Q3 2023 The Home Depot Inc Earnings Call
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Greetings and welcome to the home Depot third quarter 2023 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.
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 2023 earnings call joining us on our call today are Ted Decker Chair President and CEO.
Ann Marie Campbell Senior Executive Vice President believed that sick 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.
<unk> will be limited to analysts and investors and as a reminder, please limit yourself to one question with one follow up.
If we are unable to get to your question during the call. Please call our Investor Relations Department at 770384 to 387.
Before I turn the call over to Ted Let me remind you that todays press release and the presentations made by our executives include forward looking statements as defined in the private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to.
To differ materially from our expectations and projections. These risks and uncertainties include but are not limited to the factors identified in the release and in our filings with the Securities and Exchange Commission.
Today's presentations will also include certain non-GAAP measures reconciliation of these measures is provided on our website.
Now, let me turn the call over to Ted.
Thank you Isabella and good morning, everyone sales for the third quarter were $37 7 billion down.
Down 3% from the same period last year comp sales declined three 1% from the same period last year and our U S stores had negative comps of three 5%.
Looted earnings per share with $3 81 in the third quarter compared to $4 24 in the third quarter last year.
The third quarter was in line with our expectations similar to the second quarter. We saw continued customer engagement with smaller projects and experienced pressure in certain big ticket discretionary categories. In addition, lumber and copper and wire deflation and storm related overlaps negatively impacted results in the quarter.
We'll discuss these and other business trends shortly.
During the third quarter, our pro customer outperformed our DIY customer, while internal and external surveys suggest that probe backlogs are lower than they were a year ago. There is still healthy and elevated relative to historical norms.
Only one quarter left in the year, we believe the endpoints for our previous guidance range are no longer likely outcomes as a result, and as we announced in this morning's press release, we narrowed our guidance range for fiscal 2023.
Richard will take you through the details in a moment.
As we've discussed this year reflects a period of moderation. However, we are confident in our ability to navigate through this unique environment. We remain very excited about our strategic initiatives and are committed to investing in the business to deliver the best interconnected shopping experience capture wallet share with the pro and grow our store footprint.
As we discussed at the Investor Conference in June we continue to invest and focus on creating a frictionless interconnected shopping experience for our customers. We are pleased with the progress we are making home depot Dot com is one of the largest retail web sites in the United States and our digital App. It's one of the most highly rated and all of <unk>.
Retail and yet we believe there's still opportunity to reduce pain points across the shopping journey. Our teams are identifying areas of improvement like better communication throughout the shopping journey easier returns process and the ability to seamlessly and intuitively make changes to an order once place.
For our pros, we are investing in a multitude of initiatives. We remain focused on building out our unique ecosystem of products and services as a result.
Evolving our organizational structure and recently elevated Ann Marie Campbell to senior Executive Vice President.
Better aligning our outside sales and service business and the global stores organization.
<unk> is one of our biggest growth opportunities and this organizational change will allow us to better serve them by leveraging our full ecosystem expertise product assortment fulfillment and operations.
Our merchants store and met teams supplier partners and supply chain teams did an outstanding job delivering value and service to our customers throughout the quarter and I'd like to close by thanking them for their dedication and hard work. In addition to the home depot is proud to have tens of thousands of veterans service members and military.
Spouses and Orange Aprons last week, we announced the home Depot Foundation surpassed the goal of $500 million.
Vested in veterans' causes and also increase the total commitment to $750 million by 2030.
I'd like to turn the call over to Ann.
Thanks, Ted and good morning, everyone. Let me start by saying that I'm very excited about my new role and the alignment is will create between the outside sales and services business and the global organization.
As you heard at our Investor Conference in June capturing a greater share of the Pros' wallet is one of our largest growth opportunities.
Present, roughly $475 billion in addressable market and today, we have relatively little share.
The beauty of the home depot is that we have unique competitive advantages our convenient stores.
Our leading brands our engaged associates, our expensive fulfillment options that are on maps and that can be leveraged for the benefit of our customers.
And that's exactly what we aim to do.
To do that or new organizational structure will create a stronger momentum with our teams to drive success with the pro.
<unk> will focus on improving the experience for pros shopping our stores.
His 29 year tenure and knowledge about store operations and new pro capabilities will be instrumental in achieving our goals.
And chip the brine or head of outside sales brings nearly 30 years of distribution experience. He will work on building our capabilities to better serve more complex project needs.
Ultimately, we must focus on removing friction within or operations. So our customers have a great experience every single time, no matter, how they choose to shop with us.
In the aisles of our stores picking a product at the store.
Even product at the job site with a sales associate or digitally.
