Q2 2022 Home Depot Inc Earnings Call
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Greetings and welcome to the home Depot second quarter 2022 earnings Conference call.
At this time all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Isabel Janney. Please go ahead.
Thank you Christine and good morning, everyone welcome to home Depot second quarter 2022 earnings call.
Joining us on our call today are Ted Decker, CEO and President, Jeff <unk> Executive Vice President of merchandising and Richard Mcphail, Executive Vice President and Chief Financial Officer.
Following our prepared remarks, the call will be open for questions questions will be limited to analysts and investors and as a reminder, please limit yourself to one question with one follow up if we are unable to get to your question. During the call. Please call our Investor Relations Department at 700 70384.
2387.
Before I turn the call over to Ted Let me remind you that today's press release and the presentations made by our executives include forward looking statements as defined in the private Securities Litigation Reform Act of 1995.
These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections.
These risks and uncertainties include but are not limited to the factors identified in the release and in our filings with the Securities and Exchange Commission.
Today's presentations will also include certain non-GAAP measures reconciliation of these measures is provided on our website.
Now, let me turn the call over to Ted.
Thank you Isabella and good morning, everyone. We appreciate you joining us on our call. This morning in the second quarter, we delivered the highest quarterly sales and earnings in our company's history.
Sales for the second quarter were $43 8 billion.
Up six 5% from the same period last year comp sales were up five 8% from the same period last year and our U S.
Stores had positive comps of five 4% diluted earnings per share were $5 five in the second quarter up 11, 5% from $4 53.
In the second quarter of last year.
From a geographical perspective, each of our 19 U S regions delivered positive comps versus last year, while Mexico, and Canada posted comps above the company average and the team has done.
<unk> tastic job, serving our customers, while continuing to navigate global supply chain disruptions inflation and a tight labor market.
Our results in the second quarter reflect continued strong demand for home improvement projects as Jeff will detail. The business was strong across our departments, while our seasonal business posted positive comps as spring broke in the second quarter. These categories underperformed our expectations for the first half of the year. This was.
More than offset by strength in project related categories that outperformed our expectations were.
We also saw growth with both our pro and DIY customers in the quarter and are encouraged that project backlogs remain healthy.
While the business performed very well and our consumer remain resilient through the first half of the year. We are navigating a unique environment, we can predict how the evolving macroeconomic backdrop will impact our customer going forward. However, we continue to closely monitor elasticities and trends across our respective categories.
And believe we have the tools team and the experience to effectively manage in any environment.
Despite near term uncertainties, we believe that the long term underpinnings of demand for home improvement remains strong and that we are well positioned to leverage our distinct competitive advantages to capitalize on compelling growth opportunities in our space.
For the pro customer, we continue to invest in the ecosystem of capabilities, including enhanced fulfillment 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.
In May we launched new capabilities on our <unk> website to enhance the interconnected shopping and quoting experience for our pros in the past our website was not integrated with our ordering and quoting systems, So and associate could not seamlessly modify in order if a customer had questions or changes before placing the <unk>.
Order.
Our new interconnected capabilities remove friction for both pros and associates, allowing them to collaborate on orders both in store and online.
Sales leveraging our digital platforms increased 12% versus the second quarter last year. We also saw record downloads traffic and sales via our mobile App. We continue to see improved conversion rates as ongoing enhancements within our digital properties are resonating with our customers.
<unk>.
Our team is focused on what is most important our associates and customers 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 based on first half results, 100% of our stores.
<unk> for success sharing our profit sharing program for hourly associates 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 second quarter, we continued to see strong demand for home improvement projects and strong execution from our teams and supplier partners.
Turning to our comp performance during the second quarter all of our merchandising departments posted positive comps below material plumbing millwork paint and hardware were all above the company average.
Electrical decor and storage.
Kitchen, and Bath outdoor garden tools appliances indoor garden lumber and flooring were positive but below the company average.
As you heard from Ted while our seasonal businesses posted positive comps in the second quarter. They underperformed our expectations for the first half first half of the year driven by categories like grills fertilizers chemical and mowers.
Keep in mind that we were up against very tough comparisons versus the last two years and in these categories.
When our customers focus on outdoor living and these were some of our best performing departments.
During the second quarter comp average ticket increased 9% and comp transactions decreased three 1%.
The growth in our comp average ticket was driven primarily by inflation across our product categories as well as demand for new and innovative products on a three year basis, both comp average ticket and comp transactions were healthy and positive.
Deflation from core commodity categories negatively impacted our average ticket growth by 14 basis points during the second quarter.
Driven primarily by lower lumber prices.
Big ticket comp transactions or those over $1000 were up 11, 6% compared to the second quarter of last year.
You saw big ticket strength across many pro heavy categories like pipe and fittings gypsum and fasteners.
