Q4 2022 The Home Depot Inc Earnings Call

Speaker 1: At the home Depot, we're dedicated to helping you build the skills that get your home projects done right. That's why we offer free and interactive online homeowner 1? one and V? Y workshops set up to be a resource, no matter your age or skill level. During the.

Operator: Greetings, and welcome to The Home Depot fourth 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.

Speaker 2: At this time all participants are in a listen-only mode. A brief question-and-answer section will follow the formal presentation.

Speaker 2: 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.

Speaker 2: As a reminder, this conference is being recorded.

Operator: It is now my pleasure to introduce your host, Isabelle Jancy. Please go ahead.

Isabel Janci: Thank you, Christine and good morning everyone. Welcome to Home Depot's fourth quarter and fiscal year 2022 earnings call.

Speaker 3: Joining us on our call today: our Ted Decker, Chair President and CEO , jeph canred, Executive Vice President of merchandising, and Marie Campbell, Executive Vice President of U's stores and international operations. And Richard mcvil, Executive Vice President and Chief Financial Officer.

Isabel Janci: Following our prepared remarks, the call will be open for questions. Questions will be limited to annulment investors, and as a reminder, please limit yourself to one question with one follow-up.

Speaker 3: If we are unable to get to your question during the call, please call our Investor Relations department at seven seven zero three eight four two three eight seven

Isabel Janci: Before I turn the call over to Ted, let me remind you that today's press release and the presentations may by our executives include look forward-looking statements as defined in the Private Security's litigation reform act of 1995.

Isabel Janci: These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections.

Speaker 3: 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.

Speaker 3: 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.

Ted Decker: Thanks, Isabelle, and good morning, everyone. fiscal 2022 is another record year for our business.

Speaker 4: We achieved $157.4 billion in sales.

Speaker 4: We added over $6 billion in sales and increased diluted earnings per share 8% versus last year to $16 in 69 cents.

Speaker 4: Over a three -year period, we have grown sales by over $47 billion and delivered diluted earnings per share growth of over 60%, while investing in the long-term health of our business.

Ted Decker: Throughout fiscal 2022, we continue to face reduced friction for our customers to improve the shopping experience. As Anne will discuss, we invested in an improved customer and associate experience in our stores by implementing a new store leadership structure. We also drove productivity within the four walls of our store through our Get Stores Right, or GSR space optimization initiative, and we've implemented new tools and technology in stores to reduce complexity for associates and improve customer service. We're also pleased with the traction we are seeing in our interconnected business.

Speaker 4: As Ann will discuss, we invested in an improved customer associate experience in our stores by implementing a new store leadership structure.

Speaker 4: We also drove productivity within the four walls for our store through our Deb stores right for gr space optimization initiative.

Speaker 4: And we've implemented new tools and technology in stores to reduce complexity for associates and improve customer service.

Speaker 4: We're also pleased with the traction we are seeing in our interconnected business.

Ted Decker: We've seen increased app engagement, downloads, conversion, as we've rolled out several enhancements, including an improved online experience for our pro loyalty program, seamless connectivity for our military program, and the launch of our new store mode feature, which makes store navigation and product interaction easier. We are very pleased with the continued progress on our supply chain buildout as we reached an important milestone earlier this year. All our appliance delivery volume is now managed through our market delivery operations, significantly improving the customer experience.

Speaker 4: Including an improved online experience for our pro-loyalty program. Seamless connectivity for a military program in the launch for a new store mode feature which makes store navigation and product interaction easier.

Speaker 4: We are very pleased with the continued progress on our supply chain build-out as we reach an important milestone earlier this year. All our appliance delivery volume is now managed to our market delivery operations, significantly improving the customer experience. Progress on our supply chain buildout as we reach an important milestone earlier this year. All our appliance delivery volume is now managed to our market delivery operations, significantly improving the customer experience.

Speaker 4: Progress on our supply chain buildout as we reach an important milestone earlier this year. All our appliance delivery volume is now managed to our market delivery operations, significantly improving the customer experience.

Ted Decker: In the near term, we continue to navigate a unique environment. Throughout most of fiscal 2022, we observed a resilient customer who is less price sensitive than we would have expected in the face of persistent inflation.

Speaker 4: In the third quarter noted some deceleration in certain products and categories.

Speaker 4: Which is more pronounced in the fourth quarter.

Speaker 4: This along with a negative impact from lumber deflation, led to fourth quarter comps that were slightly softer than anticipated.

Ted Decker: We are closely monitoring our elasticities and trends across the business and believe we have the tools team and experience to manage in any environment. This team has been effectively navigating the unprecedented growth in the last three years, and I have full confidence in their ability to execute as we go forward. The investments in our associates, stores, digital platforms, supply chain, technology and other strategic initiatives have strengthened our business and enabled us to grow share and deliver exceptional shareholder value over the long term. The most important investment we can make is in our people, which is why we are announcing that we are increasing annualized compensation by approximately $1 billion for our frontline hourly associates. We believe this investment will position us favorably in the market, allowing us not only to attract the most qualified talent, but also retain the exceptional associate base that is already in place.

Speaker 4: And believe we have the tools, team and experienced manage in any environment. This team has been effectively navigating the precedented growth in the last three years and I have full confidence in their ability to execute as we go forward.

Speaker 4: The investments in our associates stores, digital platform, supply chain technology and other strategic initiatives have strengthened our business and enabled us to grow, share and deliver exceptional shareholder value over the long term. Most important investment we can make us in our people.

Speaker 4: Which is why we are announcing that we are increasing annualized compensation by approximately $1 billion for our frontline hourly associates.

Speaker 4: We believe this investment will position us favorably in the market, allowing us not only to attract the most qualified talent, but also retain the exceptional associate base that is already in place.

Ted Decker: Today, our board approved a 10% increase in our quarterly dividend to $2.9 per share, which equates to an annual dividend of $8.36 per share.

Speaker 4: Turning to 2023, we are targeting approximately flat comp sales in a mid-single-digit percent decline in diluted earnings per share compared to last year. Richard will take you through the details in a moment.

Ted Decker: While we expect this to be a year of moderation in demand for home improvement, we believe that the long-term underpinnings of our market remain strong, and we are well positioned to leverage our distinct competitive advantages to capitalize on compelling growth opportunities in our space.

Speaker 4: I could not be more pleased with the resilience and strength that our associates have continueed to demonstrate, and I want to thank them and our supplier partners for their hard work and dedication to serving our customers and communities.

Speaker 4: Now I'm going to turn it over to amrey candle Executive Vice President of U's stores and international operations, to share a little more on how we are taking care our associates and continuing to enhance the customer experience.

Ann-Marie Campbell: Thanks Ted and good morning everyone. I'm very excited to have the opportunity to spend a few minutes talking about the best team in retail and the many ways we are invested in the associate experience at the Home Depot.

Speaker 5: We know that our associates are a key differentiator and they are essential in helping us sustain the customer experience we strive for.

Speaker 5: In order to provide the best customer experience and home improvement, we must focus on cultivating the best associate experience in retail.

Ann-Marie Campbell: So, what does this mean to us? This means not only investing in competitive wages and benefits, but also providing tools, training, and development opportunities that make working at the Home Depot an enjoyable and rewarding experience. As Ted mentioned, we are making a significant investment of approximately $1 billion in compensation for frontline hourly associates. This is a meaningful investment that we believe will position us favorably in the marketplace. But this is just one component of the associate investment story.

Speaker 5: This means not only invction in competitive wages and benefit.

