Q4 2021 Home Depot Inc Earnings Call

And you can see that if you triangulate in measuring this market is kind of an art and triangulation where looking at census data. We're looking at third party consulting data, we're asking our vendors we have a high degree of confidence we have a really good perspective on it and we triangulate all of that.

Stimulus from a year ago, and then sorry, one question in two parts within your guidance for 2022, what are you including for share buybacks.

Thank you said that unless I missed it.

Thank you well we are off to a strong start as the year begins.

It is two weeks into a 13 week quarter and we've got the.

The more difficult compares of the year.

Coming up in March and April so it's early to draw any conclusions there and obviously timing of spring is important.

For the first half of the year, but we're off to a strong start with.

With respect to share repurchases start to LNG.

And with respect to share repurchases.

We intend to continue to return excess cash to our shareholders through dividends and share repurchases.

And we will do that again this year, we have $9 5 billion remaining in our current share authorization program.

So I guess a follow up on that.

Sure I mean, you must have a number.

In the India Etfs plan and in the past you provided that does it.

When you say that that includes the full buyback relative to your authorization.

We like to maintain some degree of flexibility in the cash that we hold on the balance sheet and our liquidity position.

But you can rest assured that it's our intent to return excess cash to shareholders.

Yes, okay.

One more if I can ask a follow up I don't know if that counts as my follow up and maybe this is too long a question for getting close to an hour here, but when you talk about <unk>.

Competing in a more disruptive way.

Sometimes we think of that as is that more than just price.

Are you signaling anything in terms of a change in your pricing strategy or.

Is it is it bigger than that.

No.

It's a capability comment we're not changing our promotional or a pricing approach at all the disruption is in the ecosystem we are building.

<unk>.

It has been at 42 years, the number one home improvement retailer.

We are built have been building and will continue to build a frictionless interconnected experiences that we think are disruptive.

The essence of the.

The frictionless nature of them.

As our customers we've been between the physical and digital worlds that can be installation that can be delivery that can be picked up that can be.

Cash and carry as we build that frictionless ecosystem, we think that in and of itself is disruptive because our aim is to build the next level.

A frictionless experience and then <unk>.

Perhaps more disruptive.

As our pursuit of the probe planned purchase as we've said all pros or in our buildings.

Always use the term pros use us as a 711, certainly we have more share of wallet with smaller pros, but the opportunity with larger pros to build.

Their confidence that home depot is going to be there for them with sales representative appropriate pricing reliable delivery breadth and depth of inventory.

That that is the real disruption and if I can just expand on that for a minute.

When we think about what we're seeing in the pro planned purchase I mentioned this I believe last quarter that we're seeing a redefinition of what we thought was a job lot quantity.

Always talk about Bema project store, having job what's in the store and I think I used an example of a flooring job or we might have had three odd jobs worth of flooring in the store. So an average job might be 1000 square feet. So we'd have 3000 square feet in the store at any one time.

Satisfied three jobs, what we're seeing going out of the flatbed distribution centers orders of 7000 square feet completely redefining what a job lot quantity as recently and millwork.

<unk>.

Interior doors, we have different with right and left can swing, we might have 20 doors and stock of any particular SKU.

Just this week, we are delivering door orders of counts of 150 doors out of our FTC. This is completely redefining.

Our fulfillment capability with the pro for their planned purchase so that's what we mean by disruptive.

That's really interesting I appreciate the color.

Yeah.

Our next question comes from the line of Stephens <unk> with Citi. Please proceed with <unk>. Please proceed with your question.

Great. Good morning, everyone. Thanks for taking my question, Greg Best wishes for the next step and you're correct, Pat Congrats on making role.

I had a question on the operating margin outlook for the business I understand the focus is on operating dollar growth, but gross margin has been somewhat of a hindrance to EBIT margin in the past four years. The business is roughly 120 basis points below the prior peak gross margin in the business do you think the business can get back to that level of gross margin over time.

Or has something changed structurally.

Nothing nothing has changed structurally.

