Q2 2019 Earnings Call
And services like Jobsite delivery special order and volume pricing to save you time and money when you've got a job.
Greetings and welcome to the home Depot second quarter 2019 earnings Conference call.
At this time all participants are in a listen only mode.
Hey brief question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Isabel Chancey. Please go ahead.
Thank you and good morning, everyone joining us on our call today are Craig Menear, Chairman CEO and President Ted Decker Executive Vice President of merchandising and Carol to me Chief Financial Officer, and Executive Vice President corporate services.
Following our prepared remarks, the call will be open for questions.
Questions will be limited to analysts and investors and as a reminder, please limit yourself to one question with one follow up.
If we are unable to get to your question during the call. Please call our Investor Relations Department at seven 7038 for Q3 eight seven.
Before I turn the call over to Craig Let me remind you that today's press release and the presentations made by our executives include forward looking statements as defined in the private Securities Litigation Reform Act of 1995.
These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections.
These risks and uncertainties include but are not limited to the factors identified in the release and in our filings with the Securities and Exchange Commission.
Today's presentation will also include certain non-GAAP measures reconciliation of these measures is provided on our website.
Now, let me turn the call over to Craig.
Thank you Isabel and good morning, everyone sales for the second quarter were 30.8 billion up 1.2% from last year.
Comp sales were up 3% from last year with us comps were positive 3.1%.
Diluted earnings per share were $3.17 in the second quarter.
We're pleased with these results we overcame a tough may and continued lumber price deflation to deliver accelerating comp performance throughout the quarter.
Looking at our results geographically all of our U.S. divisions posted positive comps 17, 19 US regions also posted positive comps with the exceptions being our goal and Florida regions, which delivered high storm related comps last year.
Internationally, Mexico posted high single digit positive comp and Canada posted low single digit positive comp both in local currency.
We saw broad based growth across the stores, both comp ticket and transactions.
With the exception of lumber all of our merchandising departments posted positive comps, we saw healthy balance of growth among both pro and DIY categories with pro sales outpacing our DIY business in the U.S.
As Ted will detail, we continue to invest in a portfolio of service offerings to deepen our level of engagement with the pro.
We know the more dimensional our relationship is with this customer the more they spend.
From a strategic perspective, I'm encouraged by the progress we are making to deliver the one home depot experience a seamless interconnected shopping experience for our customers.
Our ensure investments are focused on ease of navigation and improve speed of checkout.
We have implemented our way finding sign and store refresh packaging over 1400 of our U.S stores and customer service scores in the category of clean it increased 140 basis points.
Our front end store investments now and over 400 stores are designed to get customers.
Stores faster and they are doing just that.
Customer service scores and checkout time satisfaction.
Increased over 450 basis points versus last year.
Although our store should mean hub of our business, we know that many of our in store sales are influenced by online business and approximately 50% of all online use orders picked up in our stores during the quarter.
Our customers continue to blend the channels and engagement and we are investing to remove the friction as they do so.
We continue to rollout automated pick up blockers for online orders with over 1100 stores completed.
And I've seen a 250 basis point increase in checkout scores for short with blockers versus those without.
Our investment in additional price levels for our appliance Department has enabled us to incorporate ratings and reviews from the digital world into the store shopping experience enhancing the overall customer experience in that category.
As we invest to address the demands of an interconnect and customer experience in stores. We also continue to invest in our web site and mobile applications to further enhance the digital customer experience.
Our focus in improving search capabilities site functionality category presentation and product content has yielded higher traffic better conversion and continued sales growth.
Second quarter online sales grew 20% from the second quarter of 2018.
We also continue to leverage our digital platforms to drive incremental growth from new categories as we lean into adjacent seems like HD whole pool workwear.
The traction we are seeing from investments across our digital and physical assets are encouraging not only from a customer experience standpoint.
But they are also driving productivity throughout the business.
Our front end investments are optimizing labor and merchandising space.
Additional appliance lifts, enabling associates to be more productive for their time.
Instead of spending multiple hours manually change in price our associates can reallocate their time to engage with customers in a high touch category.
The virtuous cycle productivity at the home depot, a hallmark of our operational excellence over the years and continues as we move forward.
Our focus on enhancing the customer experience and productivity extends to the supply chain investments as well.
During the quarter, we completed the retrofit of our Hagerstown facility into a parcel direct fulfillment center, which expands our one day delivery capabilities or start parcel goods from approximately 30% to approximately 50% of the U.S. population.
We also.
Looking at cost out through our mechanization efforts at our upstream supply chain.
We are on track with our plans to create the fastest most efficient delivery network and home improvement and are pleased with the progress that we've made thus far.
Turning to our outlook for the remainder of the year the building blocks of our financial model remain in place as Carol will detail, we are lowering our sales guidance for the year, mostly reflects the impact of lumber price deflation as well as some conservatism to account for the recently announced tariffs.
We now expect fiscal 2018 comp sales growth.
Approximately 4%.
