Q1 2022 Home Depot Inc Earnings Call
Thank you joining us on the call this morning.
Fiscal 2022 is off to a strong start sales for the first quarter were $38 9 billion.
Up three 8% from the same period last year comp sales were up two 2% from the same period last year and our U S stores had positive comps of one 7%.
Diluted earnings per share were $4 nine in the first quarter up 6% from $3 86 in the first quarter last year.
The strong performance in the quarter is even more impressive given the robust performance we were comparing against last year a year ago. We delivered the highest first quarter sales in company history as we benefited from outsized demand for home improvement goods favorable weather and government stimulus. This year, we achieved a new high watermark for first.
Quarter sales as strong demand for home improvement goods continued despite the slower start to spring in many parts of the country.
Delivering such strong results on top of last year's historical growth is a testament to our Orange blooded associates. They are maintaining their relentless focus on our customers, while continuing to navigate the ongoing pandemic global supply chain disruptions inflation in a tight labor market. We are also thankful for the strength of a.
Our relationships with our supplier and transportation partners. Our respective teams are working tirelessly to flow product to stores and distribution centers as quickly and efficiently as possible I would like to thank them for their ongoing support as we continue to navigate a challenging and dynamic environment.
The demand seen in the first quarter exceeded our expectations. The home improvement consumer remains engaged customers continue to tell us that their homes have never been more important and project backlogs are very healthy we believe that the medium to longer term underpinnings of demand for home improvement have never.
Been stronger.
We are thrilled with our pro performance in the quarter driven by underlying strength in project demand, we continue to invest in an ecosystem of capabilities, including enhanced fulfillment options a more personalized online experience as well as other business management tools to drive deeper engagement with our pro customers and we.
Believe our efforts are resonating.
We are navigating a unique environment, but we believe we have the tools the team and the experience to effectively manage through while.
While we don't know how inflation might impact consumer behavior going forward, we are closely monitoring elasticities and customer trends across our respective categories and geographies and remain encouraged by the underlying strength, we see in the business.
Jeff will provide a bit more color about what we've observed from a category and big ticket standpoint in a moment.
And while inflation impacted our average ticket increase this quarter. It wasn't the only impact as we've seen over the past several years, our customers continue to trade up for premium innovative products in March we held an in person store manager meeting for the first time in three years one of the many <unk>.
Highlights of that week is our product work, where vendors showcase the latest in product innovation.
What I can share with you is that the level of innovation across the business is robust in fact, almost 90% of the products on display. This year are entirely new skus to the home depot. So the pipeline for innovative products remains very strong.
Beyond product and innovation my biggest takeaway from the store managers meeting is how energized. The team is the exceptional execution of our associates delivered over the last few years hasnt been easy, but our teams have consistently risen to the challenge we frequently survey our associate base and are pleased that <unk>.
<unk> and morale remained high.
Last quarter, we talked about our customer back approach to remove friction at every touch point of the shopping experience to that end, we recently announced that Matt Carey has been named executive Vice President of customer experience and this newly formed role Matt will partner across the business to help design and develop.
New and innovative solutions to drive a seamless experience for our customers.
As Matt transitions to this new role, we also announced that Faheem Siddiqi has been promoted to executive Vice President and Chief Information Officer, where he is responsible for all aspects of our technology development and strategy.
These moves will help drive further alignment around our interconnected retail strategy, which will allow us to enhance what we believe is the best experience in home improvement.
Richard will talk to you in a few minutes about our guidance for the remainder of the year, but the first quarter certainly got us off to a great start. We're also encouraged by the continued strength we see in the business through the first two weeks of the second quarter as spring is breaking more broadly across the U S. Our team continues to focus on what it is.
Most important our associates and customers are.
Our merchants store and met teams supplier partners and supply chain teams did an outstanding job delivering value and service to our customers throughout the quarter I'd like to close by thanking them for their dedication and hard work with that let me turn the call over to Jeff.
Thank you Ted and good morning, everyone I want to start by also thanking all of our associates and supplier partners for their ongoing commitment to serving our customers and communities.
As you heard from Ted during the first quarter, we continued to see outsized demand for home improvement projects and strong execution from our teams and supplier partners.
Turning to our comp performance during the first quarter 11 of our 14 merchandising departments posted positive comps led by plumbing building materials millwork and paint during.
During the first quarter of this year, we saw double digit negative comps in our seasonal departments due to the late arrival of spring.
Sciences posted slightly negative comps adjusting for a shift in event timing appliance comps would have been positive for the quarter, excluding seasonal categories. We're thrilled with the broad based strength across the business and healthy project demand.
