Q2 2021 Home Depot Inc Earnings Call
And good morning, everyone. We appreciate you joining us on our call. This morning.
We were pleased with our performance in the second quarter as we achieved over $40 billion in quarterly sales for the first time in our history.
Sales for the second quarter were $41.1 billion up eight 1% from last year comp.
Comp sales were up four 5% from last year with U S comps of a positive three 4%.
Diluted earnings per share were $4.53 in the second quarter up from $4 <unk> in the second quarter of last year.
The strong underlying demand across the business continues during the second quarter, we did observe some changing consumer patterns in the U S. As the U S economy opened up.
This has manifested itself in several ways.
We have seen a shift in pattern of sales within the week as our weekday sales performance has actually strengthened relative to the weekend.
We attributed this to consumers returning to travel and other recreational activities.
And while the consumers returning to pre pandemic activities, we continue to see them engaged in home improvement projects.
We also see cut.
Customers more comfortable taking on larger projects as evidenced by the continued strength with our pro customer, which outpaced the DIY customer for the second quarter in a row.
We remained agile and flexible and we're pleased with our ability to respond to strong home improvement demand and comp the comp in the second quarter.
We had positive comps every week. Despite unprecedented compares last year and grew sales by $3.1 billion in the second quarter and more than $12 billion year to date.
Over the last six quarters, we have grown the business by more than $34 billion of level unmatched in our market.
From a geographic perspective, 15 of our 19 U S regions posted positive comps versus last year on a two year stack basis, all 19 regions saw strong double digit comp growth.
However, unlike the past four quarters, the second quarter, we did experience some variability in performance from a geographic perspective.
The variability in our regional performance is driven by our Northern Division.
We saw a more pronounced shift in sales with stronger sales in outdoor seasonal categories. During the first quarter.
Mexico posted double digit positive comps and despite significant customer restrictions during the quarter due to COVID-19, Canada posted comps that were essentially flat in local currency.
We continue to effectively manage the strong demand for home improvement products, despite significant industry disruptions in supply chains.
We are leveraging the scale of our supply chain and partnership with our vendors to prioritize key skus in high demand categories.
And while our in stocks are not where we want them to be they have improved from where they were a year ago and our network continues to flow goods remarkably well. Thanks to the investments we have made in our supply chain over a number of years.
The team continues to make progress on building out our one home depot supply chain vision, we remain largely on track with our plans with a critical mass of building scheduled to come online this year and next week.
We believe that the network. We are building is unique to the market. It will not only enhance the customer experience from a delivery standpoint, but also expand the breadth and depth of our current opportunity set drive efficiency.
And leverage our scale to further extend our low cost position in home improvement.
In the near term, we remain focused on being flexible and agile as we navigate this dynamic environment.
But we also continue to leverage the momentum of our strategic investments to further enhance interconnected shopping experience and supportive of our goals to drive growth faster than the market in any environment.
Further strengthen our position as low cost provider and home improvement with a relentless focus on productivity and efficiency and deliver exceptional shareholder value.
Throughout all of the events of the past 18 months, our cultures remainder North star.
In fact, I recently spent time with a number of new associates that we have hired in the past year and was struck by how engaged and connected these associates were to the home depot culture.
They were on boarded during a time when our stores and teams are busier than ever but our associates took the time to get to know these new folks and share what it means to be part of the Orange Blooded family.
Our ability to invest for the future while also managing the most fluid environment in our company history as a direct result of our associates and their extraordinary efforts.
I want to close by thanking them for the many ways. They continue to live our values by serving our customers communities and each other.
And with 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 supplier partners for their commitment to serving our customers and communities.
As you heard from Craig during the second quarter, we continued to see strong performance in our business, particularly as we lap the significant growth in the same period of last year.
We were able to meet strong customer demand despite ongoing pressures throughout the supply chain.
Raw material shortages production constraints and pressures across modes of transportation are creating a difficult supply chain environment.
That being said our performance would not be possible without the cross functional efforts by our supply chain merchandising store met teams as we continue to flow record volumes of goods week after week.
Over the course of the pandemic you've heard us talk about a number of initiatives. We've implemented many in concert with our suppliers to improve our in stock positions and get product to our customers and our teams continue to use our culture and values to guide our decisions one of our values is entrepreneurial spirit, which is alive and well.
Home depot, our supply chain teams recently leveraged our scale and flexibility to arrange for several container vessels for exclusive use yet another way. Our team has found a creative solution to better serve our customers in this dynamic environment.
While our in stock levels are still not where we want them to be we are maintaining the improvements we made over the last few quarters and building depth in key categories as evidenced by inventory growing faster than sales compared to the same period last year.
