Q1 2020 Earnings Call
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Greetings and welcome to the home depot first quarter 2020 earnings call.
At this time all participants are in a listen only mode.
He brings question 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 GNC. Please go ahead.
Thank you Dan good morning, everyone, joining us on our call today, our Craig mini or chairman CEO and President <unk>.
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.
Actions will be limited to analysts and investor and as a reminder, please limit yourself to one question with one follow up.
If we are unable to get your question during the call. Please call Investor Relations at 770 384 to 387.
Before I turn the call over to Craig Let me remind you that todays press release and the presentations made by our executive includes forward looking statements as defined in the private Securities Litigation Reform Act of 1995.
These statements are subject to risks and uncertainties and they could cause actual results could differ materially from our expectations and projection.
These risks and uncertainties include but are not limited to the factors identified in the release and in our filings with the Securities and Exchange Commission.
Today's presentations, who also includes certain non-GAAP measures reconciliation of these measures is provided on our website now let me turn the call over to Greg.
Thank you Isabel and thanks, all of you for joining us on our call. This morning.
We hope that you and your loved ones are safe and healthy and our thoughts and prayers are with all of those who have been directly impacted by cobot 19.
I also want to think Oliver incredible associates and supplier partners for their hard work and dedication to serving our customers and communities in this time with me.
And well the purpose of the call today is to update you on our first quarter results I thought it would be helpful to explain how we're thinking about and making decisions at the home depot.
When our founder started the company over 40 years ago. They did so by first defining the type of culture and value system that they wanted to promote.
These values are the foundation for our business and provide the lens through which we evaluate our decisions.
Anchoring to these values and this time of crisis has never been more critical.
Our decisions and actions are rooted in a commitment to do the right thing to take care of our people and be there for customers and communities.
So that in as a situation around cobot 19 has evolved our focus has been and continues to be on two key priorities, the safety and well being of our associates and customers and providing our customers and communities, where the central products and services.
The teams alignment around these two objectives has enabled critical speed and flexibility when making decisions and implementing a number of changes across the business in a rapidly evolving an incredibly fluid environment.
I'd like to briefly touch on just a few of the early and decisive actions that we took in support of these primary objectives.
To promote a safe environment for associates and customers, we implemented a number of operational changes starting in mid March.
We've adjusted our store hours closing earlier than usual could give our associates more time to properly clean and sanitized and restock ourselves.
We took a proactive and early stance on limiting customer traffic in our stores to better maintain physical and social distancing protocols.
At the height of our spring selling season, we also made the decision to cancel our annual spring events, including spring Black Friday.
This was not a decision that we took lightly.
Yes, we made confidently, giving our belief that having this event would drive put steps to our stores and directly undermine our commitment to prioritizing safety.
Take care of our associates, we expanded our paid time off for all hourly associates that can be used at their discretion and will be paid out at year end if unused.
We also are offering additional paid time off for associates or 65 are all are deemed to be at higher risk by the CDC guidelines.
We have instituted weekly bonuses for hourly associates in our stores and distribution centers.
We are providing double pay for overtime work and we have extended dependent care benefits in the wave related copays.
Our more than 400000, Orange blended associates part of a heartbeat of the home depot and supporting them as a core value of our company.
Okay.
Beyond the grounding that our culture and values provides and the actions we've taken to support them.
We believe that the home depot is uniquely positioned to weather covert 19.
Nobody could have predicted what has unfolded since we spoke with you three months ago on our earnings call in February and yet the distinct competitive advantages and overarching benefits of an interconnected one home depot strategy that we're reinforce and then perhaps even more and focus and relevant today.
Investments, we've made over the years in our stores market, leading digital assets flexible supply chain and a world class merchandising organization have allowed us to quickly adapt to shifts in customer needs preferences and behaviors.
Our interconnected retail strategy, an underlying technology infrastructure have supported record level web traffic for several weeks without disruption.
Sales leveraging our digital platforms increased approximately 80% in the quarter and more than 60% of the time, our customers opted to pick up their orders at a store.
We were able to extend our in store focus capabilities to curbside pickup in the us in a matter of days offering customers and additional choice with the respective fulfillment.
In the case of our Ontario stores in Canada. This curbside capability was turned on essentially overnight when it became the only option to remain open and operational with those stores operating under these circumstances for more than a month.
The flexibility in the agility of our business model, coupled with our focus on execution and strong partnership with our suppliers.
Deliver solid results in the quarter and gave the board the confidence to declare a one dollar and 50 cents per share quarterly dividend.