During the first quarter, our comp average ticket increased 11, 2% and comp transactions decreased eight 4%.
The growth in our comp average ticket was driven primarily by inflation across several product categories.
As well as demand for new and innovative products.
Transactions reflect the late start to spring and the Anniversarying of stimulus.
On a two and three year basis, both comp average ticket and comp transactions were healthy and positive.
Inflation from core commodity categories positively impacted our average ticket growth by approximately 240 basis points during the first quarter.
Driven by inflation in lumber copper and building materials.
Lumber prices remained volatile during the quarter.
As an example framing lumber peaked at approximately $3500 per thousand board feet during the first quarter before falling over $400 to approximately $900.
Big ticket comp transactions or those over $1000 were up 12, 4% compared to the first quarter of last year we.
We saw big ticket strength across many pro heavy categories like pipe and fittings chips and fasteners.
During the first quarter pro sales growth outpaced DIY.
On a three year comp basis, both growth with our <unk>.
Growth with both our pro and DIY customers with consistent and strong.
We're encouraged by the momentum, we're seeing with our pros and they tell us that their backlogs are strong.
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 double digit comp performance of our building materials and plumbing departments.
As well as in certain kitchen, and bath categories like in stock kitchens, tubs showers and countertops.
We also saw double digit growth in our kitchen, and Bath installation business. This underscores the strength of project demand, we're seeing across the business.
Sales leveraging our digital platforms increased three 7% during the first quarter. We are very pleased with the performance of our digital assets as we delivered the highest sales dollar volume in our company history.
For those customers that chose to transact with us online during the first quarter more than 50% of our online orders were fulfilled through our stores a testament to the power of our interconnected retail strategy.
As you heard from Ted we are very excited about the innovation, we are introducing across the business. We continue to lean into products that simplify the project saving our customers time and helping them take on more jobs.
One example is our Vega Pro press line of plumbing.
Plumbers can create a watertight copper connection in 60% less time than a traditional copper solder job Diego.
Diego appropriate fittings required no flame and working wet applications big is.
As the market leader in this space and is exclusive to the home depot and the Big box channel.
In paint working with Masco and PPG, we have put together a formidable pro paint lineup that is resonating with our pro painters Masco Behr formulated pro specific offering continues to perform well in our stores and in the first quarter. We added PPG speed height series. This pro specific paint.
That is spec in the vast majority of multi housing and large commercial jobs, giving us an entry point with our pro painter for larger scale projects and this is not exclusive to the home depot in the Big box channel.
And spray paint, we launched Ppg's Glitten Max flex rate pain.
Ppg's proprietary industrial based technology is uniquely flexible covering and preserving the original look and feel of a wide range of services, including leather and fabric.
And with Masco.
Expanded their exclusive offerings to spray paint Cox and ceilings as well as interior stains.
Now, let's turn our attention to spring and the exciting lineup of products. We have for our customers. We are thrilled to showcase our new product offerings across our seasonal categories. We are seeing an industry wide shift from gas power to battery powered mowers demand for cordless mowers have never been stronger and our lineup of battery powered mowers, including Ryobi 80 volt zero.
<unk> writing more.
<unk>, new <unk> fuel walk more.
The Walter flexible work more.
And makita <unk> walk mower is unmatched. This lineup offers something for everyone building on an ecosystem of innovative tools.
By the same battery platforms.
And patio, we've continued to add optionality and today customers can create a perfect patio set to transform their outdoor living space through an enhanced online experience.
And we expanded our assortment of Grilles, we're particularly excited about our new trager Timberland, XL, which provides a larger cooking surface easier maintenance.
And Ah sideburns to enhance your cookie needs and our new Nemo next Fi Grill is the first propane powered grill controlled via an app or your mobile device.
The after slate timers grill temperatures and internal food temperature is providing a consistent cooking experience for hours.
We're also excited about our lives this program each year, our merchants provide our customers with new and improved varieties to enhance the overall garden experience, we've expanded our disease and drought resistant products offering superior performance.
For example, <unk> in patients or disease resistant and are easy way petunias now require less sunlight allows up to six weeks longer.
Adding these new hardware plants allows our customers to have.
<unk> and healthier garden for longer.
Our livelihood category looks incredible.
We are ready for spring from everything from shrunk to a variety of flower and edibles for every type of Gartner and with that I'll turn the call over to Richard.
Thank you, Jeff and good morning, everyone.
In the first quarter total sales were $38 9 billion.
An increase of $1 4 billion or three 8% from last year.
During the first quarter, our total company comps were positive two 2% with.
With positive comps of 12, 9% in February .
Essentially flat in March and negative 2% in April .
