Q3 2024 The Home Depot Inc Earnings Call
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Speaker Change: Greetings and welcome to the Home Depot 3rd Quarter 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. A brief question and answer session will follow the formal presentation.
Speaker Change: 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 Change: It is now my pleasure to introduce your host, Isabel Janci. Please go ahead.
Isabel Janci: Thank you, Christine, and good morning, everyone. Welcome to Home Depot's third quarter 2024 earnings call.
Isabel Janci: Joining us on our call today are Ted Decker, Chair, President, and CEO, Anne-Marie Campbell, Senior Executive Vice President, Billy Bastek, Executive Vice President of Merchandising, and Richard McPhail, Executive Vice President and Chief Financial Officer.
Isabel Janci: Following our prepared remarks, the call will be open for questions.
Speaker Change: Questions will be limited to analysts and investors. And as a reminder, please limit yourself to one question with one follow-up.
Speaker Change: If we are unable to get to your question during the call, please call our Investor Relations Department at 770-384-2387.
Speaker Change: Before I turn the call over to Ted, let me remind you that today's press release and the presentations made by our executives include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.
Speaker Change: These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections.
Speaker Change: 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.
Thank you. Thank you. Thank you.
Speaker Change: Today's presentation will also include certain non-GAAP measures, including but not limited, to adjusted operating margin and adjusted diluted earnings per share.
Speaker Change: For a reconciliation of these and other non-GAAP measures to the corresponding GAAP measures, please refer to our earnings press release and our website. Now let me turn the call over to Ted.
Ted Decker: Thank you Isabel, and good morning everyone. Sales for the third quarter were $40.2 billion, an increase of 6.6% from the same period last year.
Ted Decker: Comp sales declined 1.3% from the same period last year, and our U.S. stores had negative comps of 1.2%.
Ted Decker: adjusted diluted earnings per share with $3.78 in the third quarter compared to $3.85 in the third quarter last year.
Ted Decker: From a geographical perspective, storms and more favorable weather throughout the quarter drove a higher degree of variability in the performance across our divisions, and four of our 19 U.S. regions delivered positive comps.
Ted Decker: In local currency, Mexico and Canada posted comps above the company average, with Mexico posting positive comps in the quarter.
Ted Decker: In the third quarter, our associates and communities were impacted by two hurricanes.
Speaker Change: As you'll hear from Anne, our associates and supplier partners work tirelessly under difficult circumstances to serve our customers and communities.
Speaker Change: Our thoughts continue to be with those impacted by Hurricanes Helene and Milton.
Speaker Change: Excluding the impacts from the hurricanes, our third quarter performance exceeded our expectations.
Speaker Change: As weather normalized, we saw better engagement across seasonal goods and certain outdoor projects.
Speaker Change: But as Billy will detail, we continue to see pressure on larger remodeling projects.
driven by the higher interest rate environment.
and continued macroeconomic uncertainty.
Speaker Change: Today, we updated our guidance, primarily as a result of the better performance in the third quarter, as well as expected hurricane-related demand in the fourth quarter.
Speaker Change: For fiscal 2024, we now expect our sales to grow approximately 4%, comps to decline approximately 2.5%, and adjusted diluted earnings per share to decline approximately 1%.
Richard will take you through the details in a moment.
and others.
Speaker Change: Despite the continued uncertainty in the macroeconomic environment, our focus remains on creating the best interconnected experience, growing pro-wallet share through a differentiated set of capabilities, and building new stores.
Speaker Change: Today, I would like to highlight where we are improving the interconnected experience.
Speaker Change: Recall that over the last several years, we've built a network of downstream supply chain facilities, including 19 direct fulfillment centers, allowing us to reach 90% of the U.S. population with same- or next-day delivery.
Speaker Change: Recently, we expanded our assortment in these facilities to allow for faster delivery speeds across more products. We made significant website enhancements to better communicate faster delivery options.
Many customers were not aware of our robust delivery options.
Speaker Change: In the third quarter, we launched a marketing campaign that builds awareness of our faster delivery speeds.