During the second quarter, both pro and DIY sales growth was positive with pro outpacing DIY we're.
We're encouraged by the continued momentum we are seeing with our pros and they tell their backlogs remain healthy.
During the quarter, we saw robust project demand across the business. This.
This can be seen in the double digit comp performance of our bill of materials plumbing and millwork departments as well as in certain project related categories like fencing siding conduit boxes, and fittings, tutsan showers and countertops.
We continue to introduce new and innovative products aimed at simplifying the project saving our pros time and helping them take on more job. One example in building materials, where we launched nationally Henry's tropical group coatings. This new formula offers maximum reflective <unk>, helping reduce cooling costs Henry stripe accrual can be applied in any.
Even the 100% waterproof and rain safe within 15 minutes of application.
And this product is exclusive to the home depot in the Big box channel.
And Bath, we're excited about the success, we're having with our great assortment of Delta tub and shower wall combinations Delta Classic 500 series with a simple tub to shower system that delivers a big transformation to a bathroom and a fraction of the time.
It is easy to install and it's acrylic surface makes it easy to clean. This series is exclusive to the home depot and the Big box channel.
Turning to our online sales we are very pleased with the performance of our digital assets as we delivered the highest sales dollar volume in company history.
Sales leveraging our digital platforms increased 12% during the second quarter.
This was driven by our continued investments, which are resonating with our customers enhanced search capabilities and improved site experience and more robust fulfillment capabilities helped drive online conversion.
So those customers that chose the transact with us online during the second quarter.
Than 50% 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 remain committed to being our customers' advocate for value.
Last quarter, we highlighted several new innovative products for our customers. This quarter. We are excited to announce the launch of mosquitoes, new ex GT 40, volt and 80 volt Max system of cordless equipment and tools and our outdoor power categories. The ex GT system is engineered to achieve the optical power required for heavier load applications without sacrificing runtime.
And these one battery solution tools are exclusive to the home depot and the Big box channel.
We're also excited to build on the success of our <unk> based smart home platform expanding our assortment across several categories, such as door locks lighting control fixtures and ceiling fans hub space makes it easier to setup and manager smart home products and pairs well with voice controlled operating systems.
This platform is exclusive to the home depot.
In a garage organization will be rolling out our Milwaukee pack out and Ryobi link wall systems utilizing the same locking technology across the system that can be customized to meet your organizational needs from the workshop to workplace.
We're also excited about our lineup for Halloween, our merchants have worked with our supplier partners to put together an expanded assortment of product offerings for this Halloween season. These.
These products bring excitement to our stores and helped drive traffic.
And our sneak preview of our Halloween lineup was a tremendous success, we are thrilled for the full rollout in the upcoming weeks.
With that I'll turn the call over to Richard.
Thank you, Jeff and good morning, everyone in the second quarter total sales were $43 8 billion.
An increase of $2 7 billion.
Our six 5% from last year.
During the second quarter, our total company comps were positive five 8% with.
With positive comps of five 2% in May and four 9% in June and seven 1% in July .
Comps in the U S were positive five 4% for the quarter with positive comps of four 1% in may four.
Four 7% in June and seven 2% in July .
In the second quarter, our gross margin was approximately 33, 1% a decrease.
<unk> of approximately 15 basis points from last year, primarily driven by supply chain investments.
We continue to successfully offset significant transportation and product cost pressures, while maintaining our position as the customers advocate for value.
During the second quarter operating expense as a percent of sales decreased approximately 50 basis points to 16, 6%.
Our operating leverage during the second quarter reflects solid expense management for the quarter.
Our operating margin for the second quarter was 16, 5% compared to 16, 1% in the second quarter of 2021.
Interest and other expense for the second quarter increased by $58 million to $379 million.
Due primarily to higher long term debt levels than one year ago.
In the second quarter, our effective tax rate was 24, 3%.
Up from 23, 9% in the second quarter of fiscal 2021.
Our diluted earnings per share for the second quarter were $5 and five.
An increase of 11, 5% compared to the second quarter of 2021.
Our total store count at the end of the quarter was 2316 and selling square footage was 240 million square feet.
At the end of the second quarter inventories were $26 1 billion.
Up $7 2 billion compared to the second quarter of 2021.
Inventory turns were four five times down from five seven times last year.
Approximately half of the year over year increase in inventory reflects product cost inflation.
Our inventory also reflects deliberate investments and higher in stock levels and pull forward of inventory for back half events in response to continued global supply chain disruption.
Investment in our new supply chain facilities.
And carryover of some spring seasonal inventory.
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.
During the second quarter, we invested approximately $750 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 $1 $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, 6%.
Up from 44, 7% in the second quarter of fiscal 2021.
Now I'll comment on our guidance for fiscal 2022.
As you heard from Ted we are very pleased with the strong performance. We saw during the second quarter, which was in line with our expectations.