Comps in the U S were positive one 7% for the quarter with positive comps of 12, 5% in February negative, 0.3% in March and negative two 9% in April .
Recall that in March reflects the Anniversarying of stimulus and April was impacted by a delayed spring this year.
Our results this quarter were once again driven by continued strength across the business.
Spring temperatures broke late in all our geographies, but in particular impacted some of our northern regions.
In local currency, both Mexico, and Canada posted comps above the company average.
In the first quarter, our gross margin was 33, 8%.
A decrease of approximately 20 basis points from last year, primarily driven by supply chain investments and pressure from lumber.
We continue to successfully offset significant transportation in product cost pressures, while maintaining our position as the customers advocate for value.
During the first quarter operating expense as a percent of sales remained essentially flat to last year at approximately 18, 6%.
We were pleased with our operating expense performance during the first quarter, which reflected planned increases in wage and planned rollout of investments designed to drive efficiency in our store environment.
Our operating margin for the first quarter was 15, 2% compared to 15, 4% in the first quarter of 2021.
Interest and other expense for the first quarter increased by $36 million.
To $369 million due.
Merrily to higher long term debt levels than one year ago.
Our effective tax rate was 23, 9% in the first quarter of both fiscal 2022 and 2021.
Our diluted earnings per share for the first quarter were $4 nine.
An increase of 6% compared to the first quarter of 2021.
Our total store count at the end of the quarter was 2316.
And selling square footage was 240 million square feet.
Unfortunately during the quarter, we lost a store in San Jose, California, due to a fire.
Thankfully no one was injured and all of our associates have been reassigned to other nearby stores and the team has done a fantastic job continuing to serve our customers in the area.
At the end of the quarter inventories were $25 3 billion up $6 $1 billion compared to the first quarter of 2021 and inventory turns were four four times down from five five times last year.
This level of inventory reflects outsized demand for home improvement projects actions taken to improve in stocks and the impact of the delayed start to spring.
While our in stock position is not back to pre pandemic levels. It is the healthiest. It has been since the pandemic began.
Turning to capital allocation after investing in our business and paying our dividend. It is our intent to return excess cash to shareholders in the form of share repurchases.
As we have mentioned on previous calls we plan to continue investing in our business with Capex of approximately 2% of sales on an annual basis.
We also plan to maintain flexibility to move faster or slower depending on the environment.
During the first quarter, we invested approximately $700 million back into our business in the form of capital expenditures.
And during the quarter, we paid approximately $2 billion in dividends to our shareholders and we returned approximately $2 two $5 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 45, 3% up from 45, 1% in the first quarter of fiscal 2021.
Now I'll comment on our updated guidance for fiscal 2022.
As you heard from Ted we are very pleased with the strong performance, we saw during the first quarter, which surpassed our expectations.
Today, we are raising guidance for 2022.
We now expect sales growth in comp sales growth of approximately 3% for fiscal 2022.
We expect comps to be stronger than the first half of the year than the second half of the year.
We expect our fiscal 2022 operating margin to be approximately 15, 4% for the year.
And we expect mid single digit percentage growth in diluted earnings per share compared to fiscal 2021.
While a number of uncertainties remain we feel confident that we will be able to continue to manage through a dynamic environment, while growing faster than our market and delivering exceptional shareholder value.
Thank you for your participation in today's call and Christine we are now ready for questions.
Thank you we will now be conducting a question and answer session. If you would.
I'd like to ask a question. Please press star one on your telephone keypad.
<unk> 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 Michael Lasser with UBS. Please proceed with your question.
Good morning, Thanks, a lot for taking my question understanding that your overall results were very strong are you seeing any signs that either inflationary pressure rising interest rates or simply home improvement fatigue.
Starting to have a negative impact on the business and does it give you pause the comp transactions were down high single digits in the quarter. It may be a leading indicator that the business could soften from here.
Thanks, Michael and good morning.
So it's a lot a lot in that question as we said we had we had a great Q1.
And comp the comp from last year as you recall Q1 last year was our highest first quarter sales in our highest comp.
At 31%.
In the very very long time, so as we went into this year, we were understandably conservative as to how we thought Q1 would.
Pan out but in fact, we saw that the consumer is very engaged.
Pro is very strong.
We posted those results with with very much delayed spring.
In Q2, it's early but we're off to a strong start.
We also think that the fundamentals I mean these are all very short term in nature comments, but the fundamentals for home improvement remain incredibly supportive.
So when you look at inflation and interest rates and any fatigue, but take those in order inflation is definitely higher than we thought if you recall last year, we thought we'd have about 5% growth in ticket, we're seeing obviously much higher than.
That was 11% and ticket a lot of that is inflation driven.