Turning to our comp performance during the second quarter 10 of our 14 merchandising departments posted positive comps led by kitchen, and Bath and lumber during the second quarter of this year, we saw single digit negative comps and paint hardware and indoor and outdoor garden it.
It is important to note that these are some of our strongest performing departments. During the second quarter of last year on a two year stacked basis, each of our departments posted healthy double digit comps.
Our comp average ticket increased 11, 3% income.
Transactions decreased 6%.
And our comp average ticket was driven in part by inflation in certain categories, notably lumber.
On a two year stacked basis comp average ticket and comp transactions were healthy and positive.
This was another historic quarter for lumber price volatility during the first few weeks of the second quarter prices for both framing and panel lumber reached all time highs for quickly falling from their peaks.
As an example during the second quarter framing lumber peaked at approximately $500 per thousand board feet before falling over $1000 to approximately $500, while pricing for both framing and panel has come down from the peaks the average price during the second quarter was still significantly higher.
The same period last year.
Inflation from core commodity categories positively impacted our average ticket growth by approximately 420 basis points during the second quarter.
Big ticket comp transactions or those over $1000 were up approximately 24% compared to the second quarter of last year, we saw big ticket strength across many pro heavy categories like lumber vinyl plank flooring, gypsum and pipe and fittings.
During the second quarter pro sales growth outpaced DIY growth for the second quarter in a row on a two year stock basis growth with our pro and DIY customers was consistent and strong.
We're encouraged by the momentum we're seeing with our pros growth with our larger pros continues to outpace that of our smaller pros and they tell us that their backlogs are long and growing and.
In fact, the National Association of Homebuilders remodeling index hit all time highs during the second quarter and during the quarter. We saw many of our customers turned to pros to help them with larger renovation projects.
This can be seen in the strength of several of our kitchen and bath categories like in stock kitchens, tubs, and showers and vanities, all of which posted one year and two year comps above the company average.
Sales leveraging our digital platforms were essentially flat during the second quarter as we lap digital sales growth of approximately 100% in the second quarter of last year.
On a two year stacked basis sales from our digital platforms increased approximately 100%.
We're thrilled with the customer engagement across our interconnected platforms. We know the vast majority of our customers engage with us in an interconnected manner, whether it be through project inspiration and research transacting fulfillment or support our customers' blend physical and digital worlds.
While customers have gotten more comfortable buying online.
Never been more confident in the importance of our physical stores is that they remain the center of our customer experience due to the project nature of our business.
For those customers that chose to transact with us online during the second quarter more than 55% of our online orders were fulfilled through our stores a testament to the power of our interconnected retail strategy.
As we look forward to the back half of the year. We know our pros are busy and we are working hard to secure the best products to help our pros get their jobs done.
Last quarter, we highlighted several exclusive products for our pro customers.
This quarter, we're excited to announce a new big box home improvement exclusive relationship with LP building solutions.
Provider of OSB panel boards.
In addition, we are pleased with the momentum we're seeing with our pro Xtra loyalty program <unk>.
Several quarters ago, we relaunched pro Xtra, and we've been thrilled with the membership take up and engagement we're seeing.
Pro Xtra offers more frequent touch points with our pros and convenient services like purchase tracking and volume pricing along with other benefits. In addition, all pro Xtra members are now able to access our b to B pro online experience offering pros more personalization on home depot Dot com.
Tom.
During the third quarter. We are also thrilled to announce the rollout of what we believe is the most innovative paint offering in years drugs looser relationship with bear.
Baird dynasty as a brand new four in one interior paint that offers DIY or pro painters and design professionals are unique product exclusively from the home depot. It is our most stain repellent scuff resistance.
Last drawing one coat coverage pain.
All in one can.
With that I'd like to turn the call over to Richard.
Thank you Chad and good morning, everyone.
In the second quarter total sales were $41.1 billion, an increase of $3.1 billion or eight 1% from last year.
Foreign exchange rates positively impacted total sales growth by approximately $385 million.
During the second quarter, our total company comps were positive four 5% with positive comps in all three months.
During the quarter, we saw total company comps of four 7% in May three.
Three 9% in June and four 9% in July.
Comps in the U S were positive three 4% for the quarter with.
With comps of three 1% in May.
Two 7% in June and four 3% in July.
In the second quarter, our gross margin was 33, 2%.
A decrease of approximately 80 basis points from the same period last year.
While there are many factors that impact gross margin.
The year over year change during the second quarter was primarily driven by lumber, which accounted for approximately 60 basis points of pressure.
In addition, several other factors negatively impacted our gross margin, including rising transportation costs.
One supply chain investments and lapping a benefit from canceled events in the second quarter of last year.