And reaffirm our expectation for diluted earnings per share of $10.03.
I want to close by thanking our associates for their hard work, which resulted in the highest quarterly sales in our company history and with that let me turn call over to.
Thanks, Craig and good morning, everyone. While we had a slow start to the second quarter. We were pleased to see demand accelerated throughout the quarter as we help our customers tackle a variety of.
The next area projects.
Looking at our departments comps in appliances tools to corn storage indoor garden building materials.
Outdoor garden hardware and plumbing grew above the company average.
All other departments the exception of lumber were positive, but below the company average lumber reported a high single digit negative comp due to commodity price deflation.
Second quarter comp average ticket increased 2%.
Comp transactions increased 1%.
Lumber prices remain depressed during the second quarter and as a result bumper negatively impacted our average ticket growth by approximately 110 basis points.
Last quarter, we talked about a four by a sheet WSP selling for about $8 more than 50% below the price for the year ago.
During the second quarter the price for that same sheet of LSB fell further to an average about $7.60.
During the second quarter Big ticket comp transactions for those over $1000, which represent approximately 20% of your sales.
3.7%.
Reflecting in part the impact of hurricane related sales last year and lumber price deflation.
Excluding hurricane related markets only big ticket transaction costs were nearly 5%.
During the quarter, we saw strong performance in big ticket categories like appliances final plank flooring and Patty.
Last quarter, we talked to you about opportunities in our flooring business. While vinyl plank has been continues to be one of the strongest performing product categories across the store.
Densify the need to refine our assortment within our other flooring categories.
For example, special over carpet recently taken several actions.
We upgraded all of our showrooms reset the category to reflect the latest styles and trends offerings simpler shopping experience showcasing a good better best line structure.
Given the associate engagement is extremely important for this category also enhanced our in store training efforts to drive better customer shopping experience. While early days, we're pleased with the results.
During the second quarter, we saw growth, both our pro and DIY customers.
Gross sales outpaced sales in the U.S., we continue to focus on our sweet pro initiatives, because we know that the more we engage with them the more they spend with us.
With our store associates for the number of tools and better understanding their top pro customers. Our my view system allows our pro sales associates access customer data information. So they can proactively work with our pro customers and determine how we can better serve them. We continue to simplify the pros shopping experience and expand engagement through services like tool rental delivery in our new beat of the online experience.
While may was another wet month, we saw project demand and outdoor categories rebound as weather improved categories like concrete exterior paint states live goods all had comps above the company average. In addition, we continue to see customers respond to our industry, leading brands and innovation they are bringing to market. Our outdoor power equipment business. We are seeing strong customer demand and continued trade up to cordless.
Lowers trimmers, even lawn mowers exclusive cordless product for brands like Ryobi, Milwaukee, Walt ego provider customers with superior functionality and run time to keep their yards looking great.
Switching gears as you heard from Craig we are happy with the progress we are making with our investments deliver best in class interconnected shopping experience.
Looking at our likelihood to shop again metric, 87% of our customers gets best in class four and five.
Our strategic investments include accelerated Merchandizing resets focused on upgrading showrooms proving visual merchandising.
Refining assortments to drive a better in store shopping experience.
For example, we are rolling out a new color solution Center paint Department, which simplifies the color selection process for our customers, while emphasizing our price color satisfaction guaranteed and our new project color and updated online experience allows our customers to seamlessly explore inspired and shop color online whenever or wherever they want.
Another example is in pipe and fittings, we're resetting all of our Bayes reconfiguring to better showcase the assortment and freeing up space at new product categories for our customers.
Now, let's turn our attention to the back half of the year.
As the number one retailer waters, we are pleased to announce an expansion of our partnership corner. The number one brand for pros all type position ladders are the fastest growing segment of the latter category and we are now the exclusive big box retailer of Warner multi physician ladders.
We're also happy to announce an exciting new partnership with Louisville ladder.
As their exclusive big box retailers, starting in the fourth quarter.
Combining warner with our exclusive Weve the ladder real of brands, we are the leading destination for top programs in the latter category.
Our merchants have worked hard to put together offense and special buys for our customers in the third quarter.
We're excited about our customers continued appetite for home improvement projects.
Just weeks, we will host our annual Labor day event, followed by our house parts.
With that I'd like to turn the call over to Carol.
Thank you Ted and good morning, everyone. As you will recall fiscal 2018 had a 50 threerd week, which shifted our fiscal 2019 calendar. Our comp sales are reported on a like for like basis total sales growth is reported on a disciplined today.
In the second quarter.
Ill for $30.8 million, a 1.2% increase from last year, reflecting a shift in our fiscal calendar as well as the impact of deferred sale.
Our total company comps were positive 3% for the quarter with positive comps of 2.2% in may.
4.1% in June and 4.6% in July .
And then you asked for a positive 3.1% for the quarter with positive comps.
6% in May.
4.1% and 4.7% in July .
Versus last year, a stronger us dollar negatively impacted comp sales growth.