But.
Our customers are resilient and we are not seeing the sensitivity to that level of inflation that we would have initially expected on.
On interest rates and Richard can talk a little bit more about interest rates and housing, but we have not not seeing that impacting our business and the nature of housing again, Richard will cover in greater detail.
And then the fatigue, we're not seeing at all we look at PCE and shifts in PCE and while we are seeing some shift to services in general we're not seeing a big shift out of home improvement and we're not seeing fatigue with our customers given repair remodel or intent and activity still.
<unk> tracking at the highest levels that we've recorded.
And then lastly on transactions we.
We do always look for a balance of ticket and transactions, but again with these inflation rates. It's a very unique year and inflation in ticket is higher than the norm for sure but again the consumer is hanging in there and Richard.
To touch on the interest rates sure so.
Just first to start with who our customer is unique.
We need to keep in mind, our customers are homeowners virtually all sales to our pro customers or on behalf of the homeowner and over 90% of our DIY customers are homeowners as well so let's talk about home improvement demand and what drives it.
Our history, we've seen that home price appreciation is the primary driver of home improvement demand when you're home appreciates and value you view it as a smart investment and you spend more on it.
So let's look at what's happened to home prices, we've seen appreciation of over 30% over the last two years in fact home equity values over the last two years have increased by 40% are over $7 billion just in the last two years. So the homeowner has never had a balance sheet that looks like this.
They've seen the price appreciation and they have the means to spend.
And then surveys our customers tell us that their homes have never been more important and their intent to do projects of all sizes has never been higher and our pros to say the same thing about their backlogs. So let's talk about interest rates I think it's important to remember that our addressable market is the 130.
Housing units occupied in the U S.
Plus probably call it $40 million to $50 million more in Canada and Mexico.
Of those 130 million housing units on any given year only about four or 5% are sold.
Means that over 95% of our customers are staying in place theyre.
They're not shopping for a mortgage.
Nearly 40% of those homes are owned outright.
Those who have mortgages about 93% of those mortgages are fixed rate so.
So when you think about our addressable market the vast majority aren't really paying attention to mortgage rates.
And what we've what's interesting about that is what we heard when they do look at moving their.
They are actually more and more tempted to stay in their low fixed rate mortgage and remodel their home instead.
So these low locked in mortgages are probably a benefit on improvement.
Yes.
That's all very helpful information in light of that I hate to follow up with.
Good question.
An abundance of conservatism.
I'll ask that historically home depot has talked about a 20 basis point margin change for every 1% increase or potentially decrease.
It seen store sales recognizing that the environment hasnt necessarily been business as usual for quite some time.
We do want to take a conservative expectation on the overall macro would it be reasonable to think that if if comps were to decline 1%.
That that would translate to a 20 basis point decline in operating margin or is the.
This is this advanced so much over the last few years due to the.
<unk>, a technology, a greater sophistication of the supply chain and other factors that.
The deleverage wouldn't be a significant moving forward as it might have been in past.
So Michael first.
We operate an activity based model with respect to payroll, which is our largest operating cost and so that naturally decreases.
As volume decreases.
More importantly.
We operate with a degree of financial flexibility in our P&L.
And that that financial flexibility allows us to manage as we think is appropriate in any given environment. So we have room to manage and.
We are confident that we can take share in any environment and manage this pill manage this P&L wisely.
The environment.
With respect to any old benchmarks, we may have given.
We're beyond that we have financial flexibility in our model and again, we would flex to sort of meet the circumstances, we would see them.
That's helpful. Thank you so much and good luck.
Thank you.
Our next question comes from the line of Simeon Gutman with Morgan Stanley . Please proceed with your question.
Hey, everyone. My first question is if we could talk a little more detail around the intent and the backlog that was just mentioned curious if youre seeing demand come through because supply was constrained there is some pent up projects versus what the backlog or pipeline continues to build.
Well I think you can just start with some survey results. These are these are public and these are published by the National Association of Homebuilders.
This is a survey that goes back to 2001.
And the survey if you'll bear with me just sort of says our conditions are you optimistic or pessimistic 50 being kind of the.
The media Mark here, so for the 20 years up to 2020 that optimism index never got above a 58.
Today It stands at <unk> 86, so that is the sentiment of the remodel or with respect to backlog that is also surveyed.
That number over the past 20 years never got above a 64 today. It stands at an 84 both of those sentiment numbers are all time highs.
Fair enough and maybe a follow up you mentioned home price depreciation being the most important lever it looks like the home prices in Canada are starting to turn a bit and the business seems to be holding up well can you talk about if the if that relationship holds or if the same dynamic the macro conditions for the customer.
