Q1 2021 Home Depot Inc Earnings Call
Today's pros need today's tools and nobody understands that better than the home depot.
Greetings and welcome to the home depot as first quarter 2021 earnings call.
At this time all participants are in a listen only mode.
A 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 Janney. Please go ahead.
Thank you Christina and good morning, everyone and welcome to the home Depot's first quarter, 2020 one earnings call.
Joining us on our call today are Craig Menear, Chairman and CEO, Ted Decker, President and Chief operating Officer, and Richard Mcphail, Chief Executive President and Chief Financial Officer.
Following our prepared remarks, the call will be open for questions questions will be limited to analysts and investors and as a reminder, please limit yourself to one question with one follow up.
If we are unable to get to your question during the call. Please call our Investor Relations Department at 7703842387.
Before I turn the call over to Craig Let me remind you that todays press release and the presentations made by our executives include forward looking statements as defined in the private Securities Litigation Reform Act of 1095 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 Craig.
Thank you as well and good morning, everyone. We appreciate you joining the some of our call. This morning.
Fiscal 2020, one is off to a strong start as we grew the business by over $9 billion compared to the first quarter of last year.
Sales for the first quarter were 37 5 billion up 32, 7% from last year.
Comp sales were up 31% from last year and.
U S stores had a positive comp of 29, 9%.
Diluted earnings per share were $3.86 from the first quarter up from $2 eight from the first quarter of last year.
Our results this quarter were once again, driven by broad based strength across the business and geographies.
All of our top 40 markets posted double digit comps, while Canada posted comps above the company average and Mexico posted double digit comps.
Both ticket and transactions were up double digits and the quarter and as Ted will detail, we saw strong double digit growth from both of our pro and DIY customers.
We continue to effectively manage the outsized demand for home improvement products seen throughout most of the last year, despite disruptions and global supply chains that were further exasperated by port congestion during the quarter.
We leverage the scale of our supply chain and partnered with our vendors to maintain our in stock positions and prioritized key skus and high demand categories.
While we continue to see strong level of engagement across our digital platforms. We saw more of our customers return to our stores.
Sales leveraging our digital platforms increased approximately 27% versus the first quarter of last year and approximately 55% of online orders were fulfilled through of store.
We continue to rollout new capabilities, such as mixed cart selling from store that.
And that remove friction from both our customers and associates.
The mix current feature enables associates to more efficiently and effectively serve the total project needs for our customer as products from both the website and store can be added to a single transaction.
We also continue to drive interconnected and enhancements and other areas of the business to solve customer pain points and.
And tool rental for example, we will soon and expand our rent online pilot chain wide.
The enabling rent online pickup and store capabilities for all of 1300 plus to run of locations and the U S and Canada.
This will enhance the experience for our busy pro and DIY customers and complement additional investments, we're making to expand our rental footprint and increase our assortment and delivery capabilities.
We're focused on continuing to leverage the momentum of our strategic investments to further enhance the interconnected shopping experience.
Our efforts will continue to support what we believe is our winning formula deliver the best shopping experience and home improvement and extend our position as the low cost provider with a relentless focus on productivity and be the most efficient investor of capital and home improvement.
We believe this strategy will help us deliver returns by driving growth faster than the market and.
Any environment.
The build out of our one home depot supply chain vision is a wonderful example of our strategy and action.
And enhanced fulfillment capabilities will not only create a better customer experience, but they will also expand the breadth of our current opportunity set from both a product and customer standpoint.
The ability to combine this growth potential with scale to create the low cost network and home improvement is a formula that we believe delivers long term value creation for our customers supplier partners and shareholders.
During the quarter, we continued to build out our one supply chain vision by opening several new facilities and we are very excited with the progress we continue to make on this key strategic priority.
We've now been operating and this unprecedented demand environment for over a year and continue to align around a few key learnings.
First the investments we've made and the business over the past decade were the right ones.
And second day of enabled agility and flexibility to execute on critical business decisions and a challenging and dynamic operating environment.
As a result, we have managed unprecedented levels of web traffic record levels of product flow through our supply chain, all while improving customer service levels and our stores.
These factors coupled with our World class Associates and strong partnership with the suppliers have enabled us to meet outsized demand week after week.
Our culture is remainder of Northstar is our decisions of our anchor to some of our most important values do the right thing and take care of our people.
Our ability to continue investing for the future while also managing the most fluid environment and our company's history as a direct result of our associates and their extraordinary efforts.
Want to close by thanking them for the many ways. They continue to live our values by serving our customers communities and each other during these challenging times.
And that let me turn the call over to Ted.
