Q3 2019 Earnings Call
Greetings and welcome to the home depot third quarter 2019 earnings call.
This time, all participants are in listen only mode.
Good question and answer session will follow the formal presentation.
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It is now my pleasure to introduce your host Isabel Djezzy. Please go ahead.
Thank you Christine and good morning, everyone joining us on our call today, our cried Minier, Chairman CEO and President Ted Decker Executive Vice President of merchandising and Richard Macnow 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 and as a reminder, please limit yourself to one question with one follow up.
We are unable to get to your question during the call. Please call our Investor Relations Department at seven 7038 for 2387.
Before I turn the call over to Greg, Let me remind you that today's press release and the presentations made by our executive include forward looking statements as defined by 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 projection.
These risks 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.
Now, let me turn the call Liberty.
Thank you Isabel and good morning, everyone.
First let me start by welcoming Richard to his first earnings call.
Sales for third quarter were 27.2 billion, an increase of 3.5% versus last year.
Comp sales were up 3.6% from last year, and our us comps were positive 3.8%.
Diluted earnings per share were $2.53 a third quarter.
From a geographic perspective, all of our U.S. divisions posted positive comps internationally, both Canada, and Mexico posted positive comps.
Overall, we continue to see a strong and engaged customer.
As Ted will detail both chicken in transactions grew during the quarter with the exception of lumber electrical all of our merchandising departments posted positive comps, we saw a healthy balance of growth between both our pro and DIY customers with pro sales outpacing D. I watch sales in the U.S.
Well, our third quarter results largely demonstrate broad based growth across geographies and merchandise departments. Our sales performance was below our expectations driven primarily by the timing of certain benefits associated with our strategic initiatives.
At the beginning here, we shared with you our expectation that these initiatives, which collectively contribute approximately 100 basis points to our comp performance and 29.
As the here is simple we have learned a great deal and have shared with you that some of these initiatives have progress more quickly while others are taking more time.
These investments are significant and long term in nature.
And we expect the momentum we've seen we'll continue to build.
Our rollout is largely on track and we are realizing benefits, it's just taking a little longer than our original assumptions.
In a moment Richard will walk you through the implications. This has for our 2019 guidance.
But let me first provide more context.
We are foundational I T workstreams supporting many of our strategic initiatives that will significantly enhance our ability to serve our customers in interconnected way.
Much of this.
It requires unwinding, our legacy systems that has proven to be more complex than originally anticipated.
Take to be to be web site experience for example.
Our investments in a personalized speed to be website experience is a significant component of unique value proposition, we're creating for our pros.
As you would expect the most engaged customer cohort is 135000 pros that we onboarded at the beginning the year and we're seeing meaningful lift in spend as these customers become more familiar with the new experience.
The rollout of the B to B site experience itself is on track.
But underlying achieve work must be completed before turning on additional elements of personalization functionality for our larger pro customers.
Other investments are yielding results in line with or in some cases above our expectations.
For example, home depot Dot Com continues to be a source of strength.
Mind traffic growth was healthy conversion is up and third quarter online sales grew approximately 22% from the third quarter of 2018.
Customers continue to respond to the ongoing investments enhancements, we are making to drive a frictionless interconnected experience, including faster fulfillment options.
We also continue to leverage our digital platforms to drive incremental growth from adjacent categories like HD home cool and workwear and are seeing good traction across all of these kind of.
We are seeing healthy growth in our online sales and online shoppers continue to see the relevance of our stores as more than 50% of our online us orders picked up in our stores a testament to the power of our interconnected retail strategy.
We continue to roll out automated lockers in our stores to make pickup of an online order easier and more convenient.
To date, approximately 1300 stores have lockers and we've been very pleased with the customer response.
As approximately 95% of customers rating their locker experience pickup give us a five out of five stars.
We fundamentally believe isn't when a customer comes to one of our sources asked we have great experience over 60% over to US stores have been do look and feel and customer response has been very positive.
Customer service scores in the category of neat and clean of increased 120 basis points versus last year.
While scores for checkout time satisfaction of increase over 280 basis points versus last year.
As we approach the ended the second year of our transformative one home depot investments, we have even more conviction today that we're making the right long term investments for the business to extend our competitive advantage in the marketplace.
As with any transformation. The work we're doing this complex and I'm proud of the way our team has consistently off through the channel.
Our associates continue to focus on what's most important in our business our customers and want to close by thanking them for their hard work and dedication and with that let me turn call over Ted.
