Q4 2019 Earnings Call
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Okay.
Greetings and welcome to the home depot fourth quarter 2019 earnings call.
At this time, all participants are in listen only mode.
Good 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 Jancee. Please go ahead.
Yeah.
Thank you and good morning, everyone joining us on our call today, our Craig linear chairman CEO and President quite soccer Executive Vice President of merchandise wrong, and I sort of make now executive Vice President and Chief Financial Officer.
I'm not prepared remark the call will be open for questions.
Well the limit it to analysts and investors and as a reminder, please limit yourself to one question on one follow up.
We are unable to get to your question during the call. Please call our Investor Relations Department at seven 7038 for Q3 eight seven.
Oh, I turn the call over to Craig Let me remind you that today's press release, a lot presentations made by our executive include forward looking statements as defined in the private Securities Litigation Reform Act of 1995.
These statements are subject to risks or uncertainties that could cause actual results could differ materially from our expectations on production.
These risks or uncertainties include but are not related to the factors identified in the release I, let our filings with the Securities and Exchange Commission.
Today's presentation and also include certain non-GAAP measures reconciliation of these measures are provided on our website now let me turn to go over to Craig.
Thank you as well and good morning, everyone.
Fiscal 2019 was another record year for our business as we achieved the highest sales in company history.
Excluding the extra week 20 chain School 2019 sales grew 3.5% to $110.2 billion deluded earnings per share were $10.25.
As expected we finished the year with our strongest performance in the fourth quarter.
Sales were up 5.2% from last year, and our newest comps were positive 5.3%.
Sales for the fourth quarter, or 25.8 billion and diluted earnings per share with $2.28.
We saw broad based growth across all geographies and merchandising departments in the quarter.
All 19 of our U.S. regimes posted positive comps and internationally, both Canada, and Mexico reported positive comps in the fourth quarter.
As Ted will detail book talk chicken and transactions grew in the quarter and we saw growth with both our pro and DIY customers.
Strong holiday season with record setting sales on Black Friday and during the cyber week.
These results reflect solid execution by our stores, our merchants our supply chain change as well as our vendor partners and demonstrate the overall health of the considerable.
I'm proud of that results in fiscal 2019 as the team successfully navigated a number of external headwinds by maintaining a relentless focus on our customer.
2019 was also a pivotal year in our transformation to create the one home depot experience.
We are now two years into our multiyear investment in our realizing benefits.
More conviction that never but these strategic initiatives are creating a value proposition that is unique to the marketplace and will extend our leadership position for years to come.
The majority of our U.S stores have a new look and feel and we trust customer pain points, while navigation in Chicago.
Our enhanced signage in store refresh package, along with investments in the front end of our stores have been proved the customer experience and driven associate productivity.
These store investments are driving higher customer satisfaction scores, which we believe is translating into market share gains.
As a complement to our store investments, we're investing to strengthen the competitive advantages that we are still trigger blending of our physical and digital platforms into a more seamless interconnected experience.
For example, our chain wide rollout of digital appliance labels connecting ratings from the digital world to the physical world enhancing the in store shopping experience.
Additionally, home depot Dot Com continues to be an engine for growth for overall business driving in key increased traffic online and additional footsteps tourist stores.
Because of this we continue to invest in search functionality category presentations product content and enhance fulfillment options.
Friction from the online shopping experience.
Excluding the extra week last year online sales grew 20.8% in the quarter and 21.4% truly here in over 50% of the time, our customers choose to pick up their order in the store.
This is the power dealer connected retail strategy.
We've also expanded our digital capabilities by investing in data being web site experience tailored specifically for the needs of our pro customers.
We have now on boarded over 1 million pro customers.
Additionally, during the quarter, we completed the integration of a third party Duston class CRM system for all of our pro sales and services teams.
This enhances our visibility, enabling us to better serve our customers.
I'm excited about the opportunities ahead, as we continue to build capabilities to engage with the pro no matter, when where or how they want to interact.
Another key component of the best in class interconnecting shopping experience centers on the enhanced delivery and fulfillment options.
In 2019, we continued our multiyear journey to create the fastest most efficient delivery networking home improvement.
We are now live for the lease you want to each type of facility that we are building.
So it is early days were pleased with the initial results. For example, we have opened a dozen market delivery operations or Mds those that have enabled us to transition 20% of appliance deliveries from an outsourced model to one in which we control more of the customer experience.
This is translated to meaningful improvements in our customer satisfaction scores for appliance deliveries.
Supply chain build out we'll continue to ramp from here with the largest number of new facilities coming online 2021 and 2022.
Turning to 2020, Richard will take you through the details, but we're expecting another year of growth with both sales and top growth ranging from approximately 3.5% to 4% and diluted earnings per share of approximately $10.45.
