Q3 2022 Home Depot Inc Earnings Call
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Greetings and welcome to the home Depot third 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's third quarter 2022 earnings call.
US on our call today are Ted Decker Chair, President and CEO , 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 and one follow up.
If we are unable to get to your question during the call. Please call our Investor Relations Department at 700, 7038 for Q3 eight seven.
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 1095. 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.
Thank you Isabel and good morning, everyone. We appreciate you joining us on our call. This morning sales for the third quarter was $38 9 billion up five 6% for the same period last year.
<unk> sales were up four 3% from the same period last year.
<unk> stores had positive comps of four 5% diluted earnings per share were $4.24 in the third quarter compared to $3 92 in the third quarter of last year.
From a geographical perspective, each of our 19 U S regions delivered positive comps versus last year, while Mexico posted comps above the company average and candidate below the company average both in local currency.
The team has done a fantastic job, serving our customers will continue to navigate global supply chain disruptions inflation in a tight labor market. This quarter also marked another active hurricane season, as they always do our associates and suppliers did an incredible job supporting those in the path of both Hurricanes Fiona and.
Ian.
Thoughts continue to be with those impacted by these storms.
Our results for the quarter reflect continued solid demand for home improvement projects, while we did see some deceleration in certain products and categories as Jeff will detail. The project business remains strong across most of our departments. We also saw year over year growth with both our pro and DIY customers in the quarter.
While the business performed very well and our consumer remains resilient, we are navigating a unique environment, we can't predict how the evolving macroeconomic backdrop will impact our customer going forward. However, we continue to closely monitor elasticities and trends across our business and believe we have the tools.
Team and the experience to effectively manage in any environment.
Despite near term uncertainties, we believe the long term underpinnings of demand for home improvement remains strong.
Well positioned to leverage our distinct competitive advantages to capitalize on compelling growth opportunities in our space.
We are pleased with the traction we are seeing that our interconnected business as we continue to build on our momentum with both our pro and DIY customers. For example, as we have better functionality and capabilities in our home depot App, we see greater engagement in fact throughout the year, we've seen strong double digit growth.
And monthly active users versus last year.
The growth is attributable to several enhancements, we have made including an improved online experience for our pro loyalty program. The seamless connectivity, we've provided for a military program and the launch of our new store mode feature, which makes navigating the store and interacting with products much easier.
As enhancements translate into less friction of our customers as they navigate the digital world and connect the physical world.
We also remain focused on driving continuous improvement in productivity within the four walls of our store to enhance both the associates and customer experience. We are currently launching a new application on our in store mobile devices called sidekick, which is and in Iowa tasking tool designed to direct associates.
The highest value task in real time.
We will direct associates to keep as we're on shelf availability is low or outs exist.
Simplifying our operations, we can generate productivity enhance both the customer and associate experience.
For the pro customer we remain focused on investing in an ecosystem of capabilities, including enhanced fulfillment more personalized online experience as well as other business management tools to drive deeper engagement with these customers.
While we are focused on removing friction from the shopping experience. We're also onboarding capabilities to help our pros run their businesses more efficiently our.
<unk> tell us that finding qualified skilled labor is a pain point in their business.
And we recently announced our path to probe platform.
<unk> skilled tradespeople with hiring trades professionals. This unique and proprietary platform is available at no cost all pro Xtra members. It already contains thousands of candidates and pros have begun posting their open jobs.
Our team remains focused on what is most important our associates and customers. Our merchants store met teams supplier partners and supply chain teams did an outstanding job delivering value and service for 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.
<unk> heard from Ted during the third quarter, we continued to see solid demand for home improvement projects and strong execution from our teams and supplier partners.
Turning to our comp performance during the third quarter 11 of our 14 merchandising departments posted positive comps below material plumbing lumber millwork paint and hardware had comps above the company average all other departments with the exception of appliances flooring and indoor garden were positive.
But below the company average.
During the third quarter, our comp average ticket increased eight 8% and comp transactions decreased four 4%.
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.
Inflation from core commodity categories positively impacted our average ticket growth by approximately 200 basis points during the third quarter.
Driven by inflation and bill materials lumber and copper.
Big ticket comp transactions or those over $1000 were up 10, 1% compared to the third quarter of last year, we saw a big ticket strength across many pro heavy categories like fasteners heightened fitting and gypsum.
Yes.
During the third quarter, both pro and DIY sales growth were positive with pro outpacing DIY.
Encouraged by the continued momentum we're seeing with both our pro and DIY customers. In addition, our pro tell us their backlogs remained strong.
During the quarter our project business remained healthy.
As can be seen in the double digit comp performance of our bill of material plumbing lumber and north departments as well as in other categories like fencing siding combo boxes, and fittings Hudson showers and cabinets.