During the second quarter operating expense as a percent of sales decreased approximately 100 basis points to 17, 1%.
Our operating leverage during the second quarter reflects significant COVID-19 related expenses that we incurred in the second quarter of 2020 to support our associates.
These expenses were partially offset by Underspent in other expense items in the second quarter of last year, most notably payroll as we staffed up to meet the strong demand.
Our operating expenses during the second quarter of this year also include wage investments that we made at the end of 2020.
Our operating margin for the second quarter was 16, 1% an increase of approximately 20 basis points from the second quarter of 2020.
Interest and other expense for the second quarter decreased by $16 million to $321 million.
In the second quarter, our effective tax rate was 23, 9% down from 24, 4% in the second quarter of fiscal 2020.
Our diluted earnings per share for the second quarter were.
We're $4.53.
An increase of 12, 7% compared to the second quarter of 2020.
At the end of the quarter inventories were $18.9 billion up $5.4 billion from last year and inventory turns were five seven times compared with $6. One times this time last year.
Turning to capital allocation.
After investing in our business.
Our intent to return excess cash to shareholders in the form of dividends and share repurchases.
During the second quarter, we invested approximately $520 million back into our business in the form of capital expenditures.
And during the quarter, we paid approximately $1 seven $5 billion in dividends to our shareholders and we returned approximately $3 billion to shareholders in the form of share repurchases.
Computed on the average of beginning and ending long term debt and equity for the trailing 12 months return on invested capital was approximately 44, 7%.
From 41, 1% in the second quarter of fiscal 2020.
As you heard from Craig we are very pleased with the strong performance. We saw during the second quarter, particularly as we lap the unprecedented growth. We saw this time last year.
And while these challenging compares continue through the back half of the year. We are encouraged by what we're seeing.
During the first two weeks of August we have seen comps in the U S consistent with the second quarter.
Customer engagement and demand for home improvement is healthy.
Housing remains strong and we see a supportive environment for home improvement spending as we look out over the next several years.
That said there is still a significant amount of uncertainty in the broader environment as it relates to the evolution of the COVID-19, pandemic and the new and spreading variance.
As we've previously shared we did not believe we can accurately predict how the external environment will evolve and how it will ultimately impact consumer spending.
We will continue to execute with flexibility and focus on what has driven our successful performance.
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 in home improvement.
We intend to extend our position as the low cost provider and.
And we intend to be the most efficient investor of capital in home improvement.
If we do these things we believe we will continue to grow faster than our market and we will deliver exceptional value to our shareholders.
Thank you for your participation in today's call and Christine We will now open the call 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, a confirmation tone will indicate your line is in the question queue you.
You May press Star two if you would like to remove your question from the queue.
Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
Thank you. Our first question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question.
Thanks, everyone. Good morning.
Craig I think Richard I wanted to ask.
Maybe I'll ask this every quarter for now I wanted to ask about home improvement demand whether it has to digest. The next couple of years or we can keep compounding.
And I think Richard just mentioned in his comments.
Acting several years of healthy demand Ed. So curious if your thoughts have evolved on.
The next couple of years given the.
The massive growth we've had over the past two.
Simeon when we look at the overall backdrop.
For support and home improvement from a housing perspective from the remodeling index, we feel pretty good about the long term outlook for home improvement and hard to predict the short term, but the longer term outlook look solid Richard I don't know if you want to.
You just you look at the.
We believe that home price appreciation is a fundamental support of home improvement activity and demand as your home becomes more valuable you were more likely to spend more on it.
We are at a point now where the housing stock of the United States.
Is over 20% more valuable than it was two years ago.
And so as we as we look forward not only have we seen that home price appreciation.
The homeowner balance sheet is incredibly healthy.
The state of mortgage finance is incredibly healthy and so that's why.
Some of the reasons why we're optimistic.
That's helpful. And then one near term question the second half outlook for gross margin does the dynamic that occurred in the second quarter does it ease, allowing the gross margin to improve in the back end, we're not improve but at least the rate of change improved from what happened in the second quarter.
I'd say, we're focused on executing.
Week to week here, there is certainly cost pressures in the environment.
And I think we're all dealing with that.
But we've dealt with that throughout our history.
And we are comfortable with our ability to manage through the cost environment effectively.
Simeon I think there are some very unique scenarios, obviously in the quarter lumber being the one as Richard.
Called out.
Unprecedented level of drop an unprecedented speed with which it drops normally the only impact you have is from mix.
But with the rapid decline in the extent of the decline, yes, we always have a philosophy that we want to lead the market down and lag going up to remain as competitive as possible for our customers and that actually created an impact which in this quarter was unique that.