Today, we are reaffirming our guidance for 2022.
We expect sales growth and comp sales growth of approximately 3% for fiscal 2022.
We expect comp sales to be stronger than the first half of the year than in 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 percent growth in diluted earnings per share compared to fiscal 2021.
We find ourselves in a unique environment with many cross currents where.
We're operating in a broad based inflationary environment not seen in four decades, while managing through constrained global supply chain conditions.
All against the backdrop of monetary policy shifts intended to moderate demand.
We also see engaged and resilient homeowners, who have strong balance sheets consumers spending more time in their homes and continued structural support for home improvement project demand.
We feel confident that we will continue to manage with flexibility 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 like to ask a question. Please press star one on your telephone keypad.
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For 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 are you seeing any signs that housing is having a negative impact on the business could it be that some of the seasonal performance that fell short of your expectation is a sign that.
Some of the underlying challenges and housing are starting to make its way into home improvement.
Hey, good morning, Michael.
We have not seen that yet in fact with the strong performance this quarter the variability across our regions has been the lowest in markets has been the lowest that we've seen in some time. So we all appreciate the headlines and follow those very closely but we have.
Not seen anything in our business yet from macro housing.
Is there a key head where it is not evident in the business because you are generating a very healthy return on the investments that the home depot has made over the last couple of years, perhaps you could frame it.
What's going on in the Dallas market, which is where some of the distribution facilities and Clos.
Efforts that have been in place for the longest versus what you've experienced in the rest of the market.
Sure Michael we'll get to.
To Dallas, and Hector will take us through some of the things, we're seeing with our pro which is incredibly strong, but we're seeing overall in the business the questions about housing and the economy.
All very real questions again things, where we're following closely but I mean, we just couldn't feel better about our business. We just reported record quarterly sales and profits and reaffirmed our guidance and that's on top of the $40 billion in growth in the past two years, we see a very engaged customer.
Merck each DIY and pro.
As Richard said, though we are operating in the unite unique environment with many cross currents of inflation and interest rates and supply chain disruptions and the like but given all of that our customer in our markets has been incredibly resilient as Jeff said project demand is incredibly strong.
Our pro in particular is very strong and their backlog remains healthy and DIY. We did see some some seasonal weakness, but as we parse through that it's difficult to say is that weakness in the seasonal businesses. The overlap of the two prior incredibly strong.
<unk> years is it the weather, where we had a really bad in late spring and then it turned incredibly hot across the country or are they fundamental demand pressures again, we have not seen a broad based fundamental demand pressure in the business. So we couldnt be happier with the overall business.
Watching it very closely and I can just say as I said in my comments, Michael whatever comes we are an agile business and experienced management team and we look to take share in any environment and Hector if you can give some color on overall pro and specifically Dallas would be.
Yes, Michael as you know we're building a unique interconnected pro ecosystem to capture more of that propylene purchases to.
To serve our approach, it's really about removing friction through a multitude of enhanced product offerings and capabilities and it all starts with brand Assortments and job lot quantities and as you know all this new supply chain assets allow us to do that at a different level, but it also includes digital tools and personalized experience a multiple fulfillment options for reliable delivery.
No extra loyalty tool and other value added offerings, such as credit tool rental quote center and for our larger pros we have to serve them with a single point of contact Haynesville, we're expanding our <unk> sales team and building an inside sales team and I will tell you specifically to Dallas Dallas is the most advanced market and is performing extremely well.
We're thrilled to see our pros trying our capabilities are growing their spend quarter over quarter and I will share with you. The other tough markets for all of our markets, where we have the new supply supply chain assets in other parts of the ecosystem lives.
Thank you very much and good luck.
Our next question comes from the line of Simeon Gutman with Morgan Stanley . Please proceed with your question.
Good morning, everyone hope you're good I wanted to ask an oldie, but goodie on reversion given the significant gains that have occurred post COVID-19 one of the ways that we've been looking at it suggests that most of the unit reversion is basically in the base. So we've kind of re baseline a significant part of the business.
2002, and that it opens the door to growing next year I'm not asking for any endorsement on 'twenty three but curious how you're looking at this reversion question anything interesting on units.
We look at it.
Well, Michael sorry, sorry Sammy.
It's a good question I think though we have to return to Ted's commentary.
Consumer.
Our customer consumer and pro has been more resilient than we even expected at the beginning of the year.
We expect when we issued guidance at the very beginning of the year, we assume that.
We'd see ticket growth driven by inflation and really sort of like for like offset and transaction, we haven't seen that and so that led to our.
Our increased guidance in Q1 of a 3% comp we've reaffirmed that guidance today.
It does assume.
Some level as it assumes that inflation to persist at current levels and that we may see.
Slightly greater offset in transactions through the year.
But it's a conservative assumption and not really based on observation.