We're also encouraged by the momentum we continue to see with our larger pro customers. These medium to large repair from other pros continue to post strong double digit comps.
We believe we are building a unique interconnected ecosystem that will increase our ability to grow share and a $450 billion addressable pro space with <unk>.
The pro it's about removing friction through a multitude of enhanced product offerings and capabilities, we feel confident that the investments across our ecosystem are resonating and then we continue to gain share with this important customer.
As you know we've been on a journey to remove friction from our interconnected shopping experience a great example of this was our announcement in December of 2017 to own more of the appliance delivery and.
And in the third quarter, we achieved an important milestone.
We now have 100% of our appliance delivery volume managed through our market delivery operations.
<unk> significantly improved the customer experience on timing could peak deliveries have increased meaningfully and customer satisfaction metrics have increased by approximately six percentage points compared to the third quarter of last year.
Turning to total company online sales, we are very pleased with the performance of our digital assets sales leveraging our digital platforms increased nearly 10% compared to the third quarter of last year. This was driven by our continued investments which are resonating with our customers. For example, during the quarter lead times improved across different fulfillment capabilities.
Which drove greater conversion.
So those customers that chose to transact with us online during the third quarter approximately 50% of our online orders were fulfilled through our stores.
Testament to the power of our interconnected retail strategy.
We're excited about the holiday season.
During the third quarter, we hosted our Halloween event and could not be happier with the results 2022 was a record sales year for Halloween program, both in store and online as our customers continue to add to their collection with our unique and exclusive assortment.
As we turn our attention to the fourth quarter, we intend to continue this momentum with our annual holiday Black Friday gift center events. Our teams of course, the most compelling artificial tree assortment, we've ever had which makes it easier for our customers to find the perfect treat for their holiday.
Terms of our decorative holiday program, we couldnt be happier with our industry, leading assortment with extraordinary features and functionality that looks great and also reflects the exceptional value.
And our gift center, we continue to lean into brands that matter most for our customers with our assortment of Milwaukee, Ryobi, makita, well rigid husky and more.
Earlier this fall we launched the next generation of the Milwaukee drill and drive <unk> fuel lineup offering more power, one time and increased safety for our customers and our gift center, we are featuring innovation in combo kits with four tool and through tools.
And we have our exclusive rigid for tool 18 volt Rushcliffe combination kit with two three tool all backed by our lifetime service agreement.
And in appliances, we have exciting offers on LG, Samsung Bosch Whirlpool GE and Frigidaire, we have multiple exclusive offers including the LTE side by side refrigerator with craft.
Innovation and ice making.
As with prior years, we've extended this these events over several weeks and we believe we are well positioned with the right brands the right inventory and a great customer experience with that I'd like to turn the call over to Richard.
Thank you, Jeff and good morning, everyone.
In the third quarter total sales were $38 9 billion, an increase of $2 1 billion or five 6% from last year.
During the third quarter, our total company comps were positive four 3% with positive comps of seven 1% in August four 4% in September and two 1% in October .
In the U S were positive four 5% for the quarter with positive comps of seven 2% in August four 2% in September and two 5% in October on.
On a three year basis monthly comps were consistent across the quarter.
In the third quarter.
Our gross margin was approximately 34% a decrease of approximately 10 basis points from last year, primarily driven by supply chain investments.
We continue to successfully offset significant transportation in product cost pressures, while maintaining our position as the customers advocate for value.
During the third quarter operating expense as a percent of sales decreased 18 basis points to 18, 2%.
Our operating expense performance was in line with our expectations, which reflected continued wage investments as well as planned investments designed to drive efficiency in our store environment.
Our operating margin for the third quarter was 15, 8% compared to 15, 7% in the third quarter of 2021.
Interest and other expense for the third quarter increased by $80 million to $406 million due primarily to higher long term debt levels than one year ago.
In the third quarter, our effective tax rate was 24, 4% down from 24, 5% in the third quarter of fiscal 2021.
Our diluted earnings per share for the third quarter or $4 24.
An increase of eight 2% compared to the third quarter of 2021.
During the third quarter, we opened three new stores one in the U S and two in Mexico, bringing our total store count to 2319.
Retail selling square footage was approximately 241 million square feet.
At the end of the third quarter inventories were $25 7 billion.
Up $5 $1 billion compared to the third quarter of 2021.
Inventory turns were four three times down from five four times last year.
And our inventory growth, primarily reflects product cost inflation and strategic decisions in response to continued global supply chain disruption.
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 third quarter, we invested $770 million back into our business in the form of capital expenditures.
And during the quarter, we paid approximately $1 9 billion in dividends to our shareholders and we returned approximately $1 $2 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 43, 3%.