Speaker 5: But also providing tools, train-ing and development opportunities that make work in at-the-home Depot and enjoyable and rewarding experience.

Speaker 5: As Ted mentioned, we are making a significant investment of approximately $1 billion in compensation for frontline hourly associates.

Speaker 5: This is a meaningful investment that we believe will position us favorably in the marketplace.

Speaker 5: But this is just one component of the associate investment story.

Ann-Marie Campbell: We know that the key to an engaged and committed workforce is investing in the person, taking an interest in them and in their development. To that end, we began the year with a new store leadership structure, the first time we have changed the structure since our company was founded. The driving forces of these changes were customer service and associate development. We created new management positions focused entirely on the customer service experience, increasing the number of managers on the floor at any given time.

Speaker 5: Taken an interest in them and in their development.

Speaker 5: To that end, we began the year with a new store leadership structure, the first time we have changed a structure sinceour company was founded.

Speaker 5: The driving forces of these changes were customer service and associate development.

Speaker 5: We created new management positions focused entirely on the customer service experience, increased in the number of managers on the floor at any given time.

Ann-Marie Campbell: This frees up time for other store leaders to devote to associate training and development. The net result of all this is both an improved customer and associate experience, while also creating new career paths for our associates. Another important element of a best-in-class associate experience rests on simplification. How can we simplify processes and systems in our stores to enable associates to deliver a better customer experience? And how can we simplify and streamline paths, so that an associate can spend more time serving our customers? One example we have talked about before is the work we've done to simplify order management in our stores with the order up initiative.

Speaker 5: The next result of all this is both an improved customer and associate experience, while also create a new career path for our associates.

Speaker 5: Another important element of a best-in-class associate experience rest on simplification.

Speaker 5: How can we simplify processes and systems in our stores to enable associates to deliver a better customer experience?

Speaker 5: And how can we simplify and streamline CX So that an associate can spend more time servving or customers?

Speaker 5: one example we have talked about before is the work we've done to simplify order management in all stores with the order-up initiative.

Ann-Marie Campbell: Historically, our associates had to navigate dozens of systems, but with order up, we have been able to streamline multiple systems into one that is simpler and more intuitive.

Speaker 5: We took simplification even further this year with the introduction of the new hc phone and associated applications such as psitekit.

Speaker 5: The rollout of our eightd phone was a direct result of associate feedback on the limitations of our first generation in our devices knownon as first phones.

Ann-Marie Campbell: For the first time ever, every associate on the floor will have an 8-D phone in their hands, when enhanced communication features, tools, and training capabilities.

Speaker 5: This increased accessibility to real-time support is significant in helping our associates better serve our customers.

Speaker 5: In addition to enhancing the customer service experience, the home new HD phone provides real-time access to tools and applications such as sidekic. That hopes associates priatoritize the highest value task more effectively.

Speaker 5: Powered by machine learning. sidekic directs associates to keepy base where on-shelf availability is low or out exist.

Ann-Marie Campbell: The HD phone empowers our associates to provide a best in class customer experience, increases operational efficiency, and generally makes an associate job much easier.

Speaker 5: These are just a few examples of the many ways we're invest, enhance and improve their asshiate experience at thehomdeo.

Speaker 5: Our associates are trusted advisers for our customers and all the heartbeat of our company, and I want to thank them for all they do to take care of our customers.

Speaker 5: We will continue to invest in them with a focus on listening to their needs, maintaining competitive wages and benefits, and continueing to enhance or tools, trainingin and development opportunities.

Ann-Marie Campbell: With that, let me turn the call over to Jeff.

Jeffrey G. Kinnaird: Thank you, Anne, 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.

Speaker 4: During the fourth quarter, our comp average ticket increased 6%.

Speaker 4: In comp transactions decreased 6%. Growth in our comp average ticket was driven primarily by inflation across our product categories, as well as demand for new and innovative products.

Jeffrey G. Kinnaird: Inflation from core commodity categories positively impacted our average ticker growth by approximately 15 basis points during the fourth quarter.

Speaker 4: On lumber specifically.

Speaker 4: During the fourth quarter we saw a significant decline in lumber prices relative to a year ago. On average, lumber prices were down over 50% year-over-year.

Speaker 4: Given this dynamic, comp sales were negatively impacted by approximately 70 basis points in the fourth quarter.

Jeffrey G. Kinnaird: Turning to our department comp performance for the fourth quarter, seven of our 14 merchandising departments posted positive costs.

Speaker 4: Bill materials: plumbing, network hardware tools, outdoor Garden and paint headcomps above the company average.

Speaker 4: Big ticket comp transactions are those over $1 thousand were up 4% compared to the fourth quarter of last year.

Speaker 4: While we saw big ticket strength across Pro-heavy categories like portable power, hypeened fittings and gypsum.

Speaker 4: We did experience softness in other categories like laundry, softwing and roofing.

Jeffrey G. Kinnaird: During the 4th quarter, ProSail wrote outpaced DIY. Pro backlogs still remain elevated compared to historical averages, and we saw positive comp performance in our bill materials, plumbing, and miller departments.

Speaker 4: As well as in certain bath-related categories.

Speaker 4: Turning to total company online sales, we are very pleased with the performance of our digital assets.

Jeffrey G. Kinnaird: Sales leveraging our digital platforms increased over 4% compared to the fourth quarter of last year. This was driven by our continued investments, which are resonating with our customers. For those customers, that chose to transact with us online during the fourth quarter, approximately 45% of our online orders were fulfilled through our stores, a testament to the power of our interconnected retail strategy.

Speaker 4: Compared to the fourth quarter of last year. This was driven by our continued investments, which are resonating with our customers.

Speaker 4: For those customers that chose to transact with us online. During the fourth quarter, approximately 45% of our online orders were fulfilled through our stores, a testament to the power of our interconnected retail strategy.

Jeffrey G. Kinnaird: During the fourth quarter, we held our decorative holiday gift center and Black Friday events. 2022 was our record sales year for these events.

Speaker 4: We are the product authority in home improvement.

Speaker 4: And together with our supplier partners, we continue to offer the best product at the best value for our customers every day.

Speaker 4: A great example of this is our recent partnership with eco app, a global leader in water hygiene and infection prevention solutions and services.

Jeffrey G. Kinnaird: The Eagle Labs Scientific Clean Product Line offers the cleaning solutions for commercial, industrial, and residential use that Eagle Labs is known for to both our Pro and DIY customers.

Speaker 4: Giving them access to innovative cleanning technology, and this partnership is exclusive to the home Depot. It marks the first of its kind and e-collapse 100 -geyear history.

Jeffrey G. Kinnaird: We're looking forward to the year ahead, particularly with the spring-selling season right around the corner. We have a great line of products from live goods to out-for-power equipment. We continue to see an industry-wide shift from gas powered to battery-powered tools.

Speaker 4: And as we've been discussing for some time, we have been leaning into this trend, offering a broad assortment of outdoor power equipment with cordless technology.

Speaker 4: We are the brands that matter across tools and outer power, including raoi Milwaukee, the waltz and Makita.

Jeffrey G. Kinnaird: In our Spring Gift Center event, we are expanding our equipment to include cordless innovation in mowers, trimmers, blowers, and chainsaws.

Speaker 4: As an example, our maiquita xgt platform will have over 125 professional grade corus tools. I'm particularly excited about our new forty-volt xgt mower that delivers gas power performance with high vacuum lift for premium cut quality.