So the consumers and customers are resilient.
And Simeon we've been watching obviously all of those metrics in PCE in share on goods in share on services and <unk>.
And clearly the.
The U S. Consumer is re engaged in activities outside of the house and travel is incredibly strong right now.
Eating out in hospitality.
There has been the movement of PCE to services as we thought but home improvement in particular has been again, just incredibly strong as Richard laid out which led us to increase our guidance from what was essentially flat at the start of the year to 3%.
<unk> affirmed but.
We just don't we don't see a slowdown from that.
We remain incredibly bullish about the engagement level.
Really all the dynamic.
The home improvement can so many cross currents in the economy, but when you think of the wealth that are core customers in their home equity up $9 $1 billion the excess.
Savings rates.
Strong jobs and earnings growth of wages and the fact that we're just continuing to spend more time at home in general people are still super engaged in improving.
Improving that home that they are spending more time and so we're certainly benefiting from that longer term dynamic and I think there is.
Emerging interesting dynamic that kind of pushes against reversion.
You think about those who may have look to move into another house a few years ago were looking at their fixed rate mortgage and saying like that mortgage I like my equity position in my home.
I'm going to stay in place and remodel.
We see that in the survey data where customers say, they're intensity projects of all sizes is still very high.
And my follow up I think Ted and Richard you basically answered it I was going to ask why you think the backlogs are still so healthy because looking at the other high ticket spending across the consumer complex a lot of it is contracting and yet youre basically, saying, we're not really seeing that or expecting it I think it's partly that.
<unk> of the housing market to your point I don't know if its income cohort, but I think there is anything else because you mostly answered it in the response to the last question, but curious if there is more.
Our our customer skews heavily homeowner our pros spend on behalf of homeowners and in our DIY customers over 90% of that sales is to a homeowner and as Ted said when you look at the wealth creation over the last few years and a price appreciation of almost 40%.
Our customer is just in a really good place right now and I think that also carries over to income. If you were to take a look at real purchasing power of our customer it compares favorably.
Thank you.
Our next question comes from the line of Scot Ciccarelli with Jefferies. Please proceed with your question.
Good morning, guys. So at the sake of asking I guess, a shorter term question here and it's hard not to notice that July sales picked up a couple of hundred basis points on a SaaS basis, and I guess I'm wondering would you guys point to anything specific VA, whether the slate Ethan we've seen in interest rates or gas prices any kind of color.
<unk> on that might be helpful.
Yes, Scott good morning.
On a three year basis, it's more or less stable. So July has had a relatively easier compare but I will say one thing we have noticed because our strength has continued into Q3 here in the first couple weeks, we think.
Again, I mentioned PCE in people traveling and service spending going up.
As people have come back, particularly in the South we started school very early down here early August and as people, including pros came back from vacations, we sought an acceleration of the business Midway through July and that has continued into August .
People are back home and home from the Beach, the mountains et cetera, and back engaging in home improvement projects.
Okay. That's helpful. And then just can you size the adverse impact on seasonal and the first half obviously came a little short of expectations.
Is there a way to provide a magnitude of that for us.
Yes.
We.
As Ted says, we're accustomed to offsets in our business and we look at home improvement demand in total.
And so as we said we met expectations. There is always we never had a quarter.
<unk> the way, we think we are but.
We feel great about the demand that we saw out there.
Roger that thanks, guys.
Thank you. Thank you.
Our next question comes from the line of Steven <unk> with Citi. Please proceed with your question.
Good morning, guys. Thanks for taking my questions. Ken I was just hoping we could revisit your comments about the macro backdrop are you concerned there could be a lag in the sense that demand control over time, because in the past you've looked at home price appreciation as a key factor for home improvement demand you concern that home prices could stay flattish or potentially decline from here.
Does that alter your view on the demand outlook for the near to medium term.
So it hasnt as of yet in this this is what we're seeing I mean, we talk about home price appreciation.
Transactions household formation et cetera, multiple inputs on housing, but the strongest and most correlated for our sales as home price appreciation now.
It's gone up as Richard said.
30%, 40% in the last couple of years, which we believe translates to high.
Eight nine trillion.
<unk> of increased wealth with what is our core customer base, so when mortgage rates touched at 6% there for a minute.
Certainly you saw new home construction and mortgage rates feel that immediately.
If we have a couple of years.
Our.
Holding serve if you will on this incredible price appreciation in the home.
We don't see that impacting demand.
Demand. The fact that we're not going up year after year. After year is less the point that we've gone up so much in the past two years in the equity position in these homes are so strong coupled again with people spending more time in their homes, so repair and remodel.
<unk> is going to increase from wear and tear.
Going to want more space and just improvements in the home because you're there often and then the fact that the U S home.