Sales for the first quarter were 28.3 billion up 7.1% from last year.
Comp sales were up 6.4% from last year with us comps of positive 7.5%.
Diluted earnings per share were $2, an eight cents in the first quarter.
Richard will walk you through the details in a moment, but I want to stress that while we were pleased with the results in the quarter and we see an engaged customer there was significant volatility.
Month to month, and even week to week, we saw extreme ups and downs across different categories and geographies.
As a result, we're cautious to extrapolate trends from the first quarter into a forecast for the remaining of the year, particularly given the tremendous amount of uncertainty we faced with regards to the duration and continued impacts of the virus.
Despite the many unknowns at the current environment, we're confident that we have taken the steps to ensure that we will emerge from this crisis stronger any better position for the future.
Though this crisis is unparalleled in size and scope, we've built a reputation through our history of doing whatever it takes to be there for our associates customers and communities and the most critical times and this situation is no different.
Once again I want to thank our incredible associates and express how grateful and proud I am of the resiliency and strength that our teams have demonstrated as we navigate these extraordinary circumstances together.
This reminds me of the words of our founder burning markets that have never resonated more deeply than they do today.
If you take care of our associates.
They take care of the customers and everything else takes care of itself and with that I'd like to turn the call over to Ted.
Thanks, Craig and good morning, everyone. I also want to start by thanking all of our associates and supplier partners for the incredible collaboration over the last several months.
Supplier relationships and partnerships matter in during times of prices when they matter the most.
One of the actions we took early on when Cobot 19 was impacting the supply chain in China was to establish regular in frequent contact with our suppliers both internationally and domestically.
As cases increased in the us our suppliers helps source the essential products are customers and communities needed.
Establishing effective plan shifted resources needed and worked on getting the right products to the right stores across the country well in stock levels vary from store to store in region reach and our focus remains on replenishing in restocking high demand products as quickly as possible.
We are grateful for a strong strategic partnerships our supplier partners are helping us in many ways, including supplying the central products for our own use let me give you an example.
Very early on in the pandemic, we reached out to PPG, one of our key paint suppliers for health.
He asked PPG, if they could help supply hand, sanitizer for our store associates. They quickly converted several of their manufacturing lines and within a few short weeks. They produced an initial order of approximately 100000 gallons of hand sanitizer.
They are planning to produce three times that amount for future in store use it will help our associates for the remainder of the year.
This is just one of many examples and I want to thank PPG and all the other supplier partners that have stepped up to help us prioritize the safety and well being of our associates and customers.
The challenges we faced as a result of cobot 19, including the most fluid operating environment, we've ever experienced have further reinforce our strategy of the one home depot interconnected shopping experience as a direct result of our investments across the business over the last decade, our teams were able to make decisions quickly and adapt to check.
Changing local government mandates in customer behavior, and as you heard from Craig We did this while focusing on two priorities, keeping our associates and customers safe and continuing to serve our communities with the essential products and services they need for their homes in places of work.
Our continued investment in our interconnected capabilities has positioned us well as customers turned online for their shopping needs.
The shelter in place orders rolled out across the country in mid to late March we start digital businesses accelerate from approximately 30% growth in early March to triple digit growth by the end of April in fact daily traffic to home depot Dot Com reached new records towards the end of the quarter.
During the last three weeks of the quarter traffic to home depot Dot Com was consistently above black Friday levels.
As a result of our continued investment in our digital infrastructure and with the great work of our technology teams, we've provided continuous service to our customers and our conversion rate continued to increase.
During the quarter, we continue to leverage our different fulfillment capabilities like buy online pickup in store in our enhance delivery capabilities, whether it be on a flatbed truck box truck or our car in van service.
Our BOPUS and deliver from store fulfillment options sought triple digit growth in the first quarter. In fact, the flexibility that we have built into our systems allowed us to quickly rollout the new fulfillment option for our customers to buy online pickup at our stores through a contact list curbside pickup option.
Looking at the first quarter in total we saw positive comps in 11 of our 14 merchandising departments comps in kitchen, and Bath flooring in Millwork Department. So the heavy reliance on in home installation were negative during the quarter.
During the first quarter, we saw three distinct phases of sales performance. The first phase covered the first seven weeks of the quarter. During this phase we saw strong sales across the store with all departments showing mid single to double digit comps as customers prepared shelter in place, we saw particularly strong growth with certain categories.
Like cleaning in safety and security, but we also saw growth above our expectations and other core categories.