Speaker 4: The xgt mower can cut over an acre in less than 60 minutes on two and 40 volt xgt batteries. These maiquita tools are exclusive to the home Depot in the big box retail channel.

Jeffrey G. Kinnaird: One of our key focuses in the spring is to provide great value in innovation for our customers within our live goods offerings. We continually work to strengthen our relationship with key vendors.

Speaker 4: Throughout the industry, providing the best value, innovation and guard performance for our customers.

Speaker 4: We have expanded our offerings in national, regional and proprietary brands such as big Ro Rio, proven winners, Southern living and knockout rose, just a name a few.

Jeffrey G. Kinnaird: Our teams continue to look for better garden performance varieties that provide solutions for our customers and we are excited about the upcoming spring season. With that, I'd like to turn the call over to Richard.

Richard McPhail: Thank you, Jeff, and good morning, everyone. In the fourth quarter, total sales were $35.8 billion.

Speaker 4: An increase of approximately $1 million, or zero 3% from last year.

Speaker 4: During the fourth quarter, our total company comps were essentially flat and negative zero 3% for the quarter.

Speaker 4: As Jeff mentioned, lumber prices in the quarter negatively impacted comp sales by approximately 70 basis points.

Richard McPhail: We had comps of negative 1.3 percent in November , positive 0.8 percent in December , and negative 0.1 percent in January .

Speaker 4: Comps in the? U's were negative 0% for the quarter, with negative comps of 0% and one 0% in November , positive 1% in December and negative 0% in January .

Speaker 4: For the year, our sales totaled a record $157.4 billion.

Speaker 4: With sales growth of $6.2 billion or 4% versus fiscal 2021.

Richard McPhail: For the year, total company COPSAILs increased 3.1% and US COPSAILs increased 2.9%.

Speaker 6: In the fourth quarter, our gross margin was approximately 33%, an increase of seven basis points from last year.

Speaker 6: For the year, our gross margin was approximately 34% and.

Speaker 6: A decrease of 10 basis points from last year.

Richard McPhail: Gross margin was in line with our expectations, reflecting planned investments in our supply chain capabilities. Throughout the year, we continued to successfully offset significant transportation and product cost pressures, as well as increased pressure from shrink during the back half of the year and we did this while maintaining our position as the customer's advocate for value. During the fourth quarter, operating expenses were approximately 20% of sales, representing an increase of 32 basis points from last year. Our operating expense deleverage is driven largely by charges unique to the quarter related to litigation in California storm-related expenses and an unfortunate fire in one of our stores.

Speaker 6: Reflecting planned investments in our supply chain capabilities.

Speaker 6: Throughout the year, we continued to successfully offset significant transportation and product cost pressures.

Speaker 6: As well as increased pressure from shrink during the back half of the year.

Speaker 6: And we did this while maintaining our position as the customer's advocate for value.

Speaker 6: During the fourth quarter, operating expenses were approximately 20% of sales, representing an increase of 32 basis points from last year.

Speaker 6: Our operating expense deleverage is driven largely by charges unique to the quarter related to Litigation in California.

Speaker 6: Storm-related expenses and an unfortunate fire in one of our stores.

Richard McPhail: For the year, operating expenses were approximately 18.3% of sales, representing a decrease of 13 basis points from fiscal 2021. Our operating margin for the fourth quarter was approximately 13.3% and for the year was approximately 15.3%. Interest and other expense for the fourth quarter increased by $85 million to $408 million due primarily to higher long-term debt levels than one year ago. In the fourth quarter, our effective tax rate was 22.6% and for fiscal 2022 was 23.9%.

Speaker 6: Representing a decrease of 13 basis points from fiscal 2021.

Speaker 6: Our operating margin for the fourth quarter was approximately 13% and for the year was approximately 15%.

Speaker 6: Interest and other expense for the fourth quarter increased by $85 million to $408 million, due primarily to higher long-term debt levels than one year ago.

Speaker 6: In the fourth quarter, our effective tax rate was 23% and for fiscal 2022 was 24%.

Richard McPhail: Our diluted earnings for share for the fourth quarter were $3.30, an increase of 2.8% compared to the fourth quarter of 2021.

Speaker 6: Diluted earnings per share for fiscal 2020 -two.

Speaker 6: Were $16 and 69 cents.

Speaker 6: An increase of 8% compared to fiscal 2021.

Speaker 6: During the year, we opened six new stores and lost a store in California due to a fire.

Speaker 6: Bring our store count to 2322 at the end of fiscal 2020 -two.

Speaker 6:

Richard McPhail: Total sales per retail square foot were approximately $627.00 in fiscal 2022, the highest annual figure in our company's history.

Speaker 6: At the end of the quarter, merchandise inventories were $24.9 billion, an increase of $2.8 billion versus last year, and inventory turns were four point two X.

Speaker 6: Down from five point two X from the same period last year.

Speaker 6: Moving to capital allocation.

Richard McPhail: During the fourth quarter, we invested approximately $900 million back into our business and the form of capital expenditures.

Speaker 6: This brings total capital expenditures for fiscal 2022 to $3.1 billion.

Speaker 6: During the year, we paid approximately $7.8 billion of dividends to our shareholders.

Speaker 6: We look to grow our dividend every year as we grow earnings and, as Ted mentioned today, we announced our Board of Directors increased our quarterly dividend by 10% to $2 and nine cents per share.

Speaker 6: Which equates to an annual dividend of $8 and 36 cents per share.

Richard McPhail: And finally, during fiscal 2022, we returned approximately $6.5 billion to our shareholders in the form of share repurchases.

Speaker 6: Including $1.5 billion in the fourth quarter.

Speaker 6: Computed on the average of beginning and ending long-term debt and equity for the trailing 12 months, return in invested capital was 45% compared to 45% at the end of the fourth quarter of fiscal 2021.

Speaker 6: Now I'll comment on our outlook for 2020 -three and.

Richard McPhail: As we think about how 2023 might unfold, we think it's helpful to look back on our performance since 2019. From 2019 through 2022, we grew sales by $47.2 billion, a compound annual rate of 12.6%. During the first five quarters of this period, from the first quarter of 2020 through the first quarter of 2021, our sales were driven by significant ticket and transaction growth. This growth reflects factors unique to home improvement, as homeowners spent more time in their homes and took on more projects as they saw their homes significantly increase in value over that period. The home improvement market also captured a greater share of the consumer's wallet, as spending on goods outpaced spending on services during the period.

Speaker 6: From 2019 through 2022, we grew sales by $47.2 billion.

Speaker 6: A compound annual rate of 13% and.

Speaker 6: During the first five quarters of this period.

Speaker 6: From the first quarter of 2020 through the first quarter of 2021.

Speaker 6: Our sales were driven by significant ticket and transaction growth.

Speaker 6: This growth reflects factors unique to home improvement.

Speaker 6: As homeowners spent more time in their homes.

Speaker 6: And took on more projects, as they saw their homes significantly increase in value over that period. The home improvement market also captured a greater share of the consumer's wallet.

Speaker 6: As spending on goods outpaced spending on services during the period.

Richard McPhail: Beginning in the second quarter of 2021 and continuing through the fourth quarter of 2022, we reported strong sales and earnings growth driven by ticket while transactions steadily normalized back toward 2019 levels as the broader consumer economy shifted from goods and back into services. During this time, we continued to report positive sales growth in every quarter up to present. As we set targets for 2023, the context of the past three years led us to consider three factors that will likely influence our performance this year.

