fourth quarter of fiscal 2021. I'll comment on our outlook for 2023.
As we think about how 2023 might unfold, we think it's helpful to look back on our performance since 2019. From 2019 through 2022, we grew sales by $47.2 billion, a compound annual rate of 12.6%. During the first five quarters of this period, from the first quarter of 2020 through the first quarter of 2021, our sales were driven by significant ticket and transaction growth. This growth reflects factors unique to home improvement as homeowners spent more time in their homes and took on more projects as they saw their homes significantly increase in value over that period. The home improvement market also captured a greater share of the consumer's wallet as spending on goods outpaced spending on services during the period.
Beginning in the second quarter of 2021 and continuing through the fourth quarter of 2022, we reported strong sales and earnings growth driven by ticket, while transactions steadily normalized back towards 2019 levels as the broader consumer economy shifted from goods and back into services. During this time, we continued to report positive sales growth in every quarter up to present. As we set targets for 2023, the context of the past 3 years led us to consider 3 factors that will likely influence our performance this year. Point for our target setting this year is our assumption regarding consumer spending. We've assumed, like many economists, that we will see flat real economic growth and consumer spending in 2023. Second, over the last 7 quarters, we have seen our transactions gradually normalize as consumer spending has shifted from goods to services.
We believe that if this shift continues at its current pace, the home improvement market would be down low single digits. Third, as an offset to this pressure, we plan to continue to capture market share. Our competitive advantages, the investments we have made over many years, and the unique advantage that our orange-blooded associates give us over our competition position us to take share in any environment. Taking these factors into account, we are targeting approximately flat sales and comp sales growth for 2023. Our operating margin target of 14.5% reflects approximately 60 basis points of impact from the compensation investment we announced today. Our effective tax rate is targeted at approximately 24.5%. Our diluted earnings per share is targeted to decline by a mid-single digit percentage.
Outside of this target setting, if lumber prices remain at current levels for the remainder of our fiscal year, that would equate to approximately 100 basis points of pressure to comp sales and an insignificant impact to earnings. At today's current price, this would imply more pressure in the first half than in the rest of the year. We plan to continue investing in our business with CapEx of approximately 2% of sales on an annual basis. After investing in our business and paying our dividend, it is our intent to return excess cash to shareholders in the form of share repurchases. We believe that we have positioned ourselves to meet the needs of our customers in any environment. The investments we've made in our business have enabled agility in our operating model.
As we look forward, we will continue to invest to strengthen our position with customers, leverage our scale and low-cost position to drive growth faster than the market and deliver shareholder value. Thank you for your participation in today's call. Christine, we are now ready for questions.
Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your headset before pressing the star keys. One moment please while we poll for questions. Thank you. Our first question comes from the line of Michael Lasser with UBS. Please proceed with your question.
Good morning. Thanks a lot for taking my question. Ted, in this environment, we're all just kinda guessing, but we assume that your guesses are a lot more educated than any of the rest of us. In that case, what do you see as the downside risk for the home improvement market and turn The Home Depot this year, both in terms of the depth of a potential decline and the duration of a downturn? In that case, how would The Home Depot's earnings look in that scenario?
Well, good morning, Michael. Thanks for the question. we'll certainly address that, but before we go into a downside, you know, I'd like to set the tone on what we see that's favorable in the business trends. We feel very good about our business. As we've just referenced, we've grown the business $47 billion over the last three years and grown earnings 60% during that time. Our associates did an amazing job focusing on the customer in this challenging environment, and there's really no way we would have captured that much share had we not been making the investments over the past few years. We also still see a healthy customer.
I mean, we have good jobs, job growth, growing wages, still strong balance sheets, and most of our customers tend to own their home, which has seen a significant increase in value. As we've said, we do see a unique environment with many crosscurrents right now. Obviously, there's heightened inflation and rising interest rates, a tight labor market, and moderating equity in housing markets. Given all that, we do expect moderation in home improvement demand. Pro backlogs are still healthy, Michael, although they are off their peak from last year. Customers are still spending time at home. Homes are aging and worth about 40% more than they were before the start of the pandemic. People are also starting to shift spend more towards services. As we've said, we see some more price sensitivity.