And that's why that business is sort of breaking away from that trend.
Well, yes, our Canadian business I'm, not as up to speed Simeon.
On the Canadian stats that Richard just went through for the U S, but our Canadian business is.
Terrific shape, I mean remember they had much more significant lockdowns last year, Ontario in particular, our stores were closed in the first quarter and we had curbside pickup only so the business is very very strong.
Don't have as much detail on the relationship with home alright, well, but let's let's just sort of reflect on something so last Q1 as a company we reported a 31% comp.
Canada was higher than that so.
So we had a tougher comp in Canada and this quarter.
Our comp in Canada was higher than company average.
Thanks.
Our next question comes from the line of Michael Baker with D. A Davidson. Please proceed with your question.
Yes.
Okay. Two one simply can can you just quantify if there's any way to quantify the weather impact.
Late spring, how much did that hurt April and.
Should we expect that to contribute.
And to me and then I'll have a follow up question.
So for the.
Quarter, Michael we think it was about 1%.
Yes.
Negative impact to comp sales in Q1.
And presumably most of that occurs in April so, yes, yes, because February.
It's not spring anywhere and it's our lowest volume months. So yes, that's April April driven.
As rich said in his notes March March was more of a stimulus impact as well.
Weaker spring in the South and then as you started to move toward northern markets.
Particularly cold weather in April and for the quarter, 1%.
Yes, we've all felt that.
That cold weather up here in the northeast, although it's getting better now I also wanted to follow up on the home price appreciation question.
We've all looked at this for many years and I think most people get that.
Home price appreciation is that important.
How concerned are you that higher interest rates eventually slowed out existing home sales and we've seen that decline three or four months in a row such that the record home price appreciation that we're seeing eventually pass the slowdown, particularly as the fed keeps raising rates and so how big of a concern is that as you think about the.
The rest of the year.
Well I think we're in a.
<unk> unique position now and recent housing history, where we have built a chronic shortage.
Of housing units in the U S consistently and steadily for the last 10 years.
Some some economists assume that that shortage is a little less than $2 million you hear numbers as high as $4 million.
If you take other estimates of what will likely be built we're looking at at least five years, if not seven or eight years before we could actually get back to a point of equilibrium.
So.
We believe that supply and demand are going to be the main drivers of support for home price appreciation and we know that that chronic under supply is going to be a condition for quite some time.
Okay, yes. Thanks I appreciate your comments on that.
Thanks.
Our next question comes from the line of Chris <unk> with Jpmorgan. Please proceed with your question.
Thanks, Good morning.
So on the seasonality sort of lens as you think about the year you mentioned shifting of the bathtub effect and then second quarter. It looks like the guide doesn't assume that.
This above average seasonality that you saw in the first quarter. Despite a late spring.
Holds youre actually sort of degrading the seasonality going forward. So.
I guess my first two questions are you are you expecting a full bathtub effect until the second quarter and then.
Why is there any reason why you wouldn't think normal seasonality could hold through the back half.
Good morning, Chris Yes, we certainly don't think it's going to degrade I would say.
Posting the results that we posted with a very cold.
In wet spring certainly exceeded our expectations.
As.
Commented earlier, we haven't generally raised guidance after the spring because we say bathtub effect.
Too early into Q2 at the time of this call to make a determination.
But the first quarter.
Our expectation by such an extent, even with the poor weather we felt.
Necessary to raise to the 3% for the year.
We haven't taken as specific of a view of Q2 I mean, we know.
At least the 1% is going to flow into Q2, we generally get back all of our spring sales in Q2, even even tracking back to the two or three.
Worst early spring since I've been at home depot.
But it is still just so early in our largest suites are ahead of us. So we don't want to get too far over our skis, but we're certainly not anticipating a degradation of that normal bathtub effect.
Got it and then my follow up question is a number of vendors have indicated more price increases are coming can you talk about how much of the ticket increase was inflation. How do you expect an inflation in the play out over the year like we just sort of flatten out as we lap through more.
More price.
Over the next year and do you expect units.
To turn positive as the year progresses.
Right. So I'll I'll start and then Jeff will give a little bit more detail, yes, as I mentioned earlier inflation is higher than we had expected to the extent of about two times. The 11 odd percent ticket was was the vast majority of.
That was inflation driven.
It is impacting transactions, but as we said not to the extent that we would have thought so that's all good.
We have taken.
Cost. This this year and there is more on the table.
Transportation.
We've just finished up our our ocean contracts, that's a global contract cycle that goes into effect in may. So those are in place for the next 12 months those are certainly higher on a contract basis from 2021.
So we think inflation.