Second phase of our sales performance relates to the last week of March in the first two weeks of April during this phase as a number of shelter in place orders were issued across the country. We are among the first essential retailers to take immediate and decisive action geared at limiting customer traffic in our stores. These actions.
It's included reducing store hours limiting the number of customers in our stores in canceling our annual spring events, including spring Black Friday.
In addition, we made the decision to suspend certain non essential installation services such as kitchen Remodels.
During these three weeks, we saw negative comps in most departments.
Finally during the last three weeks of the quarter, while maintaining safety protocols around distancing and proactively restricting customer traffic in stores, we saw strong comps across most of our departments as customers focused on a number of home improvement projects. We continue to see significant pressure in products require.
Installation services, like kitchen, and Bath and flooring.
During the first quarter comp average ticket increased 11.1% in comp transactions decreased 4%, reflecting the lower traffic that we just discussed the strengthen our comp average ticket was driven by a notable increase in basket size core commodity categories like lump.
Burn copper did not have a material inflationary impact on our comp average ticket during the first quarter.
During the first quarter Big ticket Con transactions are those over $1000 were up 2.5%.
We saw strong performance in big ticket categories like appliances, and riding Lawnmowers. However, this strength was offset by pressure in categories like special kitchens countertops in flooring, where we intentionally limited these installation services and customers zones.
Sales of both our DIY in pro customers grew during the quarter with the iwai sales growing faster than pro sales. We continue to have a high level engagement with the pro however, certain states and municipalities restricted in home activity, which had a direct impact on some of our pro customers.
In addition, certain social distancing actions, we took during the first quarter also served as a headwind to productivity.
As we look ahead, we're focused on continuing to provide essential products and services to our customers and communities in a safe and responsible way.
The investments we've made across our business have helped us be flexible and agile in this fluid in dynamic situation, we will continue to adapt and improve the ways in which we serve customers in this new environment and with that I'd like to turn the call over to Richard.
Thank you Ted and good morning, everyone. We appreciate everyone joining the call today, and we hope you and your loved ones are safe and healthy.
This was certainly a unique quarter with curve at 19 dramatically changing our operating environment, but it has also reinforced that the investments we've made in the business over the last decade had been the right ones.
They have allowed us to be more flexible and agile than ever before.
And we've taken unprecedented actions to respond to the virus, primarily focused on supporting our associates, keeping them and our customers safe, while providing essential products to our communities.
Today I'll review, our consolidated results for the first quarter and will provide some color in the context of the three distinct periods that Ted mentioned, we observed.
I will also review some of the direct actions, we took as a company to support our associates and further strengthen our capital structure.
In the first quarter total sales were $28.3 billion, a 7.1% increase from last year.
Our total company comps were positive 6.4% for the quarter with positive comps of 9.3% in February 7.1% in March and 4.2% in April.
Comps in the US were positive 7.5% for the quarter with positive comps of 9.7% in February 7.5% in March and 6.4% in April.
From a geographic perspective, all three of our US divisions posted positive comps and 17 of our 19 US regions had positive comps in the first quarter.
The two exceptions, where our New York Metro and South Florida regions.
New York and its surrounding areas were negatively impacted given the outsized impact that the virus had on the region.
And our South Florida region was negatively impacted by our stores in Puerto Rico being closed for a period of time in accordance with local mandates.
During the pre covert period in February and stretching into mid March comps were double digit positives in the us with relatively uniform strength across all regions.
As we moved into late March in early April we experienced peak shelter in place mandates across the country.
During this time, we implemented early and decisive measures to restrict customer traffic in our stores, which had a direct negative impact to our sales most acutely felt in higher volume stores in densely populated urban areas.
Over the course of these three weeks shelter in place mandates and self imposed limitations on traffic pressured our weekly performance to double digit in double digit negative comp sales with higher volume stores underperforming lower volume stores by over.
30 percentage points in certain areas.
And finally during the last three weeks of April and continuing into the first two weeks of the second quarter, we've seen a significant acceleration to double digit comp sales growth with strong performance across most of the store as customers turn to repairs and home improvement projects.
Thanks.
As a result of ongoing measures to promote social distancing practices in our stores.
Customer limits continue to constrain sales in our higher volume stores.
But we have flex our operating model to improve our ability to serve the strong levels of demand.
In the first quarter, our gross margin was 34.1%.
A decrease of 12 basis points from last year.
This decrease was primarily driven by changes in the mix of products sold.
And continued pressure from shrink.
This pressure was offset in part by favorability and supply chain expenses and by the cancellation of our annual spring Black Friday event this year.
During the first quarter operating expense as a percent of sales increased approximately 190 basis points to 22.5%.