We normally don't see.
And I'd make another comment which is.
The shape of the business given the volume that is coming through our system.
<unk> is not predictable, but we know we're confident that we are taking share and we're there too.
To meet the demand that we see from our customer.
That that mix may have an impact, but when we look at the operating profit dollar growth, we're generating as a company we feel great about it so we're looking more at driving.
Driving market share capture and driving that operating profit dollar growth.
Thank you.
Our next question comes from the line of Michael Lasser with UBS. Please proceed with your question.
Good morning, Thanks, a lot for taking my question how.
The trends that you outlined with divergent performance on the weekdays versus the weekend inform how we think about the DIY business moving forward.
Do you attribute that to more of a temporary condition, where consumers had pent up demand to go on vacation. This summer and a return to projects in the fall or Alternatively as families return to traditional activities like youth sports watching college, and pro sports and gradually returning to the office it could.
Put accelerating pressure on the DIY business and do you think theres enough strength and pent up demand for the pro segment that it can offset that.
Hey, Michael It's a great question and that's something we're watching carefully as the consumer gets back to more normal environments. What we did see as the consumers and our research would suggest this as well consumers are taking on more projects they are larger projects.
Have a tendency to hire a pro to do them and as a result, we've seen our pro business strengthen.
For several quarters in a row with the last two quarters, where the pro outperformed the DIY customers for the first time since the pandemic started and so we're very.
Optimistic about where the probe business goes in the strength of that probe business.
And we're focused on making sure that we can take care of those pros along with our with our DIY customers, but feel like there is solid opportunity to continue to grow pros tell us their backlogs are bigger than ever and consumers continue to tell us the homeless more important than ever and that they have a laundry list of projects.
That's all helpful, Craig and Youre going to have this funky dynamic where maybe the pro business is good maybe the DIY business Decelerates from here and how is that going to impact your labor model, which is activity based so of comps do turn negative in the back half how quickly can you flex.
And how well is it fine tuned for this dynamic where you might have a decline in DIY transactions that you may actually not need as much labor.
You can see some SG&A dollars on that.
Yes.
You hit it on the head in terms of our labor model is an activity based model.
Which has a component in there of transaction so we.
We can adjust relatively quickly it's a short cycle model.
And we will make the appropriate adjustments as we go.
We plan out.
Few weeks in advance.
Okay. 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.
I was wondering if you guys could elaborate a little bit more on some of the benefits you expect to see once the one HD supply chain gets built out sometime in 2022.
Sure.
The whole purpose of the supply chain is really our ability to deliver all of our products parcel in big and bulky to 90% of the U S population same and next day in three plus years into this build out we have multiple facilities up of each type that we're.
Building there.
They are all performing well.
Fulfilling that expectation of being able to deliver and satisfy the customers' speed and reliability is what's required, particularly with our pro customers.
In addition, it's allowing us to expand our assortments from what we carry in our stores. So not only can we get the product.
In a quicker more reliable fashion to our customers, we can get a broader assortment to our customers and lastly, we're up to $660 a square foot or sales this past quarter.
In our stores and it's just a tremendous amount of activity in cube in that building so to be able to get deliveries, particularly the big and bulky deliveries out of the store that helps our customer flow.
And our associate activities in the store and we're just thrilled with that in particular is our FTC's have opened up we're relieving tremendous amount of delivery activity in Q flow out of our stores and delivering directly out of the new facilities exactly the way the supply chain team has planned it.
That's great and then just on lumber.
Curious what youre seeing from from <unk>.
And that volume perspective as prices dropped throughout the quarter.
Well clearly when we when we had $500 plus 1000 board feet.
People people backed out of the market for sure in weighted.
It wasn't that we got a tremendous amount of new supply in the marketplace. I think once you hit that tipping point, where people backed off on the margin and prices started to fall and as Craig said it was falling so quickly.
100, $150.200, a 1000 board feet per week people just step back even further.
Now settled at about $430 for framing lumber and for sure at those high levels. We saw an impact to units our units and turned negative and as prices have come down units are still negative, but on a sequential basis, improving and responding to that lower price. So.
We're very pleased supply and demand dynamics work worked out as expected.
Thank you.
Our next question comes from the line of Karen short with Barclays. Please proceed with your question.
Hi, Thanks, very much just.
Just wondering with respect to inventory obviously.
We are up against.
Harrisons from last year, but looking at overall areas of inventory is there any area, where you think you're still lacking product and then how to think about inventory growth in the second half.
Sure.
Yeah first first of all I care I would say.
Super pleased that we've been able to continue to build up but yet at the same time have incredible inventory productivity at five seven turns.