Proximately $29 million, 4.1%.
As you just heard from Ted during the second quarter lumber prices remain depressed.
Versus last year, this rubber price deflation negatively impacted our comp sales growth by approximately $340 million or over 100 basis points.
In the second quarter, our gross margin was 33.8% a decrease of 19 basis points from last year.
The year over year change in our gross margin reflects the following factor.
First higher shrink than last year resulted in approximately nine basis points of gross margin contraction.
Second changes in the mix of products sold it drove approximately eight basis points of gross margin contraction.
And finally, we have two basis points of gross margin contraction in our supply chain.
Primarily by startup costs.
Associated with our one home depot supply chain initiatives.
In the second quarter operating expense as a percent of sales at 18% was essentially flat compared to last year.
Our operating expense performance reflects the impact of our strategic investment plan and good expense control during the quarter, specifically expenses related to our strategic investment plan of $242 million increased by approximately $28 million from last year.
And resulted in approximately eight basis points of operating expense de leverage this de leverage was offset by productivity, if you or business as usual.
Which drove a seven basis point operating expense leverage.
Our operating margin for the second quarter was 15.9%.
Decreased 21 basis points from last year.
Interest and other expense for the second quarter grew by $37 million to $283 million.
Primarily to higher long term debt level in one year ago.
In the second quarter, our effective tax rate was 24.6% compared to 24.7% in the second quarter fiscal 2018.
For the year, we now expect our effective tax rate to be approximately 25%.
Our diluted earnings per share for the second quarter were $3 at 17 cents.
An increase of 3.9% from last year.
Now moving onto some additional highlights during this quarter, we opened two stores one in the U.S. and one in Mexico.
For an ending store count at 2290 Mark.
Selling square footage at the end of this quarter was 238 million square feet.
Total sales per square foot for the second quarter were 510 dollar of 1.1% from last year.
At the end of the quarter inventory turns were 5.1 time.
Down from 5.4 times last year, reflecting his heart.
A lot of in inventory in support of our strategic initiatives.
For the year, we now expect our inventory turn.
Slightly from what we reported in fiscal 2018.
Moving on capital allocation in the second quarter, we refer.
Billion dollars or approximately 19 million shares of outstanding stock.
We plan to repurchase approximately $2.5 billion of outstanding shares in the second half of the year during fiscal 2018 share repurchases to $5 billion in line with our guidance.
Further during the quarter, we took advantage of an attractive interest rate environment and raised $1.4 billion of long term debt.
Of which $1 billion was used to repay senior notes that came due in June .
Computed on the average of beginning and ending long term debt in equity for the trailing 12 months.
Return on invested capital was approximately 43.7%.
580 basis points higher than the second quarter fiscal 2018.
Now turning to our outlook for the remainder of the year.
While global economic pessimism has increased due to geopolitics.
Currently the us consumer remains healthy.
Consumer confidence is near a record high level.
As wages are up over 3% from last year.
Alvin metrics are in line with the assumptions, we used to build our 2019 financial plan.
Nonetheless, what we didn't expect when we built our plan was the significant lumber price deflation will experience. We are now more than halfway through the year and lumber prices are below the levels. We saw in the first quarter fiscal 2019.
Additionally, the U.S. consumer facing impact of Terra.
Well trade discussions are fluid consumer demand could be impacted.
Today, we are updating our fiscal 2019 sales and earnings per share guidance to reflect this change.
Remember that we guide off gap. So this will 2019 guidance, we'll launch from our reported results for fiscal 2018.
Which includes sales and earnings associated with the 50 Threerd week.
Perfect for 29.
We now expect cross sell.
Absolutely.
To increase by approximately 4%.
That's down 100 basis points from the 5% growth rate.
The beginning of the year, reflecting for the most part lower lumber prices.
As well as some potential impact to the U.S. consumer from recently announced Tara.
With this we now expect sales increased by approximately 2.3%, reflecting that compares to 53 weeks last year.
We are also reaffirming our earnings per share growth guidance for fiscal 2015.
For earnings per share, we expect fiscal 2019 diluted earnings per share to grow approximately 3.1%.
$10.
We are able to hold our earnings per share guidance to what we had initially planned as lumber is a lower margin category and because we are projecting a lower tax rate than our original plan.
We thank you for your participation in today's call and Christine we are now ready for questions.
Christine before we open the call up for questions I'd like to turn the call back over to Craig.
Thank you Isabel.
As I mentioned on our last earnings call Carrollton may will be retiring as our CFO at the end of this month.
After 24 years with the company.
She has served as our chief financial officer for the past 18 years.
In a fact today's call is the 70 threerd consecutive quarter. This year's reported our financial results Mark.
I'd like to thank Karel for her commitment to our associates the investment community and our shareholders. Carol has set the standard for excellence and transparency. During these calls reflecting not only hurt in depth knowledge of our business operating environment, the economic environment, but also her dedication to our values.