This increase primarily reflects our decision to extend enhanced benefits for our associates totaling $850 million incurred and accrued expense, reflecting the provision of additional paid time off for all our hourly associates, which can be used.
Anytime during the year and will be paid out at year end of our associates choose not to use it.
The provision of incremental additional paid time off for associates considered to be at higher risk based on CDC guidelines.
Weekly bonuses for our hourly associates.
Double pay for overtime hours worked and other benefits.
These enhanced benefits created approximately 300 basis points of expense deleverage during the quarter.
In addition, we recorded expenses related to our strategic investment plan of approximately $270 million, a slight increase versus last year, creating 10 basis points of expense deleverage.
Finally, we showed strong expense control and all other areas of the business as we navigated the quarter and drove approximately 120 basis points of expense leverage on that basis.
Our operating margin for the first quarter was 11.6% compared to 13.6% in the first quarter of 2019.
If we were to exclude the 300 basis points of de leverage related to the curve at 19 expenses to support our associates.
Our operating margin would've been approximately 14.6%.
Interest and other expense for the first quarter grew by $34 million to $307 million due primarily to higher long term debt levels than one year ago.
In the first quarter, our effective tax rate was 24.4%.
Flat with the first quarter fiscal 2019.
Our diluted earnings per share for the first quarter or $2.08 compared to $2 in 27 cents and the first quarter of 2019.
The $850 million of expense related to enhancements, we made in support of our associates negatively impacted our first quarter diluted earnings per share by approximately 60 cents.
During the quarter, we opened one new store in Mexico, and one in Puerto Rico, bringing our store count our total store count to 2293.
Selling square footage at the ended the quarter.
I was 238 million square feet.
At the end of the quarter inventory turns were five times up from 4.7 times last year.
Computed on the average of beginning and ending long term debt and equity for the trailing 12 months return on invested capital was approximately 40.8%.
Down from 45.4% in the first quarter fiscal 2019.
This decrease primarily reflects higher long term debt balances than one year ago, as we took steps to enhance our liquidity position during the onset of the curve at 19 pandemic and I'll take a moment to comment on those actions and a little more detail.
We began the first quarter with a very strong liquidity position and we moved early in the quarter to strengthen that position.
In mid March we suspended our share repurchase program indefinitely.
Prior to that suspension, we had repurchased approximately $600 million or 2.5 million shares of outstanding stock.
In late March we Upsized, our a one PD one commercial paper program from $3 billion to $6 billion.
In conjunction with upsizing, our commercial paper program, we expanded our revolving credit facility capacity from $3 billion to $6.5 billion.
As of today, we have no commercial paper outstanding and our credit facilities our undrawn.
And finally on March Thirtyth, we raised $5 billion of staggered maturity long term debt with an average coupon of approximately 3%.
This average coupon is below the average coupon of our overall debt portfolio.
These actions we are important to ensure we had more than adequate liquidity during this period of uncertainty.
In addition, we took actions to reduce non essential activity in our stores and as a result.
Based on some of our strategic investments that touch our stores directly including changes to our front end and resets of our merchandising base.
While these actions reflect our focus on social distancing, we remain committed to our one home depot strategy.
Fiscal 2020 marks the third year of our strategic investment plan to create a seamless and frictionless interconnected experience.
These investments are designed to leverage and extend our competitive advantage and have already begun to prove their value as we pivot to serve our customers in new ways.
Now I'll comment on how we're thinking about guidance.
Recall that the fiscal 2020 guidance that we provided on our fourth quarter call in February excluded any impacts from curve at 19.
Our performance to date has surpassed our initial expectations and it is also can disconnected from traditional metrics like GDP.
Which we have historically used as a foundational element of our sales guidance.
As a result of this and the level of uncertainty that exists with respect to the impact of cobot 19 on future economic activity and customer demand.
We're suspending our fiscal 2020 guidance until further notice.
Our stance is not a reflection of current demand for home improvement, but rather a reflection of the broad range of potential outcomes for the economy and our business.
Our strategic investments have positioned us well to continue to serve our customers with essential products they need for their homes in places of work.
Our company is in a strong financial position and we've taken steps to further strengthen that position.
We will continue to invest to strengthen our competitive advantages and we believe will emerge from this cobot 19 environment, a stronger team and a stronger company.
Thank you for your participation in today's call and we're now ready for questions.
Thank you we will now be conducting a question and answer session.
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Participants using speaker equipment and may be necessary to PW, hence it before person is darkie.
One moment, please when we pull for questions.