Speaker 6: And continuing through the fourth quarter of 2020 -two.

Speaker 6: We reported strong sales and earnings growth driven by ticket, while transactions steadily normalized back towards 2019 levels.

Speaker 6: As the broader consumer economy shifted from good and back into services.

Speaker 6: During this time, we continued to report positive sales growth in every quarter up to present.

Speaker 6: As we set targets for 2023. the context of the past three years led us to consider three factors that will likely influence our performance this year.

Richard McPhail: First, the starting point for our target setting this year is our assumption regarding consumer spending. We've assumed like many economists that we will see flat real economic growth and consumer spending in 2023. Second, over the last seven quarters, we have seen our transactions gradually normalize as consumer spending has shifted from goods to services. We believe that if this shift continues at its current pace, the home improvement market would be down low single digits.

Speaker 6: The starting point for our target setting this year is our assumption regarding consumer spending.

Speaker 6: We've assumed, like many economists, that we will see flat real economic growth and consumer spending in 2020. -three.

Speaker 6: Like many economists that we will see flat real economic growth and consumer spending in 2023 second.

Speaker 6: Over the last seven quarters, we have seen our transactions gradually normalize as consumer spending has shifted from goods to services.

Speaker 6: We believe that if this shift continues at its current pace.

Speaker 6: The home improvement market would be down low single digits.

Richard McPhail: And third, as an offset to this pressure, we plan to continue to capture market share. Our competitive advantages, the investments we have made over many years, and the unique advantage that our orange-blooded associates give us over our competition position us to take share in any environment. Taking these factors into account, we are targeting approximately flat sales and comp sales growth for 2023. Further, our operating margin target of 14.5% reflects approximately 60 basis points of impact from the compensation investment we announced today.

Speaker 6: We plan to continue to capture market share.

Speaker 6: Our competitive advantages.

Speaker 6: The investments we have made over many years.

Speaker 6: And the unique advantage that our Orange-Blooded associates give us over our competition.

Speaker 6: Position us to take share in any environment.

Speaker 6: Taking these factors into account.

Speaker 6: We are targeting approximately flat sales and comp sales growth for 2020. -three.

Speaker 6: Further our operating margin target 14% and.

Speaker 6: Reflects approximately 60 basis points of impact from the compensation investment we announced today.

Richard McPhail: Our effective tax rate is targeted at approximately 24.5%. Our diluted earnings per share, is targeted to decline by a mid single-digit percentage. Outside of this target setting, if lumber prices remain at current levels for the remainder of our fiscal year that would equate to approximately 100 basis points of pressure to comp sales and an insignificant impact to earnings. At today's current price, this would imply more pressure in the first half than in the rest of the year.

Speaker 6: Our diluted earnings per share is targeted to decline by a mid-single-digit percentage.

Speaker 6: Outside of this target setting.

Speaker 6: If lumber prices remain at current levels for the remainder of our fiscal year.

Speaker 6: That would equate to approximately 100 basis points of pressure to comp sales and an insignificant impact to earnings.

Speaker 6: At today's current price, this would imply more pressure in the first half than in the rest of the year.

Richard McPhail: We plan to continue investing in our business with catbacks of approximately 2% of sales on an annual basis.

Speaker 6: After investing in our business and paying our dividend, is our intent to return excess cash to shareholders and the form of share repurchases?

Speaker 6: We believe that we have positioned ourselves to meet the needs of our customers in any environment.

Speaker 6: The investments we've made in our business.

Speaker 6: Have enabled agility in our operating model.

Richard McPhail: As we look forward, we will continue to invest to strengthen our position with customers, leverage our scale and low cost position to drive growth faster than the market and deliver shareholder value.

Speaker 6: Thank you for your participation in today's call and Christine, we are now ready for questions.

Operator: 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.

Speaker 2: A confirmation tone will indicate your line is in the question queue.

Speaker 2: You may press start two if you would like to remove your question from the queue.

Speaker 2: For participants using speaker equipment, it may be necessary to pick up your handset before person star keys. One moment please, while we poll for questions.

Operator: Thank you. Our first question comes from a line of Michael Aster with UBS. Please proceed with your question.

Michael Lasser: Good morning. Thanks a lot for taking my question. Ted, in this environment, we're all just kind of guessing, but we assume that your guesses are a lot more educated than any of the rest of us. And in that case, what do you see as the downside risk for the home improvement market in turn, Home Depot this year, both in terms of the depth of a potential decline and the duration of a downturn? And in that case, how would Home Depot's earnings look in that scenario?

Speaker 8: Head in this environment. We're all just kind of guessing, but we assume that your guesses are a lot more educated than any of the rest of us. And in that case, what do you see? Is the downside risk for the, the the home improveven market in turn on Depot this year, both in terms of the depths of a potential decline? And the duration of a downturn and in that case. howo would H depo's earnings look in that scenario?

Speaker 8: And the duration of a downturn and in that case.

Speaker 8: howo would H depo's earnings look in that scenario?

Ted Decker: Good morning, Michael. Thanks for the question. We'll certainly address that, but before we go into a downside, you know, I'd like to set the tone on what we see that's favorable in the business trends.

Ted Decker: We feel very good about our business is we've just referenced, we've grown the business $47 billion over the last three years and grown earning 60% during that time. Our associates did an amazing job focusing on the customer and this challenging environment.

Speaker 4: And there's really no way we would have captured that much share had we not been making the investments over the past few years.

Ted Decker: We also still see a healthy customer. I mean, we have good jobs, job growth, growing wages, still strong balance sheets. And most of our customers tend to own their home, which has seen a significant increase in value.

Speaker 4: But as we've said, we do see a unique environment with many cross currents. Right now obviously, there's heightened inflation in rising interest rates, the tight labor market in moderating equity in housing markets.

Ted Decker: So, given all that, we do expect moderation in home improvement demand. Pro backlogs are still healthy, Michael, although they are off their peak from last year. And customers are still spending time at home. Homes are aging and worth about 40% more than they were before the start of the pandemic. But people are also starting to shift spend more toward services. And as we've said, we see some more price sensitivity. So, given all that, we've set the stage for a moderating year in 2023, and Richard will take you through some of the downside cases that you alluded to.

Speaker 4: Probe backlogs are still healthy Michael, although they are off their peak from last year, and customers are still spending time at home. Homes are aging and worth about 40% more than they were before the start of the pandemic, but people are also starting to ship spend more towards services.

Speaker 4: And as we've said, we see some more price sensitivity. So, given all that, we've set the stage for a moderating year in 2, twentthousand and 23 in Richard will take you through some of the downside cases that you alluded to.

Richard McPhail: So, yeah, so Michael, you know, just to recap quickly the way that we set our target and our guidance for the year was to first start with the assumption of flat consumer spending. And then with respect to the good sector of the economy.

Speaker 6: As I said, over the last seven quarters we've seen that shift across the consumer economy from goods to services. So we would anticipate this would put slight pressure on our market and then we looked to overcome that by taking share in thedemanner. That we've done consistently over the past several years.

Richard McPhail: So, we're targeting flat. If you -- there are so many factors that influence our market right now, as Ted alluded to. But if you were to take a hypothetical situation, let's just think about that share shift that we call out. So, we look at the share that we currently capture as a share of consumption, PCE. And we've tracked that through the COVID period and over the last few years. As we said in our guidance, that share shift continued at the rates at which we have seen it behave. Currently, we would expect the market to face low single-digit negative pressure.