We have been and will continue to be the low cost provider in our market that provides us with plenty of opportunities to go after opportunities in a lot of ways. So let's just let's talk about operating margin. So first of all we set a goal today are driving to $200 billion in sales.

But we said just as importantly, we're going to deliver best in class operating profit dollar growth and ROIC.

We're going to watch operating margin, but dollar growth and returns are our focus.

So we can break the operating margin question down operating margin as a function of two things. It's a function of operating expense leverage and a function of gross margin dollar growth.

So first on operating expense leverage historically, we've delivered operating margin expansion driven primarily by operating expense leverage we expect this relationship to continue.

We're committed to levering expense with volume.

Gross margin dollar growth will be a function of the opportunities we take to drive outsized share gains and throughout our history, we've driven share gains in categories that delivered gross margin rate higher than our company average and lower than company average.

But we've always created operating profit dollar growth and shareholder value creation that we're proud of.

So appliances is a great example, Ted maybe you want to talk about that.

Appliances was the business and we've been in it for some time, but it was a business. Initially we didn't want to be in because of what we thought was the low margin profile, but what we realized is the gross margin dollars delivered with the type of volume of the business we have.

Bill, particularly since its.

Virtual inventory in a sense, it's all special order.

For sure it's a much lower rate than our average, but the gross margin dollar return on investment is one of our highest.

The operating profit dollars that it delivered in the growth as we've sort of double digit billion dollar appliance business is something we're thrilled we ultimately leaned into.

And so if we have opportunities to take share and drive strong capital returns, we're going to continue to do that.

Alright. Thank you that's very helpful context.

Follow up just on the external supply chain environment, maybe just talk about the status of our right now what's your expectation for the supply chain environment as we move through 2022 do you see the situation improving proving at any point as we get through the year.

Yes. This is John Dayton, we have seen some improvement, but we believe the constraints on industry supply chain are likely to persist in the near term.

Specifically, we've seen a little bit of easing of pressure at our ports.

But we plan for this.

<unk> been proactive in and landing product earlier than usual to make sure that we're ready for the business.

Great. Thanks very much.

Our next question comes from the line of Greg Melick with Evercore ISI. Please proceed with your question.

Hi, Thanks.

And then Craig Thanks for all the help over the years and Ted Congrats.

Thank you.

Inflation I wanted to make sure I got this right. If ticket was up 12 in the fourth quarter. Two thirds of that was inflation around 800 bps does that when you're thinking about that the right way.

Yes.

Got it and so then as we think about.

The guidance for this year.

And when we talk about the level of inflation. It's basically we're starting at that kind of run rate and presumably it would come down over the course of the year and might be mid single digits for the full year in your guidance.

We don't know where it goes so presume the rate that was built in as we establish that outlook based on our run rate and we have no plan adjustment up or down.

And the guidance that we provided.

So we plan in other words think of inflation is neutral from the point in time that we established.

The guidance.

Okay.

From from today, so but that is that looking at it on the price on lump sum.

If the rate is up.

800 bps year on year.

And the level stays the same then presumably by the end of the year. If we just stay at these levels, we will basically have zero inflation by the fourth quarter, but in the first writers have positive.

That's right. There is a there is an anniversarying of correct.

Sure.

Thank you that was taken in 'twenty. One that is reflected in 2020, that's correct and Youre the way Youre thinking about it is this fair.

Got it and so then maybe at the transition would be.

If you think about it maybe Richard you can help us understand that.

As we think about the cadence through the year not necessarily topline, but even on costs and operating expenses. What unusual things are there or is 2021, a reasonable base now given all the COVID-19 costs and wage actions that you took as we're thinking about modeling out this year.

I would say 2021 still included.

Covid cost.

I would tell you that.

After having grown $40 billion over two years or.

Really excited that we see growth beyond that base after after.

Two years of unprecedented growth.

Sure.

2021 did include particularly in the fourth quarter, a significant amount of Covid expense.

Just the month of January alone was a real spike and that has come down we still do include some COVID-19 expense in our 2022 outlook and so we're not completely through what I would say could be.