Stock is aging and of course, it ages every year, but it's aging disproportionately because we had so many of those years, where we under built in housing. So now we have well over half the homes in the United States over 40 years old. So all of those factors with that incredibly strong run up in <unk>.
<unk>, we think supports home improvement for some time to come regardless, if you have appreciation.
And these levels in the near term.
And we we never.
Thought or soft home price depreciation correlated period to period.
We've always seen and heard there is a lag effect there.
That stretches over over multiple periods.
As Ted said we.
Fundamentals are strong.
Great very helpful.
Just a quick follow up on inventory levels, maybe how much of the inventory up on a unit basis. If you could share and do you feel like youre at the right level of in stocks in the business now.
Good morning, Steven its Jeff can Eric.
From an inventory perspective, we are.
If you look at our total inventory half of that is inflation.
Managed through this inflationary environment second is just in stock improvement to your point, we're happy with our improvement our merchants our supply chain team. Our suppliers have worked hand in hand in building a better in stock this year versus last year, we still have a ways to go in terms of of improvement, but very happy with.
How we progress.
We are still having to pull inventory forward do you think about today's supply chain environment. Our focus is to be there for our customers to be there for our approach in terms of the right job lot quantities and the right timing of events and other activities. So.
Part of our inventory Overages, obviously due to that work in terms of being there for our customers. We do have some carryover inventory from the spring season, but it is really low risk inventory that we're managing through and ensuring that we're ready for it for next season, but overall feel very good about our in stock position, we're managing the inflationary environment and.
And we will be there for our customers in terms of in terms of in stock.
Thanks, very much best of luck in the back half.
Our next question comes from the line of Brian Nagel with Oppenheimer. Please proceed with your question.
Hi, good morning.
Nice quarter congratulations.
Thank you.
So I have a couple of questions.
First off historically, having followed home people went out for a long time.
Your company has done a very good job of sort of say.
Understanding the macro endpoints in building a model and then your forecast and your own sales off of that so the question I have.
Somewhat of a follow up from the prior questions but.
As you with your models right now when you look at the variable.
Various variables out various macro factors.
Is your business tracking.
Assistant with where it should be or are you actually is there. Some type of break where you are actually performing better right now that would be good in the macro variables would dictate.
I think Brian we're in such a unique environment that too to try to.
Build models off of macroeconomic factors.
Is is probably less valuable than spending our time managing in an agile way. What we are confident in is that we've been taking market share consistently and that we are positioned now better than ever to take market share in any environment.
As Ted said earlier, we've watched the same housing statistics for.
Over a decade now and we think Directionally, we understand what's going on here, there's just a very positive.
Environment with respect to the homeowner.
But we're not going to at least at this moment given the dynamism in the economy tied to any given macroeconomic.
Factor.
Yes, Brian I can add to that on are there any parts of the business is doing better than we expected I mean, we truly are just thrilled with what we're doing with the pro is Hector outline. This pro ecosystem that we're building I mean, we are truly building <unk>.
Capabilities that has not seen in our marketplace and in talking to our pros and the research we did.
They are they are more than comfortable to do more with home depot as as we develop capabilities to serve their larger planned purchase.
Hector talk specifically about Dallas, but as different parts of this pro ecosystem come online we have a number of one supply chain buildings now open in many large metro markets. We're starting to increase the size of the sales force are quoting capabilities and integration.
<unk>.
Our <unk> website, which I mentioned in my prepared remarks, all of this is really coming together to drive what is incredibly strong pro and larger pro comps. So as we updated our Tam to 900 billion earlier this year with.
450 of that being in pro we just see tremendous opportunity and I would say, yes that is a category that we are outperforming and happy for it.
That's very very helpful and then.
Follow up question I have unrelated, but with regard to inflation. So once again inflation has been a driver of your business I guess the question. I have is are you seeing any incremental evidence that the consumer is starting to push back somewhat on these.
Higher price points.
Okay.
Brian We are we are we have.
Average unit retail growth.
And thats higher thats higher than inflation, so really no not seeing any trade down.
We've got strengthen our ticket above $1000 and that speaks to the project into the pro customer.
We will see in categories like grills mowers laundry and a few other.
Bigger ticket items.
As possible there is some price sensitivity, but as Ted commented.
Theres COVID-19 pull forward their stimulus effect.
Went from a very wet and cold spring to a very hot summer and the majority of our markets.
And the consumers focusing on other projects do you think about that consumer has shifted your thinking over the last year. It was all about the backyard.
This year, it's about categories like paint and other large renovation categories and we're seeing it across our business. Then I'll also say, we're continue to see the consumer and approach right up around innovation and couldn't be more proud of the merchants and our supplier partners and what we delivered around innovation for our customers. We've got a lot of products, helping our pros finish.
The job faster and simplifying the project for consumer so.
No no significant trade down taking place.
Right.
I appreciate it thank you.