It doesn't go up necessarily from from where we are but it would hold steady at this call it.
Double digit low 10 ish percent.
In our product categories through the balance of the year in terms of the impact on transactions.
We're going to have.
Better transaction results in Q2, just given the spring when you when you think of the number of transactions in our garden business.
In the spring time, Thats, just a tremendous amount of transactions and we feel very good that we will get those in Q2, and then lumber was.
It's been on a bit of a seesaw.
And was high.
On average to last year in Q1, and we saw that in negative transactions in lumber, but now we're down quite a bit and we're down about 35% in lumber prices year over year. So we expect to pick up.
In Q2 in particular in lumber activity in terms of the balance of the year and how we think about managing through this so I'll just provide some more color yeah. Thank you Ted and good morning look we are to Ted's comment we are managing through an inflationary environment about two times, what we expected in the first quarter and we see some continuation.
Of that.
We are working with our supplier partners on managing through this inflationary environment, we've had long standing relationships with many of our suppliers and it's a partnership to understand the ongoing complexities of the inflation. We're seeing what we are doing is we are still the customers advocate for value in our business and if you look at the valley.
That we're offering across the screen categories across the entire business. It is exceptional.
If you look at the project business. We are pleased with what we're seeing in project related demand inclusive of some of the inflation that we have experienced across the organization and again as the customers the customers advocate for value, we have where we have the tools and the capabilities to manage our broader portfolio.
<unk> and manage the inflationary environment, so very pleased with the partnership across the business.
To manage this this inflationary environment.
Sure.
Thank you.
Yes.
Our next question comes from the line of Scot Ciccarelli with <unk>. Please proceed with your question.
Good morning, everyone. So with the one home depot.
Supply chain strategy, you guys are effectively moving into some new markets are certainly expanding your presence in certain verticals.
Handing your Tam is there any way to potentially size the impact that some of these new markets are having on your results.
Whether it's MRO large pros et cetera, and maybe places where you werent as competitive.
A couple of years ago.
Yes generally speaking.
We are excited about what we're building out in terms of capability and our ability to go after.
The repair and remodel or planned purchase occasions that we haven't necessarily been able to in the past, but when you start thinking about contribution to results.
Building an ecosystem here for the pro it's not just about fulfillment and delivery.
It's about an online experience that we think is second to none.
That seeing incredible traction over the over the very short term.
We have.
Our relationship with our pros in the store that we think is second to none and Hector I'll turn to you for a second with some with some detail, but again with respect to results.
We're quite pleased that we grew by $40 billion over the last two years.
We were we're really pleased that we were able to comp the comp and enter into the second quarter.
So far with two two strong weeks and I think over the coming years Youre going to see every element of our model add up to our ability to take market share in any environment, but Hector maybe you'll talk a little bit about the problem.
Richard Scott, we are building capabilities to attract more of the propylene purchase every one of those propane purchases help us pull a lot of the other locations out of our stores. So when Richard talked about the ecosystem. It is about enabling capabilities across all channels.
Remove friction from the transactions and experiences from our pros.
For instance, we are Super encouraged from the early signs are we seeing on the commercialization of the supply chain investments that we're making.
And the team is super encouraging involved and engaged.
Okay. Thanks, guys.
And Scott I would add on the MRO piece and the Tam, we couldnt be happier with the <unk>.
Combination of our legacy Interline HD pro business with home depot supply so not only did we combined the number one and two players in that industry.
Right.
The home depot supply had additional verticals that fit our business.
Didn't participate in so we think the Tam in that MRO market essentially doubled to about $100 billion and we still sit with less than 10% share the capabilities that we're building combining those two businesses, we're well on our way of combining sales force.
This is getting customers oriented.
One legacy.
Customer.
Sales force or the other we are beginning to integrate the supply chains, what we're able to do now.
In MRO.
Morrow for for multifamily housing is incredibly robust and then new verticals hospitality in particular as travel has come back in the hospitality.
Occupancy rates are going up that business is just booming. So we love our position in MRO in the verticals were in in Cheneau Kelly and his team are just doing a great job with that business I think just add to the Tam point, we've talked about the 130 million households in the U.
Yes.
About $30 million of those households, actually occupied multifamily.
<unk> and so that HD supply acquisition opened up that Tam for us.
Nique attribute of the home depot.
Excellent. Thanks, a lot guys.
Okay.
Our next question comes from the line of Karen short with Barclays. Please proceed with your question.
Hi, Thanks, very much wondering if you could just give a little bit more color on puts and takes for teekay to <unk> with respect to gross margin.
And SG&A I guess in the context of assuming inflation remains at the current level and then also a bit more context on how you think traffic and ticket will shake out for the full year and then I had one other question.