Thanks, Craig and good morning, everyone. During the third quarter, we saw strength across most of our departments driven by growth, both our pro and DIY customers comps in appliances indoor garden to corn storage hardware tools outdoor garden paint and plumbing were above the company average.
All other departments with the exception of electrical and lumber were positive but below the company average.
Electrical was essentially flat due to light bulbs inflation and copper.
Well lumber reported low single digit negative comp due to continued commodity price deflation, we saw strong unit comp growth.
During the third quarter, we saw a balanced growth with both transactions in ticket comp transactions increased 1.8% during the third quarter, an acceleration from what we saw in the first half of 2019.
To strengthen our comp transactions was driven in part by the strategic store investments geared at improving the customer experience and extended outdoor season and traffic growth in a number of core categories. We also saw solid performance big ticket transactions during the third quarter big ticket comp transactions.
Are those over $1000, which represent approximately 20% of us sales were up 4.8%.
Excluding hurricane related markets.
Ticket comp transactions were up 5.5%.
In the third quarter comp average ticket also increased 1.8% we remain pleased with the performance of our ticket growth. Despite significant lumber price deflation the increase in our comp average ticket continues to be positively impacted by our customers trading up to new and innovative items.
During the third quarter commodity deflation and lumber in copper negatively impacted our average ticket growth by approximately 80 basis points.
Let me take a moment to comment on tariffs as expected during the third quarter. We saw increased costs arising from tariffs are merchants finance and data analytics teams are doing an incredible job mitigating cost impacts in helping us evaluate our elasticities, while still early days, we continue to believe weakness.
Actively manage tariffs however, we remain cautious on how tariffs could impact the consumer more broadly.
Going forward, we will use our tools and analytics to help us continue to focus on being the customers advocate for value.
During the third quarter, we saw growth, both our pro and DIY customers sales to our pro customers, which we estimate represented approximately 45% Raul sales continue to outpace the iwai sales in the U.S, we're investing in resets services in a suite of tools to drive a better cuts.
Our experience save our pros time and money.
In the third quarter, we saw strong growth in pro heavy categories fasteners, new Maddox concrete and installation.
Turning to our DIY customer as summer started to wind down we saw customers take advantage of the extended outdoor season.
During the third quarter categories, like patio furniture exterior stains and pain soils and five goods all had comps well above the company average.
Our digital investments interconnected strategy are working as you heard from Craig we're enhancing features functionality and category presentations on our website, we continue to see growth in online traffic conversion and average ticket.
In fact during the third quarter, we saw double digit online growth in nearly all of our departments and given the project nature of our business more than 50% of these online us orders were picked up in our stores.
Let's look at patio furniture, as an example category we know our customers shop, both online and in our stores recently, we've rolled out new online category presentation patio that allows our customers to easily see the entire collection different colors and styles as well as various fulfillment options.
All on one page these new enhancements helped drive our strongest patio comp in the last 10 years.
Now, let's turn our attention to the fourth quarter.
Last quarter, we've talked about the incredible response, we are seeing from our customers short industry, leading lineup of exclusive worthless outdoor power equipment from ryobi, Milwaukee to wall ego.
We are excited to Adam Akita's, New line of 18, both outdoor tools to our assortment acute is 18 full platform has over 225 tools in over 30 million batteries in view us market. During the fourth quarter, we will add a powerful trimmer lower hedge tremor and chain sought to that.
Sort of them all compatible with Mosquitoes award winning portable power platform. We are proud to be mosquitoes exclusive big box partner.
In addition, we are thrilled about the upcoming holiday season, our merchants have worked hard to establish the home depot as the holiday shopping destination. We have worked tirelessly to our supplier partners put together broad assortment of product offerings. The best value for the holidays as in previous years, we will have a number of special buys.
As for Black Friday, along with an in store gift center showcasing rate offers from our exclusive brands with that I'd like to turn the call over to Richard.
Thank you Ted and good morning, everyone.
In the third quarter total sales were $27.2 billion, an increase of 3.5% EUR $921 million versus the third quarter of fiscal 2018.
Our total company comps were positive 3.6% for the quarter with positive comps of 4.1% in August 3.7% in September and 3.1% in October .
Comps in the US were positive 3.8% for the quarter with positive comps of 4.4% in August 3.9% in September and 3.3% in October .
Versus last year stronger us dollar negatively impacted comp sales growth by approximately $41 million or 0.2%.
As you'll recall fiscal 2018 had a 50 threerd week, which shifted our fiscal 2019 calendar.