From 43, 9% in the third quarter of fiscal 2021.
Now I will comment on our guidance for fiscal 2022.
As you heard from Ted we are very pleased with the solid performance. We saw during the third quarter today, we are reaffirming our guidance for 2022.
We expect comp sales growth of approximately 3% for fiscal 2022.
We expect comp sales to be positive for the fourth quarter.
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.
As we've said throughout the year, we find ourselves in a unique environment with many crosscurrents we.
We are operating in a broad based inflationary environment not seen in four decades, while managing through constrained global supply chain conditions.
All against a backdrop of monetary policy shifts intended to moderate demand.
To date, our customer has proven resilient.
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.
Before opening the call for questions. We are pleased to announce that we will be holding an investor conference on June 13.
2023 in New York City.
We will share more details in the near future, but for now please hold the date.
Thank you for your participation in today's call.
And Christine we are now ready for questions.
Thank you.
We'll now be conducting a question and answer session.
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A 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.
And narrative around your stock is still heavily focused right now on factors that are out of the home depot's control like the state of the housing market and its ultimate impact on home improvement demand. So can you help frame what is in your control.
Home improvement demand for example was down 5% next year is the state of your initiatives.
At home depot can gain a couple of hundred basis points of market share and in that environment, we would only be down call. It 3% and incentive comp were only down 3% given the flexibility that you have with your cost structure coupled with your current.
Current capitalization that affords you to buyback a lot of stock you could actually grow earnings in that sort of scenario.
Hey, good morning, Michael.
Thanks for the question.
A detailed there that.
<unk>.
I won't get into specifics, but but I assure you that we look forward to taking share in any environment. There is a lot of noise.
Around housing and home improvement and you've heard some of this before but if I can just step back a minute and lay out the environment. The way we see it I mean, we still feel very good Michael about our business. We just reported another strong quarter and reaffirmed our guidance for the year and remember we have.
Grown this business $47 billion in the last two and three quarters a year from our core customer we think our customers still healthy I mean, our customer tends to have a good job growing wages strong balance sheets.
Own their home and have seen increased home equity however, as Richard said in his prepared notes it is.
It is a unique environment with lots of cross currents inflation and rising interest rates et cetera.
But given all of that our customer has remained resilient and engaged as we said both our pro and DIY customers grew again in this past quarter project demand in particular is very strong our pro sales are strong and our pro intercepts with our customers indicate that they are <unk>.
Backlog are still very healthy customers are still spending lots of time at home. We're not all back at work five days a week. These homes continue to age and they're worth 40% more than they were pre pandemic now I'm sure we'll get into some housing questions and housing values make.
Go down a bit, but we're still going to be up meaningfully on a two year basis, we did see some deceleration in certain products and categories and again, that's difficult to get at the root cause is it is it a consumer pulling back in general is there a reaction to price inflation do we have some pull forward in certain key.
<unk> is that people bought so much certain categories during the pandemic or are they moving onto other projects.
Our transactions have been stronger than initially thought with this inflation I mean thats why we have raised guidance throughout the year is that the price sensitivity wasn't as strong as we thought it would be however, our guidance implies that the fourth quarter comps will be the lowest for the year.
Albeit positive.
And we have tougher comps from Q4 last year, so with all that as a backdrop.
As I said in my comments, we believe we have the team the strategy the initiatives with each of our consumer and pro that will continue to take share in any operating environment and while there may be some some of these cross currents in this next X quarters.
Housing, we still feel that backdrop of housing fundamental shortage of housing in this country.
The aging of homes is incredibly strong for our space in the medium to long term.
That's very helpful framework.
In light of some of the deceleration that you're seeing.
One might assume that that might be a prelude to what could be.
A more pronounced deceleration.
<unk> 23, especially at some of the material benefit from inflation that the home depot has experienced this year speeds. So is it best to recalibrate our expectations.
We think and model more about negative comp in 2023 for the home depot, even if it's slightly negative.
We'll talk about 'twenty three.
After our fourth quarter earnings call in February .
Again, we remain incredibly bullish there are certainly factors outside of our control.
Our the fed actions going to ultimately take.
Take us to a recession, if so how deep that might be those are things that we.
We're all wrestling with and everyone has an opinion, but we're focused on what we can control rolling out our strategy is delighting, our customers and taking share in any environment.
Thank you very much and have a great holiday.
Thank you.
Our next question comes from the line of Simeon Gutman with Morgan Stanley . Please proceed with your question.
Good morning, everyone.
Focusing on housing so housing metrics are decelerating much quicker than your comps in your comp stacks.
Is this just a lagged effect I don't know this lag is longer than other legs or in <unk>.
<unk> you just made the case that maybe sales decouple from these metrics.