So we're very very pleased with that.
There is still we are in a situation is still while we're not exactly where we want to be from an in stock perspective.
Our suppliers are working hard, but our merchants have worked with our suppliers to kind of narrow the focus on key skus.
So there is opportunities still.
To continue to bring more product in across the breadth of the assortment, but right now we're trying to stay focused on the things that really really matter.
And I'd say, it's been a.
Category by category.
Story and.
And as Craig said, we're trying to build depth in our highest velocity skus, we're trying to build depth and job lot quantities for our pro customers and that tends to be heavy on the building material side of the business of lumber building materials, and electrical and plumbing fixtures and we've recut.
<unk>.
Nicely in all of those departments, but again it can be category by category. There is a COVID-19 outbreak in a factory. There is a shipping constraint. There is a domestic transportation capacity constrained. So it's been a story of two steps forward one step back, but we are making progress.
And that's why we're happy to lean into inventory.
Plus with the financial strength and liquidity are goods tend to be non perishable not a lot of obsolescence, particularly in our core product. So a lot of this is who has the product is going to sell the product and I think our supply chain and merchants responding as well as they have is one of the reasons we've taken.
So much market share in this environment.
Okay. That's helpful and I just was wondering on the pro Xtra loyalty.
Wondering if you'd be willing to give a little update on the number of members in the program and then any color you can provide on average spend of members versus non member pro or just any metrics that you can provide.
Yeah, I won't get into details but.
Our rough dynamic about 45% of our customer base being the pro mix up 45% of our sales. So this is a number in the mid millions of our core pros.
Very strong number of those percentage of those are in the pro Xtra program and now as I mentioned in my prepared remarks.
We are building a b to B website, and all of our pro Xtra members now has been transferred over to that <unk> experience. So with a combination of the benefits that youre getting with pro Xtra.
Stood up a separate pro Xtra app.
Pros are using.
The ability to engage on the <unk> website, which has all sorts of functionality built out specifically for the pro so think of.
Bills of material for jobs tracking jobs.
Quotes building quotes reorder capability tracking all receipts preferred pricing in certain instances.
All of that is coming together as well as personalization and building relevance on that pro VW website. So think of something like search results. If you were I would put in pliers.
We have thousands suppliers that could be returned.
And that search result, we're getting to the point now that we know an electrician.
Is performing that search so we're going to provide relevance and we're going to provide our electrical pliers as the first results in that search queries. So this is just another great add to our pro ecosystem and just been tremendous engagement with the pro loyalty App the pro Xtra program.
<unk> and now <unk> website.
Great. Thanks, very much for all the color.
Our next question comes from the line of Brian Nagel with Oppenheimer. Please proceed with your question.
Good morning, Thank you for taking my question.
So.
Couple of questions with regard to sales.
Pretty quick ones, but first off just with respect to lumber I know you've talked about it in your prepared comments or in response to the questions, but could you say to.
To what extent lumber.
As a benefit.
The comps this quarter.
About $1.3 billion.
Okay, and then does that mean that.
It was weighed more towards the first.
You've laid it out we've obviously knows weighted much more towards the first half of the quarter.
Early in the quarter I guess, you better setup.
Yes, Brian for sure it was.
Unbelievable fast fall, but yes. It was that was heavily geared towards the first part of the quarter.
Okay and then the second question I have and I know this is often nuanced because you talk about the strength in the pro business.
Your conversations your connections with your pro customers.
Do you think that the jobs are being taken on now where those jobs that were started during the pandemic and are only now being able to be fulfilled because the pros pros are available to work or are these projects are actually starting right now.
I. Thank you.
We have a combination would be my best guess.
I don't know that for sure.
Right.
We know for example, when we talk to pros.
Backlog for some time and so I think.
Clearly theres, probably some that have been in the works where they've been waiting to customers have been waiting for Protos start a job and then I think theres, probably scenarios, where it's a quicker cycle.
But we don't we don't really have a way of knowing that.
The National Association of Homebuilders Index has a lot of interesting survey data within it one of the survey components is.
Consumer optimism and intent around projects and we have actually seen intent tick up for small projects medium sized projects and large projects really serve sequentially through the year. So I think if you kind of take the.
<unk> off of the backlog you say, what's the intent it does seem like that homeowners are leaning into projects and whether its a pro or a consumer customer at all eventually is the same customer demand. So it looks like the trend is strengthening in project.
And.
And I think if you look at our services business as a proxy.
Certainly seeing that as well as our service.
Business think of these are large projects carpet installation cabinet installation of re phase fast HVAC those all are strong and accelerating.
I appreciate all the color. Thank you.
Our next question comes from the line of Zach <unk> with Wells Fargo. Please proceed with your question.