Our next question comes from the line of Chris <unk> with Jpmorgan. Please proceed with your question.
Thanks, Good morning, everybody. So a follow up question on the pro.
Art can you talk about the sort of the relative performance amongst the large pro versus the smaller pro is the large pro outperforming what would you attribute to that and then overall I'm not sure. If he can track this but.
Are you seeing pro transaction growth because overall transaction growth this crowd.
Presumably that was DIY.
Yes, Chris I would share with you that.
The performance of our high spend pro has been very consistent over the last several quarters. So we're very pleased to see that we're seeing.
Other areas of our pro business as far as the customer size accelerated quarter over quarter. So we just feel really good we spent a substantial amount of time with them talking about backlogs and we feel very good about where their position.
For the next couple of quarters.
So sorry, just to interpret so youre, saying that the large pro.
It's been the best performer.
Our large pros were the best performers this quarter, that's right Chris.
Got it and then are you able to look at on a transaction level.
Transactions up for the pro.
We're not going to break that out any further but let's just say that demand is strong with the larger professional customer.
Got it.
And then a follow up on that sort of tied to your point on people came back from vacation and have re engage in that category last year that seemed to happen more in the September timeframe, where DIY re engaged.
How are you thinking about the DIY DIY business and into the fall versus maybe people come back and there's some things that need to get done and the kids are going back to school, but.
How do you think about the risk on DIY may be fading as as.
As we get into September in the fall.
Well, Chris that's a great question.
And frankly when we.
We.
Given the strong first half and the strong second quarter.
To reaffirm guidance, which implies a.
Lower comp in the second half.
That's really the question for Us and frankly, we don't know the answer Super comfortable with pro.
<unk> continues to motor on.
But the question for the second half and the opportunity to do better than that implied comp is if the consumer hanger.
Hangs in there and as Jeff said of the various potential reasons for seasonal relatively underperforming in the first half if it's things more like weather and having focus for so long in the backyard for two years, if they went and did other things go to the beach.
<unk> et cetera, and then they get back in the fall and Reengage that will obviously be be great news, but with these cross currents, we just haven't called that and and Thats a little bit of conservatism in the second half.
Got it thanks very much best of luck.
Our next question comes from the line of Chuck Grom with Gordon Haskett. Please proceed with your question.
Hey, Thanks, just to kind of build off Christian's question I'm, just curious how you're planning the business from a category perspective over the next couple of quarters and maybe into early 'twenty three.
Is it your expectation that the pro continues to lead or do you think that what you've seen over the past few weeks.
We start to see maybe a shift on that front.
Chuck and good morning look we are prepared for the continuation of the project customer.
When it comes to innovation and value appointed Halloween and how we launched Halloween a few weeks ago and so I'll just just great success in the early launch and will set in stores in the upcoming recent and look forward to that category performing well.
When it comes to the pro will be there in terms of innovation and job lot quantities and leveraging our supply chain capabilities and other capabilities that Hector spoke to so.
The continuation of the project business, the <unk> business and we'll be there for our consumer when it comes to labor day coming up in a few weeks. We've got a great program planned for labor day as move through Halloween as we head into the Black Friday timeframe will be there for our customers with great value and that will continue to be in the advocate for value for our.
Customers.
Chuck it's interesting.
On something like Halloween, it's not a huge category.
Not going to.
Move the needle on a $150 billion in sales per se, but the level of excitement that that category brings to us in the traffic and when you think about resilience to the customer and willingness to spend on clearly discretionary items.
Two releases of some of that product very very specific limited quantities.
Leading up to this period.
We sold out in I don't even know if it was ours.
How quickly people are spending $300 for a clearer discretionary item, but a lot of fun great innovation in <unk>.
<unk>, but clearly people snapped up.
In minutes.
Pretty decent price point, 100% discretionary item.
Okay.
Obviously good to hear.
Just switching gears a little bit to the next couple of years. Just wondering if you guys can discuss the new facilities that you've opened up across the country and the benefits Youre seeing you touched on it in Dallas a little bit.
But how much of a tailwind can that be over the next couple of years as you largely complete that rollout.
Yes, I'll start off.
Our supply chain is an important component of the ecosystem that we're building to serve our customers and drive productivity.
And our intent is really to build the fastest most efficient and reliable delivery network in home improvement, reaching 90% of households.
With a same day next day service.
On partial and big and bulky.
Our original plan was to open up a 150, new buildings and while many of these will be complete by the end of this year.
We're going to take us a little bit longer and Thats a function of our.
HD supply acquisition, which we paused and reevaluated our needs.
<unk> facilities that serve similar.
Capabilities as well as some of the impact that we had associated with Covid.
We're very pleased with the performance of the buildings, we've got about.
<unk> 85 of our 100 planned market delivery operations.
We've got 11 of our planned Dfc expansions.