Assume it's temporary because of home equity and we're spending more time on our home or are you, suggesting that maybe it's not temporary because we're spending more time on their home.
So Simeon it's Richard good morning.
Just to maybe sort of put some further points on.
Backdrop.
A lot is made of both home prices in <unk>.
Home price appreciation the change in home price appreciation, we think has always driven home improvement demand and we've held that for a long time, but what we also.
Really ran into even I'd call it the middle part of the last decade.
Does that as.
As home prices began to.
Call it become more steady.
Price discovery in our view became a little bit harder and so the question has always been number one is there a lag to spending are you going to spend and that specific period. When you know your home prices appreciate it.
Is there a halo effect the lags over multiple periods and our hypothesis is yes, that's what we saw in the last decade.
And I think that that just.
Sort of holds true from intuitive perspective, but I think there is another.
There are so many points that are important I think we were all somewhat anchored to what we observed in 2008 and nine and many of the folks on this call in fact, almost all of us were here.
During 2008 2009, you had a situation where.
25% of homeowners were underwater on their mortgages you had really a relationship that we saw on our comp sales driven by acceleration in foreclosures. So it wasn't weak.
We're not in a period of home price depreciation that you are talking about single digits. We had a massive price correction in 2006 to 2008, there was price discovery at every single day on the front of the newspaper.
And millions of forced sellers that we're creating that price discovery when.
When I look at the situation now as Ted said, we have home price appreciation is essentially 40% year over year.
Sorry over the last three years in fact year over year home prices are up 13% since December home prices are up 8%.
It is decelerating, but I think if you ask.
You listen to most observers I think most people are calling for if there is a correction a modest one. So my question is how will the price discovery occur.
And then second is that.
Depreciation actually meaningful enough to change folks spending behavior, because as Ted said, if you're a homeowner.
We've done quite well from a balance sheet perspective.
You likely have a job.
You likely have cash in the bank.
And then we're seeing another just interesting.
Dynamic.
There.
With mortgage rates, increasing our customer is becoming more and more likely to stay in place.
Again project, so improved in place and so just sort of going back to the health of the homeowner backend.
Over a decade ago, 25% of mortgages were underwater back then let's look at the.
Credit standing.
The housing stock in the U S. Now of owner occupied households, 40% are owned outright no mortgage.
Of the 60% that do have the mortgage 90% of those mortgages are fixed rate, 73% of those mortgages are fixed rate below 4%.
So we are now seeing a dynamic of stay in place and improve their home and that's what our customers are telling us and that's what the pros are telling us that customers are telling them.
That's helpful. A follow up on another very easy to forecast variable inflation.
Can you can you frame, maybe what percentage of your sales could be at risk from disinflation is at a 100 or it shouldnt be a 100, because some parts of.
Of your product mix arent going to be vulnerable.
Hey, good morning, Jeff generic we're watching inflation very carefully.
We have seen some deceleration in inflation in the recent months, which is which is good for our consumers, but broadly we are still experiencing some inflation in some specific categories.
I'll call it the lumber market, we have seen a deflationary market and lumber over the recent weeks in fact, we've seen a lot of stabilization in that industry versus the prior two years I did call out an impact from inflation in lumber for the quarter that was more representative of early days early days in the quarter, but we're looking at it carefully.
<unk> category by category, we are working closely with our suppliers in terms of managing costs and cost components. We have a very good and deep understanding of virtually all cost components of all products that we sell and again were managing it very closely.
Thanks very much.
Our next question comes from the line of Chris <unk> with Jpmorgan. Please proceed with your question.
Thanks, Good morning, everybody so maybe.
To summarize your comments today, I guess I'd say Youre you are incrementally more cautious because you're seeing certain categories, maybe become slowing or more volatile, but it's not dramatic and it's more the uncertainty of what the fed does.
<unk> rate raising is going to.
The business in the future potentially.
That's I think that's a fair representation Chris.
Okay and then.
So can you talk about some of the Kpis you're watching.
I guess what categories specifically, our current serving you are you seen DIY trade down are.
Are you seeing maybe unit trends in the project business slowing it seems like the commodity inflation is driving some of your best project categories and are you seeing any more sort of volatility from the consumer I guess over the past couple of months that that is adding that element of caution.
Well I would say.
The healthiest thing, we see and as you can imagine we look at.
Every data set.
By geography and category et cetera.
The healthiest thing about this business as the project nature of the demand that we are a project oriented business.
And all of the categories.
<unk> called out that is driving.
That project demand remains incredibly strong and we look at it with both our pro customers household pros versus consumers and that project demand remains strong with each of the pro and the consumer.
Some of the caution is and again was it pull forward.
Finally, some price sensitivity on some of these whole good items, we've talked about certain appliance categories or grills.