So Carol let me say, thank you for your leadership and through your partnership and your 24 year career at home depot.
Definitely business.
[noise] Thanks Christine.
[laughter] requests.
Greg will try and get questions about me Chris.
[laughter].
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your questions on the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
Thank you. Our first question comes from the line of Michael Lasser with UBI. Yes. Please proceed with your question.
Hi, good morning, Thanks, a lot for taking my question, that's a hard lead in to ask a question off of and Kara.
Okay.
Oh, good Carol congratulations and best of luck.
When you do Richard.
Good luck following though in those very large stuff.
I mean, they certainly are thanks.
So my first question is we have assumed that about three quarters of the reduction in your full year comp guidance is due to the the lumber price changes and the remainder is to about a quarter of a comp point due to the macro there's obviously been a lot of concern on the macro recently given the yield curve inverting a large educational institution that calling for a significant slowdown in remodeling activity and then as you pointed out the tariff one certainty. So do you think.
A quarter point reduction in your comp guidance.
Sufficiently considers all of those uncertainties.
So let me make a couple of comments and I'll turn it over to Carol. So first of all when you look at the overall macro factors that we think are critical to how we lined up our business.
Those are largely remain unchanged and so we feel good about the fact that the consumer.
You know as wages up about 3% year over year consumer confidence is still high so the general trend that we see in the macro based on how we did our plans really hasn't changed much and we feel we feel pretty good about that and then when you when you think about going forward.
In the business when we look at commodity Hurricane may.
And then compare that to where where we were at the end of the quarter. We feel good about the guidance that we have.
Yes, sure I'll give a little bit more color there Michael so the implied back half comp and the guidance that we just gave you is around 5%.
If you look at our our reported comp in the second quarter, new assets and 3.1% comp.
If you add back the impact of hurricane related sales 50 basis points.
If you add back the weather driven demand softness that we saw in May that was 40 basis from 40 basis points occur and as you've heard us talk about commodity being a 100 basis points. So when you add that back actually the normalized comp in second quarter was 5%.
As you've heard us talk about the comp cadence than we exited July quite strong on an unadjusted basis. The conflict in the U.S. is 4.7.
And then I look at our our plan how are performing relative to plan and we're on our plan. So you add up all the data points and it suggests that this is just the comp guidance is is very achievable.
The other way to look at it is it just stack the comps you stack the comps for the first half of this year against last years back to second half, what we reported and what we're guiding to assess that as Bob. Thanks.
And most of the half so every way we look at it very good about that.
Yes, Michael I guess last comment that I'd have on if the consumer.
Softened in anyway I'll bet on this team all day long to go after the business.
No doubt and.
Carol you mentioned you're on your plan do you mean, you're on your plan, where you stand quarter to date, such that you really haven't seen any impact from the tariff flowing through to the consumer as of yet yes, that's exactly what I mean, the beauty of our business is that we see sales on our phone. We can know exactly how we're doing by the minute. So that's very different than that leading indicator of remodeling activity report that you just mentioned, which is based on a biennial survey at housing data coming out of it.
We have real data at our fingertips.
Net about perform.
You might want to remove that up by the end of the month.
And then my last question [laughter] then my last question is on as you look at your guidance for the back half of the year, how should we model gross margin and then as you know, particularly between the third and the fourth quarter recognizing that it's not so straightforward given that you'll be lapping the extra week in the fourth quarter of last year.
Yeah. So if it's a little movie isn't there so.
I would.
Talk to us.
And as we told you we expect our expenses on a 52 week 52 week basis, excluding the write down into first treatments that are no longer using.
We told you that our expense growth factor would be 90% for the year for the first half it was around 73% so it'll be a little bit higher in the back half and quarter over quarter expect Q4 to be higher than Q.
On the on the gross margin side as we've indicated our gross margin.
It wont be as.
Low as we had anticipated at the beginning of the year because of the penetration shift lumber.
So we will be slightly higher than our original guide our original guidance.
That's a 34% for the near term.
So we'll be down as much so the second half margin will be down as much as the first half.
That's helpful. Thanks, again and best of luck.
Our next question comes from the line of Simeon Gutman with Morgan Stanley . Please proceed with your question.
Thank you good morning, everyone and well done Carol congratulations.
My first question is on the second half I know you don't provide quarterly guidance, but can you can you share some cadence around the second half comp guidance and its dependencies, and I'm thinking about macro dependencies and strategic initiatives and if you can share with us part of it.
On the strategic initiatives, which ones are expected to contribute to the most of the second half comps.
Hello, Thanks to think about.
The second half.
First as you know over the last $800 million hurricane related sale of which $500 million occurred in the first half.
300 million in back half of the hurricane sell overlap it's easier secondly on lumber price deflation, let's just use a number of 800 million okay.
About $500 million that occurred in the first half to $300 million will occur at the back half so it's easier to them.
Yes, and so on the initiatives.
When you think about the pro.
First is the B to B web site that we have launched and we are seeing pros that have been migrated onto the website.