Thanks, Craig and good morning, everyone I want to start by also thanking all of our associates and the supplier partners for their commitment to serving our customers and communities.
We continued to experience unprecedented levels of demand during the first quarter with comps accelerating to more than 30% when compared to the first quarter of last year.
This elevated demand and transportation headwinds are pressuring parts of the supply chain, but our teams continue to work together with our supplier partners to manage through these pressures.
Moving to our comp performance during the first quarter 13, or 14 merchandising departments posted comps at or above 20% led by our lumbar and kitchen and Bath departments.
Our comp average ticket increased 10, 3% and comp transactions increased 19, 1%.
Similar to what we reported and our previous three quarters and the growth and our comp average ticket was driven by elevated project demand customers trading up to new and innovative products and continued inflation and many product categories, including lumber.
This was another record setting quarter for lumber prices. Let me give you. An example of what that means for one of our core lumbar skus at the end of the first quarter last year of sheet of 700, Sixteens OSB was approximately $9 55.
As we exited the first quarter. This year that the same sheet of OSB and more than quadrupled and price to $39 76.
Inflation from the core commodity categories positively impacted our average ticket growth by approximately 375 basis points during the first quarter.
Our interconnected retail strategy is resonating with our customers as evidenced by strong growth from both in store and online transactions and we are pleased with our ability to meet widespread demand across our selling platforms.
As you heard from Craig sales from our digital channels grew by 27% during the first quarter, which equates to more than 100% growth on a two year stack basis.
Big ticket comp transactions or those over $1000 were up approximately 50% compared to the first quarter of last year, we saw widespread big ticket strength across our business with notable outperformance and lumber vinyl plank flooring and many of our installation services.
From a customer standpoint, we saw double digit growth with both our pro and DIY customers.
With both customer groups accelerated during the first quarter with pro sales growth slightly outpacing DIY.
Sales to our pro customers continued to strengthen posting the fourth consecutive quarter of accelerating growth and the best quarterly growth rate on record.
Pros continue to tell us that project demand as strong and their backlogs are growing.
Shifting over to our DIY customers. The strong demand we saw during the back half of last year continued during the first quarter.
From gardening to garage and organization, new and existing customers are engaging with home improvement and during the quarter. We were also well positioned for the start of the spring selling season.
We took decisive action earlier than usual to proactively leaned into our inventory position.
This paid off as spring began breaking across the country and our associates, we're well equipped to service customers across key outdoor and garden categories, and the strength and gardening was more than just plants and shrubs and we posted a record quarter and categories like planters and Hardscape.
Additionally, while outdoor categories exhibited significant growth during the first quarter. We've continued to see strong momentum with interior projects around the house interior projects like counter tops vanities blinds and home decor, all showed significant growth and the first quarter.
As we look forward of the rest of the year. We are focused on continuing the momentum we are seeing with our customers, we're particularly encouraged with the strong demand we're seeing from our pro customers and for our pros, we know the brands matter brands like Milwaukee, Cline, and Carlotta and have significant market.
Share and their respective categories and are trusted by our pro customers to get the job done.
Milwaukee recently expanded their powerful and <unk> battery platform to include a full line of cordless mailers that deliver pneumatic performance with no compressors, no gas cartridges and rapid fire rates to keep pros productive the.
<unk> platform now features over 200 tools that are exclusive to the home depot and the big box home improvement channel.
And at the time when pros are busier than ever we're thrilled that we of the destination for car loans PVC electrical boxes and Klein tools. These brands are two of the most widely used by electricians and we've enjoyed the long exclusive partnership with Klein being first to market with their new and innovative products and we are now.
The exclusive national partner of car loans, and the Big box home improvement channel.
And while we don't know how the demand environment will ultimately unfold as we look forward of the rest of the busy spring season, we feel great about our position and we look forward to serving our customers both in store and online with that I'd like to turn the call over to Richard.
Thank you Ted and good morning, everyone.
And the first quarter total sales were $37 5 billion.
And increase of $9 2 billion or.
And were 32, 7% from last year.
During the first quarter, our total company comps were positive 31%.
With positive comps of 19, 8% and February 36, 2% in March and 34, 3% in April.
Comps and the U S were positive 29, 9% for the quarter with positive comps of 19, 9% and February <unk>.
35, 6% in March and 32% in April.
During the first quarter, all 19 of our U S regions, as well as Canada, and Mexico posted strong double digit comps.
And the first quarter.
Our gross margin was 34%.
A decrease of approximately 10 basis points from last year.
Mixed pressure from higher lumber sales alone negatively impacted our gross margin by approximately 35 basis points.
During the first quarter operating expense as a percent of sales decreased approximately 390 basis points to 18, 6%.