We know that most of <unk> many of these capabilities across our ecosystem when shopping with us.
We are building trust and partnership that last for decades and.
Generations. This means we have to work hard to deliver a great experience.
Les on the point of interaction.
As you know we have identified additional growth opportunities with the pro which requires us to invest in new capabilities and functionalities across the business.
Think about the initiatives, we have undertaken with the complex trial.
This customer interacts differently, they are accustomed to interacted with their suppliers in a different way than our traditional business model.
<unk> working on complex projects want to reserve product used trade credit and have products delivered to their job site in a staged manner.
While these capabilities exist in the market today, we are incorporating them in our full ecosystem to serve customers in a way no one else can.
I could not be more excited about the opportunity that lies ahead.
And for the in store experience over the last several years, we have talked about importance of in stock and ultimately on shelf availability or OSA.
Having the right products in stock and the right quantity and on the shelf available for purchase is critical.
And we have implemented several initiatives to help us do this more effectively and efficiently.
In the past, we've talked about GSR or get stores right.
GSR drives productivity by using our proprietary space allocation model, coupled with tenured field merchandising teams to determine which categories to invest in on a store by store basis.
More recently, we have talked to you about our rollout of sidekick and computer vision using machine learning technology computer vision helps our associates quickly find the power type product in the overhead and sidekick helps direct associates to keep pace.
Phase out.
<unk> exist today.
Today. These tools have been deployed across all U S stores.
And while early days, they have driven meaningful improvement in our on shelf availability.
The beauty of these initiatives is that they also drive productivity they make it easier for associates to restock product have a greater depth of high velocity product.
And ensure we remain in stock with more product on the shelf and available for sale.
As a result, we enable our associates to focus on the most important task and allocate more time to deliver a better shopping experience.
These are just examples of the many different types of initiatives that can drive significant value for customers.
Our associates and our shareholders.
Despite a challenging year, our amazing associates have remained engaged and ready to serve our customers and I want to thank them for all they do with that let me turn the call over to Billy.
Thank you and good morning, everyone I wanted to start by also thanking all of our associates and supplier partners for their ongoing commitment to serving our customers and communities.
As you heard from Ted during the third quarter, our sales were in line with our expectations. However, we did have some unfavorable impacts from core commodity deflation and storm related overlaps.
We saw a continuation of the trends that we've been observing throughout the year.
With softness in certain big ticket discretionary type purchases.
Instead of engaging in larger projects customers continue to take on smaller projects.
Turning to our department comp performance for the third quarter, our building materials Department posted a positive comp and seven of our remaining 13 merchandising departments posted comps above the company average, including plumbing appliances hardware outdoor garden millwork tools and pain.
During the third quarter, our comp transactions decreased two 7% and comp average ticket decreased 3%.
Excluding deflation from core commodities, we experienced comp average ticket growth, primarily driven by demand for new and innovative products.
Deflation from core commodity categories negatively impacted our average ticket growth by approximately 60 basis points during the third quarter driven by deflation in lumber and copper.
During the third quarter, we continued to see a decline in lumber prices relative to a year ago.
As an example on average framing lumber was approximately $420 per thousand board feet compared to approximately $545 in the third quarter of 2022, representing a decrease of over 20%.
Big ticket comp transactions or those over $1000 were down five 2% compared to the third quarter of last year.
We continue to see softer engagement in big ticket discretionary categories like flooring countertops and cabinets.
We saw big ticket strength in pro heavy categories like roofing installation and portable power.
Turning to total company online sales.
Leveraging our digital platforms increased approximately 5% compared to the third quarter of last year.
We continued to invest in the digital experience across our website and App and released a variety of enhancements in the third quarter.
These range from simple improvements to help customers track orders to more complex things like updating our search and recommendation algorithms.
So those customers that transacted with us online during the third quarter nearly half of our online orders were fulfilled through our stores.
During the third quarter, we hosted our annual Labor day appliance and Halloween events, and we're pleased with the results.
In appliances, we were encouraged with the customer's engagement during the event and.
In 2023 was another record sales year for our Halloween program, both in store and online as our customers continue to add to their collection with our unique and exclusive product assortment.
As we turn our attention to the fourth quarter, we intend to continue this momentum with our annual holiday Black Friday and gift center events.
And our gift center, we continue to lean into brands that matter most for our customers with our assortment of Milwaukee Ryobi Makita Dewalt.
Rigid husky and more we will have something for everyone, whether its a wide assortment of cordless ryobi tools to Walter atomic drilling impact kits are our new Milwaukee <unk> forged batteries. These new <unk> forged batteries will be a game changer for our pro customer providing the most powerful fastest charging.