Today, our board approved a 10% increase in our quarterly dividend to $1.50 cents per share, which equates to an annual dividend of $6 per share.
We remain committed to maintaining a disciplined approach to capital allocation to create value for shareholders.
I'm incredibly proud of the progress our teams made as we transform ourselves into the one home depot the future.
Well, we define our sales growth in percentage terms, we capture share in dollar terms into the second year of a one home depot investment program, we have grown sales by over $9 billion level growth unmatched in our market.
As we look forward to 2020.
Im more excited than ever about the opportunities ahead.
Destined to unlock the power truly interconnected customer experience.
Enhancing our already strong foundation to further extend our leadership position into the marketplace.
As with any transformation work, we're doing is complex and I'm proud of the where associates continue to execute at high levels and focus on what's most important in our business our customers.
I want to close by thanking our associates for their hard work and dedication to the fourth quarter and throughout the year.
For the second half of the year, 100% of our stores will receive success sharing our bonus program for our hourly associates.
We look forward to continue in our momentum and 2020.
Yeah, Let me turn call over to Ted Thanks.
Thanks, Craig Good morning, everyone. We had a strong finish to the year with fourth quarter sales exceeding our expectations, we saw growth across the store at both our pro and DIY customers all of our merchandising departments posted positive comps, but by appliance department, which posted double digit comps in the quarter.
Constant corn storage and tools were also above the company average all other merchandising departments were positive, but below the company top of 5.2%.
In the fourth quarter comp average ticket increased 4.4% in comp transactions increased 0.8%.
Strengthen our comp was partially driven by a shift in our that timing, which Richard will talk through in a moment.
In addition, we had an excellent response for Black Friday, and holiday events, and our customers continue to trade up to new innovative items.
After experiencing significant deflation in lumber in copper during the first three quarters of 2019 commodity prices had a more neutral impact in the fourth quarter.
During the fourth quarter big ticket comp transactions those over $1000, which represented approximately 20% of your sales were up double digits strengthen our big ticket sales was driven in part by the shift in our that timing as well as strong performance or number of other big ticket categories during the fourth quarter Victor.
Good categories like appliances final Pike flooring, and our installation services business all posted comps above company average.
Consumer demand is strong and this was evident during our annual Black Friday gift center decorative holiday affects the partnership and collaboration between our merchants and supplier partners, helping have been Tas decline of great deals as special buys in categories like Smart home power tools hand tools and decorative holiday our unit.
He could assortment together with excellent customer service and execution led to incredible results Black Friday was a record sales day for our company and our gift center that grew double digits versus last year.
We also saw our customers tackle a variety of projects around the house during the fourth quarter, we saw comps above the company averages several kitchen bath categories special or window coverings cleaning and exterior paint. We also saw significant growth in our online only home decor categories, which we call HD.
As we build awareness around these high quality style forward assortments.
Sales to our pro customers were healthy driven by strength in categories like pneumatic concrete hand tools and Cox all of which grew faster than company average.
Looking back at 2019, our team continued their unwavering commitment to serve our customers with great everyday values and innovative product and we did this while investing in a customer back store interconnected experience to ensure that we continue to be the product authority in home improvement per year.
As to come.
At our investors conference back in December we talked about investments, we're making across our business.
We also shared our new AD campaign and tagline outdo, it's got more down that we launched a highlight or investments into these new experiences and capabilities. We believe it is important to signal to our customers. The home depot is evolving as their needs change.
While it's still early in our campaign, we see customers responding to our enhanced capabilities, giving us credit for saving them time, and helping them complete their projects.
In response to our campaign, we saw one of our largest several days of downloads of our award winning mobile app and double digit growth and usage mobile tools like product locator image search.
As we look forward to 2020, we will continue our investments to better meet our customers' needs and drive with great shopping experience one of the investments you will see the first half of the year is a reset to our outdoor power equipment base, we know the marketplace for outdoor power tools. This transition cordless technology and we.
We learned in our tools department that once a customer adoption battery platform, they see tremendous value sticking with that platform.
Similar to what we've done in our tools Department. We're in the process of resetting our outdoor power equipment phase to showcase our assortment by brand highlighting ego Toro Milwaukee Ryobi to Walt and makita, many of which can only be found at the home depot.
Through this new presentation customers can clearly see easily shop the value proposition.
These cordless platforms spring, including being more environmentally friendly safer and easier to use all with the power in rapid time to get the job done.
These powerful brands now have the lions share of batteries in the marketplace with hundreds of millions of batteries and customers homes and job sites. Today. We currently offer over 1000 cordless power tools and that number will continue to grow as our supplier partners are introducing innovative product all the Todd.
Our comprehensive and unique assortment of outdoor power equipment resulted in double digit comps in fiscal 2019.