And those facilities will serve both the parcel in the big and bulky customer.
Hi.
In local markets and then lastly in Hector referenced this.
Our flatbed distribution centers that will finish the year with about 15 or half of our intended goals.
You are right on track and Dallas was the first market that we stood up these capabilities, it's been operational for for over two years, and we really like what we're seeing out of that ecosystem in the Dallas market.
Hector mentioned, we're learning a great deal and we're winning.
<unk> probe planned purchase and so we're excited about the possibilities that remain with with our investment in our one supply chain strategy.
Great.
Chuck.
You asked.
Or do we think.
Tail winds are as we build this out and John mentioned HD supply as part of the pivot on what we're building for one supply chain I'd like to I'll, just say that we couldnt be happier with the HD supply acquisition Cheneau Kelly and his team are just doing a.
Terrific job that integration is going incredibly well on product catalog on customers and sales force integration.
And they are just off to a great start and that business is performing incredibly well remember we put together the number one and two.
Multifamily players and have a leading position in multifamily and then with the supply acquisition picked up.
Additional verticals in hospitality and health care government et cetera, all of them are doing incredibly well and we couldnt be happier with HD supply.
Thanks, Dan.
Our next question comes from the line of Steven Forbes with Guggenheim. Please proceed with your question.
Good morning.
Jeff I was hoping to expand on the pro loyalty program and a <unk> website experience really looking for.
Any specific data points, you can provide to help us better understand the maturation benefits of these initiatives.
How many members do you have how often are they engaging and personalized offers whats happened to sort of average wallet share of the pro post Onboarding is there is there anything you can provide us to help us understand the opportunity here.
Yeah.
Okay.
Hey, Thanks for the question this is Jordan bromine.
From the online team, we don't break those out but what I would say is we're super happy with our loyalty customers. They are outperforming the average and the customers that are logged into our <unk> experience online outperformed pretty significantly the customers on our consumer site.
And then I'm sorry.
And I'll just jump in on pro Xtra as well.
Just thrilled with the second year in terms of performance, we link our pro Xtra loyalty to our commercial credit cards. This past spring that's been another leap forward in terms of overall performance, we see great existing member engagement, we see great new sign ups and enrollment.
Enrollments are strong.
And the revenue is strong and then our pros are engaging in the perks and where we are.
Seeing a significant growth in that level of engagement.
And then just a quick follow up maybe for Richard I think Ted mentioned that 100% of the stores qualified for success sharing.
Any any color on on how that.
Payment.
Compared to last year or or I guess to the original plan for the year as we think about the expense build.
It was roughly equivalent to last year.
Thank you.
Our next question comes from the line of Mike Baker with D. A Davidson. Please proceed with your question.
Hi, guys.
So I just wanted to ask.
A lot of moving parts, obviously in the environment, but through it all looks like at least.
According to your guidance you guys going to comp at about 3%.
With flattish operating margins is that the right way to think about the business longer term is that where you sort of target.
The comp in the margin breakeven at about 2% you'd be breakeven something above that maybe margins go up et.
Et cetera, just wondering about the long term view.
Thank you for the question, we typically lever operating expenses into the.
Very low single digit comp.
And we would always expect to do so leveraging operating expense as a part of our.
Our financial model and been a part of how we do business that youre going to see fluctuations from quarter to quarter, but we've met expectations. This year.
And feel great about.
<unk>.
Where we sit and how our teams have managed through this environment.
Longer term again, we expect to generate operating expense leverage.
Our goal here is to.
To gain market share and deliver shareholder value and we think about delivering shareholder value in terms of driving operating profit dollar growth.
A formula that's worked for us and we think it's going to keep working for us.
And so if I could follow up on that what that sounds like to me both of those comments.
Leverage operating expenses.
So on gross profit dollars.
Is it fair to say you're willing to let gross margins continue to tick down I think they have been down something like six of the last 10 quarters in each of the last couple of years not by much just by 10 to 20 basis points a year, but it is that the idea that we're okay with.
Gross margins ticking down a little bit as long as it's driving comp and leveraging the SG&A.
Thank you for the question again, we think about dollar growth and we think about cash on cash returns first and foremost.
I think gross margin in particular is that kind of a secondary metric I'll give you. An example over 10 years ago. We identified appliances is a category, where we had a major competitor who is losing steam and where we thought we can make some inroads.
The question at the time was that gross margin on appliances carried a gross margin that was below company average, but the return on invested capital given that model, where we really don't own the inventory.
And the model the return on invested capital was.
Fantastic.
So as we look back at appliances impact on our business.
We would say we do that again every single time.
We will look for opportunities to drive market share drive operating profit dollar growth and drive return on invested capital.
Perfect makes sense, thanks for the color.
Thank you.
Our next question comes from the line of Zacks, Adam with Wells Fargo. Please proceed with your question.