Thank you. Our first question comes from the line of Mike last year with you BS. Please proceed with your question.
Good morning, Thanks, a lot for taking my question I know uniquely difficult to quantify but if you use the spread in the difference in performance between your high volume stores and the rest of your gene as a guide what do you think the overall impacts from metering.
Limiting promotions and not having installation in the first quarter would.
Michael we it's hard to determine what we took a crack Richard.
It is hard to determine if if you just look at sort of traffic limitations that we impose do you look at the restricted operating hours and.
Caps on customer accounts in our stores I can't can't give an exact number but it would be several points of comp.
Impact to the quarter.
Several points of comp eating.
More than a couple hundred basis points, just just to clarify net.
We're into.
Several hundred basis points your year end, the right neighborhoods several hundred basis points of comp.
Okay.
To what degree as the strong feels that home depot have experienced as the lead simply pull forward steels for future period and as part of that are you planning for negative comp in any given quarter of this year.
Yes, Mike I mean.
Spring has always one of those scenarios, where you have first quarter second quarter kind of.
How much happens in the first quarter is theyre pull forward. If you have an early great spring those are dynamics that we deal with every single year.
And we've seen strength as we began the second quarter.
And we're not planning for any negative comp in the business.
Thank you very much Stacey and good luck. Thank you. Thank you.
Our next question comes from the line of Scot Ciccarelli with RBC. Please proceed with your question.
Good morning, guys and again also hope everyone's well.
Obviously current demand is strong you just talked about that and I would also think that there's going to be greater focus.
On wallet share from consumers towards home relate investment because we've all been under locked down for the last two months now in the flip side, we had a pretty sizable contraction in mortgage credit since really mid February so I understand I'm, asking an opinion or view here, but when you kind of look at or the next six nine months, how do you kind of net out those two forces because once obvious.
Okay, very positive and one is potentially meaningfully negative.
Again, we started the year with an overarching strong housing environment. It's it's hard to determine what impacts are going to play out as a result of this at this stage of the game.
I just don't know how we predict that.
Clearly the the current demand is strong and you know the capabilities that we've built.
Really fall around flexibility and we're going to use that flexibility to drive engagement with the customer on ongoing basis.
Okay, and then if I could sneak another one then Craig.
I'm just curious your average ticket was so strong but big ticket sales were ethylene production and a half percent I think thats kind of any unusual disparity between those two figures. So just wondering if you could provide a little bit more color in terms of the average ticket performance. Thanks.
Yes, let me I'll I'll make a comment and tell you can add anything.
But I think I think in this situation.
You know customers were very focused on making sure that.
They reduced their exposure in terms of going into retail environments and they were really focused on getting everything they needed in one drug.
Yes, Scott if you if you can imagine we look at.
The the breakdown in comp than items per basket et cetera, and every permutation of ticket and what we experienced is Craig said people, we're limiting trips to the stores. So our smaller tickets our smallest tickets had a negative comp transactions had a negative comp and why.
We had a positive comp in the over $1000 of 2.5% as I said number that was limited by all the special order and installation businesses that we purposefully curtailed what were particularly.
[music].
Excited about was the performance.
From the two hundreds the three hundreds the 500 dollar ticket those are your core basket building project oriented.
Tickets that were extremely strong across the whole store.
Very helpful and good luck guys.
Thank you.
Our next question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question.
Good morning, everyone.
Little bit of a twist on the prior questions.
Virus, obviously makes the backdrop very uncertain in the past home depots offered a framework for a potential next recession. It was hypothetical I think it was comps flattish in a downturn assuming the downturn wasn't driven by housing and then given how big maintenance and repairs.
I realize the virus is unpredictable and thats a variable known can predict but does the economic backdrop argue for that type of scenario any any perspective I realize.
This variable it's hard and Craig did you say for Q2.
Obviously, you're not expecting negative but that wasn't for the whole year that comment just for Q2.
Yet we're not we're not planning for negative.
It's obviously very uncertain as to how the year plays out in total were not planning for negative comps.
In Q2 or for that matter for the year at this point.
We'll watch carefully and see how this all plays out and react accordingly.
Again, the flexibility that we've built in our business should give us the ability to to react.
And if you just if you go back to you recession question.
We.
We entered the year with a healthy housing environment, we havent seen anything in that housing environment.
Thats changed materially and typically when you look at recessions that are non housing led.
For us the performance decline as much more shallow more of a flat type environment, but again. This is a unique situation and the duration of the situation is one of the more important dynamics just can't be predicted.
