Q3 2020 Home Depot Inc Earnings Call
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Greetings and welcome to at home Depot at third quarter 2020 earnings call.
At this time all participants are in a listen only mode.
Brief question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Isabel Jancee. Please go ahead.
Thank you Christine and good morning, everyone joining us on our call today are Craig Menear, Chairman and CEO, Ted Decker, President and Chief operating Officer, and Richard Mcphail, Executive Vice President and Chief Financial Officer. Following our prepared remarks, the call will be open for key.
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 score.
2387.
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 day.
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 correct.
Thank you Isabel and thanks for joining our call. This morning, we hope that you and your loved ones are safe and healthy.
As we announced yesterday, we entered into a definitive agreement to acquire HD supply, a leading national distributor of maintenance repair and operations products in the multifamily in hospitality end markets.
Before moving to the results of the quarter I wanted to take a moment to discuss how HD supply fit into our strategic framework.
As you know the Emerald customer as an important pro customer for the home depot, we are committed to better serving the MRO customer and growing in this space.
The success, we've had with our existing number of business makes us confident in our ability to accelerate sales growth in a highly fragmented $55 billion MRO marketplace.
While the transaction is subject to customary regulatory approvals I look forward to welcoming the HD supply associates to the home depot.
Richard will take you through the financial details shortly.
Now, let's discuss our third quarter results.
Sales for the third quarter of grew $6.3 billion to 33.5 billion up 23.2% from last year cash.
Net sales were up 24.1% from last year with U.S. comps of positive 24.6%.
Diluted earnings per share were $3.18 in the third quarter.
The third quarter was another exceptional quarter for the home depot as we saw the continuation of outsized demand for home improvement projects.
Our results were driven by broad based strength across the store and geographies.
All of our top 40 markets posted double digit comps, while Canada posted comps above the company average and Mexico posted its best performance since the onset of the pandemic with double digit comps in local currency.
As Ted will detail of both tickets and transactions were up double digits in the quarter and we saw strong double digit growth from both of pro and DIY customers.
As we mentioned last quarter the step change in volume of business that we have witnessed over the last six months is not without its challenges, but our strategic investments coupled with our near term actions taken have allowed us to better serve our customers.
Our third quarter performance is a reflection of this and as we continue to learn and adapt to meet the unprecedented level of demand we are seeing in the market.
Actions, we have taken across our supply chain in our stores and in partnership with our suppliers have helped us to improve in stock levels reduce lead times better manage in store replenishment and improved price improved fulfillment options and delivery times.
All of this is ultimately translated to over 300 basis points of sequential improvement in customer satisfaction scores for the third quarter.
Our interconnected retail strategy and underlying technology infrastructure have continued to support record level web traffic on a consistent basis for over six months.
Sales of leveraging our digital platforms increased approximately 80% versus the third quarter last year at approximately 60% of online orders were fulfilled through a store.
We continue to invest in our digital assets, introducing new capabilities in different ways to engage with the home depot.
Over the past several months, we have refreshed the digital experience in key categories and are extremely pleased with the customer response.
And decorative lighting for example, we enhance the category experienced offer improved visual imaging and more lifestyle photos of our on trend lighting assortment.
As a result of these changes and increased marketing effort to better highlight our offering.
We have seen significantly higher customer engagement with the category online, which help to drive sales growth above the company average in the quarter.
We also found new ways to leverage our online platform to better showcase our assortment for events.
For our Halloween event, we increased our digital offering and enhance our presentation, which resonated with our customers, resulting in the strongest customers spots we've had to these events.
We are focused on continuing the momentum of our strategic investments to enhance the interconnected shopping experience and position ourselves for continued share capture over the long term.
Key components of our one home depot strategy, such as opening of various supply chain facilities technology investments at enhancements to the digital experience remain on track.
And we have now restarted many of the store investments that were pause at the onset of the pandemic.
Our results through the first nine months of the year clearly indicate that from many customers at the home has never been more important.
And we share from them that they will continue to invest in home improvement through a multitude of different projects and plan to embrace the upcoming holiday season.
As customers engaged with the home depot, we see a continued blend of both of physical and digital worlds as a result of distinct competitive advantages and overarching benefits of an interconnected one home depot strategy have never been more relevant.
I'm incredibly proud of our associates for the many ways that they of lift our values by serving our customers communities and each other during these unquestionably challenging times.
Our ability to grow the business by more than $15 billion through the first nine months of the year, while navigating the global pandemic and supporting our communities through multiple natural disasters is a direct result of our associates extraordinary efforts.
Given the ongoing demands and complexity of the current environment. We continue to focus on taking care of our people in part by extending weekly bonuses for hourly associates in our stores and distribution centers for the duration of the third quarter.