Speaker 6: But if you were to take a hypothetical situation let's just think about that share shift that we call out. So we look at the share that we currently capture as a share of.

Speaker 6: Consumption pce, and we've tracked that through the COVID-19 period and over the last few years.

Speaker 6: As we said in our guidance, if that share shift continued at the rates at which we have seen seen the behave currently, we would expect the market to face low single-digit negative pressure.

Richard McPhail: But if you were to take perhaps a more extreme case and say, if that...

Speaker 6: Share of pce that our market holds were to shift all the way back to 2019 levels by the end of the year.

Speaker 6: That would imply pressure of call it mid-single-digit percentages.

Speaker 6: And so that would that sort of be one way to get your mind around around a hypothetical case where share shift happens more rapidly than it has been.

Michael Lasser: So in an environment where the market's down mid-single digits, presumably home people is going to do better than that, it will take some market share. So can you frame out what you think the decremental margins would be in a down three or four type scenario and it's part of that?

Speaker 8: Where do you think you would see this first? You're already starting to experience some challenges in areas like soft flooring and others that you outlin. Is that a precursor to weakness that you might experience in other categories?

Richard McPhail: And plus, so just to keep it simple, because you know, share shift is not a perfect science.

Speaker 6: In a hypothetical case, and again, we're not guiding this way. This is not a downside case, but a hypothetical situation.

Speaker 6: That share shift. If our comps were to be mid-single-digit negative, we would see operating margin around 14%.

Speaker 6: As kind of the Coral area, to that hypothetical situation.

Multiple: [Ted Decker] And, Michael, Jeff can give some further detail. But, you know, the price sensitivity is -- while it's a bit broader in Q4 than we saw in Q3, it's still primarily those larger, you know, single ticket more discretionary items that we've referenced before, appliances, you know, grills, patio, but still being a project-oriented business. And with the pro backlog, again, albeit down, still strong. We're still seeing, you know, strong project business. But there is a bit more overall sensitivity as we saw more one-for-one offset with ticket and transaction in Q4. [Jeffrey Kinnaird] Yeah. Thank you, Ted. So, yeah, in general to your comments, you know, more broad than what we saw in the third quarter, but still very good project demand. If you look at the seven departments that outperformed, the plumbing business, building materials, millwork, hardware tools, and paint, above our company average and just reflected the strength of the project business, to your point, Michael, we're watching categories like flooring very closely. We're working assortments. We're working different opportunities in the market to look at what's happening in categories like flooring. But some broader-based sensitivity, but still good strength in the overall business.

Speaker 4: Than we saw in Q3. It's still primarily those larger single ticket, more discretionary items that we've referenced before- appliances, grill', S patio- but still being a project-oriented business.

Speaker 4: And with the Pro backlog again, albeit down, still strong. We're still seeing strong project business.

Speaker 4: But there is a bit more overall sensitivity as we saw more one for one offset with ticket in transaction in Q4. Yes, Thank you, Ted So yet in general to your comments.

Speaker 4: More broad than what we saw in the third quarter but still very good project demand if you look at the seven departments that outoverperformed the plumbing business, Bill materials, network hardware, toolsand paint.

Speaker 4: Above our company average and just reflected the strength of the project business. To your point, Michael. We're watching categories like fouring very closely. We're working assortments, we RE working different opportunities in the marke to look at what's happening in categories like fouring, but some broader-based sensitivity, but still still good strength in the overall business.

Speaker 4: To your point, Michael. We're watching categories like fouring very closely. We're working assortments, we RE working different opportunities in the marke to look at what's happening in categories like fouring, but some broader-based sensitivity, but still still good strength in the overall business.

Michael Lasser: Thank you very much and good luck.

Operator: Our next question comes from a line of Scott Chikarelli with Truist. Please proceed with your question.

Scot Ciccarelli: Good morning, guys. So can you please clarify your expectations for unit elasticity if we are starting to see St.C. inflation pressures of ease? And then secondly, any common denominators in categories or geographies where you're starting to see some of the incremental softness. Thanks.

Ted Decker: Sure, Scot. I think, you know, the last two years, we've had the same guidance that we're having this year, and that is that whatever inflation is represented in our average unit retail in ticket would be offset by transactions. So, we started the year, you know, thinking about a balance of ticket and transaction, and that higher ticket driven by inflation would be offset with transactions. The outperformance of the prior two years was that we didn't see that much sensitivity. The consumer, our customer was much more resilient sort of purchase through that elasticity curve, if you will. 

Speaker 4: We've had that, the same guidance that they were're having this year, and that is that whatever inflation is represented in an average unit retail in ticket would be offset by transaction. So we start the year: think about a balance of ticket in transaction.

Speaker 4: And the higher ticket driven by inflation would be offset with transactions.

Speaker 4: The outperformance of the prior two years was that we didn't see that much sensitivity. The consumer, our customer, was much more resilient. Sort of purchase through that elasticity curve, if you will.

Ted Decker: What we are seeing now is some more sensitivity, and we had almost an exact one-for-one offset in Q4. That's what we're expecting for 2023, that there is still inflation. I mean, we are still in an inflationary environment, as we saw from CPI and PPI results last week. Although, it is abating and it's abating more, I would say, in our industry, our costs on the table are much lower than they had been. Our wraparounds and price moves going into 2023 will be much lower than they had been in the prior two years. And so, while we're still expecting an offset in transactions, because the ticket won't be as high, the negative transactions won't be as low, but still net to that flat guidance for 2023.

Speaker 4: Some more sensitivity and we had almost an exact one for one offset in Q4. That's what we're expecting for 2023: that there is still inflation. I mean we are still in an inflationary environment, as we saw from CGI P results last week.

Speaker 4: Although, it is abating and it's abating more, I would say, in our industry, our costs on the table are much lower than they had been. Our wraparounds and price moves going into 2023 will be much lower than they had been in the prior two years. And so, while we're still expecting an offset in transactions, because the ticket won't be as high, the negative transactions won't be as low, but still net to that flat guidance for 2023.

Speaker 4: In transactions because the ticket won't be as high, the negative transactions won't be as low, but still net to that flat guidance for 2020. -three.

Scot Ciccarelli: Okay, thank you. And then any comments and nominators in terms of category or geographies where you're seeing some being from alphopinus?

Speaker 6: The justesttry like it, or is there?

Ted Decker: Yeah, big ticket would be the ones you know that I called out before that it continued.

Speaker 4: With softness in the geography is, while we had a little more variability of our comp range, there's no particular geography that you call out, other than weather impacted ones, that that would show.

Speaker 4: Anything off the mean for us.

Scot Ciccarelli: Got it. Make it up.

Operator: Our next question comes from light of Simea and Gutman with Morgan Stanley . Please receive your question.

Simeon Gutman: Hey, good morning, everyone. Maybe related to the last question, we've had home prices have decelerated for about six to eight months now, and we know existing home sales are in deep negative territory. If you align your business against those trends, and in markets where they're more pronounced, is there a decoupling in other words?

Speaker 10: Y the business is stable, despite prices have fallen, an existing home sales being down, you know 20, 30%.

Richard McPhail: Thanks, Simeon. On home prices, we know, over the long-term, that our business does correlate to price appreciation. Obviously, we've had unprecedented growth and appreciation since 2019. Home prices peaked in June of 2022. In fact, at that point, they were 45% higher than they were at the end of 2019.

Speaker 6: meanyou know, on home prices.

Speaker 4: We know over a long term that our business does correlate to price depreciation. Obviously we've had unprecedented growth.