Fair enough and then my follow up is so you've been opened throughout this this crisis you've seen a surge you've adjusted how you've operated and there's probably more adjustments to come any thoughts on the margin profile I know youve, it's going to be hard to talk about structural change and how it relates but any of the puts and takes and how you think about the long term margin of the business.
Yes, I'd say.
Margin was at sort of relatively where we would have anticipated it.
Prior to tick of it we run a.
Portfolio approach at the home depot, and you have puts and takes every quarter I Wouldnt say that our long term view of margin has changed.
From from what we've seen in the situation.
Okay. Thanks, good luck.
Thank you.
Our next question comes from the line of Karen short with Barclays. Please proceed with your question.
Hi, Thanks for taking my question.
I wanted to just talk about ecommerce is a little bit obviously product.
On growth rate and it looks like E. Com is now around 17% of sales.
Which is almost double what it ended maintain act. So wondering if you could talk a little bit about what the composition was on whether or not thank you gain share with a particular demographic and then wondering what your thoughts are just in terms of the stickiness with respect to E com and home improvement just going forward.
Yes, our.
Our penetration did jump to just under 15% for the quarter. So we had strong penetration and we gained a lot of new customers exposed to home depot dotcom that we as Richard said, we run this on a portfolio and so they are heavy engagement in.
Both channels customer using dot com to order goods to be done 60, some percent of those picked up at a store.
Tom will give further.
Karen the performance of online.
As Craig said, the penetration increased to 15% we had a 79% growth.
Accelerating throughout the quarter. So we started strong.
In the beginning of the year similar to the growth in the prior years accelerated into triple digits in the last weeks and meaningful triple digits in the growth is really across all categories.
What's particularly encouraging is the number of new customers and the opportunity in the future we more than doubled our number of customers. When we look at our customers from repeat customers six to 12 months less than 12 months 12 to 24 Riyadh.
Activated over 24 months brand new customers.
Sorry.
One of those segments, where it was healthy in effectively doubled.
Again purchasing categories across the entire store the engagement with E Mail and my account sign ups.
Tripled the normal run rate as we went through the quarter.
Our app downloads nearly doubled from their normal quarterly and weekly run rate. So just terrific engagement across the business in our devices and we're very encouraged with this this new and re energized online customer base to.
Work with these folks and contact them engage with them in the future.
And the one other income.
Make on it is.
Great News is the majority this growth came through earn channels, we didnt have to go pay for it.
Yes, I know thats very helpful.
I just wanted to ask a slightly separate follow up.
Obviously, we have you talked about the Tam.
50 billion Tan.
In the past Im wondering if you have a sense of what.
How big I guess, just smaller and more fragmented competitor base is in terms of the total dollars, meaning will they actually make it kind of the other side of it and how much of an advantage you might have in terms of taking care of from weaker more fragmented players.
Okay.
So I believe you broke up little bit there, but I believe you're asking about the $650 billion Cam and so what we've always said is at our size theres plenty of share out there plenty of fragmentation, you think about categories like flooring.
Which are are truly.
Penetrated more greatly by the small mom and Pops theres plenty of share out there to to grab.
Okay. Thank you.
Our next question comes from the line of Chuck Grom with Gordon Haskett. Please proceed with your question.
Hi, good morning, everyone as well just wonder if you guys talk about the cadence the pro and DIY business separately throughout the quarter and if the real acceleration that you spoke about in may the double digit increase was seen in both camps.
So.
Clearly.
The DIY customer is reengage with the iwai, there's no doubt about that.
Very strong DIY business. What was interesting is we actually saw the pro grow in the quarter, but we did see bifurcation in the quarter with the pro as we moved into.
The different phases that tenant Richard described.
In the smaller pro actually performed well throughout the quarter with more pressure on the larger pro and Bill if you want to jump in and provide some additional color there.
Yes, Thanks, Craig.
So Chuck we we saw more steel impact in the highly.
Shelter in place regions are zones versus the states that add moderated or no actions in place.
So the pros definitely faced some headwinds from the state mandates.
So thats the restrictions.
The form of inability to get permits issued or job site inspections completed so they can move on with their project.
And finally, there were some headwinds there with homeowners just having to reluctance.
Yes crews working in their home when they were sheltered in place so.
As Craig said, hi spend pros were more impacted.
Makes sense, if you think about them being more concentrated in metro areas likely or do you have some of those mandates impact your business, but also larger jobs more proves more likely to be impact, it's an inability to get permits or job inspections.