Through the end of the third quarter, we have spent approximately $1.7 billion on temporary pay and benefits in response to COVID-19.
As Richard will discuss we've now made the decision to transition from our temporary weekly bonus program to invest in permanent compensation enhancements for our frontline hourly associates.
This will result in approximately $1 billion of incremental compensation expenses on an annualized basis.
Our Orange Aprons associates of the Heartbeat of the home depot and supporting them through this time of uncertainty and beyond continues to be at key priority.
We know that we must remain agile and flexible to execute against the demands of the current environment and our third quarter performance highlights key progress that we have made as we continue to learn and adapt.
I could not be more proud of the resilience and strength at our associates at continue to demonstrate and I want to thank them and our supplier partners for their hard work and dedication to serving our customers and communities.
And finally I want to take a quick moment to congratulate Ted Anne Marie and John who are on the call with me today.
On their recent promotions and expanded responsibilities.
Their new roles are among the number of leadership development moves that we have made as we continue to invest and grow the deep bench of talent that we are fortunate to have here at the home depot.
With that I'd like to turn the call over to Ted.
Thanks, Craig and good morning, everyone I want to thank all of our associates and supplier partners for their incredible effort to serve our customers in this unprecedented environment.
The consistently strong demand we've seen over the last six months has been remarkable for the last two quarters, we have seen comps north of 20% for 25 of the 26 weeks. The strong demand has pressured supply chains partnered with our supplier partners to make various improvements.
As we mentioned last quarter. The actions. We took include adjusting our assortments and planograms introducing alternative products and in some cases, reducing the number of skus in certain categories to focus on the highest demand products.
In addition, we are further recognizing our rapid deployment center network of now implemented mechanized score loading at two thirds of our facilities meaningfully improving our productivity in those buildings as a result of all of these actions we have seen reduced product lead times and continued improvement in our in stock positions the end.
Stock level in our use of stores has improved for 12 straight weeks. While we are pleased with these results we're not at free pandemic levels.
We have also revisited customer fulfillment choices some of which we paused earlier in the year. As a result, we are starting to reestablish premium delivery Windows and express car in van delivery service that covers over 70% of few of us population.
During the third quarter each of our merchandising departments posted double digit comps led by our lumber and decor in storage departments, our comp average ticket increased 10% to comp transactions increased 13% of.
Growth in our comp average ticket was driven primarily by the continuation of project demand. We saw in the second quarter customers trading up to new and innovative items as well as inflation certain commodity categories like lumber.
Over the last four months, we have seen significant volatility in the pricing of lumber as the industry works to balance supply and demand during the third quarter of the average price of framing lumber was approximately 130% higher than the same period last year.
As we exited the quarter pricing for certain lumber categories had fallen from the peaks, we saw mid quarter, but still sit well above the levels. We saw at this time last year. Despite the significant.
At significant inflation, we saw strong double digit unit comps in lumber in the third quarter.
During the third quarter inflation from core commodity categories positively impacted our average ticket growth by approximately 260 basis points.
Additionally, the strength of our comp transaction growth was driven by consistently strong in store and online transactions continuing the same trends we saw in the second quarter.
During the third quarter Big ticket comp transactions are those over $1000 were up approximately 23% you saw strong performance across a number of big ticket categories like appliances vinyl plank flooring and lumber.
During the third quarter, we saw double digit growth with both our pro and DIY customers and while DIY sales grew faster than pro sales our pro business posted the strongest growth we've seen all year.
As we look at our different pro cohorts growth with our smaller pro customers has been consistent with strong double digit growth every month of the year.
Growth with our larger pro customers is healthy and accelerated from the second quarter.
However, some large froze still face headwinds related to the current operating environment, including some customers being hesitant to like frozen to their homes.
Turning to our DIY customers, we continue to see unprecedented levels of engagement from both new and existing customers across a variety of home improvement projects and importantly, as these customers.
Power equipment. However.
However garden seasonal we're not the only projects our customers were working on if we exclude our garden departments from our third quarter results, our comp was still north of 20%.
We saw customers working on a variety of projects across your home in categories like garage from organization ceiling fans vanities in power tools, all posting comps well above the company average.
The customer engagement. We are seeing was also evident in our annual Halloween event during the third quarter. We hosted our most successful Halloween event with both in store and online offerings customers responded to our larger assortment of animatronics inflatable CDR decor as evidenced by our 12 foot giant skeleton.
Sold out before October helping drive a record level of sell through for the event.
As we turn our attention to the fourth quarter. We are excited about the upcoming holiday season, and believe we are in a great position for continued customer engagement.