And longest life of any battery under Milwaukee <unk> platform.
This quarter I'm also excited to announce the addition of <unk> to our powerhouse assortment of pro brands, including Milwaukee, USG custom building products Levitan and QEP to name a few.
It is the strategic vendor relationships that make us the product authority in home improvement and the addition of <unk> will help extend our position.
<unk> is one of the top requested most innovative pro brands in the wire connector segment that features a release of all level lock wire connector that speeds up installation and saves space and tight applications. We recently launched a number of skus in our stores, which are exclusive to the home depot and the national Big box retail channel.
Our merchandising organization remains focused on being our customers' advocate for value. This means continuing to provide a broad assortment of best in class products that are in stock and available for our customers when they need it.
We will also continue to lean into products that simplify the project saving our customers time and money. That's why I'm. So excited about the innovation, we continue to bring to the market.
With that said I'd like to turn the call over to Richard.
Thank you Billy and good morning, everyone in the third quarter total sales were $37 7 billion.
A decrease of approximately $1 2 billion or 3% from last year.
During the third quarter, our total company comps were negative three 1%.
With comps of negative two 1% in August negative three 4% in September and negative three 7% in October.
Comps in the U S were negative three 5% for the quarter.
With comps of negative two 5% in August negative three 8% in September and negative four 1% in October.
In local currency, Mexico, and Canada posted comps above the company average.
It is important to note that adjusting for storm related overlaps and some seasonal shift.
<unk> comps were relatively consistent across the quarter.
In the third quarter, our gross margin was 33, 8%.
Kris of approximately 20 basis points from the third quarter of last year, which was in line with our expectations.
During the third quarter operating expense as a percent of sales increased approximately 120 basis points to 19, 4% compared to the third quarter of 2022.
Our operating expense performance during the third quarter reflects our previously executed compensation increases for hourly associates as well as deleverage from our topline results.
Our operating margin for the third quarter was 14, 3% compared to 15, 8% in the third quarter of 2022.
Interest and other expense for the third quarter increased by approximately $30 million to $438 million.
In the third quarter, our effective tax rate was 23, 3% down from 24, 4% in the third quarter of fiscal 2022.
Our diluted earnings per share for the third quarter were $3 81.
Decrease of 10, 1% compared to the third quarter of 2022.
<unk>.
During the third quarter, we opened seven new stores, bringing our total store count to 2333.
Retail selling square footage was approximately 242 million square feet.
At the end of the quarter merchandise inventories were $22 $8 billion down to $9 billion or 11% compared to the third quarter of 2022 and inventory turns were four three times flat to one year ago.
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 quarter, we invested approximately $670 million back into our business in the form of capital expenditures.
And during the quarter, we paid approximately $2 $1 billion in dividends to our shareholders and we returned approximately $1 $5 billion to shareholders in the form of share repurchases.
Computed on the average of beginning and ending long term debt and equity for the trailing 12 months.
Turn on invested capital was approximately 38, 7%.
One from 43, 3% in the third quarter of fiscal 2022.
Now I will comment on our guidance for fiscal 2023.
As you heard from Ted with one quarter remaining in fiscal 2023, we no longer expect the endpoints of our previous guidance range is likely outcomes and therefore, we are narrowing our guidance for 2023.
We expect fiscal 2023 sales and comp sales to decline between three and 4%.
We are targeting an operating margin between $14, two and 14, 1% for the year.
Our effective tax rate is targeted at approximately 24, 5%.
We expect interest expense of approximately $1 8 billion.
And we are anticipating between nine and 11% decline in diluted earnings per share compared to fiscal 2022.
In addition, as you heard from and we continue to focus on driving productivity in the business.
We have taken a number of actions that will help us realize the previously announced $500 million in.
An annualized cost savings in 2024.
We are fully confident that we will deliver on this commitment.
We also remain focused on meeting the needs of our customers with our leading product authority in home improvement strong in stock levels and knowledgeable associates we.
We will continue to prudently invest to strengthen our competitive position and leverage our scale and low cost position to outperform our market and deliver shareholder value.
Thank you for your participation in today's call and Christine we are now ready for questions.
Thank you.
Now be conducting a question and answer session.
I would like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is in the question queue.
You May press star two if he would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Okay.
Thank you. Our first question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question.
Hey, good morning, everyone.
And thinking about inflections and when we might see one.
Looking at the spread maybe between DIY and pro.
Is the story of this quarter that maybe DIY has stabilized, but the pro is getting a little bit worse.
And then if that's right and feel free to correct if that's wrong.
Would that mean that it could take a little longer than for the pro sort of normalizing to play out and actually the overall comp could get a little worse before it gets better.