Given all that, we've set the stage for a moderating year in 2023. Richard will take you through some of the downside cases that you alluded to. Yeah. Michael, you know, just to recap quickly, the way that we set our target and our guidance for the year was to first start with the assumption of flat consumer spending. Then with respect to the goods sector of the economy, as I said, over the last 7 quarters, we've seen that shift across the consumer economy from goods to services. We would anticipate this would put slight pressure on our market, and then we look to overcome that by taking share in the manner that we've done consistently over the past several years. We're targeting flat.
There are so many factors that influence our market right now, as Ted alluded to, but if you were to take a hypothetical situation, let's just think about that share shift that we call out. We look at the share that we currently capture as a share of consumption, PCE, and we've tracked that through the COVID period and over the last few years. As we said in our guides, if that share shift continued at the rates at which we have seen it behave currently, we would expect the market to face low single digit negative pressure.
If you were to take, perhaps a more extreme case and say, if that share of PCE that our market holds were to shift all the way back to 2019 levels by the end of the year, that would imply pressure of, call it, mid-single digit %. That would sort of be one way to get your mind around a, you know, a hypothetical case where share shift happens more rapidly than it has been.
In an environment where the market's down mid-single digits, presumably The Home Depot is gonna do better than that. It'll take some market share. Can you frame out what you think the decremental margins would be in a down 3 or 4 type scenario? And as part of that, where do you think you would see this first? You're already starting to experience some challenges in areas like soft flooring and others that you outlined. Is that a precursor to weakness that you might experience in other categories? Thanks.
Just to keep it simple, because, you know, share shift is not a perfect science. In a hypothetical case, and again, we're not guiding this way, this is not a downside case, but in a hypothetical situation, that share shift, if our comps were to be mid-single-digit negative, we would see operating margin around 14% as kind of the corollary to that hypothetical situation.
Michael, Jeff can give some further detail, but, you know, the price sensitivity is while it's a bit broader in Q4 than we saw in Q3, it's still primarily, you know, those larger, you know, single ticket, more discretionary items that we've referenced before, appliances, you know, grills, patio. Still being a, you know, project-oriented business and with the pro backlog, again, albeit down, still strong. We're still seeing, you know, strong project business, but there is a bit more overall sensitivity as we saw, you know, more one-for-one offset with ticket and transaction in Q4.
Yeah. Thank you, Ted. Yeah, in general, to your comments, you know, more broad than what we saw in the third quarter, still very good project demand. If you look at the seven departments that outperformed the plumbing business, build materials, millwork, hardware, tools, and paint above our company average and just reflected the strength of the project business. To your point, Michael, we're watching categories like flooring very closely. We're working assortments, we're working different opportunities in the market to look at what's happening in categories like flooring. Some broader-based sensitivity, still good strength in the overall business.
Thank you very much and good luck.
Our next question comes from the line of Scot Ciccarelli with Truist. Please proceed with your question.
Good morning, guys. Can you please clarify your expectations for unit elasticity if we were to start to see same few inflation pressures ease? Secondly, any common denominators in categories or geographies where you're starting to see some of the incremental softness? Thanks.
Sure, Scot. I think, you know, the last 2 years, we've had the same guidance that we're having this year, and that is that whatever inflation is represented in an average unit retail in ticket would be offset by transactions. We start the year of, you know, thinking about a balance of ticket and transaction, and that higher ticket driven by inflation would be offset with transactions. The outperformance of the prior 2 years was that, you know, we didn't see that much sensitivity. The consumer, our customer was much more resilient, sort of purchased through that elasticity curve, if you will. What we are seeing now is some more sensitivity, and we had almost an exact 1-for-1 offset in Q4. That's what we're expecting for 2023, that there is still inflation.
I mean, we are still in an inflationary environment, as we saw from CPI and PPI results last week. Although it is abating, and it's abating more, I would say, in our industry. Our costs on the table are much lower than they had been. Wrap arounds of price moves going into 2023 will be much lower than they had been the prior 2 years. While we're still expecting an offset in transactions, because the ticket won't be as high, the negative transactions won't be as low, but still net to that flat guidance for 2023.