During the quarter, we will be hosting our annual holiday Black Friday end gift center events. However, this year they are going to look a little different as we remain committed to prioritizing the health and safety of our customers and associates and promoting a safe shopping environment.
We have adjusted our Black Friday event this year to cover an extended period of time and not just focus on one day. Additionally for both our Black Friday at our gift center events, we've reorganized how we place in stage our product to assist the social distance from.
For example, we've reduced the amount of product displayed on our front racetrack and we've created more space store gift Center presentation.
Made deeper buys on fewer skews to bring great values to our customers and Weve also included some of our core skews in our event, which will help with replenishment as we continue to see strong comps.
For example featured in our gift center of Black Friday events. This year, our exclusive power tool products from our industry, leading assortment of Milwaukee Makita to Walt Richard Ryobi in more this year, we are especially excited about the launch of Ryobi 18 volt one plus.
HP brushless tools. These tools of been designed from the ground up to serve our DIY and pro customers with more features and performance than ever.
HP tools are up to 20% lighter and 30% more compact while delivering improved power and durability with brushless motors. The ryobi Oneplus platform has more than 100 million batteries and our customers' homes and job sites today and this new HP line at brings a strong pipeline of future enough.
In addition to the more than 175, ryobi, one plus tools in the marketplace today.
Our Black Friday, and gift center event kicked off a little over a week ago and we're thrilled with the early results 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.
In the third quarter total sales were $33.5 billion at 23.2% increase from last year.
Foreign exchange rates negatively impacted total sales growth by approximately $100 million.
Our total company comps were positive 24.1% for the quarter.
With positive comps of 21.8% in August 27.8% in September and 23% in October.
Comps in the U.S., we're positive 24.6% for the quarter with positive comps of 22.6% in August.
28.5% in September and 23% in October.
Our comps in August and September of this year were impacted by a shift in our labor day event.
At this year, our labor day of that fell in fiscal September and last year at fell in fiscal August if we adjust for the shift our monthly comps in the us would be 24.7% in August and 26.4% in September.
All 19 of our us regions as well as Canada, and Mexico posted double digit positive comps in local currency.
In the third quarter, our gross margin was 34.2% at decrease of approximately 30 basis points from last year.
Gross margin was negatively impacted during the quarter by several factors, including product mix and pressure from shrink mix.
Mix pressure from lumber alone negatively impacted gross margin by approximately 35 basis points in the third quarter.
The decline in gross margin was partially offset by the benefit of reduced promotional events during the quarter.
During the third quarter operating expenses were approximately 19.7% of sales representing a decrease of approximately 30 basis points compared to last year.
Let me take a moment to comment on a few of our expense items.
First during the quarter, we continued to support our associates with enhanced benefits in response to curb at 19.
Which total approximately $355 million, resulting in approximately 105 basis points of expense de leverage.
As you heard earlier from Craig through the end of the third quarter. We have spent approximately $1.7 billion on enhanced associate pay and benefits in response to Cove at 19.
We've also made the decision to transition from our temporary weekly bonus program to permanent compensation enhancements for our frontline hourly associates.
This will result in approximately $1 billion of incremental expense on an annual basis.
We began making these adjustments in the third quarter and will continue to make the majority of them in the fourth quarter on a market by market basis.
Second.
We incurred approximately $60 million of operational covered related expenses, including personal protective equipment for our associates and customers and enhance cleaning of our stores, resulting in approximately 20 basis points of operating expense deleverage.
Third we recorded at expenses related to our strategic investment plan of approximately $325 million, an increase of approximately $48 million compared to last year.
And finally during the third quarter, we showed strong expense control in other areas of the business and drove approximately 155 basis points of expense leverage.
Included in this 155 basis points of leverage is approximately 70 basis points of pressure driven by accrued bonus expense primarily related to our current outperformance for our biannual store success sharing program and store and field based.
Management bonuses for the second half.
The success sharing and store and field based management bonuses are in addition to the $1.7 billion of enhanced pay and benefits in response to kind of the 19.
Our operating margin for the third quarter was approximately 14.5% flat with the same period last year.
Interest and other expense for the third quarter grew by $49 million to $329 million due primarily to higher long term debt levels compared to one year ago.
In the third quarter, our effective tax rate was 24.1% compared to 24.5% in the third quarter of fiscal 2019.
Our diluted earnings per share from the third quarter were $3.18, an increase of 25.7 per cent compared to the third quarter of 2019.
At the end of the quarter merchandise inventories were $16.2 billion, an increase of $444 million versus last year.
And inventory turns were 5.9 times up from five times from the same period last year.
Moving on to capital allocation.
Our long term principles for how we think about deploying capital have not changed after.