Good morning, Simeon Thanks for the question.
I would say pro and consumer.
It had the narrow as performance.
GAAP in some time so they both performed.
Reasonably well.
If you step back and look at the quarter, we feel really good about the third quarter.
We narrowed our comp guidance for the year because of that and in fact, if you look at the performance of the business. Overall. This year. If you look at the seasonality of Q1, and Q2 were pretty smooth and that minus 3% comp through the first three quarters of this year.
Thats normalized for weather and storms and commodity price deflation.
Then our regional businesses are also pretty consistent we've seen the least variability in regions and as I said, the narrowest gap between pro and consumer we had really good seasonal sell through and as prices have settled with abating.
Deflation, we feel feel pretty good about that.
And our operations are increasingly getting back to normal the supply chain is operating very well our inventory positions are better our in stock rates are much better as an took you through all the things we're doing in the store to improve on shelf availability our value.
<unk> as Billy mentioned are in great shape and product innovation.
Is better than it's ever been and the wage investments are paying off.
Our attrition is way down and with that attrition being down our associates had more more time in the store.
Their ability to serve customers has improved so all of that really.
As would deliver that consistent comp throughout the year.
But to answer your specific question as we sit here feeling really good about the operations.
The share.
Share shifts of PCE from pre Covid.
Today is not completely reverted and we're still not exactly sure where that reverts to the asset class for home improvement is worth $15 trillion more than it was pre pandemic.
And we know now that the fed it definitely has a higher for longer monetary posture, and thats going to continue to pressure durable goods and financing or motivation for larger home improvement projects. So as we said, we see great engagement engagement seasonal goods engagement with smaller.
<unk>.
The larger projects are a bit down at the moment. So that's what we're watching I mean, we're not obviously talking about 2024 today, but lots of good news in the operations of the business Great News with it's still a very resilient customer I mean, we just came off.
Four 9% GDP in Q3, driven by the consumer but as you know we're we're looking at this year this period of moderation.
For home improvement spend but couldn't feel better about about the business and our operations overall.
Yes.
Thanks for that and then maybe the follow up you mentioned GDP given that home prices seem to be pretty sticky, even with pretty weak turnover and may not get it get any better how should we should we think about GDP should we revert to GDP is maybe a better proxy.
Or how the business could do.
Simeon this is Richard.
We have.
Tried to take the most thoughtful approach possible in over the last few years of what the drivers of the business are and those things that indicate to us.
How we have settled back out of the pandemic period and Thats why we focused on share of PCE.
Ted said, we're not going to talk about 2024 today there is an underlying.
Kind of layer of economic activity that supports the business.
But as Ted pointed out.
Number one we still havent reverted all the way back to.
2019 levels of PCE share.
And the fed stance of higher for longer.
Has had and could have increasing pressure on the outlook for durables and housing related spend so like Ted said, that's what we're watching at the moment.
And we will we'll talk about 2024, when we get to our call next quarter.
Thank you.
Our next question comes from the line of Zach <unk> with Wells Fargo. Please proceed with your question.
Hey, good morning, Richard considering all the ins and outs of your cost base. This year with wage investments you've got the legal settlement in Q1, plus the cost saves next year is it fair for us to assume your operating margins can expand in 2024 or is there a certain level of comp that you will need to see.
To hold this 14% plus margin.
Good morning, Zach. Thanks for that question you know margin expansion is largely a function of topline growth.
There is a point there in the low positive comp digits, where you see expense.
Turn from deleverage to leverage we're not going to take on 2020 for.
Guidance today.
<unk>.
What what we have done.
As we have.
Put in place measures and in fact now have essentially completed actions.
That will provide us with a $500 million cost buffer heading into 2024, and so regardless of the outlook that provide some buffer and <unk>.
Margin.
Got it and then you mentioned that you would reinvest the legal settlement gain from Q1. So first of all any color on what this reinvestment actually is or what it would look like and then is it fair to say the investment will be largely in Q4 or was there a part of that in Q3.
We've had we've had part of that.
Spent throughout the year I think it is still a correct assumption.
That that favorability will be fully offset by the end of the year and so I really point you to our guidance as the best jumping off point for your modeling.
Got it thanks for the time.
Thanks, Ed.
Our next question comes from the line of Scot Ciccarelli with Trust. Please proceed with your question.
Good morning, everyone. So and some other retail verticals there are lot of other retail verticals, we're seeing a return to pre COVID-19 purchasing patterns, where we probably see more activity purchasing activity on weekends and around holidays and events with frankly bigger loans in between.
<unk> are one are you seeing.
Similar general pattern in two assuming that is the case are there ways you guys can take advantage of that pattern from an operational standpoint to improve productivity.