As a result of this shift our comp in October was negatively impacted due to the timing of our black Friday event last year versus this year.
This shift in timing and event timing negatively impacted our us October comp by approximately 100 basis points.
You asked comps for the quarter were negatively impacted by approximately 35 basis points.
As you just heard from Ted during the third quarter.
Our prices remained depressed.
Versus last year. This lumber price deflation negatively impacted our comp sales growth by approximately $175 million or over 65 basis points.
In the third quarter, our gross margin was 34.5% a decrease of 31 basis points from last year.
The change in our gross margin was primarily driven by higher shrink and the mix of products sold compared to last year.
In the third quarter operating expense as a percent of sales decreased by 10 basis points versus last year to 20%.
Our operating expense performance reflects strong expense control and continued productivity in the business as well as continued investments in our strategic initiatives.
Specifically.
Expenses related to our strategic investment plan of $277 million increased by approximately $44 million from last year.
And resulted in approximately 13 basis points of operating expense deleverage.
This deleverage was offset by productivity and BA you or business as usual expenses, which drove 23 basis points of operating expense leverage.
Our operating margin for the third quarter was 14.5%.
The decrease of 21 basis points from last year.
Interest and other expense for the third quarter grew by $56 million to $280 million due primarily to higher long term debt levels than one year ago.
In the third quarter, our effective tax rate was 24.5% compared to 21.4% in the third quarter fiscal 2018.
For the year, we now expect our effective tax rate will be slightly lower than 25%.
Our diluted earnings per share for the third quarter or $2.53, an increase of 0.8% from last year.
In October a devastating round of storms and tornadoes impacted the Dallas area.
During these storms tornado destroyed one of our stores in Dallas.
And our thoughts continue to be with that community and our impacted associates.
At the end of the third quarter.
We had an ending store count of 2209.
In total sales per square foot or $449 up 3.5% from last year.
At the end of the quarter inventory turns were five times down from 5.2 times last year.
Reflecting a load in of inventory in support of our strategic initiatives.
Moving on to capital allocation in the third quarter, we repurchased $1.25 billion or approximately 5.2 million shares outstanding stock.
This included repurchases of approximately 2.0 million shares on the open market and approximately 3.2 million shares through an accelerated share repurchase or MSR program.
Note that for the shares repurchased aren't the SAR.
It is an initial calculation.
Final number of shares repurchased in the third quarter will be determined in the fourth quarter when the ANSR terminates.
Computed on the average of beginning and ending long term debt and equity for the trailing 12 months.
Return on invested capital was approximately 45.1%.
290 basis points higher than the third quarter of fiscal 2018.
Turning to our outlook for the remainder of the year.
As we approach the ended the second year of investment geared and achieving our one home depot vision.
We're confident that we're making the right investments for the business to extend our competitive advantage over the long term.
As Craig said these initiatives are gaining momentum and are contributing to our sales growth.
Some of the benefits anticipated for fiscal 2019 will take longer to realized in our initial assumptions.
As a result.
Today, we are updating our fiscal 2019 sales guidance.
Remember that we guide off of gap.
So fiscal 2019 guidance, we'll launch from our reported results for fiscal 2018.
Which include sales and earnings associated with the 50 Threerd week.
For fiscal 2019, we now expect comp sales as calculated on a 52 week basis to increase by approximately 3.5%.
And we now expect sales, reflecting the compare of 53 weeks last year to increase by approximately 1.8%.
We're also reaffirming our earnings per share guidance for fiscal 2019.
We expect fiscal 2019 diluted earnings per share to grow approximately 3.1% to $10.03.
We look forward to talking with you at our Investor Conference on December 11th in New York, where we'll give you an update on our key strategic initiatives as well some initial thoughts around fiscal 2020.
Thank you for your participation in today's call and Christine we're now ready for questions.
Thank you we will now be conducting a question and answer session.
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Thanks.
Thank you. Our first question comes from the line of Simeon Gutman with Morgan Stanley . Please proceed with your question.
Thanks. Good morning. My first question is what gives you confidence in these initiatives hitting.
And then what gives you proof that it's the initiatives that are taking longer to realize are not something slowing in the macro and then I have one follow up.
Let me, let me start with the initiatives first of all we're seeing benefits from the initiatives. It's just not at the rate of our original plan.
And when we look at the investment that we're making in this business as we shared with you back in December of 17, we're doing this for the long term health of the business and to position ourselves to win competitively in the long term. This is such a big opportunity that we're going to do this right and country.