The spring right around the corner, you're gearing up for another busy season, our stores or stock with new and innovative products and we just recently announced we're hiring 80000, new associates to help us serve our customers during our spring selling season.
I'd like to turn the call over to Richard.
Thank you to add and good morning, everyone.
Before we begin let me take equipment to remind everyone at fiscal 2019 consisted of 52 week.
While fiscal 2018 consisted of 53 weeks.
This extra week added approximately $1.7 billion in sales the fourth quarter fiscal 2018.
When we report our comparable sales for our comps we report them on a 52 week to 52 week basis.
Comparing weeks one through 52.
Fiscal 2019 with weeks to 53 fiscal 2018.
In the fourth quarter of 2019 total sales were $25.8 billion, a 2.7% increase decrease from last year, reflecting the compare against the extra week and 2018.
Our total company comp sales in the fourth quarter increased 5.2% and comps in the U.S. increased 5.3%.
Okay last year, 50, Threerd week, and the resulting in calendar shift our monthly comps are distorted due to the timing of our annual Black Friday cyber Monday of this year versus last year.
Our reported monthly comps for the total company were positive 1.2% in November.
9.9% in December and 5.7% in January.
Our monthly comps and U.S. ER positive, 1.1% in November 10.4% in December and 5.8% in January.
Given the distortion in our monthly comps caused by the calendar shift we believe it is more appropriate to look at November and December on a combined basis.
For the combined two months of November and December our total company comp was 5%.
Followed by 5.7% in January.
For the year, our sales totaled a record $110.2 billion.
If we exclude the sales from the 50 Threerd week in fiscal 2018.
We grew sales by approximately $3.7 billion in fiscal 2019, a level of growth unmatched in our market.
For the year total company comp sales increased 3.5%.
And U.S. comp sales increased 3.8%.
In the fourth quarter, our gross margin was 33.9%.
A decrease of 20 basis points from last year.
Similar to last quarter the change in our gross margin was primarily driven by higher shrink and a mix of products sold compared to last year.
For the year, our gross margin was 34.1% slightly higher than our guidance at the beginning of the year.
And the fourth quarter operating expense as a percent sales decreased by 64 basis points.
20.7%.
Slightly better than our plan.
During the quarter, we saw approximately 77 basis points of leverage as we lap for fiscal 2018 impairment of certain will trade names and in the 50 Threerd week last year.
This leverage was partially offset by expenses related to our strategic investment plan.
Approximately $280 million, which increased approximately $25 million from last year.
Cost 12 basis points of the leverage.
Let's go to 29 operating expense as a percent of sales was 19.7%.
A decrease of 28 basis points from last year.
Our fiscal 2019 expense performance was better than our initial expectations driven by productivity initiatives in our core business.
During the year, we spent approximately $1 billion of investment expenses related to our strategic initiatives inline with our plan.
Our operating margin for the fourth quarter was approximately 13.2%.
For the year was approximately 14.4%.
Okay.
Interest and other expense for the fourth quarter grew by $27 million to $292 million due primarily to higher long term debt levels than one year ago.
In the fourth quarter, our effective tax rate was 20.3%.
For fiscal 2019 was 23.6%.
The lower than expected effective tax rate in the fourth quarter and for fiscal 2019 was driven primarily by several discrete tax items.
Our diluted earnings per share for the fourth quarter or $2.28, an increase of 9.1% from last year.
For fiscal 2019 diluted earnings per share for $10.25, an increase of 5.3% compared to fiscal 2018.
Moving onto some additional highlights.
We ended the year with the store count of 2291.
While retail selling square footage was approximately 238 million square feet.
For the fiscal year total sales per retail square foot or $455, the highest and our company's history.
At the ended the quarter merchandise inventories grew $606 million to $14.5 billion and inventory turns were 4.9 times down slightly versus last year.
The growth in our inventory versus last year reflects investments, we're making to accelerate merchandising reset and higher in stock levels than we had one year ago.
Moving on to capital allocation.
In fiscal 2019, we generated approximately $13.7 billion of cash from operations and use that cash as well as the proceeds from $2.4 billion at net debt issuances to invest in our business pay dividends to our shareholders and repurchase our shares.
During the year, we invested approximately $2.7 billion back into the business through capital expenditures.
Further.
We paid $6 billion in dividends to our shareholders.
Finally during the year, we repurchased approximately $7 billion or about 32.8 million of our outstanding shares, including roughly $3.25 billion or 14.5 million shares 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 approximately 45.4% 60 basis points higher than the end of fiscal 2018.
Today's press release includes our guidance for fiscal 2020, and I want to take a few moments to comment on the highlights.
Remember that we got off of gap, so fiscal 2020 guidance or wants from our reported results for fiscal 2019.