At least hopefully nonrecurring expenses go into the future. So there is a little bit of that in 2022.

Got it and are there any wage actions I mean, we've seen rising labor costs and tightness there how do you feel about getting people for the peak spring.

Do you see any additional wage actions on the horizon.

Hey, Greg I mean, we're.

<unk>.

As we've indicated we're looking to hire 101000 people for the spring.

We're going to utilize all of our capabilities and our messaging around attracting folks to the home depot and we've been able to do that.

On the wage front.

We're doing the same thing that we've always done we look at this.

Every single month, we will look at market by market and we're going to make sure that we're competitive in the marketplace. So that we can attract folks into the home depot nothing's different there there are certainly.

More action and more pressure than we've seen in the past, but our approach has not changed.

Greg I think the good news on the hiring.

Hiring 100000 people our applications are up meaningfully so we feel good about about hiring that spring cohort.

That's good news, thanks, and good luck.

Thank you. Thank you.

Our next question comes from the line of Peter Benedict with Baird. Please proceed with your question.

Hey, guys good morning Congrats.

Congrats to Craig Ted My question is on inventory My first question is on inventory.

As you sit here, it's up a little more than 50% over 2019 levels sales up a little less than 40%. Just how are you thinking about that gap and what the right level of inventory is as we move through 'twenty. Two I know you are.

There was a comment earlier about landing product earlier, so just maybe talk us through the kind of inventory situation, where you sit right now and how you see that flowing through the year.

Peter a couple a couple of comments I mean first of all we feel good about the makeup of our inventory as John said, we are working to bring goods in early to make sure that we're ready for spring.

That's our busiest time of the year I think an important thing to step back and look at us.

We delivered five two turns.

That term level was higher than pre pandemic levels, which ran four nine so we feel really good about the inventory productivity that we have in place last year's five eight was off of a scenario, where we just didn't have the level of goods for a good portion of the year that we that we wanted to have.

Half.

And then finally as it relates to the inventory.

It's been referenced on the call here, we're in still in many categories, where a storm like environment. The more goods, we get the more we sell.

And.

The merchants and the supply chain team has been working like crazy to continue to build inventory to find out what the high level of demand actually is.

So we're kind of Washington, the productivity at the same time, we're not concerned about the inventory build.

At $5 billion at all.

Okay. That's helpful. Thank you and then I guess my next question is done from a category standpoint, My foreign was mentioned a little bit below I guess the company averages just curious if there's any anything going on within that category.

Just an overall tone or what youre seeing.

Or is that.

Not really a material change.

Peter if Jeff and Eric we had a great quarter and floor and we're happy with our business. The hard surface categories are exceptionally strong if you look at vinyl flooring electric volatile business thrilled with the life for <unk>.

<unk> brand strategy, we've got deployed.

On top of that we're just leveraging new capabilities with that Ted spoke to with our supply chain and larger format tiles.

Very happy with the foreign business.

Okay terrific. Thanks, Good luck guys.

Thank you.

Our next question comes from the line of Steve Forbes with Guggenheim. Please proceed with your question.

Good morning, and also congrats all around.

I wanted to focus on the 2021 expense build so maybe to start with for Richard can you remind us how the success sharing program trended during 2021 relevant to plan.

And then as we think about incentive compensation for the whole year or is there anything to call out.

In terms of that weight on the business as we look out 2022.

Hi.

We're proud that we.

Paid.

Impressive levels of success sharing to our amazing associates.

We do see that bonus normalizing in 2022.

So that's part of the dynamic, allowing us to keep operating margin flat.

Slightly positive sales environment.

Thank you and then just a follow up maybe thinking longer term, so forget or Richard.

As we think about like the.

The level of investment spending youre sort of indicating because it sounds like investment spending is going to be more constant.

But any updated thoughts on how you sort of think about what the right level of spend is or maybe if you could just update us on your methodology on how you sort of approach your planning process for our investment spending.

Is that a certain percentage of sales that we should think about it is the normal sort of base case level.