Hey, good morning, So youre lapping a period of very low promotional activity as you know and given the three major holiday events in Q2 with Memorial day father's day July four could you talk about to what extent. These events were a material topline driver in the quarter and then with respect to gross margin to what extent did this half.
And impacted in Q2, and how should we think about the <unk>.
Promotional impact as that makes it into the gross margin line in the second half.
I would say our promotions were up from last year, but only because we canceled. So many last year. We were we were on the margin less promotional say then.
Going back to 19, so while we're very happy with our events and our sell through we had record sell through in virtually all of our programs the.
The events were not a huge driver of our comp.
It wasn't.
The things Richard called out on our margin impact it wasn't particularly.
Meaningful wasn't it wasn't meaningful.
Got it that's that's helpful. And then Richard could you talk about how you are pro versus DIY trends performed through the quarter and if there was any variability in trend from one versus the other and then for Q3 does the commentary that that trends are in line. During the first two weeks of August does that also hold for.
Both pro versus DIY.
Well, so we are not going to break out intra quarter.
It was the second quarter, where we saw our pro customer grow faster than our DIY customer.
Say in the first two weeks of the quarter not much has changed with respect to the direction of our business.
Got it appreciate the time.
Right.
Our next question comes from the line of Liz Suzuki with Bank of America. Please proceed with your question.
Great. Thank you could you just given update on the MRO market and the trends Youre seeing there I mean, you mentioned that your bank pros are outpacing small pros with MRO growth EBIT above that of those bank pros given relatively easier comparisons against last year.
We're very pleased actually with our MRO business and the acquisition of HD supply.
Yes.
Business, there is very very solid.
We're excited about candidly with that business has the opportunity to much better serve 50 million households in the multifamily space.
Not only can we serve them with MRO products, but obviously as we have.
Have relationships and build that through our MRO business the opportunity to then participate in capital refreshes.
For those property owners on those 50 million households that are in the multifamily is a huge opportunity for home depot going forward. So we're super pleased with with the business and the progress we're making there.
Great and just SEC answers that question a little bit I mean, maybe early to be thank you Robert but how are you approaching the holiday season. This year from a procurement standpoint, and a promotional standpoint, we expect it to look more like last year, where marketing started early and extended longer but the promotions were a bit shallower than in normal years do you think.
It will go back to kind of a shorter and deeper promotional cadence.
Pre pandemic.
Well as you can imagine.
With the international supply chain involved in those types of events.
The merchants and supply chain teams made the bulk of those buy decision some time ago. So.
It's a fixed by.
We're not.
Expect in huge growth in those programs.
But to your point, it's deeper buys stronger values fewer items.
And we think we have great programs in terms of marketing early.
I think we're going to follow all our normal trends, we we had a sneak peek of opening up Halloween online and just sold out.
Pre release how.
<unk> product.
Almost immediately so that's a very strong indication that people are still going to engage in decorating and we look forward to setting our decorative holiday later in October.
Great. Thank you.
Our next question comes from the line of Christopher <unk> with Jpmorgan. Please proceed with your question.
Thanks, Good morning, everybody, it's been a long time since the weather was a potential question, but during the second quarter do you think it was a net headwind the major DIY holidays had record rain in some of the northern geographies and so was it beyond just the bathtub effect of <unk> versus <unk>.
I wouldn't say it was beyond it but we certainly saw it. So we think that may have accounted for.
Low single digit comp impact Cogs, one to 200 basis points of comp.
All forward from Q1.
Sorry from Q2 into Q1, particularly in the Northern Division.
So as Craig called out while we did see a difference in divisional performance that really was the primary driver in our view.
Got it and then on the on the lumber side is as prices stand now with lumber be a modest headwind comp for the balance of the year.
And is that reflected in the quarter to date commentary.
So yes lumber just the market pricing of lumber Chris right now framing is approaching 40% under LOI and panel is 10% under LOI. So with neutral units there would be a negative comp impact.
As I said unit unit progression is going in the right direction with these lower prices and that all speaks to the project nature, but from a price perspective, not expecting any tailwind in lumber.
Got it and then the last question Richard as you think about.
How transportation costs I assume some of that gets hung up in inventory.
So do you think the <unk>.
<unk> cost pressure actually gets worse as you look in the back half so as much as the rate pressure from lumber doesn't repeat itself.
Could have higher transport transportation cost pressures on gross margin.
Yeah.
The back half is a long period of time I'm not going to speculate on what transportation costs might look like I will just tell you that I would I would bet on our team every single day to be able to manage through.