React very positively from a sales standpoint, we are on track for the million frozen 2019.
Perfect right at the tail end of this quarter, we added a significant number of gross to the to the web site.
As Ted detailed my view capability that we've given to our associates in store to better understand how we can engage with the pro customer is delivering the results as well.
And then we've made significant investments in our rental business, which we know is an important aspect of the ROE.
25% of the pros rent from US today, we know that 90% of gross rent tools. So we have an opportunity as we invest in this business to continue to grow and then in the digital investments.
Our HD home program as we expand categories to fill rooms in the home.
As well as the investments, we're making in search capabilities category updates are all leading to improved sales and conversion in the business.
And then the number of investments that we've made in the store as well, whether that's our overhead management, which is driving productivity in the store are interconnected lockers, which is enhancing the.
Pickup experience for our customers.
Or our Merchandizing resets.
Are paying off in a nice way.
I don't know.
A little more color on the resets.
We've been working on our appliance resets in our tool trials for some time.
Those two businesses.
Continue to post incredibly strong results, we don't see that changing in the back half.
More recently, we've been working through our pipe file recess, which is going extremely well do about half the chain.
This year and that adds holding power.
Persons newer assortment programs and then soft flooring I mentioned in our prepared remarks for for a while there you thought hey is soft flooring.
Losing all ground hard surface flooring, what we've seen is solid for vinyl tile, but resetting all of our soft carpet showroom. So those are done we simplified our brand structure, we simplified our minds structure pricing structures that has continued to accelerate.
Through the quarter and exited the quarter at much higher.
Company comps so we're we're happy to see Saul.
And then lastly, our largest reset to calm which we've just launched the last several weeks and we'll finish the entire chain by the end of this year is our new color solution center in our paint department pretty highlighting our bear in PPG products and really pleased with that the timing couldn't be better.
A number of recent consumer surveys.
Consumer.
Testing agencies released the new winners for this year in better capture the top three.
Hey, Hey products.
Tire industry at the best value and PPG posted the two top sustain it.
Products at the best value. So we're very excited about all that.
Right, Okay, and just to add a couple of points from.
Driving the customer experience as well number one you mentioned new entrant, we are continuing to see growth accelerate from half to half. So the investments we're making there are really drive an exponential value and so we are going to continue to lead in there.
To the point about driving events in the second half when we think about all comp cadence kind of talked about overhead management and our ability to find the product and get on shelf availability to us very very high level, its driving incremental performance and for US as we think about the investments not only get into product on the shelf. It how do we get the customers to the store. So we have done 450 finance transformation, we have heard the numbers that we've seen just the customer experience well across the board we're going to have over 800 by the end of the year as a way able to deliver this performance by not only to transform into a business, but making sure that we're focused a simple and direct and drive into where the customer expects us to be so we will continue to drive to that in the second half of the year and leverage the events too.
Dr. exponential differentiated performance.
Thank you that was very comprehensive kind of I'm going to ask my follow up a year ago. When rates are rising we went through this hypothetical scenario. If we saw a recession I think we talked about a scenario in which home depot would come flat and margins could go to 12. If you made all the investments as part of your plan I think we're now one year forward, you're making progress on margins can you provide us another update would your margin end up better than that 12, given that you are closer now to some of your goals.
Well I mean, we haven't updated that recession model.
Productivity is a virtuous cycle it I don't depot, but for modeling purposes, I will use the same numbers that we shared with you before and just on the sort of the state of the economy and when a recession might happen, we certainly can't predict that.
A few things we are in the longest economic recovery in our nation's history and yet the amount of growth. During this recovery still on average every other recovery interest rate. So this is one reason why it's been an elongated cycle.
Further the sure housing as a percent of GDP is drop it's about 90% of GDP back in 2006, it was about 22%.
So whenever that downturn Thompson. It will it is a cyclical company whenever that downturn, because that's going to be like it was.
So we're very well positioned to manage through all that.
Thank you again and best of luck.
Our next question comes from the line of Scot Ciccarelli with RBC. Please proceed with your question.
Good morning, guys.
I have another follow up on me.
Hi investments that you're making despite the pretty comprehensive answer you provided can you help us better understand the cadence of the comp growth improvement that you're expecting both in the back half of this year and that flows into next year front, specifically targeted to these investments.
Well, we said and.
Earlier statements that we believe that we'll achieve about a 1% impact in the back half of the year from the investments that we're making when you. When you took GDP the house housing benefit.
And then added in the investment that's how we got to our to our growth overall and the only thing that's changed from that from Brian focuses inflation.
But just to clarify I think it was one point for the year all of which is kind of loaded into the back half or did I misunderstand that.
You're right, it's loaded into the back half weighted.
Based on events as well as the completion of that space for from God.
Is that the fourth quarter.
Hi.
Got it.
And we should presume that because of the changes in the customer interaction.
These improvements should flow into next year or is there a point, where you start to anniversary it and it levels off thanks.