Any sort of high level thoughts on how we should be thinking about the model implications of of investment related spending.

We do think that a steady an agile approach to <unk>.

Two capital investment in the businesses the right one.

We had what I would say is objectively and.

An extraordinary return on investment in the period 2018 to 2020, when we ramped up our capital investment.

But starting with last year, we established a.

Sort of a guideline, where we expect appropriate capital expenditures to be around 2% of sales.

We intend to invest on a much more consistent basis, but also much more agile basis, and I think when one benefit that we took from the.

The period over the last two years is a much more frequent almost <unk>.

Ever Green constant reevaluation of where our investments were going and whether we were seeing returns we've pivoted significant investment within the capital plan and within the P&L during 2021.

But that didn't mean it was incremental we just saw where.

We had more favorable return on investment and that's why we went GSR is a great example of that over the last two years, an idea that our brilliant associates.

Really kind of drove from grass roots and.

Has become a major competitor.

But what we're doing from a productivity perspective so.

That's a long answer the short answer is we think 2% of sales should be adequate.

It's important to note that.

We do.

A reasonably robust testing scenario and most capital investments that we make and we look to test and see a result, before we actually roll and Thats a process that we've been using for the better part of the last 15 years.

Thank you.

Our next question comes from the line of Karen short with Barclays. Please proceed with your question.

Hi, Thanks very much.

Couple of questions as well on the Tam and market share. So when you look at your Sharon in 2019, I'm kind of at around 16%.

50 billion Tam.

Then when I look at 'twenty one.

On a 900 billion Tam you're kind of still at 16%. So I guess the first question is why would your share or not have increase in maybe I'm not using apples to apples on the Tam, but maybe just clarify that.

Well I think it is such an imprecise science, we're trying to give you a sense that this is a huge market and it is fragmented.

I think trying to measure market share with precision is difficult that's why when we check ourselves in market share gain we do a lot of triangulation vendor partners third party data.

And but but as far as thinking about the $650 to 900, both of the both of them had pluses attached to them again, it's not completely apples to apples. We've included the entirety of North America.

Expanded our view of MRO previously our view that market was.

$55 billion as we have.

Understand that market is just a bigger market, we have a smaller share than we thought and what I love about the $900 billion plus number is there's a tremendous.

This amount of room to grow for us.

Okay. That's helpful and then with respect to your 'twenty guidance on sales growth basically growing in line with EBIT.

I mean is there is a sharp slowdown in sales at some point can you just talk a little bit about what levers you have to remain within your EBIT guidance and then just on that also can you just remind us what you think your comp leverage point is now versus pre pandemic.

Well again it depends on the circumstance, we find ourselves in that's why we've created plenty of financial flexibility in our model.

In a scenario where sales are decreasing we have variable expense.

That decreases with sales.

We have a degree of fixed expense that can be reduced we have a degree of discretionary expense that can be reduced but all of these things are levers that we have to consider in the moment.

As far as a flex point, we've historically been able to drive.

Operating expense leverage and low single digit comp environments.

So confident that we have the financial flexibility to continue to do that.

You've heard us say this before Karen, but but our largest operating expenses hourly payroll.

And having.

Activity based model.

Sales drop off transactions units et cetera.

Our labor model adjusts to that.

<unk> you.

You reduce your labor expense.

Granted Jonathan Congrats on pretty real time.

Pretty real time right.

Okay, and my congratulations to Greg and Todd as well.

Thank you.

Our next question comes from the line of Liz Suzuki with Bank of America. Please proceed with your question.

Great. Thank you. So I was hoping you could give an update just on the one supply chain strategy that you discussed back at the analyst day in 2019, and what you ultimately able to get done in those last two years, adding FTC's Rbc's Mds I mean, there were a lot of facilities that were planned in the capex outlook and I'm sure there was some disruption.

Due to Covid. So just curious how much of that Capex outlook for 'twenty. Two might include some of those one supply chain investments.

Yes.

I'll give a bit.

A bit of contacts on on the one supply chain rollout and then I'll, let Richard comment on the Capex.