We were pleased with our operating leverage during the first quarter as it reflects disciplined expense control along with a couple of other expense items that I would like to highlight.
First our operating leverage and the first quarter of this year reflects the impact of several one time expenses that we incurred and the first quarter of 2020, including additional compensation and benefits to support our associates.
These expenses were partially offset by understand and other expense items and the first quarter of last year, notably payroll as we work to staff up labor and meet the surge and demand.
And together the net impact of these factors resulted in approximately 240 basis points of operating expense leverage during the first quarter of 2021.
Second.
During the first quarter of 2021, we incurred approximately $80 million of COVID-19 related expenses, which created approximately 20 basis points of operating expense deleverage.
And lastly, our operating expense leverage during the first quarter also includes pressure from higher accrued bonus expense primarily related to our outperformance for our store success sharing program and store and field based management bonuses for the first half of fiscal 2021.
Our operating margin for the first quarter was 15, 4%.
Compared to 11, 6% and the first quarter of 2020.
Interest and other expense for the first quarter increased by $26 million to $333 million due.
Primarily to higher long term debt levels than one year ago.
And the first quarter, our effective tax rate was 23, 9%.
Down from 24, 4% and the first quarter of fiscal 2020.
Our diluted earnings per share for the first quarter were $3 and 86.
And increase of 85, 6% compared to the first quarter of 2020.
During the quarter, we opened one new store and the U S and one in Mexico, bringing our total store count to 2298.
Selling square footage at the end of the quarter was 239 million square feet.
At the end of the quarter inventories were $19 $2 billion.
$4 $2 billion from last year and inventory turns were five five times up from five times last year.
Turning to capital allocation, our long term principles for how we think about deploying capital have not changed.
First and foremost, we will invest and our business day.
During the first quarter, we invested approximately $525 million back into our business in the form of capital expenditures.
And second it is our intent to return excess cash to shareholders through a balanced approach of paying a healthy dividend and repurchasing shares.
During the first quarter, we paid approximately $1 8 billion and dividends to our shareholders and we returned approximately $4 billion to.
To shareholders and the form of share repurchases.
Our share repurchases during the first quarter, partially reflect and elevated cash balance in 2020, when we paused share repurchases to temporarily increase our liquidity levels as we navigated the pandemic.
Computed on the average of beginning and ending long term debt and equity for the trailing 12 months return on invested capital was approximately 45, 1%.
Up from 48% and the first quarter of fiscal 2020.
Moving to the broader demand environment for home improvement and the.
The strong demand that we've seen for more than a year now has continued.
During the first two weeks of May on a two year stacked basis, we've seen comps and the U S above 30%.
Housing remains strong homeowners balance sheets are healthy and our customers continue to tell us that they are planning on spending of <unk>.
On a variety of home improvement projects.
With that said, we cannot predict how the external environment will evolve and how it will ultimately impact the consumer.
We will continue to execute with flexibility and focus on what has driven our successful performance.
Our relentless focus on the customer and our ability to remain flexible and agile has enabled us to serve our customers and to meet demand and this dynamic environment.
Yeah.
Longer term, we remain committed to what we believe is the winning formula for our customers our associates and our shareholders.
We intend to provide the best customer experience and home improvement.
We intend to extend our position as the low cost provider.
And we intend to be the most efficient investor of capital and home improvement.
If we do these things we believe we will grow faster than our market and we will deliver exceptional shareholder value.
Thank you for your participation in today's call and Christine we are now ready for questions.
Thank you we will.
We'll now be conducting a question and answer session.
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Please while we poll for questions.
Thank you. Our first question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question.
Hi, everyone. My first question is is there anything that changes your view on housing.
More or less constructive compared to the underlying assumptions that you've built through 'twenty one plan again.
No semi and I'd say, yes, the housing and environment continues to remain very strong.
So.
It's the only strength and I think from last year and the.
The current shortage of new housing clearly is helping to drive improvements and the home values, which is a good thing for spending and the home.
Okay and then my follow up is actually more on an operating profit and margin and I.
Thank you message is very clear that you are focused on growing faster than the market and I think Richard told us last quarter.
And you're managing operating profit dollars and margin fall, where they fall.
And I ask about the two I think about incremental drivers going forward, it's about interconnected retail.
And then somewhat and MRO and probe some of the investments and acquisitions you've made.
Is there anything about the margin structure of those businesses and incremental growth that would hold back margin.
No I mean, when we look at the business overall.
Interconnected we manage the as a portfolio of approach and and 55% of the orders are flowing through our stores.
And then as it relates to the structure and pro we've shared in the past and you look at pro and total pro is a very similar margin profile to the DIY customer when you're when you're looking at of complete project.