After investing in the business. It is our intent to return excess cash to shareholders through a balanced approach of paying a healthy dividend end through share repurchases.
Let's take a moment to talk about our first priority.
We're committed to reinvesting in the business to drive growth faster than the market and the acquisition of HD supply strategically positions us to drive accelerated sales growth in a highly fragmented MRO space.
Under the terms of the merger agreement a subsidiary of the home depot will commence at cash tender offer to purchase all outstanding shares of HD supply common stock for $56 per share for a total enterprise value, including net cash of approximately $8 billion.
The closing of the tender offer is subject to customary closing conditions, including regulatory approvals and the tender of a majority of the shares of HD supply common stock then outstanding on a fully diluted basis and is expected to be completed during the home depot as fiscal fourth quarter, which ends on January.
30 Onest.
2021.
We plan to finance the acquisition with cash on hand, and new debt.
We also expect the transaction to be accretive to EPS in fiscal 2021 with potential for significant shareholder value creation over the long term.
During the quarter, we invested approximately $470 million back into our business in the form of capital expenditures and paid $1.6 billion in dividends to our shareholders.
Computed on the average of beginning and ending long term debt and equity for the trailing 12 months.
Return on invested capital was approximately 41.6%.
Down from 45.1% in the third quarter of fiscal 2019.
This decrease primarily reflects our decision to temporarily enhance our liquidity position, including the suspension of our share repurchase program back in March.
Turning to the macro environment the strong demand we've seen has continued.
Comps of slightly accelerated in the first two weeks of November reflecting an earlier start for our black Friday and holiday events versus last year.
We are encouraged by consumer sentiment and consumption trends.
Its show home improvement receiving more than its historical share of consumer spending.
Housing metrics are significantly stronger than when we entered this crisis turn.
Turnover is rising we see continued growth in household formation and home prices are appreciating as inventory on the market hovers near record lows.
Our customers tell us their homes have never been more important and they intend to continue their investment in the improvement of their homes.
While the current demand environment of strong it is important to remember that we're not through the Cove at 19 pandemic and we do not think is prudent to extrapolate recent trends to predict future performance are.
Our main focus remains on meeting our customers needs, while prioritizing safety.
And we believe that the investments we have made over the last several years have uniquely positioned us to capture market share regardless of the environment.
Thank you for your participation in today's call and we are now ready for questions.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
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One moment, please when we pull for questions.
Thank you. Our first question comes from the line of Christopher Horvers with JP Morgan. Please proceed with your question.
Thanks, Good morning, guys.
Right. So I know you mentioned about the slight acceleration quarter to date, but I wish I was wondering what you've seen in areas, where coal, but cases have spike what do you think the business looks like as it gets colder and outdoor DIY gets tougher you mentioned, the low 20% ex guarding comp.
Do you think that's a good proxy for the underlying trend would you expect the large pro to continue to improve and provide a benefit.
So Chris first comment would be we've seen no correlation in the business as it relates to covert cases I mean.
Our performance overall was actually really tight geography wise.
And.
And we saw broad strength across the store so.
Yes, we as Ted mentioned, we had an extended season because of the weather and garden, but we were extremely pleased with the performance outside of.
Our outdoor categories. So we feel we feel good about that and we've seen the pro continue to recover and the large per recover.
Got it.
And then a couple of follow up questions on the investment outlook. It sounds like you're making progress on the store investments again will you end up on track versus the original plan and when do you think about the degree at which investment dollars in X gene. They are down year over year at year end 2001 year over year end 2021.
And then nothing at HD supply I was curious how many of the 150 or so new buildings that you plan to build under the current investment plan related to the end MRO end does the acquisition of HD supply impact.
The outlook for the building those buildings and capex related to that thank you.
So with respect to investment outlook at.
As we as we said in the past we have deferred certain investments at that that principally relate to investments made inside the store at a large number of those investments remain deferred.
We started the year with a capex plan of approximately $2.8 billion.
We have deferred less than half a billion dollars and so while I won't give you an exact number I would say you know we will see deferral of call it $3 million to $400 million from it from our original plans in 2020.
Some of that May push into 2021 at.
And you know we'll update you as time goes on but I would say that overall 2021 is getting very similar to 2020 in terms of capex.
And as it relates to you know.
The HD supply asset base in total.
Obviously, we'll take a look at at and we'll evaluate combined asset base. Once this gets approval and we will move forward with what we think the best leverage point is to serve our customers and grow.
In the MRO space, which is a 55 billion dollar fragmented market that we're pretty excited about.
If I could just take a minute of yeah.
At Sun on what we've accomplished what we did push of bid into 2021. We're just thrilled that we are finishing of the investment in our new look and feel the store our sign packages will be done in all of US stores. This year I think that is probably the first time to be.