Ted called out our supply chain is an important component of the ecosystem. We are building to better serve our customers and drive productivity as you know the intent of our supply chain transformation was to build the fastest most efficient and reliable delivery network for home improvement products, reaching our <unk>.

Proximately, 90% of the population with same or next day service for parcel big and bulky and flatbed deliveries.

Our original supply chain investment plan called for approximately 150, new facilities and while many of these facilities will be complete by the end of 2022, some will take a bit longer due to the constraints, we have seen as it relates to COVID-19 .

And also taking into account our recent acquisition of HD supply.

In terms of our market delivery operations or <unk>, we expect to have approximately 85 of the 100 that we plan fully operational by year end.

In terms of our market delivery centers, we have a handful open today, but I expect those will take a bit more time to rollout given the acquisition of HD supply, which we required that we briefly pause the rollout in order to determine how legacy.

<unk> supply assets would factor into our broader supply chain plans.

This led us to the decision to rethink the scope of our MDC facilities, which were originally intended to carry the most delivered store skus as well as MRO Skus, we decided that we would leverage the legacy HD supply network for our MRO fulfillment freeing up capacity.

CNR Mdc's, so that we can better operate as a local direct fulfillment center for store base Skus.

Lastly in terms of our flatbed distribution centers, we expect to end the year with approximately 15 or about half of our intended goal.

The FTC in Dallas was the first we stood up it has been operating for just over two years and we really like what we're seeing out of this facility, but what we've learned is that it takes time to assort optimize and really commercialize these buildings.

So we're very pleased with the progress that we made regarding our one supply chain strategy, but still have more work to do.

And so just some.

Clarification on the Capex the Capex too.

Complete one supply chain is embedded in our expectations.

For capital.

Capital expenditures around 2% of sales.

I think it's also really noteworthy to think that while there were some delays and some great opportunities we took.

After the acquisition of HD supply to further optimize what these assets could means our end markets. We still grew by $40 billion over two years and so while we're really sort of early days of one supply chain.

It's one part of an ecosystem that has created tremendous market share capture in topline growth. We're excited to keep investing in as we are the rest of the ecosystem.

Yeah.

Save lives that we talk or hear about running the business and changing the business with our new capabilities in the supply chain team had to run the business.

Run the business during a pandemic and change the business.

They've done just a tremendous job.

And Christine we have time for one more question.

Thank you. Our next question comes from the line of Dennis Mcgill with Zelman and Associates. Please proceed with your question.

Hi, good morning, Thank you.

First question I just wanted to go back to you mentioned a couple of times the storm like situation in the stores and that if you had more inventory or when you get the inventory youre able to sell it pretty quickly and yet transactions are down. So I. Just wanted to clarify are you implying that transactions are down because you don't have the rate and stocks or are those two things done relate.

Yeah.

There are certainly transaction pressure.

As a result of levels of inventory in certain categories.

One of the one of the pressured areas in the business over the last year and a half. If you will has been an electrical our merchants did a phenomenal job as Ted called out came over the last quarter or the quarter before.

On capturing.

More capacity in terms of getting goods.

With the carlile boxes become an exclusive to the home depot.

We literally have seen the volume go up significantly in stocks have improved one iota because it moves off the shelf as fast as we get it and so.

Part of what's happening with our pro customers when they see good theyre buying it or in the past they might have bought it closer to a job and actually shop more frequently they are actually grabbing what they see when they see it on the shelf.

Okay. That's helpful and then.

Longer term on the market share side as you think out over the next two or three years are there certain categories in the store departments in the store that Youre, most excited about share gain opportunities.

Well I mean truly it's across the store Dennis.

You've heard me go on before about innovation, we literally have innovation.

Everybody in the store, we remain a project business and.

I can't say any one project today.

Your thoughts.

<unk>.

Driving the business more than any other.

Yes.

It's across the store.

That's.

Thank you for seeing and thank you all for joining US today, we look forward to speaking with you on our first quarter earnings call in May.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.