Okay. Thank you. Any common denominator in terms of category or geographies where you're seeing some of the incremental softness? If it just big ticket?
Yeah. Big ticket would be the ones, you know, that I called out before that have continued with softness. In the geographies, while we had a little more variability of our comp range, there's no particular geography that you'd call out other than, you know, weather impacted ones that would show anything off the mean for us.
Got it. Thanks a lot.
Our next question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question.
Hey, good morning, everyone. Maybe related to the last question, we've had home prices have decelerated for about six to eight months now, and we know existing home sales are in deep negative territory. If you align your business against those trends and in markets where they're more pronounced, is there a decoupling? In other words, you the business is stable despite prices have fallen and existing home sales being down, you know, 20%, 30%.
Thanks, Simeon. You know, on home prices, we know over a long term that our business does correlate to home price appreciation. Obviously, we've had unprecedented growth in appreciation since 2019. Home prices peaked in June of 2022. You know, in fact, at that point, they were 45% higher than they were at the end of 2019. They have regressed by about 3% since that point, so we've seen some modest correction. But I can tell you, we have not seen an impact on a market-by-market basis since that peak. There's no relationship with comp sales and the home price appreciation, or correction that we've seen. On housing turnover, you know, there's just that interesting dynamic of whether... What is actually happening in housing turnover.
You know, there just aren't the willing sellers out there to the degree that they have been in, you know, past eras. Our customer, our homeowner customer is in such a healthy position, that, you know, you just think about their motive for selling. Did you know over 90% of U.S. homeowners either own their homes outright or have fixed rate mortgages under 5%? That incentive to sell and move to a higher rate mortgage just isn't there. In fact, the incentive is really there to improve in place. It's hard to say what the sort of, what the housing economy, how the housing economy might impact us.
No, to answer your first question, to date, since 2022, we haven't seen a relationship.
To follow up to a point that was made earlier that if the share of PCE reverts back to the 2019 level, do you take a view on this, or is there any confidence that it doesn't? It's a view really on digestion. We've seen a couple of categories in real terms actually overcorrect to 2019. Only two right now, but not home improvement, obviously. How confident are you that we don't need to go back that far or that the digestion or so is done and we can hang out at the current share that we are?
You know, I think the only thing I look at really is the trajectory that we've observed. I think that's kind of the best information we can use. We're not making an assumption about whether, in your terms, there's full digestion or not.
Okay, fair enough. Thanks. Good luck.
Simeon, I would say, you know, we said this is a unique period, and hard to gauge on the shortest horizon. We are just so incredibly bullish on the longer horizon for this industry. Just all the dynamics that we know about, starting with the fundamental shortage of housing. I mean, we're still, you know, whether it's 1, 2, 3 million units short, and with household formation and population growth and aging housing stock, all the things that we talk about, I mean, that is all very much in place. As the market works its way through PCE reversion or not or level of that and inflation mortgage rates, that will all settle.
What you're left with is still a market that is underserved in housing units built. Over half the homes are over 40 years old. As Richard said, the remaining in place with owning the home and low mortgage rates, people are gonna wanna make more significant improvements on those homes. We remain and just couldn't be more bullish on the longer term view of this industry.
Thank you.
Our next question comes from line of Brian Nagel with Oppenheimer. Please proceed with your question.
Hi, good morning. I have a couple questions that are both maybe more philosophical in nature, you know, first off, Ted, just some of the comments made, you know, here about increased price sensitivity, I think on the part of your consumers, and, you know, maybe that turned a little more severe than we saw in the third quarter. You know, I think having followed The Home Depot for a long time, one of the big, you know.
Brian, you're breaking up. Can you repeat that?
Oh, I'm sorry. I gotta move around here. The question, I'll make it shorter. The question I'm having is, as you're looking at this, you know, the consumer behavior. You know, we're all seeking or searching right now for those signs of weakening consumer given a tougher backdrop. Do you believe that we're still kind of in the one-off, what you're seeing is more one-off in nature, or is this really the beginnings of a weaker trend coming that could persist over the next few quarters?