At our Investor Conference in December of 2019, we shared with you some preliminary thoughts for 20 point.
And we are reiterating that guidance today.
The economy is strong and U.S. consumer is healthy.
The foundation of our sales plan starts with GDP and our 2020 sales guidance assumes U.S. GDP growth of slightly less than 2% in 2020.
To GDP, we add the impact that we think we will see from the housing environment.
Including demand driven by home price appreciation housing turnover household formation and the age of the housing stock.
As we look at these metrics, we see an environment that is healthy and stable.
Our 2020 sales guidance also assumes that we will continue to gain share in the marketplace.
For fiscal 2020, we expect both sales growth and total company comp sales growth of approximately 3.5% to 4%.
Let's go 2020 represents the peak year of our investment program.
And as a result, we expect our fiscal 2020 operating expenses to grow at 1.2 times the rate of our expected sales growth.
For the year, we expect to grow operating profit dollars to $16 billion, giving us an operating margin of approximately 14%.
For fiscal 2020, we assume our effective tax rate will be approximately 24%.
We expect fiscal 2020 diluted earnings per share to grow approximately 2% to $10.45.
For the year, we project cash flow from operations approximately $13.5 billion.
We plan to invest $2.8 billion at this cash back into the business in the form of capital expenditures.
We also plan to use this cash to pay $6.4 billion of dividends and repurchases at least $5 billion of outstanding shares.
Before I close I would like to update you on how we're thinking about one of our capital allocation principles.
With regards to our dividend in lieu of using a 55% payout ratio will look to grow our dividend every year as we grow earnings as we have for the last 11 years.
This morning, we announced that our board increase our quarterly dividend by 10%.
Which equates to an annual dividend of $6 per share.
With that I want to 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.
I would like to ask your question. Please press star one on your telephone keypad.
Confirmation to only indicate your line is my question Q.
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Thank you. Our first question comes from the line of Michael Lasser with you B.S. Please proceed with your question.
Good morning speaks a lot for taking my question is on any learning it's on any potential supply disruption coming out of Asia or what have you factored in what's the current status of your supply chain have you seen any issues with getting product from Asia at this point and if this extends.
For a meaningful period of time, what how do you size the potential impact to your sales and earnings over the next few quarters.
So Michael let me I'll start off and then I'll hand, it over to Mark Holifield.
First of all the.
The guidance that we provided obviously does not include any guidance update for the situation. It's a very fluid situation that we're monitoring closely and all of our goods for Q1 are essentially onshore or on their way. So we're feel pretty good about.
And Mark you might want to provide an update on.
Well sure. Yes, you mentioned it does change every day, our Q1 merchandise is already here on the way in Q2. The picture is still developing there for our direct import or sourcing offices in Asia or in touch with our top factories is they're returning to operations for our domestic vendors were working with them.
Understand and mitigate any potential impact them in their supply chains.
Our team working with all of our suppliers, both domestic and import and our logistic service providers on a PEO by PEO container by container basis to understand what the impacts to our product flow, our and they're taking appropriate action.
We are encouraged that we're seeing factories come back to work.
Provinces coming back to work.
China, but it is a fluid situation and its highly variable in terms of what's the current state.
In just to clarify the based on what you know today.
You think that there will be in earnings heat.
Over the next couple of quarters based on any supply disruptions you know if this even if you things get back to normal in the very near future.
So.
Where do you have time to Josh.
Based on what you know at this point.
Michael based on what we know today, we could we couldn't say that there would be ahead.
Yes, the teams are working.
Day to day as Mark said.
Joe container to container.
We're also putting plans in place to mitigate any any risk going forward.
The agreement when the revenue so what we did as domestic.
Okay. Thanks My follow up question is can you just wrapped up your second year in a row with about 1% growth comp growth in traffic. After many years of higher traffic than that is 1% growth in traffic the new norm in how do you think the implementation of your strategic investment plan is going to into.
Pack traffic in the next few years.
We'd like to the objective of what we're doing the investments plan is positioned ourselves to be able to continue to grow faster than the market I think some of the growth that we saw.
In years past was a result of an accelerated recovery from a very difficult spot what we've always focused on.
How do we balance ticket and transaction and that's really where our focus is.
The market will determine what level that.
Okay. Thank you very much and good luck.
Thank you.
Our next question comes from a line of Scot Ciccarelli with RBC. Please proceed with your question.
Good morning, guys.
I actually had a follow up on a Michael's question first like well I guess the question is given the delta that we've seen in transactions and average take it.
What would you guys 0.2 regarding kind of what's driving that divergence in I mean, and you you just reference you had a recovery phase, but I would think that recovery phase actually would help both sides of that ledger not just one.
Yes, so I'd say, we had some opportunity areas that we've invested in to continue to grow that has accelerated our ticket growth largely being we put significant investment and appliances that has paid back and im very big way in terms of accelerate.