Brand standard across all of the United States stores has been the same maybe since our first two stores opened at 1979, we've completed all our self checkout refreshes, we've added storage most of our stores for online pickup we've implemented electric sign like true.
On at sign labels and all of our appliance departments completely refreshed our paint color wall experienced in our paint Department. We've completed the tool Corral buyer brand standards in those leading brands in our tool of.
Business and we've also taken that to our outdoor power equipment and will be done early next year resetting all our outdoor power equipment begin by those battery platforms that are leading brands in the industry. So we've completed a ton of work despite some of the setbacks with.
With Cove at this year that the team just did a terrific job getting all that work done.
So then Richard I know you mentioned capex differing in but I think originally 21 was from an opex perspective sort of source of funds incremental investment dollars down year over year for speed of the past few years do you still expect those investment dollars in opex to be down 21.
Yes, they will be flat down at 21, the specific expense dollars with respect to the investment program.
That continue alongside the deferred spending and 20.
Got it have a great holiday season.
Thank you.
Our next question comes from the line of Scot Ciccarelli with RBC. Please proceed with your question.
Hi, Good morning, guys. So you did talk about product mix as the primary factor for the gross margin decline was there much of an impact on gross margins from channel mix as ecommerce is at the store growth or was it really on the private side or were there any other factors, we should be mindful of thanks.
Nothing in particular, Scott by far the Big driver was the lumber penetration the lumber mix as strong as at business was.
No as we just thinking about this kind of going forward kind of should we think about you know if we wind up seeing more normalized mix kind of getting back to let's call. It you know flat ish kind of gross margins is at the right way to think about from a cadence perspective.
I think at this point, you know with with the level of uncertainty in the environment and the dynamics in the business today, we wouldn't give any forward expectations with respect to margin. We are running a very healthy business, we run it on a portfolio basis when you.
You bring up channel mix.
We run this is of portfolio and half from many many years and you've seen the stability in our gross margin reflects that remember that over 60% of sales that are purchased on our digital assets are picked up in the store.
And have an identical mix in essence to add to our store mix. So that's.
Thats, where we stand we're very comfortable with the mix of business we see.
Okay very helpful. Thanks, guys.
Our next question comes from the line of Michael Lasser with you. Yes. Please proceed with your question.
Good morning. Thanks.
Thanks, a lot of my question.
A lot of moving pieces with home depot longer run earnings power between any changes in consumer behavior, the incremental costs that you're paying your true you the acquisition of home depot supply from Tim.
Gentlemen.
Relative to the 14% operating margin expectation you put out previously recognizing that.
Sales expectation, you're not providing longer run going.
The business can now were at a higher lower or about the same margin knowing what you know day in what you had thought previously.
Okay.
Well.
I'd say at lot has is dynamic, but many things stay the same I think we have executed exceptionally well in terms of expense management throughout the year and I think you can expect that from us in the future and I think I think one.
One thing I will just make sure that we clarify is how.
The shape of our investments to support our associates.
Goes from 2020 into 21, so as we said our expenses through the first three quarters of the year in support of our associates total of approximately $1.7 billion. We are transitioning the nature of those investments into permanent wage investments during the fourth quarter.
So if you think about the fourth quarter.
We're not going to quite be down to that billion dollars annualized run rate of some of these programs leak into the beginning of the fourth quarter, we will be lower than the third quarter run rate, but at it to $1.7 billion in say the 2020, we'll likely end at a total of $2 billion of investments and our assets.
He is of the.
That $2 billion only.
Only 1 billion will remain in our cost base in 2021.
So I think that that's the most important from.
Back with respect to our cost base I'd like to make sure we clarify.
Good day.
The only other comment I'd add to that is everything that we've been doing through our investment program.
Is to try to position the home depot to grow faster than the market on a consistent basis no matter what the operating environment is end to deliver incremental margin dollars. As a result that that's our focus assets or trying to get done.
Great Thats a good segue to my second question.
She is recognizing that it's very hard to prognosticate how to me in for overall home improvement is going to shape up next year.
You had to make an estimate what percentage of your categories are you skewed do you think you'll be ordering inventory down next year.
So look we first of all the inventory of planning for the home depot is on a very short cycle, we plan really week to week.
We release orders every single day, and 70% of what we purchase is domestic goods at.
Net income was from from you know.
Short lead time type performance. So we'll manage that on a day by day week by week basis based on what we see in demand.
And I'm really not looking we're not looking to extrapolate anything at this point from current performance our whole focus is on being able to be flexible and agile and adjusted accordingly.
Okay I get from the.
At the heart of the question would you seek home proved to be end, it's going to grow next year.