That dynamic our supply chain team is exceptional and creative and I think that they have reinforced our position as the low cost provider in the in the market. So regardless of where the market goes I think we'll be in an advantaged position.
I'm sorry, one last quick one in July how would you characterize sort of the competitive promotional environment. There are some questions out there that maybe some of your competitors got more promotional although it was for you just more of a comparison to a low level last year.
I don't see anything really different didn't notice didn't notice that much Chris.
Got it thanks, so much best of luck.
Thank you.
Our 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 just a key.
Couple of housekeeping type questions I wondered if you could address it all.
The trend of trading up by the customer if that was something you continue to see during the quarter and any commentary you can give specifically around appliances and what you saw in Q2.
I would say, yes, we continue to see the trading up.
It's not as clear.
As I used to report on it just because of the inventory situation and we're seeing lots of substitution of goods depending on.
In stock on the shelf that particular day, but if you look at.
Power tools for example, outdoor power equipment, the appliance category Grill category.
Riding Lawnmower and zero turn categories, just as a few examples Kate.
People are trading up to innovation and all of those categories. So.
Just more powerful longer run time on batteries, that's moving over to outdoor power equipment.
The design is static and the features.
Modern appliances people are happily trading up.
Quite strong price points in appliances led lighting, it's going through not just light bulbs with integrated into ceiling fans and fixtures that trade up as innovation and newness driven.
We're seeing that as strong as ever.
Does that complete your question.
Yes, sorry, thank you.
Our next question comes from the line of Greg Melick with Evercore. Please proceed with your question.
Thanks, Tom had a follow up on comps and then SG&A I guess I'd start with SG&A. So you had 100 bps of leverage in the first half and you guys had talked about getting back to leveraging the way that home depot did in the past should.
Should we expect the second half to have similar type leverage or is there something unique about what happened last year that means it would be less.
Well.
Greg 2020.
As such a unique year in comparisons from 2021% to 2020 are difficult for a number of factors.
You think about the amount of Covid expense that.
That we that.
We put in place in support of our associates last year, if you think about it.
Expense under spend as we.
<unk> worked to bring staffing up to levels to meet demand and then you think about the wage investment that we made towards the end of 2020 all of these make comparisons difficult.
We are committed to generating operating expense leverage over the long term, we feel great about the operating expense leverage that we've delivered in.
In Q2 and in the first half.
Youre always going to see fluctuations quarter to quarter.
<unk> is a function of top line sales it can be a function of seasonality.
And other factors so in any given quarter, you may see volatility, but over over a period of quarters youre going to see from us operating expense leverage and again, we're very happy with how the quarter may have played out.
Got it and my follow up maybe linked to that is on comps. So if the trend I just want to make sure I got it right, but trying to similar in the second quarter, but there is no inflation in lumber is it fair to say that the two year comp is stable in the mid twenty's without inflation.
Is that correct.
Well to your comp.
Is sort of similar in its consistency to one year comp in the first couple of weeks of the month.
Got it alright, I appreciate it thanks, a lot and good luck.
Thanks, Greg.
Okay.
Our next question comes from the line of David Bellinger with Wolfe Research. Please proceed with your question.
Hey, good morning, and thanks for taking my question I wanted to ask in regard to supply.
Supply chain. So you alluded in the prepared comments working through a difficult environment. So are you seeing incremental pressures now versus just a few months ago. There is some level of sales that you missed out on in the Q2 period and maybe a bigger picture question for all the recent supply chain issues across the industry is there anything now that youre reevaluating or making some type of.
Change within the the one home depot build out.
Yes, I'd say the first comment that I'd have is.
As it relates to the potential sales impact really really hard to tell and the reason, it's so hard to get a gauge on that.
Is the fact that there is a higher level of willingness of substitution on the customer's part since this pandemic began.
Much more so than pre pandemic.
Is there some level of impact the logic tells you that we're probably was but it's really hard to gauge and we think we captured most as a result of of substitution.
And any change in regard to your larger build out plans of one home depot.
No not at all no.
Sure.
I'm, sorry that build out is focused on where the customer has taken us.
And how they want to engage with the home depot. So it has no impact at all.
Got it got it and just as my follow up here, you mentioned, a new exclusive relationship with LP building solutions.
Can you expand upon that any further does that reflect some type of shift in the business, where maybe lean more into pros tied to more new home construction is the next level of pros sales growth just give the company more exposure on the new home construction side can you just expand upon that any further.
No I mean the.
Intent was not to be any different position in regards to new home construction its not a market.
Play in are consciously go after.
<unk> is similar to.
What we did last quarter with car long electrical boxes there is.
<unk> is the largest provider, particularly for the pro and PVC electrical boxes LP is one of the top couple OSB providers very strong brand.