No no no definitely flow into next year.
We'll get to that guidance later in the year.
Understood all right. Thanks, guys.
Thank you.
Our next question comes from the line of Christopher Horvers with JP Morgan. Please proceed with your question.
Thanks, Good morning, everybody and I, certainly echo Craig's comments and wish you Carol the very best a fortune in the next phase of your life.
In terms of my questions just a follow up on the macro on the housing front you know rates have moved around a lot moved down quite a bit I'm about to reset, perhaps perhaps personally but pricing has moderated in existing home sales are now picking up so is that what you are expecting and then what are you seeing out there in terms of the in the market say some of the coastal markets, where we're here, that's really driving the deceleration in pricing and pricing coming down versus other parts of the country and then related to that on the consumer front are you seeing anything different than the consumer around the type of projects that they're taking on or perhaps the trade up versus the value orientation.
On the macro model things are moving around a little better but its just on the margin. So there is no material change to the implied that create the act and drive ourselves plan to your question about the coastal markets I'll just give you some data.
Let's take San Francisco with Amoco's, the comp was higher than the company average, let's take San Diego a little further South office asking company average, let's take New Jersey, which is the high so state.
<unk> costs were higher than the company average and then unless Atlanta and Dallas.
Dallas is seen a 54% increase in home prices since 2006, and the conference as a company average you can see thanks, performing the way that we thought they would.
Understood.
And then a couple of detailed modeling questions first you know.
Any comment on your expectation for the U.S. count for the year versus the 4% total guide and can you help us a little bit more about on the SGN Ane Fourq right. It gives US 52 to 52 week comparison, perhaps how much incremental M&A dollars there weren't four Q1 8 related to that 50 Threerd week.
So.
Our answer.
For instance, because we don't like to give you too much.
Yes, so the one comment I'd make as it relates to us we're expecting positive comps in Canada for the year if that helps but the question is what happens to the US dollar and we plan to currency neutral so.
Yes.
The model that we think is going to have to the dollar and feedback.
Okay.
I'm sorry.
On a reported basis.
The extra.
That.
This growth guidance on a GAAP basis.
Really.
And that's the only way to explain it is going to look really bill and we're going to have more of that extra weight I think the best thing to do is just work within the annual guidance.
Given you can look at it on a good.
50 basis, and you can back into what the fourth quarter.
Understood very helpful. Thanks, so much.
Our next question comes from the line of Charles Grom with Gordon Haskett. Please proceed with your question.
Thanks, Scott Good morning, Carol Congrats again.
The front half of the year has not been kind on the weather front, we all know that at this point I'm just curious in the past when you've seen this type of pattern you typically see the release of that demand or do some of the projects just get postponed or canceled altogether.
It's by category.
So there's some categories that.
And the ability to extend and we're seeing that in the business right now and so you capture that.
There are some where you don't recover.
Although that business you might get part of it but not all of it. So it really varies by category. So if you think about it.
Japan.
When the weather takes place you may or may not get a pre emergent business back for example in this this year, we didn't get that back.
Okay, Great and then just on the on the change in the comp guide when you look when you look ahead to your long term sales targets of 114.7 billion to I believe around 120 billion I'm just wondering if that changes that outlook at all or maybe perhaps bring it to the lower end.
The algo equation.
Yes, it definitely goes to the lower end.
But it doesn't change the range of guidance.
Okay, and then just one follow up on the gross margin Carol you all Bashir transportation was a pretty big headwind you didn't call it out.
This quarter I don't believe you called out last quarter, just curious if it's actually helping you guys at this point.
Well it certainly has moderated from what we saw last year. What we are very excited about the productivity that we're seeing.
And our upstream supply chain, our supply chain team has done a great job of Mechanizing, our Austin facility, we actually well I called out two basis points of pressure on the gross margin from supply chain upstream, we leveraged we leveraged 60 basis points, so tremendous tremendous productivity and supply chain.
Great. Thank you.
Our next question comes from the line of Zack Fadem with Wells Fargo. Please proceed with your question.
Hey, good morning.
Craig you specifically called out some conservatism in your guide from the potential impact of tariffs curious if you could quantify the assumptions here a little more detail maybe talk us through how you think about the balance in the back half of raising prices and the potential down tick in volumes as a result.
Yes, I mean, the uncertainty is whether the total impact on the customer is economically overall when we look at it specifically as it relates to home depot. If you think about China tariffs list one through four four being 10% that's about a 2 billion dollar or 2% of sales kind of cost impact and so the way you have to think about tariffs is there's really two sides that you work on this.
There's the actual cost side.
And there is a number of initiatives underway. There and then there is the potential of the impact to the customer as it relates to the project.
And.
Yes, I can I'll, let Ted talk about the cost side, and we have a number of initiatives underway.
As it relates to how we flow things through to the customer we use our portfolio approach. We think about this business as a project business, which it is and there's clearly ups and downs in elasticities, but we have pretty good tools for the merchants to use on that and we've actually been able to cover the topline.