Sure. So for the year, we believe that gross margin if you just sort of.
Stay mix neutral.
Gross margin will see slight pressure from the investments, we're making in one supply chain those had been planned all year and we.
We would expect that for a while with respect to operating expense leverage.
As we have taken our sales guidance up we've also raised our operating margin guidance that reflects the operating expense leverage we expect to generate on those incremental sales.
With respect to ticket and transaction.
We assume that comps.
In the back half are positive if it.
If inflation persists for the year.
Pacific current levels, we expect ticket could be in the range of 10% to 12% for the year offset by transactions to net out to a three comp for the year.
So I guess my question on that my follow up but that would be I mean.
Investors are focused on your Q1 year two year three year traffic trends and I. Appreciate there is a labor efficiency component with.
Negative traffic to some extent, but at what point does the traffic on.
A multi year basis.
Maybe start to concern you.
Well this is.
This is definitely a unique year for sure.
And our ticket and transaction dynamic.
As stated earlier, we do look for a balance between ticket and transaction, we usually plan.
That growth will come from more or less an equal mix of ticket and transaction.
The.
Two fundamental things things going on Karen one were.
To your point on two and three year stacks.
We're comping off the $40 billion of sales growth Richard commented on and in Q1 at 31% comp.
Our highest comp in the longest time at home depot.
And to comp that we didn't plan on to comp that is a huge positive now the balance is the norm for sure again, a unique year with this level of inflation.
At 10 10 odd percent.
But.
The customer's engagement is much more resilient than we would've thought.
That's why we hit.
The inflation going into the year and we knew the.
<unk> impact of transactions.
The level of activity in our space and we've talked about the backlog and the intense.
As really help.
Helping offset that and the consumers staying more engaged now as we lap through these extraordinary comps from the $40 billion of growth.
And certainly hopefully lap through the inflation, we would would get back to the balance that we would certainly prefer.
Okay. That's helpful. Thank you.
Our next question comes from the line of Zach <unk> with Wells Fargo. Please proceed with your question.
Hey, good morning, Ted following up on your comment that Q1 beat your expectations could you talk about the extent that was pro driven versus DIY or other pockets of your business and then as you think about the second half of this year to what extent do you incorporate stable pro trends and could they offer.
Set a more variable DIY.
<unk> inflationary environment softens from here.
Sure.
I would start by saying in.
Even our pro traffic is consumer driven right I mean all projects.
Abundantly on the home, we certainly have trades and our business.
Buying product for servicing other other spaces in the home, but the vast majority surety of our activity.
Is supportive of the home and whether it's a consumer buying themselves or a pro the pros buying ultimately for.
Consumers home.
So with that being said, though.
<unk> pro is stronger than we would have thought I mean that that's where the beat came from our pro is incredibly strong and we're so optimistic.
As Hector outlines ecosystem. We're building, we just continue to gain momentum with that pro customer.
Certainly offset more of an as expected consumer when you think of spring as a consumer business in terms of garden, we don't have large penetrations in pro in our garden business. So that is consumer driven and then the stimulus is really impacting the consumer I mean, we.
<unk> heard plenty of anecdotes about consumers getting their check last march and truly going to buy.
A new power tool or a new lawn mowers. So that was what was unique about the consumer in terms of the trend over time.
Not just the intent that Richard talked about in the ecosystem that Hector talked about but what we love.
With our with our pro customer and the confidence we continue to build and what's happening is when we look at our our comps with our pro customers.
We get a stronger progression of comps with the pro from what.
What we call an unplanned purchase in store, which is still a strong comp, but sequentially going up to higher and higher comps as we get to a planned delivered purchase so think of that pro who's just coming to the store to do cash and carry and unplug.
<unk> purchase versus one who we know is staging out of project and getting that project delivered the sequence of comps of that engagement gets higher and higher and higher with the highest being planned delivered.
Also when you think about the engagement with our loyalty models in our engagement with our sales forces again, while still positive.
Our pros were not in our loyalty program buying a cash and carry unplanned purchase while positive that is the lowest comp going all the way through to a pro who's in the loyalty program. It was purchasing with us on an interconnected basis and is managed by.
By an outside sales contact those by far have the highest comp within the pro So we just love this ecosystem that we're building the engagement that we're starting to see the sequential strength of comps as these pros get more engaged with us and yes, we think those.
<unk> trends are going to keep powering the business.
Thanks Ted.
Helpful and then for Richard with your inventory growth outpacing sales growth for the past four quarters by a pretty wide margin. How do you think about your position here in terms of having enough inventory or too much inventory and with the slower start to spring that you've called out how should we think about potential <unk>.