This is a matter of the home depot, making.
Arrangements with top suppliers, so that they can focus their supply chain into serving us we can focus on having that depth of inventory in these critical pro categories on our shelves. So the likes of exclusives with car lawn and LP is all about taking care of our pro.
Customer.
Got it I appreciate the color.
Our.
Next question comes from the line of Laura Champine with loop capital. Please proceed with your question.
Thanks for taking my question I just wanted to.
Get some context around the commentary that you should be able to lap the difficult comparisons given the strong macro drivers in home prices and comparing that to.
The outcome in Q2 of transactions that were down is this is the thought there that the transactions were down largely because of lumber inflation and other sort of onetime issues and the transaction should tick back up as we move through the rest of this year and next.
Okay first comment would be we didn't really provide any outlook going forward. We don't believe we can take past performance and project that forward due to the uncertainty in the environment that exists today.
As it relates to the transactions I mean huge transactions last year as a result of PPE.
If you want to.
Yes, I mean that was one of our single biggest drivers of the falloff is people coming in for masks and hand sanitizers in of the four departments that we did see.
Negative negative sales hardware outdoor and indoor garden and pain those are.
Contend to be more consumer oriented.
Lots of units in March in.
And soil and things and paint is at Diyer was home not doing other activities on the weekends. So we're not.
Harmed by that that fall off at all.
We'll get through that I would say that take a category like paint and paint.
<unk> had been a one or two unit grower.
Several years.
Until the pandemic and painting is one of the initial home improvement projects that a customer engages in and starts to build confidence in home improvement and while we saw a dip in Q2 the levels.
In unit volume that we're seeing in paint as well above 2019, and I've talked about the millennials before the <unk>.
<unk> engaged in housing they're engaging in home improvement.
Done that first project, which is painting and some gardening work generally so we're just thrilled that they're engaged in the category.
Moving on to bigger projects.
Got it and then as a follow on do we have a better sense now on where digital should be in terms of.
Longer term sustainable growth rate <unk> as a percentage of sales hopefully things are settling out there.
I mean, we really look at this as an interconnected experience our customers are clearly blending the physical and digital worlds together.
Because of the project nature of our business.
Certainly from pre pandemic levels, we've seen an accelerated rate of engagement in terms of sales through our digital channels.
But thats not how we focus on that or look at it we view it as a capability for our customer to engage with the home depot.
Got it thank you.
Christine we have time for one more question.
Thank you. Our final question comes from the line of Eric <unk> with Cleveland Research. Please proceed with your question.
Thanks, two things first of all perhaps for Richard some clarity on lumber.
You talked about leaning on the way down with price to do what's best for the customer does that necessitate more gross margin pressure from lumber.
In <unk> or am I thinking about that wrong.
By and large.
From a lumber.
At least what the prices we've seen in the market have been recognized.
To date so.
No.
Now it depends on future lumber price right, but at the moment.
The precipitous decline.
<unk> had its impact in Q2 for the most part yet Eric.
Key for that normally you don't see any pressure from gross margin.
As a result of lumber, it's all because of mix.
The reason that we saw at this time was the steep decline that happened in price in a very compressed timeframe.
And again, we werent going to change our approach to the market, we want to be incredibly.
Focused on driving the best value for our customer so we always try.
Try to lag the market when it's going up and lead it when it's coming down.
Perfect that makes sense and then secondly.
The sales growth over the last couple of years now is exceptional like you pointed out <unk>.
You've obviously invested to take care of your associates to take care of your customers the margin leverages its been less than what we would've expected with nearer.
Nearly a $50 billion, 50% increase in sales in the last three years is there is some embedded operating margin improvement that can get released over the next couple of years, if things return to normal or is the cost of doing business in other investments you've made.
Some of that away trying to figure out if the operating margin of the enterprise and the lift incrementally in the next couple of years or.
More of a focus on sales growth and a little bit less unreleased operating margin.
I think so I think that we have to go back to the central focus that we have from our financial performance.
Perspective, which is growing operating profit dollars as fast as possible and generate an exceptional return on investment.
Those dollars.
So we feel.
Very pleased.
With the market share that we've captured over the last three years to four years.
And we feel exceptionally pleased with the shareholder value that we've created as well.
We think that the formula of having the best.
Experience in home improvement retail being the lowest cost provider and being the best investor of capital.
And the market is a formula that cant be beat and that's what we're going to continue to do.
Great. Thank you very much.
Thank you Ms. Ms. Jackie I would now like to turn the floor back over to you for closing comments.
Thanks, Christine and thank you everyone for joining US today, we look forward to speaking with you on our third quarter earnings call in November.
This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.