Jeff you want to talk about the cost side, yes, I'd say on the cost side.
Couldn't be happier with our partnership with finance team the accounting team.
Our assortment planning team, we have data country of origin.
Potential tariff impact literally down to skew so we know exactly.
Glitter on various lists.
And.
The tariff impacts will hit we even know that through our retail accounting.
When the impacts hit in our in RPL. So thank you very much to the to the great partnership with the finance team has as Craig said on a macro perspective through phase four phase four only being a 10% it's a potential impact of about 2%.
Our us sales now with a number of activities that were working with divergence between negotiations.
With our supplier base, taking into account things like currency transfer pricing in the United States value engineering, we're embarking upon.
With our suppliers with customer back research if you have marginal dollar to put into the product where you put it best.
Best customer value and then we're starting to see significant supply chain.
I would say.
On the margin I am not aware of a single supplier who is not moving some.
Form of.
Manufacturing outside of China, So we have suppliers.
Moving production to Taiwan, Vietnam, Thailand, Indonesia, and even back in the United States. So when you net all of that out we see this twoish percent impact being much much less call it something like 1%.
And then as Craig said, it's up to the merchant team to work with our overall portfolio approach to the business and project approach to the business to see how fast if at all.
There we pass on any of those net impacts to our customers.
Got it and then on the paint category seems to have gotten a little more promotional so far this year do we talk through some of the dynamics here. What do you think is driven the elevated activity.
More so overall demand or weather environment and.
Maybe also talk through your process when deciding how you respond when you typically see changes out there in the pricing environment.
So I I first I'd answer with with exterior stains. So there as the weather improved and we did the reset quickly last year and in much more comprehensively this year and with the number one and number two.
Ready to say with PPG products.
Great performance in our exterior stain business.
On interior paint exterior paint has gotten more promotional.
In the marketplace, we have folks out there advertising.
Imprinted on media as much as 40% off.
At home depot, we have.
As was just released with the third party.
Agencies, we have the absolute best.
The marketplace.
They're paying holds the top three slots.
Ratings again, two different two different surveys and we are we are not going to fall into a high low promotional traffic when we have the best product.
Best everyday value and as you know in the finance community just speaking of promotional cadence I can remember there was a lot of talk about breaking the buck.
The the money market World and we have had a a three times your promotional cadence and pain of $10 off of gallonage $40 off five gallons in the major holidays at the year some of our competitors chose to break the Buck and we're not going to do that.
Got it appreciate the color and best of luck to you Carol Thanks again.
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 just a question on tariffs in general So so I think last quarter you commented that.
On price raising prices as it relates to tariff impact in pricing you. Initially had negative units on appliances, and then demand picked up a bit maybe a little color on what you're seeing in terms of the consumer reaction to higher price points and then I just had a clarification question on the gross margin.
Yes.
So as we as I mentioned earlier, we have we have a number of models that we're working right now and.
Varies by category, there is less to Steve variance by category.
And that changes over time as well, but in the work that we've done we've been able to actually cover the total topline sales.
In the models.
Out there and when you think about it laundry because we have refers that towards the past as time has gone by laundry was actually our highest unit coffee category in appliances slots.
Okay. That's helpful and then on the gross margin front.
I mean, obviously lumber would have been a benefit to gross margin this quarter could you quantify that and how.
Walk us through how member May impact gross margin in the second half.
I'm happy to have with the lower penetration of lumber in the second quarter. It gave US 15 basis points of margin expansion.
But that was absorbed by growth in lower margin categories like appliances, as well as portable power, we love our portable power sales.
So as we.
Garden recoveries in general Thank you absolutely. So thank you for that so as we look to the back half of the there are we would expect lumber to stay down as we've talked about not as much.
As we saw in the first half is down which will give us some benefit for the back half as well as for the year.
Great. Thanks.
Okay.
Our next question comes from Steve Forbes with Guggenheim. Please proceed with your question.
Good morning.
I wanted to revisit the total rental business and really whether you expect the BB website experience to augment this initiative and as I sort of think about maybe you could just expand on how you view the interplay between those two initiatives and and the potential impact of pro engagement trends, you mentioned sort of positive, but can you provide us some additional color.
So I'd say first comment I'd make I'll turn it over to him is.
Right now our initiatives hardened around necessarily connect is a fee to be website to that from a digital experience that will come at a later date. This is all about the investments that we're making right now.
The fiscal locations, yes, and just to support Craig on that number one the first thing we are doing is investing capital in the business.
To your point, there's when we invest in fleet, we able to drive more engagements that approach because we have product available. So that's the first thing we're doing is making sure that we have the right assortment for pro.
Number two thing we are doing there as well to drive the experience. We've had just tremendous success with the labor model, we introduced in the <unk>.