And so that's really nothing there that's dramatically different.
Okay. Thank you.
Our next question comes from the line of Michael Baker with D. A Davidson. Please proceed with your question.
Hi, Thanks, guys and I appreciate the fact that.
You didn't really update your outlook and your press release, you talked to of too much but.
Let me ask this are you it seems and in fact from all you're probably ahead of where you thought you would be at this point. So is there any update to that idea of the trends continue we'll be I think it was about flat to up slightly and margins at or above 14%, but can you update the comment that you gave and in the first quarter and I guess related.
To that is the right way to think about comps for the quarter and I guess of the year somewhere in that 30% two year stacked rate.
Would that be of fair sort of assumption the model for the rest of the year.
Michael Let me, let me share with you I mean clearly.
The quarter performance was stronger than the home.
And we did not think that we would deliver of 30.
And here.
And as it relates to the.
And the framework that we provided Richard you might want to speak of the framework sure and just to remind everyone. We actually and at the end of the fourth quarter of last year, we felt unable to provide an outlook due to the level of uncertainty and the environment. So we did not provide an outlook we did feel that given the.
Inefficient of nonrecurring expenses in 2020, we could provide our view on our margin profile at a hypothetical level of sales.
And so.
Looking forward, we continue to believe that the environment and the consumer response to it is difficult to predict.
With respect to Q1, we're very pleased with the operating expense leverage and earnings flow through that we drove and we're going to keep operating the business with discipline and.
Keep a focus on driving operating expense leverage.
Okay. Thank you I appreciate the.
The commentary.
Yes.
Our next question comes from the line of Michael Lasser with UBS. Please proceed with your question.
Okay.
If you look at your months of the Mi and April year to year.
The tax we're running.
Around or even better than 40 per cent and.
And now you mentioned and <unk>.
So far is up above 30%.
Do you think that we're starting to see the stimulus impact your comp DCP and such debt.
This was at the couple of different ways, but 30% run rate and a two year stack of the good way to move forward towards the debt.
And for Us.
Net debt at 30% two year stack run rate and the arithmetic basis should should slow from here.
Well, Michael we just we can't extrapolate results.
And future periods. The it's just too difficult to predict how the environment might evolve and how the consumers' response to that and might evolve.
And you look at the progression from March and April.
And you just you think about stimulus impact, it's very difficult to quantify the impact from stimulus. What we do know is that of the $402 billion that the government announced would be paid directly to individuals as part of the American rescue plan of.
Of that $402 billion 325 billion of it hit bank accounts and March and so while we can't quantify.
The exact impact it probably did have some sort of impact on that and March to April progression.
And Michael I would say, we really can't extrapolate to future periods. The one thing that we're very encouraged about is when you look at the overall kind of backdrop for home improvement on the longer term basis.
Very good about that.
And.
Anything you want to point to specifically Craig from.
The longer term basis that you, both and when Youre right.
Yes, Mike when you when you think about where at post World War two.
Housing availability, so two months of supply versus historical average of six that that situation won't be resolved and near term, it's going to take time for that to be resolved. So I think that supports.
The home values and the continued growth and home values, which we know.
And as home values grow people feel good about and invest in their home overall.
So that alone is.
Think of a very positive outlook for home improvement as you move forward.
Okay.
The follow up question is how do you think your market share on full day in the first quarter from an online perspective, recognizing that you had a very difficult comparison.
Do you think.
At pace with the overall market and is this.
And the right one of the for the online gross to think about moving forward.
And we will again, we look at this as a total and run this as a portfolio because it's so interconnected and if you look at the data.
Appears that we picked up of about 170 points and share overall.
Based on the March data that was put out by the government and.
And just just to kind of talk about ecommerce.
E Commerce is a capability it is not of business.
And so I think it's very important to always look at the top.
Level demand in the environment and what we've delivered so we don't break the business down like that.
And we we intend to be there for the customer however, they like to shop, there's been a lot of.
A lot of dynamism and that as we.
We worked through the last 12 months.
But we're satisfied that we've been there for them and it is.
As Craig said, it's because of the investments, we made and interconnected retail over the last few years.
And Michael as you think of last year and the first quarter.
And the interest and buy online pickup and store and we stood up curbside again, our customers chose to to shop that way and our cause.
Contactless or is the least contact as possible and the early days of the pandemic. So that's returning to some more natural run rates.
Thank you very much and good luck.
Thank you.
Our next question comes from the line of Chuck Grom with Gordon Haskett. Please proceed with your question.
Hey, good morning.
So you guys are surprised that your basket withheld and so strong.