Speaker Change: While this is just launched, we are seeing the intended results, greater customer engagement, higher conversion, and incremental sales. This is also the first quarter that reflects a full period of SRS in our financials.
Speaker Change: SRS gives us the right to win with a specialty trade pro customer who needs specialized capabilities to complete their project.
Speaker Change: The SRS team did an exceptional job in the quarter and is on track to deliver $6.4 billion in sales for the approximately seven months we'll owe them in fiscal 2024.
Speaker Change: As you would expect, the immediate focus with SRS is supporting their growth, both organically and through acquisitions.
Speaker Change: However, we are also seeing incremental cross-sale opportunities from our distinct product catalogs and competitive advantages.
Speaker Change: As you can tell, we remain excited about the growth opportunities in front of us. We are committed to investing in our capabilities to continue growing share in any environment.
Speaker Change: Our merchants, store and MET teams, supplier partners, and supply chain teams did an outstanding job executing throughout the quarter, and I'd like to thank them for their dedication and hard work.
Speaker Change: Before I turn the call over to Anne, I'd like to take a moment to reflect on the legacy of our co-founder Bernie Marcus.
Speaker Change: We owe an immeasurable debt of gratitude to Bernie. He was a master merchant and a retail visionary.
Speaker Change: But even more importantly, he valued our associates, customers, and communities above all.
Speaker Change: He's left us with an invaluable legacy and the backbone of our company.
are values in culture.
Speaker Change: The entire Home Depot family is deeply saddened by his passing.
He will be missed.
Speaker Change: With that let me turn the call over to Anne. Thanks Ted and good morning everyone. First I want to extend my deepest sympathy and support to all the residents and communities that have been impacted by Hurricanes Helen and Milton.
Speaker Change: One of the hallmarks of the Home Depot has always been to support our communities through natural disasters, and we're incredibly proud of the tireless efforts of our teams to meet and post the storms.
Speaker Change: to stage and deliver the needed products while ensuring the safety of our associates.
Speaker Change: In the aftermath of the storms, the efforts of both our field and store support center teams have been extraordinary and demonstrate the culture and exceptionalism of our amazing associates.
Speaker Change: who are committed to providing the necessary support and resources to help rebuild and restore their communities.
Speaker Change: Our thoughts and prayers continue to be with all of our affected associates.
Speaker Change: and communities as they navigate this challenging time. Over the last year, I've provided some key insights on the progress we're making with the pro-ecosystem capabilities that serve
Speaker Change: that serve pros working on larger complex projects. We are pleased with the performance of this pro ecosystem which is now in 17 U.S. markets.
Speaker Change: Today, I would like to take a moment to highlight some of the investments we are making in our stores to deliver the best experience for every pro buying occasion.
Speaker Change: You've heard us talk about or focus on improving on-shelf availability through multiple initiatives, but we are also enhancing leadership oversight, processes, and systems to drive an overall in-store, pro customer experience.
Speaker Change: We recently introduced a Pro Customer Experience Manager to help drive a higher level of connectivity with our in-store pro and outside sales team in order to deliver a more seamless experience and exceptional service.
Speaker Change: This new leadership role with our existing teams enables us to focus more on the needs of the cash and carry pro, with a focus on building relationships with our most important pros, ensuring we have job lock quantities available for sale on critical SKUs, and allocating more labor hours to the pro desk during peak, shocking times.
Speaker Change: We also continue to improve MyView with more robust insights to drive a deeper level of engagement and more actionable outcomes for pro customers.
Speaker Change: These tools, combined with the process improvements, leadership engagement, and increased emphasis on service are driving more customer engagement and improving the in-store shopping experience for pro customers.
[inaudible]
Speaker Change: I would also like to take a minute to share with you a bit more around the progress we have seen over the last few quarters as it relates to shrink.
Speaker Change: For us, our focus on mitigating shrink has been a continual and evolving process, leveraging all cross-functional teams and investing in technology to test and learn the most effective methods of reducing shrink.