Speaker 11: In appreciation since 2019, home prices peaked in June of 2022. in fact, at that point they were 45% higher than they were at the end of 2019.

Richard McPhail: They have regressed by about 3% since that point, so we've seen some modest correction. But I can tell you, we have not seen an impact on a market-by-market basis since that peak. There's no relationship with the Comp Sales and the Home Price Appreciation.

Speaker 11: Or correction that we've seen on housing turnover.

Speaker 11: There's just that interesting dynamic of whether what is actually happening in housing turnoverthere just aren't the willing sellers out there to the degree that they have been in.

Speaker 11: In past eras. We're in such a healthy.

Speaker 11: Our customer, our homeowner customers, in such a healthy position.

Speaker 11: That you just think about their motive for selling.

Richard McPhail: As you know, 90% -- over 90% of U.S. homeowners, either own their homes outright or have fixed rate mortgages under 5%. And so, that incentive to sell and move to a higher rate mortgage just isn't there. And in fact, the incentive is really there to improve in place. So, it's hard to say what the housing economy -- how the housing economy might impact us. But no, to answer your first question, to date, since 2022, we haven't seen a relationship.

Speaker 11: Either own their homes outright or have fixed rate mortgages under 5%. And so that incentive to sell and move to a higher rate mortgage just is there and in fact the incentive is really there to improve in place. So it's hard to say what the sort of.

Speaker 11: What the housing economy have. A housing economy might impact us, but no. To answer your first question, to date, since 2022, we haven't seen a relationship.

Multiple: [Simeon Gutman] And a follow-up to a point that was made earlier that if the share of PCE reverts back to the 2019 level, do you take a view on this? Or is there any confidence that it doesn't? And it's a view really on digestion. We've seen a couple of categories in real terms actually overcorrect the 2019. Only two right now, but not home improvement, obviously. But how confident are you that we don't need to go back that far, or that the digestion or so is done and we can hang out at the current share that we are? [Richard McPhail] You know, I think the only thing I look at really is the trajectory that we've observed. I think that's the best information we can use. We're not making an assumption about whether in your terms there's full digestion or not.

Speaker 10: Do you take a view on this or is there any confidident that it doesn't and it's a view really on digestion. We've seen a couple of categories in real terms actually overcorrect. The 2019 only two right now but it not not home improvement obviously. But how confident are you that we don't need to go back that far or that the digestion.

Speaker 11: assumptionabout whether, in your terms, there's full digestion or not.

Multiple: [Simeon Gutman] Okay. Fair enough. Thanks. Good luck. [Ted Decker] And, Simeon, I would say this -- as we said, this is a unique period and hard to gauge on the shortest horizon. But we are just so incredibly bullish on the longer horizon for this industry. Just all the dynamics that we know about starting with the fundamental shortage of housing, I mean we're still whether it's one million, two million, three million units short in with household formation and population growth and aging housing stock, all the things that we talk about. I mean that is all very much in place. And as the market works its way through PCE reversion or not or level of that and inflation mortgage rates, that will all settle. And what you're left with is still a market that is underserved in housing units built. And over half the homes are over 40 years old. And as Richard said, they remain in place with owning the home in low mortgage rates. People are going to want to make more significant improvements on those homes. So, we remain and just couldn't be more bullish on the longer-term view of this industry. On those homes. So weeks remaining just couldn't be more bullish on the longer-term view of this industry.  [Simeon Gutman]  Thank you.

Speaker 4: Period in hard to gauge on the shortest horizon.

Speaker 4: In hard to gauge on the shortest horizon but.

Speaker 4: We are just so incredibly bullish on the longer horizon for this industry. Just all the dynamics that we know about, starting with the fundamental shortage of housing. I mean we're still- you know whether it's one to three million unit- short in with household formation and population growth than aging housing.

Speaker 4: Is is still a market that is undersserved in housing units built and over half the homeomes, or over 40 years old in, as Richard said, the remain in place. With owning the home in low mortgage rates, people are going to want to.

Speaker 4: Make more significant improvements on those homes. So weat remaining just couldn't be more bullish on the longer-term view of this industry.

Speaker 4:

Operator: Our next question comes from Brian Nagel with Oppenheimer. Please proceed with your question.

Multiple: [Brian Nagel] Hi, good morning. I had a couple of questions that are both maybe more philosophical question. But first off, and I guess, Ted, just some of the comments made, you know, here about increased price sensitivity, I think, on the part of your consumers, you know, maybe that turned a little more severe than we saw in the third quarter. One of the big -- I think I probably followed Home Depot for a long time, one of the big [Technical Difficulty] the data -- [Isabel Janci] Brian, we can't -- Brian, you're breaking up. Can you repeat that? [Brian Nagel]Oh, I'm sorry. I will move around here. So, the question, I'll make it short. The question I'm having is as you're looking at this, you know, the consumer behavior, you know, we're all seeking or searching right now for those signs of weakening consumer, given a tempered backdrop. But do you believe that we're still kind of in the one-off -- what you're seeing is more one-off in nature? Or is this really the beginning of a weaker trend coming that could persist over the next few quarters?

Speaker 13: A couple of questions that are both maybe more philosophical urebut.

Speaker 13: bothup and it ition some of the comments made. Hear about increased price sensitivity. Think on part of your consumers and you'll maybe that turn a little more severe than we saw in the third quarter. They're one of the big. I think probably followed home people for a long time with the big.

Speaker 12: That IG or youn't really understand.

Speaker 13: Understand the data gr se ation. Brian , you're breaking up and you're unch on it. That will move around here. M of the question'll make a short. Your question. I'm having it is: you're looking at, you're looking at this. You know the consumer behavior. You know what we're all seeking or searching right now is for those signs are weinkeny consumer given a cover backdrop. If you believe that we're still kind of in the one off.

Speaker 13: What you're seeing is more one-off- nature awards is really the beginnings of a weaker trend coming that could persist over the next few quarters.

Jeffrey G. Kinnaird: Brian , it's Jeff. As we talked about price sensitivity earlier, we are seeing some additional sensitivity or saw some different additional sensitivity in Q4 versus Q3. But let me give you a real time example of how we're looking at the business and I'll

Speaker 4: Go to the cleaning business as an example. As I spoke about in my prepared remarks, we launched in this quarter ecoap, which is a premium cleaning brand in the market which we're seeing exceptional performance. It is a trade-up category for for many consumers, many Pros, and we're just.

Speaker 4: Really really excited about the partnership and the long-term opportunity in that category. At the same time, we're expanding our hdx cleaning lineup and that's just a great everyday value brand for our customers and we're seeing a great pickup in that brand as well. So our merchants.

Speaker 4: Take the time, by category, to engineer what results they want to see, and claning is a great example there. At the same time, we're watching categories very closely like appliances, like patio urnurure, like real things will go in Q3 in earder today to ensure that we are positioned right for the current environment.

Brian Nagel: I'm going to leave the panel. Thank you. Appreciate the time. Thank you.

Operator: Our next question comes from a line of Christopher Warvers with JP Morgan. Please receive with your question.

Christopher Horvers: Thanks. Good morning, everybody. Can you talk about what you saw from a rate of change in DIY versus Pro and 4Q relative to 3Q? Are you seeing one side change faster than the other? And how does that inform how you're thinking about the business in 23?

Ted Decker: I don't know if we saw a rate of change, Chris, the highlight remains the high-spend pro. I mean, that's still the strongest piece of the business, but I wouldn't say there was a rate of change.