Growth, we've seen that that business same thing would hold true for what kept reference as it relates to the let them technology and the average ticket growth we've seen at power tools and now in outdoor power equipment. So I think there some innovation and investment factors that have helped drive ticket.
Maybe even above and beyond.
As we as we took share in those categories.
But we're pretty pleased with the consistency of our traffic growth over time and like I said, we'll work to balance traffic and ticket, we always want to make sure. There is it reasonable balance there.
No we don't when you think about.
I'm sorry go ahead.
Okay, Thats going to at Scott I'd I'd add to that Q4.
Very much event driven.
Gift center decorative holiday and as Craig said appliances, and those all performed incredibly well so that contribute to the ticket. It as we see consumers continue to trade up to the new innovative products that were offering and while we're happy with with transactions they were a little.
But depressed with the lack of cold weather. So you think during a winter you got a lot of people stopping in for ice smelt for.
That smaller pick up the been car washer fluid et cetera.
The more mild winter lot of the biggest suppression their transactions were those quick cold weather pickup items.
Okay. That's helpful and I guess when you think about all the investments you guys have been making in the business in supply chain technology should we continue expect kind of the pattern that we've seen here continue words it had a more balanced a impact as we go forward. Thanks.
Yeah. Thank you again, we look for.
On a balanced and that will be perfect.
One way or another no, but but we would look for bounce.
Okay. Thank you.
Our next question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question.
Thanks. Good morning long term question first so thinking again about the payback from investments it sounds like we'll see some cost moderate next year, so that'll be good to margin.
In terms of the topline list and I realize you probably not going to quantify much but can you tell us where the places will start to see better comps is it the pro wallet share.
MRO categories DIY wine.
So what are the key somebody CPI is that won't be as a parent is comps that you're seeing that that tells you that some of these investments are beginning to pay off.
First of all our investments are targeted for all the above that you just rolled out.
Great. Thank our MRO, you think consumer our attempt is to grow and all of those spaces.
And but what we're really trying to set ourselves up to do in the investment is to be able to position the home depot to grow faster than the market growth on a consistent basis no matter what that environment is that's really what we're trying to get done.
And does that require waiting for the supply chain investment to finished rolling out or know that should stagger as as all these other and other investments are taking place.
The supply chain as a part of the overall component as we've shared with you we have investments that span across our business, whether that's in investments in the store, whether that's investments in the digital world.
And our marketing elements in our product development as well as the supply chain and you know well see the.
But more and more of these capabilities in place as your supply chain continues to expand as we open more facilities in 21 in 22, the bulk of those we'll see that continue to grow had to put more capabilities against the market.
Okay and then my follow up is in the fourth quarter. It looks like the business performed a little better than plan can you parse out underlying housing signs that it may be improving versus some of the seasonal it sounds like December was a big month I don't know if that's more holiday, but at the same time you didn't have as much weather impact so.
If you can just talking about underlying housing versus other drivers.
Sure at Simeon This is Richard so from a housing perspective, all housing indicators wound up a really sort of where we expected them and so.
We don't think that that had any material impact on our business.
You mentioned December there is a little bit of the timing shift there in the calendar from November to December but overall it was realized a strong execution across the quarter and Ted maybe you want to go a little bit more end to.
And with the strength of the quarter, Yeah, I think as I said in my comments.
We'd like the balance so ticket and transaction, we certainly like the balance of consumer pro and our pro was strong in Q4, but we really sobbing gauge consumer and you know what are more discretionary categories and terrific artificial Christmas tree business art art gifts.
Better record sales growth in our gift center and appliances as I said double digit comps in appliances.
It's not always just refrigerator, that's broken and being replaced its increasingly discretionary purchases. So we just saw a very strong consumer.
Great. Thank you.
Our next question comes from the line of Chuck Grom with Gordon Haskett. Please proceed with your question.
Thanks, and nice quarter in normalizing for the B bench Upsells are pretty consistent across the quarter I'm. Just wondering how we should think about the cadence of comps by quarter and 2020 and I'm wondering if you could offer some thoughts on how February starting up.
Well. Thank you Chuck So we don't provide quarterly guidance, but we would say that at 20.8, we'll see a relatively evenly spread across the two has at the year with respect to to comp sales and with respect to what we've seen so far in 2020 our guidance.
It is based on the best information, we have of the moment and so our our results to date are consistent with that guidance.
Okay, Great and then just bigger picture is one of you guys could just amplify on the opportunity that you have with the pro as you onboard more of them onto the B to B website, particularly now that there was going to be the CRM aspect included thanks.
Yes, I think when we when we think about the pro customer.
We're actually building.