Yes. Thanks for the question Scott, it's still listen as it relates to different fluctuations in customer patterns and so forth. We haven't seen that has been very consistent.
Throughout the quarter as Ed mentioned in his prepared remarks really throughout the year. When you account for some of the weather and some of the bathtub effect. We saw in the first half. So we havent seen that does it listen as it relates to promotional activity whatsoever, we have events in our stores that we love to execute and drive excitement for our customers, but from a P.
<unk> activity standpoint, it's really reverted back to pre COVID-19.
<unk>.
Pricing is certainly as Ted mentioned settled over the last several months the environment certainly stabilized so we operate in a very.
We operate a very rational market and promotional environment as I said this has returned to kind of pre pandemic times.
And we will always Scott, we will always focus on E. DLP, we have events during certain seasons that there are a lot of fun. There engages with the associates are engaging for our customers, but day in and day out 12 months a year, we strive to be in.
<unk> LP retailer with great values every day.
Got it thanks, and then just a quick follow up on the big ticket.
Discretionary.
Any specific areas, where you're actually seeing a positive inflection or are they all still trending call. It mid single digit negative.
No we.
We called out in my prepared remarks categories like portable power and so forth, but we have seen great engagement and candidly, we're thrilled with the innovation that we continue to partner with our supplier base on that we bring to the market and where we continue to see innovation, we continue to see great engagement with both the pro and the consumer.
Got it thanks guys.
Our next question comes from the line of Chris <unk> with Jpmorgan. Please proceed with your question.
Thanks, Good morning, everybody.
A couple of follow ups to prior questions. My first one is with the gross margin decline in the third quarter.
Can you talk a little bit about what drove that you were lapping storm related demand and you had some commodity deflation. So I would've thought that those would be positive. So is that fair and what are the offsets to that drove it lower.
Thanks for the question, Chris I'll go back to <unk> comments, and Ted mentioned this as well I think.
The most important observation we've made is that the worst of the inflationary environment is behind us and as a result.
As Billy said retail prices are settling in the market. Some prices are settling at levels higher than 2022, others are settling lower but were seeing some stabilization there that Billy can talk about specific to the quarter and gross margin. There are some timing differences as some.
Prices settle ahead of anticipated product and transportation cost benefits that will come through as we turn through our inventory.
But those are I would really sort of consider those timing for the full year. Our view on gross margin hasn't changed and we expect to see slight pressure year over year, but bill maybe just talk about kind of the.
The settling of prices yes.
As you mentioned that the inflation environment seems to be behind us prices, absolutely settled in and again I reiterate what I said work in a very rational market and the other thing I would add is this is no different than any other timeframe frankly, we have a portfolio approach to how we take on whether it's lumber deflation that we've talked a lot about throughout the year.
There are other ins and outs as it relates to the P&L, so very normalized environment rational and really a stabilization that we've seen across the board as it relates to pricing.
Got it got it got it got it so that makes sense and then on the.
On the variable cost side, you talked about are loosened slow single digit leverage point, historically and in the $500 million of cost savings next year.
At the same time, you've had negative transactions for quite some time now. So can you talk about where we are in terms of the how.
Labour can maybe become how it becomes a less variable over time, maybe in the context of.
The percentage of stores on minimum staffing levels.
If if there is negative comps and 24 over the next six months.
Is the flexibility.
That you get from the 500 million offset by the fact that you'll be you could be having still negative transactions and less flexibility.
Chris Thanks for the question there is a lot of kind of 2024 conjecture built into that answer.
Tell you that right. So I think when you.
Youre talking about changes in the nature of our labor model.
The degree of of.
Change in transactions really isn't material enough to say that changes the nature of our labor model.
Got it sounds good thanks very much.
Our next question comes from the line of Michael Lasser with UBS. Please proceed with your question.
Good morning. Thank you so much for taking my question you talked about the promotional environment discounting being.
Rational if the cycle the downturn for home improvement remains protracted and extended under what condition would you expect that discounting will be more intense than it was in 2019 across the industry.
If that were to be the case with home depot choose to.
Remain true to the everyday low price in the portfolio.
Approach that it has or would it looked.
Protect market share.
And participate in some of that activity.
Good morning, Michael Yes, we will stay committed to two <unk> and our promotional cadences as we said earlier.
Black Friday appliances, and gift center, and some spring events for seasonal garden items to get traffic in stores.
Those have been.
The playbook for years and years right Billy.
And we don't.
See us going away from that in fact, we've we've stayed true to reductions of promotions. When you think of of categories like ceiling fans that I remember was constantly on and off 10%, 20% off pain.
With which was a promotional category.