Speaker Change: While the external environment continues to be challenging, we're incredibly pleased with the positive momentum we are seeing and improve results through our shrink mitigating initiatives.
Speaker Change: I could not be more excited about the progress we are making across the business to drive a best-in-class experience for our customers. Our stores are ready and our associates stay engaged and I would like to thank them for all that they do.
Speaker Change: Turning to our merchandising department comp performance for the third quarter our power.
Outdoor garden building materials indoor garden, and paint departments posted positive comps, while lumber plumbing and hardware were all above the company average.
Speaker Change: During the third quarter, our comp transactions decreased <unk>, 6% and comp average ticket decreased 8%.
Speaker Change: However, we continue to see our customers trading up for new and innovative products.
Speaker Change: Big ticket comp transactions or those over $1000 were down six 8% compared to the third quarter of last year.
Speaker Change: We continued to see softer engagement and larger discretionary projects.
Speaker Change: Customers typically use financing to fund the project, such as kitchen and Bath Remodels.
Speaker Change: During the third quarter pro sales were positive and outpaced the DIY customer.
Speaker Change: And those pros engaging with elements of our pro ecosystem will also have a dedicated salesperson were our strongest performing pros in the quarter.
Speaker Change: Turning to total company online sales sales leveraging our digital platforms increased 4% compared to the third quarter of last year and for those customers that chose to transact with us online during the third quarter nearly half of our online orders were fulfilled through our stores.
Speaker Change: In addition, as you heard from Ted we are focused on continuing to improve our interconnected retail experience.
It is our faster delivery speeds are more relevant and personalized search results or our enhanced product review summary is powered by AI.
Speaker Change: All of which are leading to greater purchasing confidence for our customers.
Speaker Change: During the third quarter, we hosted our annual supplier partnership meeting, where we focus on how we will continue to work together to bring the best products to market deliver innovative solutions that simplify the project and offer great value with best in class features and benefits.
Speaker Change: At the event, we recognized a number of vendors across categories, who continue to transform the industry with the innovation they bring to our customers on a daily basis.
Speaker Change: This included Starlink, Milwaukee, Ryobi, Waco Glacier Bay, Henry Roofing and many more we are proud of the innovation in partnership with our suppliers bring to the home depot and the value that we're able to offer both our pro with DIY customers.
Speaker Change: We also hosted our annual Labor day, and Halloween events, and we're pleased with the results.
Speaker Change: During our labor day event, we were encouraged with the customer's engagement across a number of categories, including grills, which had positive comps for the quarter led by traeger.
Speaker Change: In 2024 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.
Speaker Change: As we turn our attention to the fourth quarter, we plan to maintain our momentum with our annual holiday Black Friday and gift center events.
Speaker Change: And our gift center event, we continue to lean into brands that matter most for our customers with our assortment of Milwaukee, Ryobi, Makita, dewalt rigid husky and more.
Speaker Change: We'll have something for everyone, whether it's our wide assortment of cordless ryobi tools, Milwaukee, <unk> fuel toolkit, and our new Husky bite tools, we're bringing more innovation and batteries with ryobi edge <unk> XR and the expansion of the Milwaukee Forge lineup with new eight and 12 hour batteries all design.
Speaker Change: And to bring more power to our customers.
Speaker Change: And the innovative husky by tool technology offers increased grip on new and rounded fasteners better access more torque and more leverage making them. A great addition to any toolbox at a great value and they are exclusive to the home depot.
Our merchandising organization remains focused on being our customers' advocate for value. This means continuing to provide a broad assortment best in class products that are in stock and available for our customers when they need it.
Speaker Change: We will also continue to provide innovative product solutions 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 and with that I'd like to turn the call over to Richard.
Richard Mcphail: Thank you Billy and good morning, everyone in the third quarter total sales were $40 2 billion, an increase of approximately six 6% from last year.
Richard Mcphail: During the third quarter, our total company comps were negative one 3%.