And even at your traffic has improved so much.
I mean, we are.
Seeing customer engagement and all segments of our business and when you.
And we shared that through the progression of the last four quarters. Our pro business has been strengthening as customers get more comfortable having folks and their home our services business has been strengthening for three quarters consecutively in a row now those are all big ticket drivers.
And then as Ted called out innovation has been a driver of expansion and our ticket as well as inflation and so I don't know if you have the other come and I think it also speaks to projects again people are engaged and projects and they're engaged and projects across the whole store so with projects comes.
Basket and ticket and we're certainly enjoying that.
Got it and then just a quick follow up for me would be.
You spoke about the big increase in lumber prices, just curious what youre seeing.
And the demand side unit volume and Thats, starting to compress a little bit of discretion and Brad.
The lumber environment is certainly unique and the way we're thinking about it right now Chuck it's really.
Storm environment, it's very tough to look at traditional elasticities, certainly prices are up as I as I referenced and the call.
OSB has quadrupled and price and it's up even more since the end of our fios.
The fiscal quarter.
But at the same time demand has kept pace.
And.
When we bring the product into the store it sells and the mills are at capacity, we have plenty of wood fiber and the supply chain. The relative bottleneck is in the sawmill cutting capacity, we don't see a lot of capacity coming online so.
We're probably not going to see a lot of finished lumber product and distributions. So as soon as that product hits the stores.
Cells, certainly prices up and you would think there would be.
Supply and demand traditional elasticity equation, there, but it's hard to determine the impact given the storm nature of the demand.
Thanks, a lot.
Our next question comes from the line of Scot Ciccarelli with RBC. Please proceed with your question.
Good morning.
So we know that you're working on you and home.
Why change at least for a couple of.
Now obviously the overall industry is extremely strong but I'm curious are there any examples you can share and regarding how these new capabilities may be enabling you to either increased penetration rates and existing markets slower penetrate new markets, where maybe you can compete as well and the past.
Well I'd say, a couple of things and I'll turn it over to Mark.
So first of all of the ability to meet the kind of demand we've seen on direct fulfillment.
I think it has been a direct result of the investments that we've made and the business.
And the customer satisfaction and and efficiency that we're seeing through our new flatbed distribution centers.
And indicates to us that and we're making real progress with the customer there and mark out of ounce do you want to add to that.
Sure Craig.
Yeah, we had a great first quarter and our supply chain and development and we are on track based on that continue to increase store fulfillment square footage.
The 70% this year.
And the.
The results, we're getting in terms of the flatbed delivery centers, maybe I'll highlight the.
And that was really designed to provide store relief increase the customer satisfaction and service the customers expand our available assortment and delivery capabilities and we now have four flatbed Dcs open now.
And the stages of ramping.
Dallas is the furthest along.
Ahead of our plans in terms of the flow.
The sales comp, which are very strong and.
And not just the $1, but also in units and the number of deliveries.
Customer satisfaction has improved by 11 percentage points, we've improved our on time and complete.
And notably our pro penetration and very strong and in fact, the preponderance of sales out of that facility and in fact growth so really helping us to capture the pro there and Dallas.
And I guess, a follow up would just be.
And my I guess my understanding at least historically has been the the new HD supply and capability and supply chain capabilities should enable you to penetrate markets, where you really couldnt play before you just didn't have that capability could be competitive.
Are there any examples of where you are making progress on that front.
Yes, I mean, the focus of the capabilities that we're building all of it has to be able to expand our reach into the pool of customer we have been very strong over the years with.
All of our pro and the unplanned purchase with the larger pro and what we're building is the capabilities to actually extend into that planned purchase.
And we're seeing that beginning to play out. So we're pleased with what we're seeing and the early stages.
Got it thanks guys.
Yes.
Our next question comes from the line of Karen short with Barclays. Please proceed with your question.
MS short your line is live.
Oh, sorry, Hi can you hear me.
Alright, and just one.
And I'd ask a couple of questions on the market in general and I'm wondering if you could frame how do you think the DIY market is versus the pro market and I guess post pandemic versus pre pandemic and then I had another slightly different angle and a different question.
Yes.
We don't have data as it relates to what we think the growth and the market is.
That's the.
And that's a pretty tough number to come by at this point.
Okay.
And we play and of big market straight out of the blocks of <unk>.
600, plus billion dollar market and the MRO space that we plan, which is largely focused on multifamily as another 55 billion. So.
But I have no way of knowing how much of that has expanded as a result of the pandemic.
Okay, and then and Richard just wanted to ask the question.