Five and turns and then it went to 10 and twenties, we've backed off all of that.
On the margin, we prefer to be even less promotional than we are today. If you had a a pretax protracted downturn in the market I mean for sure we're going to be competitive and for sure. We are going to protect our share, but when you think of the nature of the <unk>.
Large home improvement projects, certainly one done by a pro the labor component is such a big piece of that job I mean, just take paint for example.
If you are painting your your living room for $500.
Paint and that job is going to be less than a $100.
And it's your labor Bill either your opportunity cost as a consumer or for the pro during your job for you so being super aggressive too to take $10 off the 100 dollar component of a 500 dollar job.
Don't think really moves the needle and that's why our our bias or starting position would be no. We wouldn't chase a lot of price in that dynamic.
Got you very helpful. My follow up question.
Quickly home depot has under promised and over.
Over delivered in just about all Factset is it is it realistic to think that you took the same approach when building this $500 million of net cost savings for next year, such that there could be upside to that number.
That well that cost number was really more a function of having built capacity to handle the explosion in our volume during COVID-19 and then the sort of other side of that Hill, where we pulled capacity in many forms back and so it was the right thing to do regardless of the <unk>.
Ironman.
It does happen to provide a buffer for our operating margin.
As we move into 2024.
Okay. Thank you very much and have a great holiday.
You too.
Yeah.
Our next question comes from the line of Steven <unk> with Citi. Please proceed with your question.
Hey, good morning, everyone. Thanks for taking my question congrats on the new role.
Wanted to focus on the pro side of the business. So the commentary about growing with the complex pro in the past there has been a focus on the flatbed distribution centers and the rollout on a regional basis is that still very much the strategy for the next couple of years and as you assume out and think about the opportunity with the contact complex pro or does it.
Top priorities within the next one to two years.
Stephen Thank you. Thank you so much for the kind words there.
Chip is in the room and he has been intimately.
Knowledgeable about that and so I'm going to throw it over to chip and he will talk a little bit about some of the capabilities that we continue to leverage and some of the functionality and capabilities that we will continue to build.
Yes, Thank you Steven.
We're going to continue certainly our March down to the expansion of our outside sales teams and continue to grow in the complex pro as it was mentioned in the earlier remarks, the connectivity into the store is an important part of this asset build as well our pros shopping our stores every single day and connecting that ecosystem.
Flatbed delivery systems as part of that so as we look to expand into different markets. As we move forward from where we currently are we will continue to evaluate the best opportunity to expand those distribution assets as well to support our growth in prep.
Okay. Thanks, I wanted to revisit finian's question about inflection because I know, it's a challenging backdrop to predict but I guess as you think about the business what are the key building blocks to take the business from this period of moderation.
To a more stable market backdrop, when we talked about low single digit market growth.
Curious if you could opine on is it really the PCE shift.
Is it rates and just any.
Any help you provided helpful. Thank you.
Yes, Steven for that you know, we're always looking at a balance between ticket and transactions.
And.
What was what was interesting during the Covid period, we had inflation. So we had we had AUR up and we had had ticked it up also driven by basket size.
But the engagement was so high you you really didn't have elasticities you had.
Driving ticket and transactions and that's what led to the 25% comp.
As inflation has abated and primarily commodities and those prices have come down you've seen a falloff ticket.
And.
You didn't you didn't get the elasticity.
Initially you would expect and that was because people were still powering through projects and now it's a mix of.
What's what's the level of response from pricing versus pull forward versus the fed stance and higher interest rates.
That's all the dynamics, it's muddying, the traditional ticketing transaction dynamic, but what's healthy for us.
As a solid com.
Equally balanced between ticket and transactions.
That's that's what we'd be looking for and now we.
We've said prices have essentially leveled our our ticket was down modestly and if you take out commodity our ticket would've been up for the quarter and then transactions, we're still working through a bit of that PCE shift pull for.
Forward, whatever that dynamic might be but.
We'd be looking for for growth in each and a nice balance going forward.
Very helpful. Thanks, guys.
Our next question comes from the line of Brian Nagel with Oppenheimer. Please proceed with your question.
Hi, good morning.
Thanks for taking my question.
The question I.
I think Michael May have asked previously just about.
Price actions, but I guess, maybe to expand out a bit further so we have been discussing now this trend and weakness in bigger ticket for a while obviously very unique.
Demand backdrop, but again.
Your perspective, particularly as you look towards 24 are there other levers that home depot could poll.
Potentially spur better demand within big ticket.
Other than other than price.
Well the number one way that we're focused to drive demand is with the complex probe. So it's.
That is our key strategy and that's what we're focused on.