Both those definitely have come off of oil and again as everyone has purchased in the last three years a lot of those categories they've move.
Moved into more project.
Home improvement or is there a reaction to two inflation, that's what's a little harder to tease out here is a case in point, if you look at our indoor garden business.
Two big categories, you might say are more discretionary grills and patio grills.
<unk> was down but patio, we had one of the strongest patio quarters that I can remember so there are definitely some mixed signals.
Definitely caught our attention and that's why we're cautious.
I guess just following up can you talk about consistent.
Three year trends over the Montana, Obviously October was an incredibly strong.
Month last year I guess.
Is that was that just.
We've heard a lot about the consumer shopping early last year and the holiday season is normalizing to what extent do you think maybe the election has had an impact on the business in November and just overall how are you thinking about the <unk>.
Positioning today, and then into the holiday season.
Without Jeff Jeff Kinnaird.
But we see some normalization back to 2019 in terms of the consumer trend in the last couple of years, we've seen pull forward.
And concerns of supply chain driven shortages across retail.
So we do see we do see potentially just returned back to a more normal holiday spend by the consumer.
I commented in our prepared remarks, we feel very good about our black Friday, our gift center or our decorative holiday Assortments and we're excited about the overall black Friday season, and just in case, you don't have the numbers in front of you Chris you called out monthly cadence so.
Really our comps were consistent across the months so not just a three year, but also a two year basis, just keeping in mind that last year's comps in August September and October were three 145% and 99 sequentially. So if you look at it two or three year basis, maybe smoothing some of that out.
The one year milestone tell you quite as much.
Got it that's very helpful. Thanks very much.
Our next.
Question comes from the line of Stephens <unk> with Citi. Please proceed with your question.
Good morning, Thanks for taking my questions guys. Congrats on the strong results to follow up on Chris's commentary about recent performance has there been any impact from the hurricane recovery spend to call out and look at the end of the third quarter and thus far in <unk>.
It was it was relatively minimal. So we think we had about $120 million impact from Hurricanes this quarter, but keep in mind, we were overlapping.
Similar amount from last year. So these.
<unk> and storm impacts.
Extend across quarters.
We're concerned about is the health and safety of our customers and our associates in our minds and hearts of certain with them right now.
Okay. Thanks.
A lot of discussion around the top line outlook, given the housing uncertainty, but I wanted to focus on margin I know there is not a target in place on a multiyear basis, but can you help us think through the levers to protect margin rate and sales growth were to weaken in the future I guess specific to gross margin is there an opportunity for gross margin rate.
Improvement and supply chain costs.
We're managing margin closely Steven we look at it quarter on quarter. If there is a lot of ins and outs.
When it comes to when it comes to.
Margin.
As we look forward.
Yes.
I'd just add that.
We think we have the tools and the experience and the people to manage pricing and costs.
As well or better than anyone else here, we've proven that over the last few years has been in knits disruption right.
Sure.
Value chain and I think the proof is in the blood and look back at our history.
Great. Thank you very much.
Our next question comes from the line of Scot Ciccarelli with Truest. Please proceed with your question.
Good morning, everyone. So I think everyone here and kind of understand theres some uncertainty around the prior home improvement environment.
And then what's happening with interest rates, but how are you guys thinking about the growth potential.
Prospects of the large pro business as well at a 23, because you guys. Obviously have a lot more infrastructure and more relationship still at that stage.
Thanks for the question Scott that we couldnt be more excited.
We've identified a 450 billion dollar <unk>.
Dressel market and an understanding of what capabilities, we need to deliver to get a larger share of wallet without large pro repair remodeling.
I've been here.
They know over 22 years, and we've always known what we needed to do to capture more share of wallet with that pro.
And what's so exciting is that Hector and his team right now are actually building out the capabilities set to get more share of wallet with that large CRO and as we build out these capabilities and introduce them to the customers, we're seeing the engagement and the instrumentality of.
Sales growth.
Take off in Hector if you could give us a little more insight of what your ability would be great. Yes, Scott just would continue to be Super excited about the response from our pros as we continue to enable capabilities to remove friction from our ecosystem.
Very excited about the expansion of our onsite sales resources in the growth of those customers.
Our driving.
Seeing those customers grow not just with direct sales without outsized outside sales associates, but they are also engaging more on our digital platform and engaging more in our stores for that online purchase and as we continue to grow around other capabilities, whether it is in the <unk> digital platform or in store platform. We just continue to be so.
We are excited about the response of our pros and we are just removing friction we're removing friction from all the different channels and our customers continue to engage with us more and more.
Is there a way to potentially size or at least for us conceptually think about kind of what the potential revenue ramp is as these capabilities get built out.
Hi.