So look at the only thing I can tell you at this point is when we talk to our customers and we do work on surveys the customer tells us at the home has never been more important maintenance in the home is going up as people spend way more time in their home at.
And they tell US there is a significant percentage of folks at say they are going to do a project within the next six months at.
And so you know it.
Everything that we see at this point in terms of customer feedback, which suggests they are going to continue to invest in their homes.
At the same bloggers here, there's a lot of uncertainty in the environment there are macroeconomic.
Fundamentals that we're all going to be subject to and so you know I think if you think about it on a comparative basis as Craig said at.
Home improvement is is it a great space to be end at the moment and as customers and it's interesting to look at the housing dynamics and you say.
When customers see their home price appreciation day, they tend to invest more in their homes again regarding our comment.
Because of the uncertainty in the macro environment and so at this point, we really can't comment on 21.
But we do think there's a lot of confidence with respect to home improvement and our customers nine.
Understood. Thank you so much of never really at Cody.
Thank you.
Our next question comes from the line of parents short with Barclays. Please proceed with your question.
Hi, Thanks, very much just a couple of questions I guess I'm wondering with respect to your inventory.
Following up on Michael's question do you actually think you maybe lost sales with inventory that was a little too lean and then wondering how to think about inventory for the fourth quarter and then the second question I had is just.
You know you, obviously have more and more information on your DIY customer and you have for the last several quarters given the income penetration.
Wondering if you could give a little more color at what the general demographic.
Looking like now one of the biggest shift store changes that you've seen from end I guess age or income cohorts.
On on inventory Karen it would it would be hard to gauge of some of the lost sales opportunity.
That would of likely been more of a Q2 impact for us because we did go in with a little more conservative approach when the pandemic head as you know we are limited customer hours limited customer accounts and we also pulled back a bit on inventory.
Since that time, though that between the merchandising team in the supply chain team and the sourcing teams and transportation team. They really have just done an incredible effort of flowing product into the store and as I said in my prepared remarks, we improved in stock levels every week.
<unk> of the quarter or inventory grew over $400 million from from the prior year that was our first year over year increase that we've seen this year in pure volume at sea look at our accounts payable at gives an indication of how much goods we have slowed.
Into the buildings, it's over $3 billion up from our low point. So the in stock still are not exactly where we'd like them to be but incredible improvement in the work the merchants of done even though the in stocks still have some ways to go by working on the right skews.
With our supplier partners updating planograms and the like where we believe we have the product in the type of items in the store that our customers are looking for.
As it relates to you know online trends, you're absolutely right. Our online business, we couldn't be happier with the performance of our digital assets and remember, we're an interconnected business so with everything I'm about to say remember that over 60.
Per cent of our goods are picked up in our store Nonetheless, our our interconnected business grew by 80% of.
The penetration was 13% to the business. The sales you know that translates to nearly $2 billion of sales growth in the quarter for our online business. Our visits are up dramatically we're up in mobile desktop mobile web or conversion is up.
Despite the hyper growth in App and mobile web that tend to have lower conversion rates than desktop our app downloads are way up our active app users are way up our orders are up our.
My account of these are folks who are setting up an account with home depot. So obviously, we know them better when they set up at an accounts are way up millennials are highly engaged with the home depot you asked about customer profile. Our pros are highly engaged our b to b website at seeing record volume.
Use of engagement with our pro customer so I'll stop there, but it is a robust interconnected digital environment right now at the home depot.
Facing from it.
Your next question comes from the line of Kate Mcshane with Goldman Sachs. Please proceed with your question.
Hi, good morning, Thanks for taking my question.
I know there Wow you gave your comments on HD supply, but I wondered if there was any more color you could give on the source of the magnitude of any synergies and how much that might be taken at at least at for the deal.
[noise], we're where we're really excited about what the combination of of these two MRO businesses will bring to our customer. We think we've got the opportunity to create significant share holder value creation through that combination out we're not going to talk.
Talk about the degree of accretion.
But we're confident that we'll see of earnings per share accretion in 2021.
Okay. What were excited about as of yet these are rough numbers, if you think of that.
$130 million occupied households in the United States about $80 million of that is kind of honed.
Households single family, there's 50 million net is rental and of the 50 of about 30 30 million give or take.
Is in kind of the multifamily operations type business.
There's a huge opportunity for the home depot to continue to grow not only on the MRO side, but as we build relationships with customers on the of MRO side, we build relationships to be able to participate and capital of refreshes of those facilities as well, which is something that we're pretty focused on so.
We're super excited about the opportunity that comes with this MRO space.
Okay. Thank you and I wondered if I could ask one unrelated follow up question just regard to your seasonal business that you do in the fourth quarter is there any way to dimensionalize or size, how big of a business that is becoming for you in in the fourth quarter.