Give you want additional point reference, though and I would draw that parallel to our services business. If you look yet job cancellations, they're running at strike trends, which really means that more customers. You have just push their jobs you haven't camps, but were so as these mandates are lifted.
We're seeing the pros come back to work.
It's just slower recovery than what we've seen from consumers.
Okay. That's very helpful. And then just on the 800 good demand across that you incurred in the first quarter.
Is there way to handicap, what you think that could look like in Twoq and maybe in the back half if you decide to continue to pay.
Your employees a little bit more.
Well I wouldn't want to.
Comment on what the second quarter or the rest of the year will look like but maybe if I gave you. Some color on the 50 that would give you clarity on how to think about it. So there really say kind of two categories of that spend the vast majority of the 850 million.
Reflects expense related to the extension of paid leave.
So in mid March we extended additional paid leave to all of our hourly associates and subsequently extended paid leave for associates, who would have been deemed at risk for both those groups of leave has not taken we fully committed to.
To pay it out during the year.
A portion of the paid leave has already been taken but we have fully accrued for all of the remaining leave eligible to be taken so the vast majority of that 850 has already been accrued then we have expenses that are paid has earned.
Our associates. This bucket of expenses was about 150 million of the 850 million.
And so these are really in the form of the weekly bonuses were paying to our associates.
As well as the enhanced overtime rates and we're paying.
We began payment of those benefits roughly halfway into the quarter. So that 150 million was paid over roughly half a quarter. We are continuing the payment of those benefits into June.
And we will continue to lets review the continuation of those payments as the situation develops.
Does that help.
Yes, I guess is there any way to hitting up would be what the accrual portion of the extended time would be because I think thats. That's the point I'm getting at you've essentially captured port costs here in the first quarter.
If you wanted to think very roughly.
You've got the 150 that is sort of expensed as incurred so that leaves about 700 million of that 700 million that.
His loosely associated with with paid leave about 150 million has already been utilized but again, we fully accrued for the remainder of the paid leave that our associates are eligible for under.
Under this enhanced program. So it is already reflected in our Q1 financials.
Makes sense, thanks very much.
Okay.
Our next question comes from the line of Christopher Horvers with JP Morgan. Please proceed with your question.
Thanks, Good morning, everybody.
A few follow up questions.
So first on the last question just in terms of like the ongoing expense, obviously in a socially distance world retails changing.
Theres an article last week about what mcdonalds is changing and.
These expenses are going to stick so how does the higher sanitation cost.
And different things that are going to stick around for the next year is there a number they could associated with that and then on the pro business.
Can you talk about what you're seeing in areas that are opening up do you have a sense of what the pros order book looks like it sounds like people are completing jobs, but do you have any sense or any view on what the new business coming into that pro looks like.
Let me just comment on the pro and I'll turn it over Richard for the cost element.
On the pro as Bill mentioned.
In our own surfaces business, which as some of our best pros, we're not seeing a high cancellation rate of the jobs is just a postponement the customer still wants those to go on.
The assumption that we have because we don't have visibility necessarily into it other than talking to pros and anecdotally. The assumption that we have is that as holding true throughout the pro business and we think that the.
As we see the volume with the pro pickup it's an indication that the same thing is happening in their business that's happening in our service business.
And to tackle the first part of it add.
So if you think about our expense performance and you remove the 850 million of benefit enhancement.
Yes, we actually under spent our expense plan by over $120 million in the quarter and that is net of the increased operating costs required whether it's in the form of cleaning.
Or or or other operating costs and so there there gives and takes in that we are actually quite pleased with our expense performance and credit to our amazing team.
Amazing store operations team and all our associates out in the field for for running the business in this way.
And so as a fun so it doesn't sound like any of that is like a shift in timing the cost control is something that's that's in the business.
Really.
One of those incentive.
And then my follow up question is it I think this is the latest into a home depot call toward whether hasn't coming up I come up at all.
Which is always interesting can you just talk about is a whether that you saw in the first quarter and perhaps even quarter to date. Obviously you have the bathtub effect like so things can can push around to shelter in place and work from home to think pull forward some of the seasonal business in any comments on sort of regionality in term.
As of where the weather as fully broker is still on the come.
Chris as.
Ted and Richard described in the beginning in the first seven weeks of the quarter are clearly there was a.
A good early strong beginning of spring.
And so.
That was a great beginning to to the quarter from there everything changed and so we have no way of extrapolating.
At this point Theres.
Probably more demand than you would typically see in any given quarter.
Because.
People are spending on other things so even if there was.
Early purchasing I'm not sure that has based on what we're seeing right now has any impact whatsoever.
Thanks, very much best of luck.