And the actual that 14% framework that you had given and I realize that was just an attempt to give a framework, but when you look at your sales growth this quarter versus your EBIT growth EBIT grew more than double sales growth, whereas when I look at prior quarters, even if I add back COVID-19 costs you won't be.
Kind of how to like 10% spread so I'm wondering if that is the right relationship to think about going forward and especially because even in <unk> and you noted you had the higher bonus accrual.
Well.
And what I'd say is that the reason that we laid out the 14% was because we knew that we were coming to a year where.
COVID-19 expenses were rolling off and investment and expenses rolling off and so it was going to be and is the first share where we said look we are returning back to operating expense leverage that you can see and the P&L. We feel like we delivered that in Q1, we're very happy.
With the operating expense leverage and the flow through relative to the sales and like we said, we're going to keep operating with discipline and we're going to drive operating expense leverage.
Just as John.
Just as we intended margin will be.
A function of sales volume obviously.
But.
And we're pleased with the relationship and Q1.
Yes, the Caribbean naturally.
<unk>.
Sorry, say that one of the time.
The naturally leverage with volume.
And there is actual leverage built into the business with volume.
And I understand that I mean, it's all a function of sales, but it just is.
Definitely a much wider gap on the tail.
The implied full year number there.
The low depending on island.
And that relationship continues.
Well I think you.
One of the other reasons that we laid out.
The hypothetical was because it is harder to read through on a one or a two year comparison and operating expense because of the fact that we were still in the middle of and investment program and 2019 and exiting it and at the end of 2020, so again.
The best.
The best comment I can give is we were very happy with Q1 and how we drove.
Drove operating expense leverage and flow through.
Great. Thank you.
Our next question comes from the line of Christopher <unk> with Jpmorgan. Please proceed with your question.
Thanks, Good morning, everybody and so my first question is do you think stimulus helped the DIY side of the business more than the pro and not sure. If you looked at it this way, but on a two year basis did pro accelerate more than the DIY side of the business.
I would say Chris on the.
Stimulus situation.
It's all consumer demand.
Whether it is the pro buying for the consumer.
Because of the consumer is doing something out of the consumer buying for the pros. So we kind of look at it as as total demand.
Yeah.
And then I guess of anything on a two year I guess my thought on that is pro you got to get them and your house.
And Theres a lot of backlog so it would seem like it could be of near term bump on DIY versus pro and.
And he also had some pro comparisons last year, where the pro was non essential. So I was just curious of if you had teased out when it looked down and the two year basis.
Well the two year stack plainly as is the the consumer is outgrew the pro.
Modestly on a two year basis, but I don't know that that provides.
Okay information, that's more helpful than saying that the pro has come back to the job site demand seems to be and a potentially more easily fulfilled through the pro than it was a year ago, but like Craig said I think you have to look at topline demand.
And.
Ultimately this is all or almost all consumer demand is being fulfilled and different ways. So if anything we're happy and.
And with the fact that the pro.
Seems to be.
It seems to have easier access to the job site and is getting to the job site easier.
Got it makes sense and then.
May was the funny months last month, you had sort of stimulus spillover into the first half yet and pro restrictions and you talked about on a two year basis North of 30, but can you maybe tease out how the month played out relative to the 2027% total and are even talk about one one year comp trends.
Quarter to date.
Okay.
Im not sure I understand your question.
You talked about and May being north of 30 on a two year basis last year did a 27% and may but there was a lot of noise. So boiling it down can you talk about.
On a one year basis, what the business looks like so far and May no.
And we're two weeks and it's just too early.
But.
As we said demand remains strong.
Got it understood have a great rest of the spring.
Thank you.
Our next question comes from the line of Zach Day, Adam with Wells Fargo. Please proceed with your question.
Hey, Good morning, Richard could you talk about performance at the gross margin line versus your initial plan and to what extent with lumber and the incremental headwind and when you think about the other moving parts around promo underlying comp leverage maybe mixing and HD supply is there anything in Q1 that changes your thinking for the full year.
<unk> gross margin framework.
Well.
So versus last year and.
Again, just to recap we were.
We saw a decrease of approximately 10 basis points and gross margin.
35 of which were from the.
Increased penetration of lumber.
And our sales and so the net of that obviously shows margins up.
There is no doubt there is cost pressure and.
And the economy, and and our environment, but hats off to our merchants and our supply chain for managing through that and Ted maybe I'll turn it to you for all that color no. The.
<unk> from the supply chain team did a fantastic job over the years, we've built tools and processes the.
Give us.
Terrific visibility.
And great partnership with our finance teams and as Craig has always said, we run the business as the portfolio and we're a project business and we're always looking to provide the best value to our customers on the project basis, having said that we certainly saw transportation pressure share.