Ecosystem or pro customer that encompasses product in brands and delivery and credit services in our digital capabilities would be to be tool rental and a whole lot more obviously all of that coming together allows us to be able to service our protest.
First in a more holistic way and it allows us to continue to grow with larger more complex customers and so when we look at the pro business. Yeah. We think we're in the 15% to 17% range and we'd love to see that being much more in line with.
Consumer penetration or share that we have as we go forward, which is why we're making these investments.
Thank you.
<unk>.
Our next question comes from line of Christopher Horvers with JP Morgan. Please proceed with your question.
Thanks, Good morning, everybody.
So one two or a couple of follow up so so first on the seasonal business in the impact of the weather overall, how would you assess the weather impact last year in December is really where I think you called out 85 basis points.
Of headwind a year ago, you also had a warm weather in January against polar vortex at the end there last year, but at same time, you didn't get the snow melt in the snow blowers. So how would you assess your overall impact of weather.
Chris This is Ted I'd say neutral.
It's just does you you said extended season in some markets grounds, not freezing et cetera that the pros could could stay at work.
But then on the other hand, you didn't get all your cold.
Whether categories are our merchants in the chore and snow.
And I smell business art art as happy as some of our or other merchants, but I would say on balance.
Little impact neutral.
Got it.
And then on the gross margin so sequentially. The performance was better relative to the third quarter, you mentioned shrink and mix, we're still headwinds and that obviously you talked about the analyst day, they persist into 20, but it did get a little bit better what was that what shifted in the sands therein.
And help offset that are did one of those factors mitigate and does it change your view as a as you think about 2020.
Shrink was consistent with what we have observed through the year and we are taking steps to address that in 2020 as we discussed we had some great benefit as we've had all year from some of the supply chain investments, we're making and productivity in supply chain, but shrink was consistent.
And so the delta versus last quarter anything to call out there. It's really it's it's a consistent trend and as I said, we're looking to to address it during 2020.
Got it thanks, so much and have a great spring.
Thanks, Thanks, Chris.
Our next question comes the line of Michael Baker with Nomura. Please proceed with your question.
Hi, Thanks, a couple of here so one the comp outlook for next year, three and half to for.
This year, you caught the three and half, but you were hurt by we 50 basis points from lumber so essentially you're guiding to slow down next year in fact, the slowest comp in a number of years when you adjust for inflation, yet housing seems to be getting better. So just curious disconnect. There is it just sort of setting up for some potential upside.
I mean like I, our methodology that we use hasn't changed and that's not a perfect model that Richard you wanted just walk.
Sure.
We we stay consistent with our methodology, providing sales guidance. Soon if you look at the elements of that methodology from GDP assumptions to what we're thinking with respect to support from housing to the expectation that we will continue to take share.
None of the assumptions behind those elements have changed significantly since December and so.
That's why we're reconfirming that outlook.
No one comment I guess you know.
People always tried to think about our business as it relates to interest rates. Just so you know we have never been able to correlate sales to interest rates, so that doesn't come into our thinking as a result.
Well I, but I got to follow up on that you would think that your business correlates to housing right, which which you know I guess in turn it correlates with interest rates is that a fair statement.
It's it's it's a fair statement, we and certainly we've seen.
Some of the indicators.
In very recent is very recent time period at tick up a bit, but we're not going to adjust guidance based on short term fluctuations are observations and housing. We think housing is healthy and stable it's going to continue to provide positive support for our business.
Okay that makes sense if I can follow up there are called the third quarter was was hurt a little bit by the timing of Black Friday, So presumably that helped the fourth quarter <unk> I get the shift in the month within the quarter, but third quarter versus fourth quarter did did that help fourth quarter at all in and if so by how much.
Yeah. It was it was roughly a 35 basis points shift both ways. So it hurt Q3 by 35, it shifted that to Q4 by 35.
Okay. Thank you if I could fight and one more you Didnt you don't change your methodology and how you do comp, but you are changing the methodology on the dividend. Just wondering why are you changing that is just a new CFO in in a different way to think about it or is there something some of the reason we should think about.
So look we you know we are maintaining our policy of wanting to increase our dividend every year as we grow earnings were not going to tied to a specific payout ratio.
But I think that this year's increase of 10%.
This is a great example of our intention to consider to continue to increase the dividend and also a reflection of our confidence in business.
Okay makes sense appreciate the time.
Our next question comes the line of Karen short with Barclays. Please proceed with your question.
Hi, Thanks, actually does well follow up on that comment on the dividend. So is there are specific relationship we should think about as it relates to escrows versus dividend growth because obviously as you said a 10% increase is very impressive <unk> you know given that in 2020, you're kind of only looking for holiday, 2% increase in earnings and Brazil.
Memory earnings growth will accelerate and 21.