Brian, it's Jeff. You know, as we talked about price sensitivity earlier, we are seeing some additional sensitivity or saw some additional sensitivity in Q4 versus Q3. Let me give you a real-time example of how we're looking at the business, and I'll go to the cleaning business as an example. I spoke about in my prepared remarks, we launched in this quarter, Ecolab, which is a premium cleaning brand in the market, which we're seeing exceptional performance. It is a trade-up category for many consumers, many pros, and we're just really, really excited about the partnership and the long-term opportunity in that category.
At the same time, we're expanding our HDX cleaning lineup. That's a just a great everyday value brand for our customers. We're seeing a great pickup in that brand as well. Our merchants take the time by category to engineer what results they wanna see, and cleaning is a great example there. At the same time, we're watching categories very closely, like appliances, like patio furniture, like grills that we spoke about in Q3 and earlier today, to ensure that we are positioned right for the current environment.
Got it. I'm gonna leave it there. I know my
Jeff, I appreciate the time. Thank you.
Our next question comes from the line of Christopher Horvers with JPMorgan. Please proceed with your question.
Thanks. Good morning, everybody. Can you talk about what you saw from a rate of change in DIY versus pro in 4Q relative to 3Q? Are you seeing one side change faster than the other? How does that inform how you're thinking about the business in 2023?
I don't know if we saw a rate of change, Chris. The highlight remains the high spend pro. I mean, that's still, you know, the strongest piece of the business. I wouldn't say there was a rate of change much beyond that.
Got it. I guess, can you share the puts and takes on the cadence of 23 from a top line perspective? You have DIY versus pro. You've got tough lumber laps in the near term, but you also have the easier spring lap. How are you thinking about the cadence of the year? If you sort of had a did a zero in 4Q and you ran seasonal, you can get to a lot of different outcomes. How are you thinking about the cadence? Just to clarify, is the 100 basis points of lumber headwind in the top line guide?
Right. Chris, our guidance assumes that we'll comp slightly lower in the first half than the second half. The lumber pressure we called out is sort of outside of guidance. There's so much volatility in that that We would not wanna put that in guidance. There is 100 basis points of pressure to the year. If lumber remains at current prices, that pressure exists predominantly in the first half. Chris, as Richard mentioned, it's been a very turbulent couple of years in the lumber market. To give you an example of what we faced in the fourth quarter, on the framing side, lumber was $420 per thousand on average compared to 886 on average in 2021.
To put that in retail dollar sense for everyone, a two-by-four stud, which is one of our top unit movers in the business, retailed on average for $3.40 in the fourth quarter of this year. Last year, it was over $5. We did make some ground back on units. You could say that, you know, when you see a lumber market depressed or normalized, you see good unit productivity and you see good overall project business. As you look forward into the front half, that same two-by-four stud was over $10. It's now $3.50. We'll see good unit productivity and certainly an opportunity to drive more project-related business.
Chris, another reason we leave that sort of lumber hypothetical case outside of guidance, if that pressure does exist and come through, we would not see any material impact to earnings.
Right. You're not. There could be a price headwind, but there could be some offsetting positive elasticity on that side and sort of net that plus the fact that doesn't hit bottom line, it's outside the guide.
That's correct. You got it.
Thanks so much. Have a great spring.
Our next question comes from the line of Steven Forbes with Guggenheim. Please proceed with your question.
Good morning. I wanted to just start, you know, really trying to expand on the $1 billion investment that was announced. Curious, Ted or Richard or the team?
Can you comment on how the investment impacts planned compensation mix for the frontline associate in 2023 on average, inclusive of how we should think about the resetting of the Success Sharing program?
Sure. Yes, Steven, and Ann-Marie will take you through, you know, some of the detail on the rates. Just to talk about, you know, this investment, you know, we feel just great about doing this for our associates. Customer service at The Home Depot starts with our associates, and we believe this investment is consistent with our values and is gonna position us favorably in the market. We've been operating successfully in a pressured labor market. We all know labor's been tighter and rates have been higher. You know, just last year, we were able to hire 200,000 associates. We believe this move is gonna protect our customer experience for the near, medium, and long term. We'll be able to track the most qualified candidates and retain the exceptional associate base that we already have.