As Ted said, we're excited one of the reasons. We're so excited because it's such a fragmented market such a fragmented market as suppliers.
And so we just think the opportunity is there.
As exciting a tremendous and part of the excitement is it's hard to size.
But what I can say I mean, we don't break out these numbers, but.
Each of pro and consumer grew again this quarter.
And the pro yet again grew meaningfully.
Faster than the consumer and our large pro the ones, who are engaging with what Hector and team are developing or growing the fastest yet.
Very helpful. Okay. Thanks, guys.
Okay.
Our next question comes from the line of Chuck Grom with Gordon Haskett. Please proceed with your question.
Hey, Thanks, good morning, great quarter overall transactions down a little over 4% I'm wondering if you could unpack that for us across the pro and DIY customer base.
I don't know, if we break that out but.
The strongest again was the large pro.
Okay Alright.
Look I'd say.
Maybe a way to put it to us are closed shop across our assortment, so youre going to sort of see similar dynamics ticket transactions across the business generally speaking.
But as Ted said.
The strength of the growth.
Okay makes sense and then.
On the cost pressure upon cost start to ease how do you think about the pricing environment. Do you think you and peers are likely to hold on to prices as cost start to moderate.
And you retain that margin as a result or are you likely to lower prices and try to maintain the same.
Gross margin gross profit margin dollars.
Chuck we watch.
Watch this very closely.
We are the customers advocate for value and we watch the market and our competitors very closely.
I'll say that there's been an enormous shift to trading up to more innovation and.
More innovative products, we see that in our tool category, we see that and regarding business. We christie it across multiple categories, we still see that willingness to trade up for great value and great innovation.
And on the cost side.
Chuck it's definitely easing. So you look at commodities in particular commodities have been down six seven months in a row lumber is obviously way down for peaking at nearly 500.
Dollars to now under 500.
From peak to current during this this last three years, however, we still see.
Inflation across the store so while some will be coming down in certain categories with costs and retails are forecast at this point is that net inflationary cost pressures continue into 2023.
Okay.
Okay. Thank you.
Our next question comes from the line of Brian Nagel with Oppenheimer. Please proceed with your question.
Hi, good morning, nice quarter congrats.
<unk>.
So my first question.
I think I want to ask that question.
Question, maybe a little bit differently, then I mean with regard to in place.
We've seen now for a while was home depot has done a remarkable job of kind of strategically passing along inflation. So Ted you're you've mentioned a few times now youre starting to see some inflationary pressures ease.
The question I have is.
Are you seeing or would you expect that as inflationary pressures, even if pricing doesn't necessarily go down you see some type of elasticity in demand means that unit demand would pick up in that type of environment.
Well.
It's a great question and you could say, hey, if elasticities werent as.
Sensitive on the up.
<unk> also likely not be on the moderation if you will.
It's to be determined.
I think.
Broadly the <unk>.
Sensitivity wasn't as sharp as we expected the last two years, that's why we started each year with more or less a flat forecast expectation.
That each of the past two years on certain commodities lumber copper wire.
We're pricing to market weekly you see a much more classic reaction to price and unit productivity.
With other categories I hate to bring up grills again, but there is some classic price points on sort of classic grills and when we saw those those grills get up over $600.
We saw a more dramatic drop off in engagement and when Jeff and the team work those prices down.
Even to the low four hundreds for.
For high 400 slow five hundred's, you saw response with with unit productivity.
Across the board, though.
There has been.
Jeff mentioned this there has been so much innovation across our categories. You think are the dramatic shift of outdoor power equipment.
Power tools and appliances and what the features and benefits of these products are the technology embedded in these products.
Not sure it's quite an iPhone, but.
We're getting close to power tools being.
In that in that genre and people love the newness and the innovation.
They are albeit higher prices, but people are responding.
So I think it's a mix Brian across.
The categories and Thats, what Jeff and our merchant teams do such a great job.
Managing every day.
Got it that's very helpful. And then my follow up a quick one just for Richard.
You gave us the cadence of comps through the quarter. Obviously, we saw the reiteration of guidance, but any commentary more specific on just the <unk>.
Trended business here into Q4.
Nothing in the first two weeks of Q4 changes our view on 2022 guidance.
And as we said, we expect comps to be positive in the quarter.
Got it appreciate it thank.
Thank you.
Good luck.
Our next question comes from the line of Zack <unk> with Wells Fargo. Please proceed with your question.
Hi, good morning.
You think about your DIY customers, specifically and the well documented challenges in the first half of the year is it fair to say that your DIY customer improved on a one and three year basis. This quarter and as you think about consumer behavior in tighter economic and housing conditions ahead is there a scenario where the D.
<unk> category Outperforms pro customers trade down or maybe pull back on bigger projects.