Look our general philosophy around capital allocation hasn't changed at all in terms of first and foremost we're going to invest what we need to into the business to continue to position. This business to win for long term then based on excess cash we look at whatever opportunities might exist.
Out there and we are committed to increasing our dividend on an annualized basis as we grow earnings and then Joe will continue to look for ways to return dollars to the shareholders down any other opportunity if your share repurchase. So those are the fundamental basics that.
Yeah, we hold true in this and this business if you want to weed control ourselves to a percentage basis. Okay. Thanks. That's helpful. And then on the 14% operating margin guidance. Obviously, you came in a little a little bit higher this year at 14 for is there anything to call out there in terms of the 40 base.
That's fine decline versus the prior 30.
No you know, it's it's really just a reflection of outperformance in Q4 and sort of rounding up to a 14 for rather than than our expectations around 2020, which have not changed but you know what great execution across the business from sales to gross margin to operating expense.
As a team effort and and we're proud of the results we delivered.
And then just last one for me is there any update you could provide on additional personalization and functional functionality on the b to B and maybe any color you can provide on on behavior with the pros and our conversion.
With respect to the ones you Onboarding.
Look we we continue to drive engagement with the pros that we've onboarded to the BBB website.
We like what we see as those pool pros accelerate their engagement.
But again, it's it we're also as I mentioned before we're building a complete ecosystem around the fro the b to B website as one portion of that experience, but accomplishes all the things that I laid out before.
Okay, great. Thanks.
Our next question comes really in a Brian Nagel with Oppenheimer. Please proceed with your question.
Hi, good morning.
Thank you for taking my question nice quarter.
Hi, I'm wondering just take a step back a bit so it's a meeting in December we spent a lot of time talking about the investment initiatives and then.
You had highlighted the benefits of some of these were not coming as quickly as you initially thought but there were still coming.
Oh, I guess I wanted to update their armies is we look as we look the business now you had very nice quarter you see.
You seem.
Side about the new ships, if you see more progress on that front and then was articulated in December.
Well I think as we shared in December that we would continue to see the investments have a payback as we move forward and that is what we're saying I think that quarter in particular as Ted called out was a combination of the.
The strength that we see in terms of.
And events that we put in place a product offering that we brought to the market. The continued development of our initiatives. It all those things coming together that actually delivered.
On this quarter. So yeah. We're pleased with the continued growth let me see any initiatives.
At the same time Im really proud of the team the execution by our stores was outstanding the supply chain team did a great job, our suppliers gave us outstanding products and values.
And you know the the customers' ability to start that shopping experience in the digital world and research product and or purchase product. There all of that is leading to the kind of performance that we saw the fourth quarter.
Got it and then my follow up Greg I guess in which have questions on shrank. Another topic. We spent a lot of times discussion into December analyst meeting.
How much about.
How much of a swing factor could shrink be here in 2020 to the extent that they would you be able to improve the performance versus where we saw in 2019.
I think what as we shared in December we are in the process of implementing our initiatives to mitigate the impact from shrink it will take time for us to actually realize the benefit as that flows through the pinedale because you're basically do the inventory in the stores, one and it's a it's a phased role.
<unk> out right.
We we piloted approaches we feel very confident about those results, but we still learn as we go.
We feel confident and as as Craig said not only do you have the rollout, but you also have the.
The actual recognition in the piano, which is on a lag basis as we take inventories.
Okay, well, thank you and good luck in spring.
Thank you.
Our next question comes the line of Elizabeth Suzuki with Bank of America Merrill Lynch. Please proceed with your question.
Great. Thank you regarding the margin guidance for 2020 can you talk about what assumptions, you're making for product margin and the mix impact on gross margin.
For the competitive reception on at least till that yeah, we would certainly know.
Yep.
Okay, so on and on and but there is no expectation that mix could be negative given that appliance sales have been strong for example, or is there anything built into your gross margin assumption in terms of <unk> well there there is and as we had outlined in December and if you think about the walk to the 14.0% guidance.
As you start with the fact that we're going to generate operating expense leverage on a business as usual basis sort of underlying everything but then recall. This is the peak year of investment of our three year investment program, So that will put.
Pressure on margin and then we see the impact from shrink a which as we said we're taking steps to address and also from mix, but the mix pressure is.
It is a good pressure. This is the pressure that reflects the fact that we're taking share in categories like appliances like power tools like outdoor power.
And so while we do think that there's mix pressure there. Our objective is to grow incremental market share incremental sales in incremental operating profit dollars and we do that through attacking our market opportunities in front us.
Okay. Okay and has there been have there been products that have been excluded from parents retroactively, where you're now getting refunds and are those refunds a positive off that to your cost of its own.
Yes, I would say you know first off a huge thank you for our.