Richard Mcphail: With comps of negative three 3% in August negative two 3% in September and positive 1% in October.
Richard Mcphail: Comps in the U S were negative one 2% for the quarter.
Richard Mcphail: With comps of negative three 5% in August negative two 2% in September and positive one 4% in October.
Richard Mcphail: The progression of our monthly comps reflects in large part hurricane related sales our.
Richard Mcphail: Our results for the third quarter included a net contribution of approximately $200 million and.
Richard Mcphail: Pain related sales, which positively impacted total company comps by approximately 55 basis points for the quarter and approximately 120 basis points for October.
Richard Mcphail: Yes.
Richard Mcphail: In the third quarter, our gross margin was approximately 33, 4% a decrease of approximately 40 basis points from the third quarter last year, primarily driven by mix as a result of the Srs acquisition, partially offset by benefits from lower shrink.
During the third quarter operating expense as a percent of sales increased approximately 45 basis points to 19, 9% compared to the third quarter of 2023.
Richard Mcphail: Our operating expense performance was in line with our expectations.
Richard Mcphail: Our operating margin for the third quarter was 13, 5% compared to 14, 3% in the third quarter of 2023.
In the quarter pre tax intangible asset amortization was $138 million, including $86 million related to Srs.
Richard Mcphail: Sure.
Richard Mcphail: Excluding the intangible asset amortization in the quarter, our adjusted operating margin for the third quarter was 13, 8% compared to 14, 5% in the third quarter of 2023.
Interest and other expense for the third quarter increased by $157 million to $595 million due primarily to higher debt balances than a year ago.
Richard Mcphail: In the third quarter, our effective tax rate was 24, 4%.
Richard Mcphail: Compared to 23, 3% in the third quarter of fiscal 2023.
Richard Mcphail: Our diluted earnings per share for the third quarter were $3 67.
Richard Mcphail: The decrease of approximately 4% compared to the third quarter of 2023.
Richard Mcphail: Excluding intangible asset amortization, our adjusted diluted earnings per share for the third quarter were $3 78.
Richard Mcphail: The decrease of approximately 2% compared to the third quarter of 2023.
Richard Mcphail: During the third quarter, we opened five new stores, bringing our total store count to 2345.
Richard Mcphail: Retail selling square footage was approximately 243 million square feet.
At the end of the quarter merchandise inventories were $23 $9 billion up approximately $1 $1 billion compared to the third quarter of 2023.
Richard Mcphail: And inventory turns were four eight times up from four three times last year.
Richard Mcphail: Turning to capital allocation during the third quarter, we invested approximately $820 million back into our business in the form of capital expenditures.
Richard Mcphail: And during the quarter, we paid approximately $2 $2 billion in dividends to our shareholders.
Richard Mcphail: Computed on the average of beginning and ending long term debt and equity for the trailing 12 months return on invested capital was approximately 31, 5% down from 38, 7% in the third quarter of fiscal 2023.
Richard Mcphail: Now I will comment on our updated outlook for fiscal 2024.
Speaker Change: As you heard from Ted while macro uncertainty remains and continues to pressure home improvement demand.
Speaker Change: Our performance in the third quarter was better than expected.
Speaker Change: Our performance reflects hurricane related sales in the third quarter, and we expect some hurricane related sales in the fourth quarter.
Speaker Change: Given the better than expected performance in the third quarter and incremental hurricane related sales were updated our fiscal 2020 for guidance.
Speaker Change: We now expect total sales growth of approximately 4%, including Srs and the 50 <unk> week.
Speaker Change: The 50 <unk> week is projected to add approximately $2 3 billion of total sales and Srs is expected to contribute approximately $6 4 billion in incremental sales.
Speaker Change: Comparable sales are expected to decline approximately two 5% for the 52 week period.
Speaker Change: We expect to open approximately 12 new stores.
Speaker Change: Our gross margin is expected to be approximately 33, 5%.
Speaker Change: We expect operating margin to be approximately 13, 5% and adjusted operating margin to be approximately 13, 8%.