We not only increased our starting wages, again, Anne will go into some detail, but we increased wages for every single frontline associate. There's a term in retail, you know, you get compression when you raise the starting rates with tenured associates. We addressed compression in a meaningful way in this billion-dollar investment. Our tenured associates saw real wage increases with this move. We hope to improve retention through this. That's why we call it an investment. It's gonna improve the customer experience through a more effective associate who's just in the building longer, understands, you know, our procedures and is much more effective engaging with the customer and selling.
You know, we harken back to our values wheel of, you know, investing in our associates and what our founders said that if we take care of our associates, they take care of the customer, and everything takes care of itself. That's what this investment is all about. Anne, you can give some more detail, please.
Yeah. Thank you, Ted. First of all, the investment is incremental. You ask about Success Sharing, and that is still a part of our total compensation package. One of the things I spoke about around, how we think about investing in our associates, wage is one component of it. We think about it not only with wage, but benefits, but also the environment we create, to promote our associates from within. I think the piece that I will say, you know, we've spoken about this before, that, you know, close to 90% of our leaders started on the floor of the store. Why is that important? This $1 billion investment puts us favorably in the marketplace so we can recruit, retain, and attract the best leaders because they are the future leaders for the company.
This is a incremental investment. Every single hourly associate will receive an increase. To Ted's point, you know, our more tenured associate, who are even key when we think about going into the spring season, also got an incremental investment, a pep in their step to continue to take market share in 2023.
Steven, while we don't, you know, disclose average wages, and we've always and will continue to be competitive on a market-by-market level, and we've been competitive, it's why we're able to hire the 200,000 people last year. After this change, our starting rate in any one market, you know, there'll be no market under $15 for a starting rate, and starting rates go much higher than that, depending on the market. The average wage, again, particularly with the investment in every associate, including, you know, tenured with addressing compression, we have an average wage that is well above the $15.
Appreciate the color. Maybe just a quick follow-up, for Richard. I think we're sort of targeting recapturing a 60% accounts payable to inventory ratio, maybe just clarify if that's still the goal and when we should expect to achieve that this year.
You know, we're still While we know that global supply chains are improving, at least relative to where we were last year at this time, we're still pulling forward inventory. We still see extended lead times. We think that 2023 is gonna be a year of continued improvement in supply chains. You know, we are encouraged by the inventory movements in our business. You know, the year-over-year inventory increase was the smallest quarterly increase of the entire year. We feel good about our inventory productivity. You know, again, we've been managing in kind of exceptional circumstances. Yes, I think over the long run, you will see us heading back to convention with respect to working capital.
Thank you.
You're welcome.
Our next question comes from the line of Karen Short with Credit Suisse. Please proceed with your question.
Hey, thanks very much. Good to talk to you. First question I just wanna ask is, looking at the relationship on sales growth versus EBIT growth. I'm actually talking about this excluding the billion-dollar investment. Obviously, EBIT growth on a one-year basis is decently below sales growth. Wondering just how to think about that relationship?
You know, including or excluding, but going forward. Wondering if you could just talk a little bit about what you're seeing on 1Q to date in terms of comp performance?
Sure. It may be more helpful to talk about the construction of operating margin year-to-year just to kind of take that out, that gives you a better sense. In a flat comp environment, we would expect to see deleverage on a fixed cost base and obviously in an inflationary environment as exists today. That deleverage is somewhere between 30 to 40 basis points. In addition, our wage investment represents about 60 basis points of movement in year-to-year wage. Offsetting that are productivity initiatives that we expect will generate between 10 and 20 basis points of recapture of margin. That's how we walk from the 15.3% to the 14.5%. Over the long run, we always expect to grow operating income faster than sales.
We've been managing in a unique environment and certainly our guidance implies the wage investment that we've made today. The second part of your question, I'm sorry, I forgot.