Okay.
I'm trying to remember off the top of my head. The you know we always we talked about seasonal breakout of of outdoor categories. The fourth quarter is the lowest of the year right. Ted yes. So generally at it's been shifting a little bit this year given the extended guard.
Susan is in as engaged as customers have been but usually think of Q4.
Of low 21 ish percent penetration of what we would deem outdoor.
Business in that very much is the low point with Q2 traditionally being at the high point think of mid Thirtys, so that sort of the range of changes of the business.
Thank you.
Our next question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question.
Thanks. Good morning, everyone first the question for Richard You mentioned, a few macro factors and trying to extrapolate it sounds like you're a little bit more bullish on those than maybe you were in prior calls.
Can you give us any sense I know you at the Directionally getting better can you give us a sense what these inc.
Inputs could look like for 2021, just in terms of magnitude, whether it's home price appreciation housing turnover et cetera.
I see so in my earlier comments I said, we're really pleased with the current level of consumer sentiment and consumption in the economy.
Im not going to make a prediction on where those macroeconomic levers go in the future.
I mean, you know anything semi that I'd say is at I think the last number I saw is somewhere in light at 2.7.
Months of supply and housing.
And that historical average on that is six months. So you'd have to believe thats kind of continued to hold up home values and at a home volume improvements have been the surprise this year.
It's it's I think it's a positive housing environment, we're not.
Extrapolating that into.
Expectations for sales principally because of the uncertainty in the macro environment. So we're we're optimistic and current conditions are certainly favorable for home improvement, but there is uncertainty we'll learn a lot of in the fourth quarter.
Okay Fair enough and then on my follow up based on the results by customer type write the pro customers coming back.
Can you talk about the backlog that you're seeing are you seeing the jobs that are coming back to normal indoor jobs and I think it may have been asked earlier, but the transition from outdoor indoor and how is that taking place.
So Simeon you are right the of the pro has been coming back we see kind of double digit comps in pro we did last quarter as well small pro is leading the large pro we've seen that large pro.
Really strength in the larger metro markets in our services business. If you look at that as a benchmark to pros business. We have one of the larger backlogs of to be installed sales jobs that we've ever seen and as you'd imagine.
A lot of this is special order goods, so getting the bespoke special order made and shipped to the particular job and then getting the labor to install that job continues to be a bit of of pressure and more so in certain markets, leading to that large backlog, but of what we're seeing at ours.
Services business translates to what the larger pros are also seeing that would be sizable backlog.
Thank you.
Our next question comes from the line of Chuck Grom with Gordon Haskett. Please proceed with your question.
Hey, good morning, Great quarter can you talk about where you are in the supply chain build out from that you've outlined.
Over the past few quarters, and maybe how much of the delay.
Which caused and the degree to which you can make that up.
The 21.
Sure I'd just largely.
Largely covered hasn't had a big impact and I'll, let mark.
Comment on where we are.
Yes, good morning, Mark Holifield here.
Yes, we've continued to open facilities through the pandemic I've been incredibly impressed at the team has been able to keep or program on track.
In terms of of one supply chain initiative in Q3, we opened up about 11 in the shows we now have three but those are market delivery operations. We now have three flatbed delivery centers open and we've got a very solid pipeline for 21 day.
At that were working and.
So we're very much on track with the ones what you're doing there.
Okay. That's great and then maybe one for Richard but a lot of over the past year about the ongoing.
The margin headwind from shrinking and I realize may be limited in your ability to do some of the inventory of the physical inventory, but I think it's where we at where are we in that lifecycle. It seems like it was an issue again here in the third quarter end in your line of sight of what do you think.
The true.
The flip from a from a negative to a positive.
Well at the beginning of the year, we said that impacts from our initiatives weren't really going to be seen until the year 2021. It takes time to roll these out.
We did anticipate at the beginning of the year that we would see pressure.
From a oney.
On a year over year basis.
The results through the third quarter have been essentially consistent with our original expectations.
Okay.
Our next question comes from the line of Michael Baker with D.A. Davidson. Please proceed with your question.
Hi, Thanks, a couple one Halloween.
Halloween at being strong does that typically act as a leading indicator for Christmas or even Thanksgiving and other words of people are buying the big blocks of for Halloween, how does that translate into big at Christmas or or John If you do a big Thanksgiving business on that what does that translate at all to what we should expect.
In the fourth quarter.
I think what we saw at the Halloween business, probably is more correlated to what we've historically seen and store markets. You know when you. When you have a hurricane hit our thinking years ago is that Oh, jeez, we need to pull back on all of that kind of.