$200 billion space as we've defined the 950 split evenly pro and consumer.
475, its pro Theres 200 billion that is.
Larger pros more complex.
Spend that we're building out the capabilities to serve that.
Demand.
That Brian.
We're.
Very very focused on and think for years and years that is going to be a driver of our business as we take share and that's sort of a $200 billion white space.
Yes, thanks until they got it and then my second my follow up it much quicker.
Obviously, you narrowed your guidance or.
Balance of the year, we'll talk about trends in the fiscal third quarter, but any commentary on sales trends really here in fiscal Q4.
Our performance in the first two weeks is on track to achieve our full year 2023 guidance.
Very good well I appreciate it congrats again.
Thank you.
Our next question comes from the line of Peter Benedict with Baird. Please proceed with your question.
Alright, guys. Thank you for taking the question.
Another one on average ticket here so.
Pre COVID-19 average ticket around $67 I think now it's kind of trended closer to $90 so up 35%.
Richard just wondering if you have any perspective on kind of a like for like SKU inflation component there versus the big ticket mix it sounds like.
Like for like inflation is it seems to be stabilizing I know theres innovation that can make things not like for like but just curious as you think about the big ticket exposure there.
And what what what could potentially.
Potentially play out there how big of a deal is that thank you.
Thanks for the question I think there are.
There are few answers for that first of all we have seen.
Inflation abate and really kind of settle on a like for like basis across the portfolio.
I think it's interesting you see some we've seen different dynamics and big ticket over the years, we've had lumber inflation and deflation in particular skewing those results and big ticket.
Maybe you talk a little bit about trends there yes.
And I'll just.
Ted.
Response back to Brian on EAC categories, like Drywall, where we have the capabilities roofing installation portable power, where we've added innovation, we continued to see great both pro and consumer reach.
The reaction to just the innovation and things we're seeing.
As it relates to big ticket.
Obviously, you've seen some deferral.
And so forth as we talked about certainly.
The pull forward is probably still playing a part in that as we continue to get further away from the pandemic. So.
We'll watch that closely we don't see anything as I mentioned stabilized pricing, a rational environment and we don't see anything.
Different from from what we've seen over the last.
Multiple months now.
Okay. Thanks for that guys and then I guess turning to maybe.
Leverage in the pace of buyback and if we stay in this environment of let's call. It moderation in demand how do you think about it.
Just may be balancing your buyback approach.
Leverage so operating below the two times.
Is there anything that prevents you from kind of moving up to that two times.
Just kind of curious your latest thoughts around those those topics. Thank you.
Thank you.
We've maintained a positioned very close to that two times debt to EBITDAR leverage ratio and we intend to do so in the foreseeable future.
We will.
Also.
<unk> maintained consistency with respect to capital allocation, we invest in the business first repair dividend and then.
As we determined excess cash we flow that.
To our shareholders in the form of repurchases to your point to date, we've repurchased $6 5 billion.
There's really no change in our stance and so I think that's the important takeaway there.
Okay. Thanks, so much good luck thank.
Thank you.
Our next question comes from the line of Michael Baker with D. A Davidson. Please proceed with your question.
Okay. Thanks.
Just thinking about the fourth quarter, if we take the midpoint of the implied guidance. It does suggest a little bit of a deceleration yet it does seem like your business has been consistent and is that just a function of am I reading too much into that or do we expect a deceleration.
And maybe a second part of that as you said Halloween was really strong historically.
And to your trim, a tree or your holiday decorating business I think if I can kind of the last 14 years your fourth quarter comp has been better than the third quarter why should this year be different than that.
Thanks.
Thanks for the question.
The narrowing of the range is truly what it is we saw the extreme points of that range become less likely and so we felt it would be helpful.
For our investors for us to narrow that range.
There has been an assumption all year from the beginning of the year that our guidance reflected.
A reversion of our share of PCE from the pandemic time period back to 2019 levels.
Our prior guidance range assumed that that share will continue to revert throughout the year, we've seen that reversion gradually and steadily and our current range still has that assumption built in for Q4.
We're largely reverted but not all the way back so there is some.
Some notion of that in our guide.
Okay. So it sounds like it's like I said, it's just a function of getting to the middle of the range if I could ask one other question.
Talk about store of the seasonality.
A lot of retailers have said, it's been a warm fall how does that impact you do you need it to get cold and you know as we go through the fourth quarter to drive your business, how should we think about that.
<unk>.
It's been a little warmer obviously, but not a big impact we started to see where the weather has normalized.
Good to see some of that fall cleanup in salt business really really take off.
No I haven't seen obviously snow and so forth. So it's kind of right in line with what we'd say is a little more normalized year and we see the weather.