It was just any color you could provide on 1Q performance in terms of comps.
As I've shared just a few questions ago, we do anticipate that comps in the first half will be slightly lower than the second half, and our performance to date reflects that guidance.
Okay, thanks very much.
Our next question comes from the line of Zachary Fadem with Wells Fargo. Please proceed with your question.
Hey, good morning. Richard, it sounds like most of the margin pressure in 2023 is expected to land at the operating expense line. I'm curious if you could talk through the puts and takes to gross margin specifically. Is it fair to assume the inflection we saw in Q4 to slightly positive is a fair, year-over-year run rate from here, just given the bulk of your supply chain investments are running their course and then freight and commodities could be a tailwind?
You know, there are a lot of ins and outs. There were a lot of ins and outs in 2022. You know, we basically delivered gross margin precisely where we anticipated to at the beginning of the year. Underlying that was a lot of product costs and transportation costs, offset by actions. Within that, continued supply chain investment in our downstream or delivery operations. For 2023, we're targeting gross margin that's roughly flat year-over-year. Again, it will be a year of several ins and outs. Product cost inflation has decreased, does persist above historical levels. Transportation costs should actually be a tailwind. We still have investment in our supply chain. Look, we did see some increased pressure from shrink in the back half, right?
We've got a lot of ins and outs, but roughly speaking, we're targeting, essentially flat gross margin for the year.
Got it. That's helpful. Following up on the $1 billion in wage investment, can you talk about where this puts you competitively versus your peers? If for whatever reason, if your comp appears to be falling short of that flattish expectation range, would you still make the planned investments in 2023, or could you spread them out over a couple of years?
We're committed to our investment. That's done. With respect to how we manage our P&L, we always operate with a degree of financial flexibility. In, in any environment, we're going to assess what that environment means for us and how we should manage the P&L.
Got it. Thanks for the time.
Christine, we have time for one more question.
Thank you. Our final question will come from the line of Steven Zaccone with Citi. Please proceed with your question.
Good morning, all. Thanks for fitting me in here. I wanted to circle back to the duration part of Michael's first question. You know, Ted, when you think about home improvement demand seeing a moderation this year, when you take a little bit of a, you know, more medium-term outlook over the next couple of years, just since you've seen strength in the business for the last three, you know, what are you focused on with the health of the homeowner that maybe this moderation could last a couple of years in nature?
Well, you know, as we've said, we're thrilled with the share we captured and the sales we drove. You know, while we don't love the moderation, you know, you can't, you know, fight the tide, if you will, with PCE spend going back to services, people traveling and whatnot. The two main things that we're gonna stay focused on to take share, you know, one, you know, I say the consumer, the consumer writes the check for all projects, even if the pro is doing the work. You know, for the consumer, we are laser focused on delivering the best interconnected, frictionless shopping experience. I mean, retail, as we know, is all about interconnection, physical world and the digital world. We are laser focused. Matt Carey and his team is focused on taking out all friction in that.
As we continue to delight customers with that frictionless experience, we'll look to gain more share. We haven't talked much about the pro in this call, but, you know, we are still 100% focused on building out all the capabilities, that pro ecosystem that is gonna allow us to capture more share of wallet with the pro and move up to larger plan purchases, and extremely pleased with the results we're seeing as we continue to put those capabilities in the marketplace. That's what we're gonna do to keep taking share regardless of the environment or the duration of the environment.
Okay, thanks. Then the brief follow-up I had was just a question on the promotional environment. You know, it really hasn't been that much of an issue in home improvement the last couple of years. Would you expect it to be more of a factor this year, just given overall moderation and demand?
Steven, it's Jeff. No, nothing specific to call out on the promotional environment as we head into the first quarter, further into the first quarter. We're excited about the value we're offering our customers. Our spring sets have gone exceptionally well. We're looking forward to the spring season. No change.
All right.
that we can predict in the promotional environment.
Thanks for the detail.
Thank you. Ms. Janci, I would now like to turn the floor back over to you for closing comments.
Thank you, Christine, and thank you for joining us today. We look forward to speaking with you on our first quarter earnings call in May.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.