Okay.
Our next question comes from the line of Zach Fadem with Wells Fargo. Please proceed with your question.
Hey, good morning, I wanted to clarify that 200 basis points comp impact you called out is that the total comp left on the table from lower promo and.
Enhance social distancing and do you think there were any offsets here in terms of categories that were pulled forward like lawn and garden or maybe DIY demand that wouldn't have otherwise occurred.
Well first of all just to clarify I Didnt say 200 basis points of comp I would say, it's several hundred basis points of comp.
You've sort of have to think about it as a as a gross impact there's no doubt that when we took steps to move our.
Our operating hours to close at six pm.
Really in advance of a lot of the shelter in place orders out there we knew it would have a significant impact on sales.
It did.
But if you and then if you think about customer account limits you had a similar impact it's very hard though to dissect.
What offsets were to that I'll, just tell you that we know the gross impact would have been in the several hundred.
Basis points of comp.
Got it and then at the gross margin line could you walk through the moving parts a little more detail around the lower impact of.
Your promotional event as well as the mix shift.
Online sales and to what extent that had a negative impact that you think could fade as consumers go back into your stores.
With respect to mix. It was it was really more about product mix, you think about growth in certain categories like appliances, and lumber that had a mix impact.
[music].
Beyond that we run this business as a portfolio and if you think about app interconnected sales over 60% of the sales ordered on home depot Dotcom are picked up in our stores and so that that margin profile as in essence.
We have one company margin profile, we our goal is to ensure that our customers can order product the way they like and to fulfill it.
In the way they are choosing so.
We aside from those those few categories that say that was the most significant impacts in the quarter.
Got it appreciate the time.
Our next question comes from the line of Mike Baker with Nomura. Please proceed with your question.
Hi, Thanks first question and then all the follow up but what are you seeing and some of the states that are starting to loosen summer. They restrictions now understand that you've been opened in all states but.
Some of the areas like like your hometown.
Are you seeing anything significant over the last couple of weeks as they start to open up.
Yes, I mean, we see again as we've shared our.
Second quarter sales are strong and we see that across geographies.
So can I interpret from that that you're not seeing anything different in states that are starting to open.
I mean every everything is lifting as you can imagine where are you still have.
Hot spots that are still crusher, but but everywhere else it's lifting.
Okay understood and if I could ask one more follow up just a bit more color in some categories.
Yes, I missed it.
I think I did but usually get a little bit more detailed some categories.
Lawn and garden in Pete DIY paint or two that I was particularly interested in and if you think presumably there was strong I guess I'll, let you tell me that but if so do you think there was a pull florida or does that sort of feed overtime. Thanks.
No, we actually didnt call that out because its.
Not relevant.
When you look at the changes in the three segments of business, there's wild swings like I shared.
Both month to month week to week category to category. So we just.
We did we didn't call it out.
Okay. Thanks appreciate the color.
And Christine we have half for one more question.
Thank you our final question will come from the line of Greg Melich with Evercore ISI. Please proceed with your question.
Hi, Thanks.
Richard that follow up thanks to the breakdown of the 850.
And you mentioned digital margins are part of the company.
Is it fair to say that even on the dot com. The is the part that isn't BOPUS that you make money on digital.
And then.
And then the second question is really for Craig.
Given the only sort of period of volatility in your balance sheet et cetera, how are you thinking about incremental investments whether they be at the company.
Or M&A or strategic.
Given what's going on out there and the opportunities that might arise. Thanks.
On the margin question, we don't split that out but I can tell you, we're very happy with our business across the portfolio.
And as it relates to.
Investment.
Starting with our strategic investment we feel like we're investing in the right places for sure we're going to continue to evaluate as we learn to this and see if theres any modifications are tweaks that need to happen.
In terms of our approach, but we feel like we're in the right places clearly we postponed some of the things that impact of stores, because we don't want to create more disruption in the stores right now and we'll bring them back when it's appropriate to build to do that in our stores I mean as far as our approach to anything else beyond that.
We've shared all along that our M&A approach is around capabilities that would be our continued thought process and approach I candidly can't imagine anybody doing M&A in this environment right now because I'm not sure how board wherever value.
What you're paying for something but.
But that's our that's our approach I mean, our thought process has stayed the same that we would.
We'll always look for capabilities.
That's great. Good luck, thank you great job.
So thank you for doing.
Sorry go ahead, I was going to turn flow back over to you missed yancey for closing comments.
So thank you for joining us today, we look forward to speaking with you our second quarter earnings on August.
This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
Okay.