Can you to make sure that we're delivering an experience that our customers are.
A custom to getting from the home depot.
And so we think we're getting about half of the investment.
The benefit in 2019, and as we continue to add additional features and benefits as we unwind some of the complexities of our legacy systems, we'll see that continue to grow.
And as it relates to how do we know it's it's not something else.
We continue to see broad based growth in our business.
As Ted called out we had great strength that ticket transactions, we had strength in big ticket, we saw our pro business accelerate during the quarter and when we look at.
What happens in discretionary spend categories, particularly that are high ticket discretionary spend we don't see anything there that concerns us at this.
Okay and my follow up if you look at the construct of the existing three year plan.
And you start from today, where 2019 margins are going to land looks like around 14 for it would call for flattish margins next year to up as much as 60, if you take the the original plan.
If the macro is not any different than you plan, which it sounds like it's not what would cause that to change this range at flat to up 60.
Hi, Hi, there Simeon so at what what I would say is first of all we're focused on delivering.
On the guidance for the year and we look forward to talking about 2020 at our Investor December Conference.
Clearly there has been pressure to our margin from shrink.
Which was the highest contributor to the decrease year over year.
Within that 31 basis points and so that that is an unplanned pressure and we're taking steps and have many initiatives in place to address that.
Okay. Thanks, Tom thought it took a swipe at it appreciate it.
Our next question comes from the line of Michael Lasser with you BS. Please proceed with your question.
Good morning, Thanks, a lot for taking my question, you mentioned that you're getting about 50 basis points of lift from from the return on investments rather than the anticipated 100 basis points.
Yeah that you previously expected is there any reason why we shouldnt take that delta the incremental 50 basis points and just tacked on to what we're modeling for next year. It speaks to both the nature of the return and the timing associated with the returns.
Michael I think it as we look at the investments that we're making.
We expect to that through the balance of 19 as we move into 2020, we will continue to see the momentum build off the investments that we're making I don't know that we see it as a straight line, but it certainly will continue to ramp as we shared in my opening comments for.
Sample on the B to B website experience. The first 235000 customers that we put on early in the year, we're seeing very nice results as we onboard more and we on boarded a number recently at the end of the quarter as we continue to see them engaged they get more familiar with the experience.
Yes, we see lift so we're definitely confident that we will continue to see the momentum build through the investments that we're making and and it's also if you. If you think Michael about the investments we've made in our store environment.
And and 10 and you may want to comment a little bit about that we know that the changes, we're making resonating with our customer and we're seeing positive lift from that.
Yeah, no. Thank you Richard a couple of things that Craig called out first of all.
When you think of auto sales growth online sales growth and what we've seen in the stores that 50% Thats picked up in the stores as we continue to make that easy for customers. We're seeing just incredible the Pete as we think about transaction. So we're going to continue to lead to things that we need a simplified the experience we'll know a customer.
We're also continuing to add delivery capabilities outside of the stores as well with our car and band delivery, which really benefit so pro customer and we see that accelerating through the quarter.
And when you think about ill be you'll see scores quick called it out.
As we think about or lockers and but we also see increase if you will see scores auto checkout process on the front end as well. So do you think about investments, we're making and we think about the fourth quarter coming up we're going to see increased traffic for customers and not the time ill introduce an all these investments.
So our customers, which we believe is just going to drive tremendous loyalty.
That's helpful and my follow up calls question is you're guiding to a 5% comp that's implied for the fourth quarter and that would be higher than what you've done throughout the course of this year. So what's driving you're more optimistic expectation is it that you're going to see this accelerating return from the investments or.
There are other factors that you can outline that can help bridge to that 5% you're guiding to for the fourth quarter.
Michael Thanks for the question, where we're very comfortable with our guide based on the momentum had called out and while our guidance does imply acceleration that acceleration is mostly caused by the absence or reversal of pressures. We saw in Q3 as we walk to Q4.
From lumber it lumber deflation from FX and from an event timing shift.
That we saw in Q3. So you can look at it a couple of ways to normalize Q3, if you take the quarterly comp of 3.6%.
Add back 60 basis points from a much lower level of pressure from lumber, we'll see in Q4 versus Q3, and you add back 35 basis points from the impact of event timing to Q3, where basically.
Our Q3 Comped over the first week of Black Friday from last year's Q4 due to the calendar shifts and then you add back 30 basis points from favorable FX compares you'll see Q4 is actually right in line with a normalized Q3.