Hey, good morning, I wanted to follow up on your Dallas market as performance seems to be tracking at or above your expectation now that you've had some time for your supply chain and facility investments to resonate is there any quantification you can share in terms of comp lift for the market new customer.
Wins or wallet share gains versus the overall fleet.
Look we're not going to break down the specific performance for us, but again I will tell you that Dallas has been.
Towards the top of our performance when it comes to the pro segment of our business, we're seeing just great.
Reaction engagement from our customers and those who are trying our capabilities are repeating purchases with us on those baskets continue to grow.
So we're excited to continue to enhance the ecosystem. We're just expanded for the second time, our outside sales resources in those team members, who are doing great. Our servicing our pro customers. So we're just very encouraged about what we're seeing in Dallas and auto markets.
But again, it's just it's just it's early in the transformation early in the build out of the ecosystem, but great signals coming back from our customers and they really want to consolidate their purchases. When you think about our customers coming to our stores over six times a year and then having to go to other retailers for complements.
Complements of our projects, we can serve those needs of our pro customers and they want to consolidate their purchases with us exactly if I can add.
I've mentioned this before and we have another quarter of this tracking as we.
Look at the size of the pro and we have a pretty good breakdown there.
They are buying.
Small item emergency infill versus a larger planned purchase days out that's delivered.
And then you look at the various capabilities sets that we're building.
You would hope to see expect to see it.
It is exactly what we're seeing as these pros engage in the capabilities. So they.
Get a sales a dedicated professional sales resource they joined our credit program they've joined our loyalty program.
Rent tools, they use are larger quoting systems they take delivery.
As they engage with more capabilities, we're seeing larger purchases we're seeing.
More repeat purchases again, everything you'd sort of map out what would you want to see.
To demonstrate that this is working that's exactly what we're seeing so we couldnt be happier. It's a journey as we've said Dallas is the market that is most established but we're in many metro markets right now with different levels of these capabilities.
We do look at Dallas, very specifically and we look at incremental <unk> and we know exactly what we need to drive it NPV positive project, even to add an incremental sales force.
Single individual sales rep, we're tracking instrumentality of sales to make sure we're paying for that resource, but this whole ecosystem again working in the different many different markets now with different levels of capabilities built is what is behind this.
This incredible performance with the pro and the large pro in particular, I mean, it's not by accident that we're growing our pro the way we're growing.
The second sector again, the only thing I'll add is is that think about the last project that you are engaged with.
Every probe planned purchase pulls a lot of AUM planned purchases for that same project and also advance order pickup and we're seeing that we're seeing the customer not only go after the large deliver product, but also coming back to restore for unplanned purchase to.
To complete the project so the ecosystem is really working with.
Got it.
That's all helpful.
Wanted to ask with the recent leveling out in CPI and also the step down in your commodity basket. If you could just talk through the impacts here as youre afraid or input costs start to moderate is it fair to say that you will immediately pass that savings on to your customers or do you view the majority of recent price.
Increases more or less sustainable.
Exactly yes, we manage a large portfolio of goods.
We do a lot of work on competitive pricing analysis, and we will stay competitive in the market and I will also say we have a deep understanding of almost all cost components for almost all of the products that we sell.
And we're working with our suppliers on what it looks like when we see commodities falloff as you said, there's been a fall off on the broader commodity index, we're watching that very closely and we will certainly maintain our competitiveness in the market as we watch.
What what's takes place with commodities.
In the short and in the midterm here.
Thanks for the time.
Christine we have time for one more question.
Our final question comes from the line of David Bellinger with MK and partners. Please proceed with your question.
Hey, Thanks for getting me on a couple of quick ones. So you mentioned the slower pace of sales implied in the back half to get to the 3% comp for the year. So how should we think about operating expense growth in relation to sales growth in both Q3 and Q4 any specific measures you are taking to get better leverage on cost differently. The nice results in Q2.
And just remind us if you can just how much of the expense structure is tied to payroll and your ability to flex that up or down in real time.
We take it in reverse order, we don't breakout our percentage of payroll the sales although it is our largest operating expense.
And we manage it very closely with respect to the remainder of the year I really just point you to our guidance youre going to have.
Variability quarter to quarter and operating expense leverage, but we feel great about.
At least where we think the year is heading and again I'd point you to the guidance.
With respect to what we anticipate.
Okay, and then just one other one can you talk about the share buyback outlook, just given where Q2 numbers have landed any potential share repurchase acceleration. We've got this potential 1% added tax coming January one just any.
Change in on the buyback.
There's no change in our capital allocation philosophy or approach, we will continue to return excess cash to shareholders.
Ms. Jessie I'd now like to turn the floor back over to you for closing comments.
Thanks, Christine and thanks, everybody for joining US today, we look forward to speaking with you on our third quarter earnings call in November .
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.