<unk> on a on a relative basis was slightly improved but we are still seeing shrink pressure and then we're seeing some commodity.
And lumber.
Non commodity cost pressures, but the team has worked through that.
Believe it or not there is still cost out and the portfolio. So we still work on cost out and optimization of supply chain flows.
And.
Given the strong demand we were our promotional cadence was slightly higher than last year. There were some early spring participation that we could completely canceled last year and so we were up and some activity on promotions the overall level of promotions and any.
The required clearance activity was down meaningfully so that is what gave the balance of the offset of.
The cost and mix pressures.
Got it that's helpful color Ted another one for you and and also Craig as you think about all of the drivers of home improvement spending today could you comment on how much of the industry you would quantify as repair and maintenance spending how much is being driven by housing turnover and then what would you call discretionary.
Yes, honestly, we have not taken the time to try to break that out and this demand environment. So I really couldnt give you a breakdown on that we know that.
Repair and remodel is.
And the essence of what our business is all about.
And then of course, we're there to help customers fulfill their dreams and terms of.
Updating their homes and clearly over the last year as customers, who have spent more time and their homes. They have told us that our home is never more important than it is today.
And many of those customers like myself cuts of.
See a whole lot of things that needed to be done on the home.
And they've been they've been going after that.
Win win.
<unk> got difficult and 2007, and 2008 repair became more important than remodel.
But we're certainly not and that kind of environment. Today. So I just don't have any way of knowing that expansion by those breakdowns at this point.
Got it I appreciate the time.
Our next question comes from the line of Lee from <unk> with Bank of America. Please proceed with your question.
Yes.
Great. Thank you can you just talk about new customer growth and whether you're seeing greater degree of growth and new pros versus non diyer.
Yeah.
Yes, we are very happy with our overall customer portfolio of both DIY.
Pro and aging and leaner.
Capabilities, while I won't give any specific numbers and breakouts I can tell you that our.
And her files of both pro and consumer have grown the.
Help the smile.
There is strong with a repurchase rate of developed customers.
The growing faster and new.
Customers, so the new customers and.
<unk> been able to keep the package and our.
At terrific rates and our current customers.
The Bill Lennie and then.
The activity, we're seeing and engagement with our pro customers with our <unk> website delivery capabilities, our new loyalty program. All of those are also adding to the stickiness of the pro customer.
Great and just on the on this.
Services side, I mean, how big is that now as the percent of sales and it was probably relatively small but I mean are the areas, where you think you can expand into services without competing with your pro customers.
Yes that business is and the four 5% range of.
Okay.
We are very pleased with.
Ultimately seeing and net.
And we think we can do that without the readings.
Great. Thank you.
Our next question comes from the line of Steven Forbes with Guggenheim. Please proceed with your question.
Yeah.
Hi, good morning, maybe.
Maybe just start with the quick follow up on the broader supply chain initiatives, Pat I think you mentioned <unk>.
70% increase and distribution footage this year and so maybe if you can update us on how many facilities that correlates to and and any color on the cadence or the plant and cadence of openings.
Mark do you want to take that.
Sure.
We.
One of our way and the 35 FTC flatbed delivery centers.
We have four open today, we're opening several more.
Through the the end of the year.
We've got a very solid pipeline there are <unk>.
And the 2020 was 39, we opened eight and Q1.
And.
Opening more of their on our way to of roughly a 100 and then Mdc's. We're we've got.
Two of those open we opened Houston vary during Q1, we have a healthy pipeline there opening several more through through the year as well.
And on our way to <unk>.
Yeah sure so empty seats.
Thank you and then maybe just a quick follow up.
Richard I think I don't believe you called out the the incremental strategic investment spend impact when you walk through the expense line items.
So maybe.
And if you can just remind us on where we are right in terms of the trajectory of that strategic investment spend the captive within the model.
Wow.
At the end of Q4 last year, we announced that our strategic investment program.
The stretch from 2018 to 2020 was materially complete and.
So.
Going forward our stance is that we will look to invest approximately 2% of sales every year and the form of capex there'll be associated expense with that but I would just consider that part of our expense structure going forward.
Thank you best of luck.
Thanks.
Our next question comes from the line of Dennis Mcgill with Zelman. Please proceed with your question.
Hi, Thank you.
Ted on the lumber side, when we think about I guess, that's the biggest driver of the commodity inflation is it fair to assume that that impact accelerated through the quarter and was largest in April and then.
As we think about the impact so far and may would be temporarily above what you experienced and the first quarter.
Yes.
Literally week week on week it's.
It's gone up and as we sit.
Last week.
Framing and panel are effectively quadrupled.