You can look at it another way you could take our October comp of 3.1% as an exit rate you'd add back 100 basis points out from that event timing impact lumber 60, and FX of 30, and again you will see why we have confidence in the progression from Q3 to Q.
Understood. Thank you very much and have a good holiday.
Thank you thanks, Mike.
Our next question comes from the line of Scot Ciccarelli with RBC. Please proceed with your question.
Good morning, guys to follow up.
First so when we think about that the impact of both the black Friday event and lumber pricing when we're thinking about a net impact kind of negative 25 basis points is that right Richard.
From from lever yes.
Okay got it.
And then.
Yes Minister answer your question can you repeat the question Brad question, Yeah, just the net impact right you had some of the Black Friday, and then kind of fall into fourth quarter. This year versus Threeq, you last year, plus you had the lumber pricing.
I guess I'm trying to figure out what's what's the net impact the comedy you've made suggests it's about 25% 25 basis points on it on a net basis no. The they actually both go the same way so 35 basis points of negative pressure to Q3, and 60 basis points of negative pressure.
Sorry, 35 basis points from event timing and 60 basis points from lumber pressure. So they add to about 95 basis points of really sort of alleviation of those pressures as we walk from Q3 to Q4 and then if you're looking at total company comp where there was a 20 basis point differential between total company and you.
Yes in the third quarter.
Then you bring FX into play and we'll have about a 30 basis point favorable compare in the fourth quarter.
Does that make sense.
I think so and then a.
A follow up question on your shrink comment as the pressure from shrink continued to increase or and related to that you have any feel for thats being driven more by internal let's call. It.
Seth or issues or if it's more external thanks.
Yes, Scott It is it is continuing to increase we've seen the pressure.
But we have a number of initiatives underway.
Yeah, I'll add a certainly.
In the departments that we've seen increased pressure they are more what we consider it kind of malicious and we have had initiatives underway and implemented in Ohio restore some.
Some of the things we've done in the past to make sure that we secure or product, but in addition to that we're working through initiatives from a technology perspective, as well because we want to make sure that we have a long term solution to mitigate index risk as well so while we're doing certain things in the short term to relieve some of this pressure.
Sure. We're also working on the initiatives in the long term.
And so when would you expect that trend if you will start to reverse.
Oh I, we have an expectation in the stores that we have implemented across some of the up the initiative that will start this bend the curve, but as I said, we've done that into a highway stores first and we want to make sure that as we protect the top line when mitigating and really created a good experience for cash.
Customer so were going to continue to monitor but some other things we've seen a short term has been really positive in these highly stores that we have implemented.
Okay. Thanks, a lot guys.
Yes.
Our next question comes from the line as Steve Forbes with Guggenheim. Please proceed with your question.
Good morning.
I wanted to follow up on the investment plan for this year. So I think you called out 44 million or $44 million of pressure right from higher spend this year.
But can you just remind us what the plan is for the whole year relative to 2018, because I thought.
I guess, both in absolute dollars because I thought the pinedale pressure, we're going to be similar right same dollar impact 19 verse 18, so should we expect the reversal or a benefit in the fourth quarter.
The investment plan actually ran through yes, yeah, the investment plan ramps actually from.
Total and remember I'm, calling out capital and expense here, but a total investment plan of about 3.3 billion last year ramping to an investment plans about 3.6 billion this year.
And so we and Thats in line with the plan that we set back in 2017.
And so the expense year over year is really sort of in line with with that lift as well because expenses generally lift with the capital.
All right just a follow up on that so it can can you help us a break that down between capital and expenses where is it really just the incremental is the $300 million spread.
Between those two numbers.
It's it's actually so the break down for 2019 is about 2.6 billion in capital and about 1 billion in expense, which is higher than than last years levels.
But it really is just that increment of ramping up to a 1 billion in expense that you see in the PML.
And the the.
The cadence of those investments quarter to quarter over the year are relatively steady ramping up through the year and peaking in Q4.
As you would expect as we continue to to ramp investment and investment will be higher in 2020 than it was in 2019.
Thank you.
Our next question comes from the line of Christopher Horvers with JP Morgan. Please proceed with your question.
Thanks, Good morning.
The the market growth.
Moderated and 19 relative to the past couple couple of years was that your expectation coming in and do you think that lower mortgage rates allow the market growth rate to re accelerate from here. So I think there's like sort of a base case, 4% market growth rate was a three year plan or do you think that maybe that market growth.
Moderates a bit further given where we're later into the cycle.
When we shared.