Speaker 4: I don't know if we saw rate of change Chris, the highlight remains the high spend pro. I mean that's still the strongest piece of the business, but I wouldn't say there was a rate of change much beyond that.

Christopher Horvers: Got it. And then I guess can you share the presentation on the cadence of 23 from a top line perspective. You have DIY versus Pro. You've got tough lumber laps in your term, but you also have an easier spring lap. And so how are you thinking about the cadence of the year if you sort of had a...

Speaker 6: Did is zero in four Q ity. You ran seasonal. You can get to a lot of different outcom, So how are you thinking about the cadence? And just to clarify, is 1, one hundred basis points of lumber a headwind in the top line guide?

Richard McPhail: Right. So, Chris, our guidance assumes that we'll comp slightly lower in the first half than the second half. The lumber pressure we called out is sort of outside of guidance. There's so much volatility in that that we would not want to put that in guidance. There is 100 basis points of pressure to the year. If the number remains at current prices, that pressure exists predominantly in the first half.

Speaker 11: That will comp slightly lower in the first half than the second half. The lumber pressure we called out is sort of outside of guidance.

Speaker 11: There's so much volatility in that that we wouldn' we would not want to put that in guidance. There is a hundred basis points of pressure to the year. If remains at current prices. That pressure exists predominantly in the first half.

Jeffrey G. Kinnaird: And Chris, as Richard mentioned, it's been a very turbulent couple of years in the lumber market to give you an example of what we faced in the forecorr and the framing side. The lumber was $420 per thousand on average compared to $886 on average in 2021.

Speaker 4: Put that in retail dollars cents for everyone a two by-four Stud which is one of our top movers in the business retail on average for $3 and for cents in the fourth quarter of this year. Last year it was over $5 now. We did make some ground back on units. So you could say that when you see a lumber market depressed or normalized.

Speaker 4: You see good unit productivity and you could see good overall project business as you look forward into the front. halfthat same two by four Stud is over $10. It's now $3 and 50 cents. So we'll see good unit productivity and certainlyof an opportunity to drive more project related business.

Richard McPhail: And Chris, another reason we leave that sort of lumber hypothetical case outside of guidance, if that pressure does exist and come through, we would not see any material in vector earnings.

Multiple: Right, so you're not, there could be a price headwind, but there could be some offsetting positive elasticity on that side. And sort of net net, that plus the fact that it doesn't hit bottom line, it's outside the guide. That's right. Yeah, you got it.

Multiple: Thanks so much, have a great spring. Our next question comes from a line of Stephen Forbes with Guggenheim. Please receive with your question.

Steven Forbes: Good morning. I wanted to start, you know, really trying to expand on the $1 billion investment that was announced.

Speaker 14: So curious. Ted, or Richard, with the team, can you comment on how the investment impacts planned compensation mix for the front line associated in 2023 on average, inclusive of how we should think about the resetting of the success sharing program?

Ted Decker: Sure, yes, Stephen. In Anne, we'll take you through some of the detail on the rates, but just to talk about this investment, we feel just great about doing this for our associates. Customer service at the Home Depot starts with our associates, and we believe this investment includes unsere life, has ensured that our associates a first is passing ahead on these?" Thank you on behalf of Governor Finan. ??!

Speaker 4: Consistent with our values and is going to position us favorably in the market.

Speaker 4: We've been operating successfully in a pressure labor market. We all know labor has been tighter in, rates have been higher, but just last year we're able to hire two thousand associates.

Ted Decker: But we believe this move is going to protect our customer experience for the near medium and in long term. We'll be able to track the most qualified candidates and retain the exceptional associate base that we already have. So we not only increased our starting wages again and we'll go into some detail.

Speaker 4: But we increased wages for every single front line associate and there's a termined retailing. You get compression when you raise the starting rates with tenred associates. We addressed compression in a meaningful way in this billion dollar investment. So our.

Speaker 4: Tenured associates saw real wage increases with this move and we hope to improve retention through this. That's why we call it an investmentand it's going to improve the customer experience through. A more effective associate is just in the building. Longer understands.

Speaker 4: Our procedures in is much more effective, engaging with the customer and selling- and we hearken back to our values wheel ofinvesting in our associates and what our founders said: that if we take care of our associates, they take care of the customer and everything takes care of itself.

Multiple: and that's what this investment is all about. But Anne, you can give some more detail, please. Yeah, thank you, Ted. First of all, the investment is incremental. So you ask about success sharing, and that is still a part of our total compensation package. One of the things I spoke about around how we think about investing in our...

Speaker 5: thatclose to 90% of our leaders started on the floor of the store. And why is that important? This $1 billion investment put search favorably in the marketplace So we can recruit, retain and attract the best leaders, because they are the pce of leaders for the company.

Speaker 5: So this is an incremental investment. Every single hourly associate will.

Speaker 5: Received an increase and, to Ted's point or more tenured associate, who are ke keen when we think about going to the spring season, also got an incremental investment, a Pep in their step to continue to take market share in 2020. -three.

Ted Decker: And, and, and, and, Stephen, while we don't, you know, disclose average wages and, and we, we've always, and we'll continue to be competitive on, on a market by market level. And, and we've been competitive. It's why we're able to hire the 200,000 people last year. But after this change.

Speaker 4: Our starting rate in any one market. There'll be no market under $15 for a starting rate in starting rates go much higher than that depending on the market and then the average wage again, particularly with the investment in every associate, including tenured.

Speaker 4: The dressing compression, we have an average wage that is well, well above the $15.

Steven Forbes: Appreciate the color and then maybe just a quick follow up for Richard. I think we're sort of targeting recapturing a 60% accounts payable to inventory ratio, but maybe just clarify that's still the goal and when we should expect to achieve that this year.

Richard McPhail: Well, you know, we're still, while we know that global supply chains are improving, at least relative to where we were last year at this time, we're still pulling forward inventory. We still see extended lead times.

Speaker 11: And we think that 2023 is going to be a year of continued improvement in supply chains. So we are encouraged by the inventory movements in our business. The year-over-year inventory increase was the smallest quarterly increase of the entire year.

Speaker 11: And so we feel good of our inventory productivity and again we've been managing in kind of exceptional circumstances.

Speaker 11: But yes, I think, over the long run, you will see us heading back to convention with respect to working capital.

Steven Forbes: Thank you.

Ted Decker: Gr screaming

Operator: Our next question comes from the line of Karen Short with credits. Please proceed with your question.

Karen Short: Hey, thanks very much. Good to talk to you. The first question I just want to ask is looking at the relationship on sales growth versus EBIT growth. And I'm actually talking about this excluding the billion dollar investment. Obviously EBIT growth on a one-year basis is decently below sales growth.

Speaker 3: So wondering just how to think about that relationship, you know, including or excluding, But going forward- and then wondering if you could just talk a little bit about what you're seeing on one Q to date in terms of calm performance.

Richard McPhail: Sure. So, it may be more helpful to talk about the construction of operating margin year to year just to kind of tick that out. That gives you a better sense. So, in a flat comp environment, we would expect to see deleverage on a fixed cost base and obviously in an inflationary environment as it exists today. That deleverage is somewhere between 30 to 40 basis points. In addition, our wage investment represents about 60 basis points of movement in year-to-year wage. And then, offsetting that are productivity initiatives that we expect will generate between 10 and 20 basis points of recapture of margin. And so, that's how we walk from the 15.3 to the 14.5. Over the long run, we always expect to grow operating income faster than sales. We've been managing in a unique environment. And certainly, our guidance implies the wage investment that we've made today. And the second part of your question, I'm sorry I forgot.