Zack I may have to get you that.
Repeat the second part of the question on the first part of the question look we're really pleased with our consumer business through the year Q1.
We had we always referred to as fast a effect in some respects.
And so we have a seasonal impact consumer in Q1 of this year Q2, and Q3 are both in positive and we're very happy with that business.
Could you could you would you mind repeating the second part of your question.
Is there a scenario, where DIY outperformed pro as customers trade down or pull back on bigger projects.
Well.
I don't think if theres any way to <unk>.
Conjecture that.
Do think that well.
What we love about this business is it's all it's all end customer demand regardless of the channel it appears through.
But we are we don't have a target protein nutrition for the business and what we've seen through cycles is that number one we do very well with both.
And you can see some fluctuation between the two but really what we have going on right. Now is what we're observing which is the probe business is leaving the company that shows us that the demand for large projects.
Is very healthy right now.
Someone asked this question before I'm not sure we answered it we are not seeing trade down.
If you take.
Hi, My Grill or appliance example.
It's not that people ultimately bought.
Traded down I think it's that people have.
Already purchased.
The past few years when.
When people.
Do purchase again.
They are buying innovation our trailer business. For example is an incredibly strong and as they bring out.
Innovation customers respond.
Got it and when you think about your sixth straight quarter of transaction decline and the fact that there is a more stable repair and maintenance component of your business to what extent do you believe we fully cycled away from all of the pull forward and excess discretionary category demand in 2022.
Thousand 21, and when would you expect this to translate to a more normalized positive transaction fee.
That's such a great question and it's something we observe in and build our theories of the case. When you go back now what are we were <unk>.
11 quarters.
Of this pandemic and the first five six we had tremendous transaction growth right. We all know the story of what happened not necessarily a lot of cost inflation at that point and then the last six quarters, we start to lap that tremendous activity.
But also saw for all the reasons, we know supply chain commodities.
Global cost pressures, we saw significant cost in our business.
Comps were driven as they were this past quarter with with ticket over transactions.
What we see now as you step back approaching three years is.
Our transaction run rate are sort of three year CAGR at this point is more or less pre pandemic rates.
And.
You could look at that at one hand, and say Wow, here's the slowdown.
On the other hand, Richard used the term holding serve you.
You can look and say Oh, my gosh this industry erupted with demand for a year and a half.
Then yes.
Cycled significant cost increases.
Customer hung in there and was resilient.
Your net over this three year period up in transactions and units. Despite what we believe youll hold on to these price levels.
I think that all goes back to my opening comments of what is the dynamic of this overall industry and the health and the engagement level of this customer.
And if we normalize from here.
Gosh more of that great.
This obviously all of these questions about recession that we can answer any better than you all can.
But when you digest and look back on what's happened in the last three years, you would say Wow, that's pretty incredible market segment.
Appreciate the thoughts best of luck.
Thank you.
Our next question comes from the line of Mike Baker with D. A Davidson. Please proceed with your question.
Yes.
Okay.
Thanks.
I appreciate the color you gave on the fourth quarter outlook.
You've done.
Such a great job of improving your holiday business in <unk>.
<unk>.
10 of the last 13 years your fourth quarter comp has been better than your third quarter comp and by definition thats occurring on tougher comparisons.
Can you talk about.
What you've done to make the fourth quarter, such a bigger quarter for you and why that might be different.
This year.
Hey, it's Jeff.
Yes, we had an exceptional fourth quarter.
In past years, we've built the business.
On the backs of decorative holiday and we are the customers advocate for value in that category and we have great innovation and great again, great value for our customers second we've built the business of gifting in our gift centers and you look at the innovation.
That we're delivering to our pro into a consumer it's exceptional.
Earlier about the mid teens.
Milwaukee drilling driver combo kit. The innovation is just exceptional Ted Ted spoke to earlier and then appliances appliances.
Enormous category for the home depot, it's been a category that we've built.
At an incredible rate, we're investing in capabilities like I spoke earlier in terms of delivery or investing in dot com capabilities in terms of our.
Our our customers.
Willingness to to review and purchase online and then I'd also say, we're building a great project and.
Business in the fourth quarter.
Fourth quarter is a great time for our project, we see a lot of consumers eating doing smaller projects around their home and getting ready for the holidays and then finally, I'd say storage storage and organization, we have incredible storage event.
Gain or the customers advocate for value when it comes to storage.
The business and then finally, we've built an incredible dot com business in.
This is ricardo.
The performance in Q3, we're expecting a great Q4, with cyber Monday, and a big part of that is our digital performance our app performance Okay.
Broker here, our president of online, that's where we want to make a couple of comments around that yeah sure. Thanks, Jeff.