Stores last year and was able to drive higher level of engagement by having more so ships at the right time to engage all customer and so we're going to continue to lean into that and within the two lentil area. We are also making sure that we are addressing to enable model to ensure as well that we are having a high level of engagement is while there and then last but not least as we think about how do we ensure that we expand offering and we were able to push into areas at this point to delivery service and so forth. We're exploring hub locations for two rental as well. So we're going to continue to push there we're seeing tremendous growth we've seen higher levels of engagement and we believe as we continue to expand it will certainly be a complement for pros and drive loyalty within the home depot.
Thank you and then just a quick follow up maybe just a modeling question here are you called out the strategic investment dollar impact.
For the quarter and year to date.
But are you still on track to expense I think it was 550 million pre DNA for the year, maybe just give us an update on where you are and what the full year outlook incorporates.
Yes, we are on our plan with regard to both the expense and capital in support of our strategic investments.
Perfect. Thank you.
Thanks.
Our next question comes from the line of sets Sigman with Credit Suisse. Please proceed with your question.
Hey, guys. Thanks for taking the question and Carol all the best to you I wanted to follow up on deflation you discuss the lumber impact I'm just curious about net deflation. If there were any positive commodity price movements and I guess, just how are you thinking about that as part of the new full year comp guidance.
And then we had another price inflation, if you will from the other line.
All the time.
Got it Okay, and then ex the deflation in your average ticket actually accelerated in the quarter versus last quarter. So I guess outside of commodities. How do we think about the average price increase that you're seeing across the store I guess on a same SKU basis, and then tying it in with the gross margin.
To the extent that you are seeing higher retail prices is that a benefit to the gross margin initially until the higher car costs I'm actually start to flow through Cogs like how do we think about that thanks.
So.
On the price side I'll, let Ted.
Channels the innovation.
That comes and it is certainly a positive.
Impact overall.
On our on our business as it relates to the Chick.
Yes, I would say from a from a.
Taking aside lumber.
Tariffs.
Sure commodity standpoint, we had quite a bit of pressure.
Back half of last year first part of this year, that's subsided, so commodity prices generally versus a year ago to think of steel and resin based metals et cetera are actually down so that pressure.
On the opposite has subsided.
To Craig's point, most of our our pricing increases our mix driven in the sense that customers are trading up.
More innovative higher priced goods, we break out the components of our average unit retail freeze, which has increased by far the largest driver of that.
In Q2 as well as the past several quarters is from new product introductions, which are higher price points because of innovation think of cordless lawn mowers versus push gas mowers.
On on tariffs, we have it we have a number of tests going on across the country nothing of any sort of magnitude.
To say that we're we're taking price broadly at this point because of tariffs that we are testing a number of things.
And to your question its impact to margin as we sell more innovative product and the customer steps himself Buffett line structure. It drives a higher gross margin dollars.
It may not change rate, but it drives a higher gross margin dollar which is what.
I guess.
Got it thanks, and then maybe you wanted but I think it's an interesting specific to look at the acceleration and I think again.
The underlying sign of health in the business. This is an adjusted.
Big ticket grew 1.5% in May 4.1% in June 9.3%.
Okay. Thank you for the color appreciate it and Christine we have time for one more question.
Thank you our final question will come from the line of Greg Melich with Evercore. Please proceed with your question.
I made it in so.
[laughter] Carol Thank you.
Really really helpful for all these years and you in Europe , all the break you get well continue to noise as best we can.
The I had a follow up on tariffs and inflation and then also digital.
If that that description you gave before of list one to four.
Does that assume a 10% tariff on everything a 25% or is it 25% analysts.
One to three and then the potential of 10 I'm list for yes, that's exactly right. It's the 25, a month or three and then 10 for perfect.
And so the tie in to that is is that a reason why inventories might have been up 5% year over year, a contributing factor.
Our inventory is all about the investments that we're making in the accelerated recess.
For the large part so it has nothing to do that got it and then and then last on digital I know up 20% continues to grow nicely is that around 9% of sales and it did decelerate. So I'm wondering did did amazon's move.
The next day did you see any impact on that and do you think that was a factor in the deceleration or is there something else going on.
Oh, yes, no. We actually were very pleased with our growth is 8.9% penetration in the quarter up from 7.5% a year ago.
And we have actually accelerated our capabilities skin same day delivery market overview.
[noise] Yeah. As was noted earlier, we have expanded our next day parcel coverage were over 50% of the population now.
And next day parcel coverage.
Weve expanded our car delivery also to a greater than 50% out of our stores.
So we're pleased with the time, we're taking out of or are we kind of the customer.
We continue to take lead time out with every move we make in the supply chain and each time, we do it improves conversion.
[laughter] deceleration.
Fiscal calendar shift.
So that's not a comp number that's a gross number.
Got it that's great well good luck, everybody and thanks again Carol. Thank you. Thank you.
Mr. Fancy, we have reached the end of the question and answer session I would now like to turn the floor back over to you for closing comments.
Thank you Christine and thank everyone for joining us today, we look forward to speaking with you on our third quarter earnings call in November .
This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.