At the beginning this year, we did expect that though the market growth would be slightly less than it was.
In the in the previous year.
And so that was that was part of our overall expectations I mean, when we look at the market in total however, I mean, we plan to $600 billion market that we own about 17% of and if you look at third party data.
It would indicate that we took significant share in Q3 and so we look at this is as an opportunity going forward.
Let's talk to the merchants about the fact.
We don't own enough share to worry about.
The market growth itself, we just need to stay focused on the customer continue to drive the business.
I think there's another point to that Chris which is really just looking at the headline of 4% market growth.
And what we experienced in 2019 from a lumber deflation perspective.
As we shared with you earlier in the year, that's going to be about $800 million of pressure to us, but it'll be pressured in the market in general.
And so when you sort of round that out you're looking at market growth or sort of our base case assumption of 4% lower down to around 3%.
And in fact, the fact that that we're guiding three five today shows that we think we're getting about half a point from initiatives.
And so do you expect so I guess the puts and takes as you look forward. He's got the benefits from initiatives, which you know I think back to through your plan. You had you had expected that the ramp or I guess, even over the five five year plan.
Then on the other side you have sort of the rate factor. So do you think that rates allow the underlying market growth rate to to Reaccelerate and maybe get some back some get back some of the deflation. So the underlying growth rate actually can be could be better as you look forward.
I would I would say is.
The macro and housing environments have played out right in line with our expectations and the the description. We would use is housing is healthy and stable.
Theres no doubt that recent movements in rate environment are going to create support.
Thats stability.
But but as we've said for for many years, we expected that we would see back from 2012, a period of modern housing recovery and appeared a sharp housing recovery and then a period of stability in housing and that has played out and so I would say again housing is healthy and stable the rate.
Environment, certainly provide support to that.
That's very helpful. So my follow up is on the extended season that was it an impressive traffic number do you think that that extended season.
It was was was weather I understand you lapped hurricane last year, but was the just the extended season additive.
To comp for for this quarter.
Hey, Chris It's Ted.
Yes, and no I say certainly the extended season, we did well and things like exterior stains and pain and some garden projects, but then in the southeast in particular, we had heavy drought as well. So there's some give and take with that I think on the margin we did do better with the extent.
Ended season.
I would say those fundamental.
Drivers of that business is the bigger story when we think about this balance of ticket and transaction growth, we always start the year.
Planning and in expecting a balance of ticket and transaction that really plays out that way, but to see 1.8% growth in ticket 1.8% growth in transactions.
Real underlying stories also unit growth, we saw our strongest units is Craig called out in a year and if you adjust for as we've always called it the Bath tub effect for spring or if you have a weak Q1, you have a stronger Q2, depending on whether whether hits when you normalize.
For the bathtub effect. This was our strongest units in two years across the entire business as Craig said, it's across geographies and it's actually across the store, where we're seeing this unit productivity.
Very helpful have a great holiday season.
Thank you.
Our next question comes from the line of Michael Baker with Nomura. Please proceed with your question.
Thanks, a couple of follow ups on the gross margin.
First what are you seeing competitively in terms of pricing into it and if you could touch on the paint category in particular, and then second as it relates to tariffs you said.
You are you think you can manage tariffs what is managed Paris me into does that mean it has an impact on gross margins, but you can often it elsewhere or basically what are the tariffs doing to the gross margins. Thanks.
Okay.
So from a.
Additive standpoint to begin with.
We see continued.
Escalated promotional environment in the marketplace.
That would include the categories of paint that doesn't seem to be abating whatsoever.
Ted the merchant team or are sticking to our strategy is delivering great everyday value to our customers.
We know that that's for the long term bright approach for the business.
As played well for us over time.
Absolutely.
Yes on on tariffs.
Since the started we said we believed it's manageable and when I say that.
Our finance teams merchants and data analytics teams have really drilled in to the overall impacted the business, we know down to the skew level the point of origin.
The classification of the tariff the potential impact and from there we start working with our supplier partners to mitigate that tariff impact. We all know that on the margin all goods have elasticities fuel at what price through.
You are going to root hard unit productivity. So each of home depot and our supplier partners are laser focused on maintaining unit growth in this business. So we will we will work on mitigating the tariff impact to change country of origin to change makeup of the product.
Itself to add to other features and benefits that can add value to the consumer with all that being said, we have offset from from what would be not theoretical the actual skew level buildup of tariff impacts we have offset well over here.