<unk> of higher promo on the gross margin line.
So first of all where we took steps as Ted had said.
Earlier in the call to invest in improving our in stock position and while we're not.
We're quite where we were pre pandemic. We are the healthiest we've been in the last few years. So if you think about sort of that pull forward.
Inventory and making sure that we landed inventory early because in this business customer service starts with being in stock and you also consider the impact of a late spring that really makes up about half of the increase in inventory and the other half is simply the impact of inflation.
So as we think about this through the year obviously.
As spring kicks in we'll.
We will see that inventory begin to reflect.
The seasonality.
And we work hard our merchants and our supply chain team and our vendor partners work hard to make sure that we.
We have an advantaged position.
Yes.
And then just just a comment on the promotional activity we did.
We didnt shift and appliance event into me driven by Easter falling in mid April .
As I commented thrilled with the performance of our clients' businesses as we finish the event.
In may.
We at this point we don't.
Focus on promotions at all our focus is providing everyday value for our customers.
That has been multiple years of progression and we're thrilled with the value. We're providing every single day in terms of being priced right every day driving great innovation and driving a great experience for our customers.
Thanks for the time.
Well.
Our next question comes from the line of Stephens <unk> with Citi. Please proceed with your question.
Great. Good morning, everyone. Thanks for taking my question, maybe a follow up that consumer spending towards the home since it's been discussed in detail here clearly youre seeing strong demand from ongoing projects I think investors are trying to grapple with the fact that home spending may slow at some point because of the macro but the home also has increased importance post pandemic, what's your take on that.
Debate do you think that makes home improvement spending more recession resistant than it's been in the past.
Well, we really just have to look at the health of our customer today, which is strong and we also have to listen to our customer those same.
Same surveys where the pro survey Theres also one with respect to consumer intent to do projects.
Homeowner intent to do projects of small medium and large sizes has never been higher than right now.
Got it very helpful.
Then just shifting could you talk about capital allocation priorities, if the macro environment were to get a bit choppy here, how do you balanced capital investment share buyback and the potential for M&A and I guess specific to M&A. It's been 18 months. Since you made the HD supply acquisition would you be open to additional M&A in the next few years to reach our higher Tam how best to think.
About the criteria.
Okay.
Well with respect to capital allocation.
We generate strong free cash flow.
So.
Ah returned.
Significant capital to shareholders over the last decade, plus with respect to Capex and investment in the business. We take a long term view, we are always going to invest ahead of the customer. We are always looking years ahead to make sure that we build the best customer experience in home improvement.
And so that would likely to be our stance, but we always have to take circumstances into consideration and we do that.
In any event.
And on M&A.
Always maintained an active strategic business development group and Theyre always looking in the marketplace for for companies really.
It really regardless of size generally on the smaller size that can add capabilities. So you've heard us talk about various data shops, we've acquired.
Certainly the larger acquisition of supply helped us into a market space and that is an ongoing reviews. It interactive looking at capabilities and market spaces that did it.
Acquisition can help accelerate our development in that space.
Alright, Thank you very much Christie.
Christine we have time for one more question.
Thank you our final question will come from Chuck Grom with Gordon Haskett. Please proceed with your question.
Hey, good morning, Thanks for fitting me in great results and congrats on the inflation front I'm curious are you seeing any unit demand destruction as <unk> been taken retail is higher.
Any signs of trade down in the basket Walmart called that out this morning, and I know youre baskets, obviously very different than theirs just want.
Are you seeing anything on that front.
No Chuck Good morning, we're seeing no trade down in the environment and we're thrilled with the innovation that we're offering to our customer as Ted commented as I commented earlier, we're seeing trade up for innovation, we're seeing a lot of activity around our consumers looking to improve their homes to adopt new innovation.
And as I talked about the <unk>.
Electrified lawn more business and the opportunity there. That's just one example of many examples of trade up and then on the on the project business, we're seeing great demand as we commented earlier on the project business both for the pro and for the consumer.
Okay, that's great to hear and then one for Richard can you flush out the expectations for comps in the front half to be better than the second half and if I look at your compares on a three year stacked they're pretty consistent I'm, just wondering if you're being conservative there or I guess the expectation for the trend to slow a little bit in the last six months of the year.
It's early.
What I would say is we do expect.
Q2 to be the highest comp quarter of the year and.
We expect first half to be higher than the second half, but we do expect positive comps through the year.
In the back half okay, great. Thank you.
Mr. <unk> I would now like to turn the floor back over to you for closing comments.
Thank you Christine and thank you everybody for joining us today, and we look forward to speaking with you on our second quarter earnings call in August .
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.