And the.
The market index pricing and the again.
And again each of those went up last week.
Okay, perfect and then anything else to learn from the category performance as you look at passing the April comp of last year and looking at that and a two year basis any category is actually accelerating and.
The two year basis versus the decelerating and and I guess just on the quarter itself. The one category and it wasn't the 20% just curious on what that was.
So the category that was not 20% was paint we were very pleased with the performance and paint the last year I think everyone stayed home and the painted so he had incredibly tough compares so we didn't quite hit the 20% Mark.
Overall and on what's accelerating.
I would say continued outdoor living has been very strong.
So if all of you are interested and things like grills and patio sets. Those those are going to be and shorter supply as we get into the spring because of the demand is incredibly strong and and things like patio. We do a fixed by is most of that is important and we had to make the decision on the <unk>.
The level.
Some time ago, so that's been particularly strong.
Anything else on the other side besides the paint debt.
And call out as being of decelerating trend.
No.
Alright I appreciate it thank you guys.
Our next question comes from the line of Greg Melick with Evercore. Please proceed with your question.
Hi, Thanks Richard.
And Richard.
We think about that operating leverage and compare it to 2019.
You were up 180 basis points and does that is it because you think about it going forward is it fair to say that now we're where we want to be going forward in other words and the second quarter. You normally are a few billion more sales and.
And usually your operating margins a little higher than the first quarter. If you look over the last five years is there any reason why we shouldn't.
Assume that sort of flow through now.
Well with respect of sales, we're not going to extrapolate what we've seen into the future. Obviously, there's there's a degree of uncertainty on how the consumer is going to respond this year.
I'll just say it again, Greg when you compare the first quarter of this year to the first quarter of last year and you adjust for non recurring expenses, we feel very pleased with the operating expense leverage that we drove and the flow through that we drove at this level of volume.
Got it and then and if I could follow up.
Inflation and mix if the.
If the commodity part of it that just wasn't just the lumber right. The seven 375 bps was lumber and maybe copper and other commodities are what the specifically lumber and then as part of that if you net.
And that was just lumber.
Lumber and lumber lumber and copper primarily yes got it and so then if we look at that average basket up 10% is it fair to say that.
Overall inflation of our average AUR was.
500, 600 bps of debt.
Basket increase.
Now north.
No. It was also driven by project nature of the business the innovation that the merchants and brought to the market.
And mix.
Got it.
Signage of basket and it.
Yes.
Yes.
And I will draw and lumber.
And so inflation is the widespread across the store across the store it's more of mix.
Okay.
If you think about it from a ticket standpoint.
Chicken is being driven by a multitude of things, yes, there is inflation and we've been able to pass through.
But again, it's also driven by the fact that our pro business strength drives the higher average ticket.
Sure.
Services business drives the higher average ticket and so theres a number of factors that drove the ticket strength overall.
And the business innovation within categories. So as you continue to expand and grow and cordless capability and outdoor power equipment. For example, the average price and a lot more of that as a cordless versus gas is significantly higher all of that contributes to driving.
And the.
The growth and ticket.
Got it thanks, a lot and good luck guys great job.
Thanks, Craig Christine we have time for one more question.
Thank you. Our final question comes from the line of Scott <unk> with RFID capital. Please proceed with your question.
Hey, guys. Thanks, Jay and thanks for taking my question.
I was just wondering if you could talk about the labor inflation and just the overall inflation as you guys think about the back half of the year.
So the number one question.
Yes, I mean as you know.
And we converted.
Part of our COVID-19 expense into permanent.
The labor cost.
And the November timeframe of 2020, and so obviously all of that is in the performance that we just delivered.
As it relates to labor and total were this is this is spring we're hiring up we've been able to hire more folks of this year than last year, even though we were ramping last year to cover the demand.
And so that's something that we work on a week to week basis to be flexible and agile right now is incredibly important and the two areas that we're focused on not knowing exactly how all of this will play out as inventory flow and labor. Those are the two things that we're focused on both the rare.
Relatively short cycle planning.
And so that's that's really what we're trying to make sure we can cover the demand thats out there.
And are you guys, having any trouble getting labor and having to raise rates of the labor rates a lot of certain markets or is that really not net.
And issue for you guys at this stage.
And I mean, theres always variances by market and some markets are more challenging than others and in any given year, but as I said, we've actually hired more folks this year than we did last year.
That's great guys Thats all my questions I appreciate the answer.
Okay.
Thank you Mr. Anssi I would now like to turn the floor back over to you for closing comments.
Thank you all for joining us today, and we look forward to speaking with you on our second quarter earnings call in August.
This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation and have a wonderful day.