A little more false you've seen.
The categories and businesses that you'd expect to trend up trend in that in that positive direction.
I appreciate it thanks, thanks for taking the time.
Thank you.
Our next question comes from the line of Steven Forbes with Guggenheim. Please proceed with your question.
Good morning.
Or maybe for Anne.
Just a follow up on pro sales really focusing on the Dallas market.
Versus the chain average can you just can you update us on how that market is performing and then maybe just comment on any behavioral differences that you're noting between pro markets based on the maturity of your strategic initiatives focused on the complex problem. Can you are you are you seeing and being able to analyze very predictable.
Behavioral changes yes.
Yes, I'll start off by just saying that the capabilities and functionality is that Hector and chip in I have been working on over the last several years.
It's certainly going to help us engineer, a great deal of momentum and success with the pro and tip.
I'll throw it over to you again because of how intimately you are knowledgeable about that but there is this just the pro ecosystem is what we're focused on now and not in store side or to come not only the in store side, but the complex pro and as we build out these capabilities and we see.
Net of these capabilities, we're going to continue to leverage those and chip I'll throw it over to you to kind of give a little bit more details on Dallas, yes, Thanks, Ann and Stephen Yes, absolutely, where we built capabilities inclusive of <unk>.
Asset distribution assets, and where we've expanded our sales force, we've seen meaningful impact and growth our outside sales team is the best performing cohort of all pro So we're going to continue as I mentioned before to invest in that and then add assets where necessary in the appropriate markets.
Thank you and maybe just a quick follow up for Richard or Billy.
All the ticket conversations here any way to just sum up how the quarter for big ticket progressed relative to expectations. It sounds like it performed better than expected sort.
Stabilization in multi year big ticket comp trends I would imagine that wasn't the expectation, but I mean any way to help us frame on how the quarter progressed for big ticket versus internal plan.
Yes, I think listen it was it was largely how we planned it.
Called out some.
Great.
Interaction from our consumers as it relates to appliances, having said that we were in a better inventory position. There. So we saw some tailwind from just a better inventory position as it relates to that but it largely played out exactly how we had it.
Thought it was really again back to the prior comments.
A very balanced year across the board when you when you account for some of the weather shifts early on and then what we what we were lapping with the hurricane very balanced across the across the board and across the regions I think it's important the somatic we just to sort of.
Repeat the point this this stance by the fed of of higher for longer.
This is sort of coming across and surveys.
There is there is a deferral of larger projects and so if you just wanted to.
Zoom all the way back to the true macro here and the forces on tickets and we're watching that as probably the largest macro force that's right.
Thank you.
Christine we have time for one more question.
Our final question comes from the line of Deane Rosenbloom with Bernstein. Please proceed with your question.
Hey, guys. Thanks, so much for taking my call. My question. My question is about the pro and really just understanding the performance of the CRO relative to the comp overall, and then splitting that out between store sales to grow versus complex project sales per CRO.
Make sure Im understanding you put up a call it a negative recall DIY and pro very close to one another U S slightly worse than Canada and Mexico.
So I'm, assuming U S crowed call it down to two and a half.
And can you just either verify or correct that and then can you characterize pro sales in the store relative to grow sales outside of the store through the outside sales force and the CFC.
Taking your last.
Part first it's an ecosystem like Dan said, we're actually not we don't have goals or targets with respect to the separation of store and delivered sales. The point is actually lifting all sales and that's what we've seen consistently in every market, where we've rolled out capabilities.
Originally we worried.
<unk> sales going to begin to cannibalize the store the opposite has proven true.
So we are progressing in a way that we're pleased.
With respect to your first question factually.
Pro did outperform the consumer in Q3, albeit at the narrowest margin we've seen in quite some time, if you actually.
Normalized for commodity impact with the pro was essentially flat for the quarter.
Okay, great. Thanks, and I guess my follow up would be.
When do you guys measure Big project versus small project can you just clarify for us how you're determining what constitutes a big project versus a small it looked like transaction size over a thousand bucks.
And you could clarify that for us that'd be great.
We infer from category sales and from class sales.
When you look at categories that are more likely to sell at higher volumes and larger projects kitchens flooring.
Millwork to an extent.
We are doing some in France. We also asked our customers what they are seeing and what kind of projects Theyre working on we use external survey data.
<unk> tells us that the nature of projects is kind of shifting from larger to smaller and so it's a triangulation.
That's great. That's super helpful. Thank you so much guys. Good luck in the fourth quarter.
Thank you.
Mr. <unk> I'd like to turn the floor back over to you for closing comments.
Thanks, Christine and thank you everyone 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.
Yes.