Ted called out the front the experiences where what it's all about we love the experience improvements we've made.
Lot of it is around in store connectivity, we talked about <unk>, we've talked about military we've talked about loyalty. We've got some features coming out on pro for in store checkout experience and our customers really respond I mean, we love the ratings in the App store for Afib, Apple for settling with Google but.
But we see it in our numbers as well strong double digit performance and growth in downloads and then they use monthly average users and our traffic is our fastest growing online property, we're going one billions of dollars of sales through the App, we couldnt be more excited.
Great if I could ask one more follow up your buyback did slow a little bit this quarter is that maybe a function of higher borrowing cost or how should we think about buybacks going forward. Thanks.
Yes.
We don't.
Ascribed to necessarily a smooth cadence of buybacks and that will typically reflect just sort of how we think about working capital investment through the year and a cash buffer throughout the year. So there's really nothing to read into that.
Okay. Thank you.
Welcome.
Our next question comes from the line of David Bellinger with MTM Partners. Please proceed with your question.
Hey, Thanks for the question so going back to some of the category comments are you seeing some evidence that the call. It more discretionary items are turning lower and at a faster pace I know last quarter. You mentioned some of those higher ticket 300, $400 Halloween items being pretty much as discretionary.
It gets them performing pretty well we saw some discounts on those items in the weeks preceding Halloween. So any indications that those splurge items or are starting to cool off more quickly than the rest of the business.
David.
We had we as I commented earlier, we had record sales both in store and online and Halloween that included the infamous <unk> been one of our best sellers in terms of.
The innovation and value we offer our customers is really unmatched in the marketplace and we couldnt be happier with our Halloween performance, if I turn to the fourth quarter. We're really excited about our decorative holiday assortment, we've got great innovation and great value for our customers across the assortment as trees. If it slides if its decorations we feel.
Very good about the category and our consumers are reacting exceptionally well.
Got it.
Kelly, So we know exactly what you're talking about.
My follow up just on the inventory levels how.
How much of that growth is aimed at pro customers. So is there a piece of that inventory that's not sitting in the stores, maybe it's at facilities like in Dallas, the number looks to be a bit more elevated to us at the store level, just help us unpack that 25% inventory growth number in <unk>.
Just get us comfortable that you arent sitting on too much at this point, especially with some of the <unk>.
Acceleration Youre now seeing.
Well, so what investment in inventory in our one supply chain facilities, certainly one of the factors inventory growth year over year, but the primary factor is really just inflation.
As part of the inventory value and then we made strategic decisions to land.
Inventory earlier in the year than we have prior and really just to give you some.
Some numbers around that and to reflect the fact, we feel fantastic about our inventory position in Q2, we grew our inventory 38% year over year in Q3 that number dropped to 27% year over year and actually if you look throughout our history.
Typically build inventory from Q2 to Q3 in this case, our inventory actually came down by $400 million from Q2 to Q3, our inventory is.
Is healthy and we're happy with our position.
Thanks, Richard I appreciate it Chris.
Christine we have time for one more question. Thank you. Our final question will come from the line of Steven Forbes with Guggenheim. Please proceed with your question.
Good morning, maybe.
Maybe just a follow up.
Our focus on the quarterly performance.
If I look at the press release, the selected sales data, obviously excludes HD supply. So curious Ted if you can expand on the performance of that asset in today's backdrop as it looks like it may be driving some upside to the overall performance of the business.
Yes, Steven Thanks, Yes.
Yes, another great quarter for HD supply, we mentioned this last quarter.
They are they are just doing a terrific job cheneau Kelly and his team.
Our running.
Our largest and the best focused MRO business for multifamily housing in hospitality extended living et cetera.
We are well remain well ahead of all our financial projections. When we made the acquisition integration is tracking there integrating sales forces customer.
Our records and now starting the work or on their way and the work of integrating the supply chain. So that one is.
Just been it's been a terrific.
Acquisition that we're super happy about.
And then maybe just a quick follow up.
Richard or Ted.
Given the performance can you remind us on what percentage of sales that business is today and then as we as we look at the sort of spread between comp and net sales growth any any reason to think that the current sort of a year to date spread doesn't hold into the fourth quarter.
Well, we don't break HD supply Alpha as Ted said were.
So happy with it.
On the <unk> sales and comp we've always seen a gap there. It just comp reflects sales of the POS sales reflects sales as they are actually delivered or installed youre going to see that number.
We'll probably through the year sales will be a little higher than comp.
Comp guide to the important guide here is comp is thats, our activity based metrics around sales.
Thank you.
Welcome.
Dante I would now like to turn the floor back over to you for closing comments.
Thank you Christine and thank you for joining US today, we look forward to speaking with you on our fourth quarter earnings call in February .
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.