Combined merchandising finance supply chain global sourcing team as they work through this tariff issue all year, we put a lot of effort audit into teams did an exceptional job.
That falls into the exclusions, because that's a whole body work that [noise].
Excuse me you need to follow.
What's being submitted requested to be excluded and literally got it down to the skew identifier and then file all the requisite paper work to get the approvals that a massive body of work that the team is currently undertaking and you know one.
Big category, a huge growth category for us that has been excluded now is luxury vinyl play in the flooring business. That's probably the single biggest one we're actively working.
To to get that refund.
Back from tariffs previously paid.
Okay. So there's and have those refunds impacted your fourth quarter at all or are they more going forward, you're likely to see some of that impacted the first happening here.
Yeah. There was some of that there was some benefit but you know ends and after the quarter, Yeah, we still feel great about the overall performance.
Okay. Thank you.
Our next question comes the line ups Axeight with Wells Fargo. Please proceed with your question.
Hey, good morning, I am curious if you speak specifically to the outlook for your E Commerce business in fiscal 20, and given all the initiatives around fulfillment in pro curious, whether you expect that 20% growth handle to tick continue whether you're still adding any categories and what you think that 2020 drivers could be.
So we're we're excited about our ecommerce business as part of a whole interconnected retail strategy. We believed that the front door of our stores now on the customers pocket, it's on the job site.
That most of our customers shopping experience actually starts in the digital world, even if it finishes in the physical world.
As as Ted as talked about.
You know we have expanded our assortments into more categories online around the home, we think that as a continued opportunity as customers are shared with us that they they believe that we can blame great value and these home categories and they trust.
Thank you bring that value. So we think that our digital business continues to be an engine for growth both in the additional world and in the physical and and it's not a separate business. It is is managed by our merchandising for now one merchandising thing right and so.
Rather than to think about as a separate business you have to think about it as a capability.
Got it and an army appliance category curious if you could talk a little more about the impact of taking home delivery in house and considering your share gains in the category over the past several years could you comment on how much do you think it you know share wise is still up for grabs in and where do you think it's coming from.
Okay.
[noise] Yeah, we're really pleased excuse me, it's mark we're really pleased with the.
Regarding our market delivery operations RMB shows a those are staffed with orange. They bring home depot associates, who are ensuring that the freight comes into those locations and is this spread apart from either the customer damage free.
And they're also working to ensure that there's a great customer experience there a working with the delivery teams. So really pleased with the progress there we as Craig mentioned in his comments, we've got a dozen of goes up we have another dozen or so leases signed or we're going to continue to roll those out through 2020 and as we do.
We continue to see an improvement to our on time performance, our reschedule rate Sandra customer satisfaction.
And I'd say an opportunity to keep growing there's still lots of participants regional superregionals, even mom and pop furniture.
Stores the habit.
Clients offerings so.
We think there's still lots of share out there I mean, clearly Sears had been a don't or over the years.
You know very markedly diminished store base, but we still see just a huge market that we've had it disruptive attitude in this space for a long time, and that's continuing to pay dividends as we picture.
Got it appreciate the time.
Chris Danley have time for one more question.
Thank you. Our final question comes within line of Seth Sigman with Credit Suisse. Please proceed with your question.
Great Hey, guys. Thanks for squeezing me in a couple of follow ups here first on the guidance and specifically the cadence Richard I think you gave us a complicated similar throughout the year, how should we be thinking about gross margin as she ne and I guess, just the cadence of investments should we be thinking about more pressure on the operating margin in the first half relative to the second half.
Hey, Firstly, we think about it didn't happen and we don't provide specific half guidance, where we're looking at a relatively balanced year across the house.
Got it Okay, and then just a follow up on the exit rate January being a better month year should we be thinking about any sort of pull forward because of weather, where do you think it's some combination of your initiatives and just solid demand overall and then there's some related piece here around the macro it sounds like you're maintaining a relatively conservative.
View I get my question is really are you seeing any sort of improvement or divergence and maybe markets that we're slowing last year and are starting to get a little bit better any change in performance. There that would maybe lead you to believe that you know housing backdrop is just better for the business right now thanks.
So I'd say, our first of all on regional variability. This past quarter was one of the narrowest we've seen in recent times and we don't we don't see any widespread variability. It's a it's really early.
Termine you know how the business plays out for the first half yeah. We've always talked about this in terms of half speakers anything can happen from a from a weather standpoint that could either accelerate or or last spring and then you generally work to capture that in the first half that's really our approach.
We're not seen anything that would have us thinking any differently or that whatsoever.
Okay understood. Thanks, a lot.
Thank you we have reached the end of our lottery time for questions Mr., Nancy I would now like turn the floor back over to you for closing comments.
Great. Thank everything again for joining us today, we let somewhere just speaking with you on our first quarter earnings call in May.
This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
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