Yes, so out of out of the gate there is no impact on well over half of the potential tariff impact to our business again working closely with our supplier partners and with the balance of the impact that is a manageable set of actions, we're taking across the portfolio.
Not necessarily in the term skews cells, but we have moved on some retails and thats implied when I said, we're measuring the various elasticities and where we've had to move and where we've acted in the portfolio fashion. We've maintained unit productivity as I said whether it.
Did this is our best units last quarter in over two years, So I would sum all that up to.
To the Con pets, we believe it's managing.
Hi, Thanks.
That's a lot of color and very helpful. One more just a follow up to a previous question just on the housing and the macro I get that you're talking about it being stable, but we just look at simply simple measures of existing homesales. They have picked up as of late.
Really six to nine months ago, and historically that does lead to better comps for you guys.
So I guess a are you surprised comps are accelerating on the back of housing or should we expect that maybe early next year.
I go back.
Mike to the to the base kind of comp that Richard walk through with you as we look forward and you know.
The underlying health of the business is very solid.
Great transaction growth Great unit growth broad based across the business. If you candidly look at where we thought this year would play out to where we are today.
70, plus percent of the variance to the current year to date performance is longer deflation plain and simple.
So we feel thank you feel good about the environment.
Our next question comes from the line of Karen short with Barclays. Please proceed with your question.
Hi, Thanks, very much just a question housekeeping last quarter, you gave big ticket at ticket growth by month. So I was wondering if you would be willing to provide that this quarter and then I had a bigger picture question.
I don't think we have that with US here right now we can provide.
You want to call ended Investor Relations Department.
Okay.
And then.
Moving to the 2020 investment comments I'm. So you you commented that the 2020 investment would be higher versus 19. That's I guess the question is is that common apply to both expense and capital and then within the expense a is that still more skewed to DNA versus SK.
But we've got our Investor conference on a couple of weeks and will provide all the color around this.
At that time right now we are laser focused on delivering the balance of this year.
Okay. Thank you.
Our next question comes from the line of Zach sitting with Wells Fargo. Please proceed with your question.
Hey, good morning, So following up on the SNA investment question for this year, you spent 277 million in the quarter that gets me to about 820 million in operating expenses. So far this year. If if my math is right. So how much of this would you categorize as strategic versus businesses.
As usual investment and then I just wanted to confirm you don't expect this strategic investments to step down in Q4 to get to that billion dollars for the year that you've talked about.
So all of the investment that we call out is strategic investment.
Of 277 million in in Q3, we've guided to.
Plan number of around 1 billion and will be north of 1 billion. This year right inline with expectations.
As we set them out.
At the beginning of the year.
Okay, and then on the 100 basis points calendar headwind in October could you expand on that just a little bit more I just want to confirm that this will be.
Similar benefit to November and then when you think about the moving parts lumber deflation in in Q4, and then the hurricane headwind, perhaps subsiding why do you think the implied five percentish comp in Q4 is the right place to land and are there any other moving parts that that we should keep in mind.
Yes, I'll I'll speak to to the event so from a merchandising calendar.
It's very heavy this time of year, So we set our pro Black Friday.
Bringing great values for our pro we bring in.
Appliance Black Friday, which is.
Very very large appliance event and then we set our gift center, which is a lot of power tools power tool accessories hand tools gifting items all of those initiatives kicked off on the calendar week late relative to comp and Thats, where.
We're quite confident that that's the number of the 100 basis points and we see that flowing into Q.
And in some of that actually will go into December on the yen. So it does it all hit in November this will hit throughout November and December .
Got it thanks Tad appreciate the time.
Our next question comes from a line of Peter Benedict with Baird. Please proceed with your question.
Mr. Benedict Your line is live.
All right guys take mute off.
So my question is just around the pro B to B Signup cadence you've talked about the 135 or so thousand that were signed a brilliant here are you guys still expecting a million by the end of year or have you kind of.
Slow the sign ups because of some of the the tech issues that you were talking about.
No, we still expect to onboard about 1 million customers.
During the year.
We on boarded a number of of at the tail end of Q3 right Bill Yes.
Peter We finished Q3, just above 780 780000 pros that have been migrated onto the website.
And we continue to add new capabilities as as we go through the quarter, we now except the pro purchase card.
Legacy airline customers that they can buy on home depot Dot com.
We've done things like introduced by it again functionality and we've made new user registration automatic so yes, we have new customers signing up onto our pro Xtra platform. We can got those customers at the time. This time of sign up and we can automatically migrate them to the PDP website. So.