Speaker 11: So in a flat comp environment we would expect.

Speaker 11: To see deleverage on a fixed cost base and obviously in an inflationary environment as exists today.

Speaker 11: That deleverage is somewhere between 30 to 40 basis points. In addition, our wage investment represents about 60 basis points of movement in year-to-year wage. And then, offsetting that are productivity initiatives that we expect will generate between 10 and 20 basis points of recapture of margin. And so, that's how we walk from the 15.3 to the 14.5.

Speaker 11: Somewhere between 30 to 40 basis points.

Speaker 11: In addition, our wage investment represents about 60 basis points.

Speaker 11: Of movement in year-to-year wage and then offsetting that, or productivity initiatives that we expect will generate between 10 and 20 basis points.

Speaker 11: Of recapture of margin, and so that's how we walk from the 15, three to the 14 five.

Speaker 11: Over the long run, we always expect to grow operating income faster than sales. We've been managing in a unique environment. And certainly, our guidance implies the wage investment that we've made today. And the second part of your question, I'm sorry I forgot.

Speaker 11: We've been managing in a unique environment and.

Speaker 11: And certainly our guidance, implies the wage investment that we've made today and the second part of your question. I'm sorry I forgotten.

Karen Short: Oh, it was just any color you could provide on one key performance.

Speaker 3: Oh it was just C. use any color you could provide. On a one Q performance in terms of comp.

Multiple: [Richard McPhail] Well, as I shared just a few questions ago, we do anticipate that comps in the first half will be slightly lower than the second half, and our performance to date reflects that guidance. [Karen Short]  Okay. Thanks very much.

Speaker 11: Shared just a few questions ago. We do anticipate that comps in the first half will be slightly lower than the second half, and our performance to date reflects that guidance.

Speaker 11: Ago we do anticipate that the comps in the first half will be slightly lower than the second half and our performance today reflects our guidance. Thanks very much.

Operator: Our next question comes from line of Zach Faden with Wells Fargo. Please receive your question.

Zachary Fadem: Hey, good morning. Richard, it sounds like most of the margin pressure in 2023 is expected to land at the operating expense line. And I'm curious if you could talk to the push-and-take to gross margin specifically. And if it's there to assume the inflection we saw in Q4, it's lightly positive. It's a fair...

Speaker 6: your-over-year run rate from here, or just given the bulk of your supply chain investments are running their course, and then freight commodities could be a tailwind.

Richard McPhail: There are a lot of vins and outs. There are a lot of vins and outs in 2022. We basically delivered Gross Margin precisely where we anticipated to, at the beginning of the year, underlying that was a lot of product costs and transportation costs.

Speaker 11: Offset by actions and within that.

Speaker 11: Continued supply chain investment in in our downstream or delivery operations.

Speaker 11: For 2023 we're targeting gross margin that's roughly flat year-over-year. Again, it will be a year of several ins and outs. Ct cost inflation has decreased but does persist above historical levels. Transportation cost should actually be a tailwind. But we still have investment in our supply chain and look, we did see some increased pressure from shrink in the back half right. So we've got a lot of ins and outounced but roughly speaking, with targeting essentially flat gross margin for the year.

Speaker 11: But we still have investment in our supply chain and look, we did see some increased pressure from shrink in the back half right. So we've got a lot of ins and outounced but roughly speaking, with targeting essentially flat gross margin for the year.

Multiple: God, that's helpful. And then, following up on the billion dollars in wage investment, can you talk about where this puts you competitively versus your peers? And then, if for whatever reason, if your comp appears to be falling short of that flatish expectation range,

Speaker 11: Would you still make the planned investments in 2023 or could you spread them out over a couple of years. We're committed to our investment that's done with respect to how we manage our piano. We always operate with a degree of financial flexibility and so.

Speaker 11: In any environment we're going to, we're going to assess what that environment means for us and how we should manage the pino.

Speaker 11: Environment we're going to. We're going to assess what that environment means for us and how we should manage the piano got it. Thanks for the time.

Multiple: Christine, we have time for one more question. Thank you. Our final question will come from the line of Steven Zakone with City. Please receive with your question.

Multiple: [Steven Zaccone] Good morning, all. Thanks for fitting me in here. I wanted to circle back to the duration part of Michael's first question. You know, Ted, when you think about home improvement demand seeing a moderation this year, when you take a little bit of, you know, a more medium-term outlook over the next couple of years, just since you've seen strength in the business for the last three, you know, what are you focused on with the health of the homeowner that may be this moderation could last couple of years in nature? [Ted Decker] Well, you know, as we've said, we're thrilled with the share we captured, the sales we drove. And while we don't love the moderation, you know, you can't fight the tide, if you will, with PCE spend going back to services, people traveling, and whatnot. But the two main things that we're going to stay focused on to take share, you know, one, you know, I say the consumer. The consumer writes the check for all projects, even if the pro is doing the work. But, you know, for the consumer, we are laser-focused on delivering the best interconnected, frictionless shopping experience. I mean, retail as we know, is all about interconnection, physical world and the digital world. And we are laser-focused. Matt Carey and his team is focused on taking out all friction in that. And as we continue to delight customers with that frictionless experience, we'll look to gain more share. And then, we haven't talked much about the pro in this call, but, you know, we are still 100% focused on building out all the capabilities of that pro ecosystem. It is going to allow us to capture more share of wallet with the pro and move up to larger plan purchases. And extremely pleased with the results we're seeing as we continue to put those capabilities in the marketplace. So, that's what we're going to do to keep taking share regardless of the environment or the duration of the environment.

Speaker 6: What are you focused on with the health of the homeowner and maybe this moderation into the last couple of years in nature well as we've said we're thrilled with with the share we captured in the sales we drove and.

Speaker 4: While we don't love the moderation, you can't fight the tide. If you will with PC, spend going back to services- people traveling and whatnot- but the to make things that we're going to stay focused on. To take share one.

Speaker 4: I say the consumer. The consumer rightes that check for for all projects, even if the Pros doing the work, but for the consumer. We are laser-focused on delivering the best interconnected, frictionless shopping experience. Retail, as we know, is all about interconnection.

Speaker 4: Physical world in the digital world and we our laser-focus Matt carrying his team.

Speaker 4: Is focused on taking out all friction in that and its we continue to delight customers with that frictionless experience. We'll look to gain more share. And then we haven't talked much about the Pro in this call, but we are still 100% focused on building out all the capabilities that pro-ecosystem.

Speaker 4: To keep taking share, regardless of the environment, towards the duration of the environment.

Steven Emanuel Zaccone: Okay, thanks. And then the brief fall, if I had just a question on the promotional environment, you know, really hasn't been that much of an issue in home improvement the last couple of years. Would you expect it to be more of a factor this year, just given an overall moderation and demand?

Multiple: Stephen, it's Jeff. No, nothing specific to call out on the promotional environment as we head into the first quarter, further into the first quarter. We're excited about the value we're ready. We're offering our customers and our spring sets have gone exceptionally well and we're looking forward to the spring season.

Speaker 2: But no change and we can predict in the promotional vironment. Thanks for the deilthank you, Ms chancy. I would now like to turn the floor back over to you for closing comments.

Isabel Janci: Thank you Christine and thank you for joining us today. We look forward to speaking with you on our first quarter earnings call in May.

Operator: 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.