Product because that wouldn't be where the customer focus was and we needed the space for rebuild type product and what our customers told US was no actually we're looking for some kind of normalcy at.
And we actually want to buy that product from you and I think thats exactly what we anticipated and and are seen through the holiday.
Programs is Halloween was a strong because of that we've ever had so you know we of anticipated in the beginning of the year because that's a long cycle of product that you purchase well in advance we had anticipated that the customer would want to engage and holiday and purchased accordingly.
And so do you have that same expectation for Christmas did you purchase that similarly, yes.
Yeah, that's what I mean, we bought into the whole holiday decor for the entire season.
Halloween all the way through Christmas because.
We anticipated that customers are going to want some kind of normalcy in their life.
No not at all.
At holiday set has has been set now from.
Christmas for several weeks in the store now and as I said, we're very pleased with the early engagement and sales in the program.
Yeah got it understood if I could ask one more follow up on the home depot supply of thinking back a few years at two at Analyst day that you had I think you implied that you or said that your share and MRO was about 5%.
Per cent, which would've implied about two and a half billion dollars.
And then we add on three plus for for home depot supply a you're getting about $5 billion at about 10% share is at the right way to think about it.
We think its a thought of $55 billion market.
We plan with a combination of our current tomorrow business and we'll we'll be at age with HD supply.
And what do you think your share is of that sales finally.
You know of it we won't we won't speak on HD Supplys.
Financial information the transaction Hasnt completed yet we'll refer you back to theirs.
But as as Craig said call hours, roughly 2 billion.
Understood, but can do that math. Thank you appreciate it.
Our next question comes from the line of Zach stay at with Wells Fargo. Please proceed with your question.
Hey, good morning, so with your digital sales up 80% in the quarter I think that would imply that your in store sales accelerated in Q3 and I'm curious if you would attribute that more so to the impact of easing some of the early kobin restrictions on stores or do you think there are other factors like better in stocks or.
Incremental demand from pro customers that you would call out.
I think its all of I'm, sorry, I think you know we.
We learn how to better operate.
We ended up turning control of constraints in stores over to our store managers, who are closest to the situation on the ground versus a company wide approach, we did that at roughly the beginning of the quarter.
We improved our in stock position as Ted.
You know indicated we saw overall improvement with our pro customers and our smaller pros of been steady our larger pros improved yet there's still opportunity for them.
And we saw our services business improve overall, so I think theres a number of factors that led to to this performance in the quarter. So we're pleased with the the trends that we're seeing in the business right now.
Got it and then lastly on the decision to re acquire HD supply could you talk about why you think the timing makes the most sense now, particularly with with some of their end customers like hospitality and facilities impacted due to coal that end on the strategic investments curious how you would think about prioritized.
Thing that incremental investment dollar across the MRO business relative to your existing strategic plans.
Look I would say a couple of things first of all over.
A period of time.
The HD supply of business came down to essentially the tomorrow.
Maintenance facility business that it is today that we just put the offer in non.
And so at strategically aligns us with what we're trying to get accomplished in the MRO business much more so than it did a few years ago. So from a timing standpoint, that's the the logic of there and like we you know we look forward to you know as we.
Close of steel hopefully during our fiscal year end here then we'll we'll determine the go forward approach and how we okay allocate and prioritize.
But we've got to get the steel close first.
Got it thanks, Craig I appreciate the time.
And Christine we have time for one more question.
Thank you. Our final question comes from the line of Steven Forbes with Guggenheim. Please proceed with your question.
Good morning, and thanks for fitting me in I was hoping to maybe expand on the compensation enhancements for the hourly associates at one of its possible.
Each of the Craig if you could discuss whether the investments are concentrated in absolute wage rates or if there is other sort of aspects of the compensation or benefits that are are being changed as we think about the cost structure going forward.
[noise] can elect.
Stephen We we believe that our associates are a competitive advantage at home depot and they're critical to the overall customer experience and this investment is essentially end wage and it you know as we do everything as it relates to.
Our associates at start of market by market basis overall, but yes, you can think of it as largely its wage.
And then and then of the follow up to that I mean should we should we expect any incremental pressure stemming from higher employee cost for the full time associate pool.
Or maybe I don't know if you could sort of.
Ill discuss right the best way to think about 2021, right Rich you mentioned 2 billion transitory versus 1 billion permanent but.
Are there any other potential yeah cost factors, we should be considering in our models as it pertains to the full time pool.
It's all of our frontline associates essentially one of their full time part time doesn't matter.
Thank you.
Yep.
Thank you Mr. fancy I would now like to turn the floor back over to you for closing comments.
Thank you Christine and thank you everybody for joining US today, we look forward to speaking with you on our fourth quarter earnings call on February.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.