We're on track with a customer migration and on track with all of the capabilities.
Okay, so that million target, what roughly what percent of your pros is that represent and I guess, where do you know what kind of penetration you guys think you can get longer term.
But if you look at it we think we can get all of our pros are.
Our verified pro customers migrated onto the website over the long term, but would represent about 30%, but about 30% of the total total right now and as we continue to build the base of capabilities that will obviously do more as we had originally planned to then.
Make that knowledgeable to our pros in market to them accordingly.
Okay, Great and just my one follow up would be just.
Backed a question to literally just around trade down I know you mentioned some things around how you're trying to manage your last this season whatnot, but I'm just even absent of terrorists or have you seen any sign of of trade down either within certain categories or whatnot, where maybe some of the pros are opting for.
More middle line product as opposed to to higher end I was curious if you're seeing anything there.
No no we're not so couple points of observation there appliances. For example, we continue to see.
Trade up a across just great innovation.
Clients business, we've introduced Bosch, which is approaching the higher higher highest end of the category in picking up lots of net new business. There and then the phenomenon with the cordless power tools now going in outdoor power equipment, we're seeing right.
Picked up in these are all higher price points with innovation.
Technology and outdoor power equipment.
Terrific. Thanks, so much good luck guys.
Our next question comes from the line of Seth Sigman with Credit Suisse. Please proceed with your question.
Hey, guys. Good morning, I did want to follow up on that last point. So when we look at your average ticket on a comp basis up 1.8.
Pretty similar to last quarter, where was 2%, yes, I'm surprised it's not accelerating more sounds like get a little bit less commodity deflation this quarter big ticket trends seem pretty healthy.
Maybe had a little bit of inflation on the back of tariffs. So I'm. Just curious is there something else that's holding back the ticket growth maybe is that the shift related to black Friday, where you have a lot of big ticket categories or something else, maybe yes, so thats exactly at.
The big Big Delta would be the events for the holiday promotions. So think of appliances. Your average ticket on appliance gifting portable power tools.
Combo kits et cetera, so that 100 basis point isn't that shifted is entirely.
Ticket, but but much more so than transactions.
I'd, just say, except that again, we think about the big ticket in this quarter over $1000 at four eight hurricane adjusted markets at five five that is right in line with our expectations.
Yeah, Okay that makes sense and then just to follow back up on tariffs. It sounds like you guys have managed that really well and have found some offsets how do we think about the same skew inflation that is that you're seeing in the business and how it may be impacting comps.
And then just the second part of that there have been some exclusions announced recently in certain categories that you do plane I'm just curious if that's meaningful meaningful at all for you guys. Thanks.
Sure I would I would say on the contribution of tariff to that ticket growth it's actually.
Very nominal amount it it's its by far lower than for example, the introduction of sales of new innovative higher priced and you are items is a far bigger driver about 1.8% and any price moves we would.
Made associated with tariffs.
And on the exclusions, we're working through that it was last Friday we.
We had a number of exclusions announced a number in the flooring category that are we're working our way through.
Very optimistic about what that is going to mean for vinyl plank. We believe most of our portfolio the luxury vinyl client, which has been our fastest growing category in number those items are.
Seemingly going to be on the exclusion list again, we're working through the details but.
Very encouraged.
Okay. Thanks for that.
Christine we have time for one more question.
Thank you our final question will come from the line of Kate Mcshane with Goldman Sachs. Please proceed with your question.
Hi, Thanks, so much for taking my question I.
I just wanted to you mentioned that the pro was still outpacing the iwai I just wondered if you had seen any changes in the delta between that probably be iwai trends.
I think if we look at the last.
A few quarters of the Delta has changed dramatically, but we did see the pro strengthened some and this is this quarter. So both both strengthened and then the one comment I'd make about the pro business says.
We're seeing Ted talked a little bit about the unit comps, which are very encouraging but the growth in pro was primarily through transactions versus ticket.
So just good broad base based strengths on the business.
Okay. Thank you for for that color just had one follow up question unrelated just with regard to the macro environment. If you could talk about any differential between the performance in different areas that before it affordability from a geographic standpoint.
We actually look at the regional variability every single quarter and in the third quarter. It was actually the narrowest we've seen in quite some time and that down that includes all states, whether they were high salt states or not so we're very pleased with the with the the narrow variability that existed.
Thank you.
You bet.
You can see I would now like to turn the floor back over to you for closing comments.
Thank you for joining us today, we look forward to seeing many of you at our Investor Conference in December .
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.