Speaker Change: Our effective tax rate is targeted at approximately 24%.
Speaker Change: We expect net interest expense of approximately $2 1 billion.
Speaker Change: We expect our diluted earnings per share to decline approximately 2% compared to fiscal 2023.
Speaker Change: With the extra week contributing approximately <unk> 30 per share.
Speaker Change: <unk>.
Speaker Change: And we expect our adjusted diluted earnings per share to decline approximately 1% compared to fiscal 2023 with the extra week contributing approximately <unk> 30 per share.
Speaker Change: We believe that we will grow market share in any environment.
Speaker Change: We're continuing to invest to strengthen our competitive possession.
Speaker Change: To strengthen our competitive position with our customers and leverage our scale and low cost position to drive growth faster than the market and deliver shareholder value.
Speaker Change: You for your participation in today's call and Christine we are now ready for questions.
Thank you we will now be conducting a question and answer session.
Speaker Change: I would like to ask a question. Please press star one on your telephone keypad.
Speaker Change: We will indicate your line of my question queue you.
Speaker Change: You May press Star two if you would like to remove your question from the queue.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker Change: Please while we poll for questions.
Speaker Change: Okay.
Thank you. Our first question comes from the line of Scot Ciccarelli with tourists. Please proceed with your question.
Speaker Change: Good morning, everyone.
Speaker Change: <unk>.
Speaker Change: In the third.
Okay.
Speaker Change: And you've outlined.
Speaker Change: But you are breaking up can you repeat your question. Please.
Speaker Change: Okay.
Speaker Change: Sales were better than.
Speaker Change: Than we did I know you guys outlined Harrington pathetic.
Speaker Change: But yes.
And then on the <unk>.
Speaker Change: Okay.
Speaker Change: Obviously, it was quite favorable.
Okay.
Speaker Change: Witness.
Speaker Change: Got it sorry to cut you off we can't really hear you. So we're going to go to the next question and we'll come back to you.
Speaker Change: Our next question comes from the line of Zach <unk> with Wells Fargo. Please proceed with your question.
Hey, good morning, so starting with the Hurricane impact Richard you called out about 55 basis points in Q3 any color on category impacts and if those sales skewed more DIY versus pro and then as you think about Q4, how would you characterize the implied down to five.
Speaker Change: Percent comp guide between Hurricane driven and the underlying business.
Speaker Change: Yes, Hey, Zach, it's Billy and then I'll I'll turn it over to Richard to answer the back half of that question just in terms of the.
Richard Mcphail: The hurricane piece, obviously pretty similar to two all events think about generators think about cleanup.
Richard Mcphail: You think about obviously lumber is it relates to to what we do to help our communities get ready for those for.
Richard Mcphail: So those events, so pretty similar from a product assortment standpoint, and obviously all of that is consumer driven as customers.
Richard Mcphail: Ready themselves for for that event.
Richard Mcphail: And I'll flip it to Richard to answer the back half of that.
Richard Mcphail: So is that just talking about the guide of two and a half for the year our guidance really principally reflects the outperformance that we saw in Q3, driven by hurricane related sales as well as reflecting the fact that we just saw exceptional weather across the entire country for most.
Richard Mcphail: The quarter. So the full year view is basically the flow through of that Q3 performance with some Q4 impact of hurricane related sales.
Speaker Change: Got it appreciate the color and just taking a step back how much of your business would you categorize as needs base versus discretionary today and is it still fair to say that the larger and bigger ticket projects are being deferred while needs based brake fix type.
Speaker Change: <unk> are getting done and also any color on how those two buckets have been trending through the year.
Speaker Change: Yes. In fact, that's that's always difficult to parse out mid space versus discretionary project. We would say you need space projects are getting done we've talked about there being.
Speaker Change: Strong engagement in home improvement and certainly with our pros, but the larger more discretionary projects are the ones that are being deferred and that balance has been consistent throughout this year.
Speaker Change: Got it thanks, so much for the time.
Speaker Change: Thank you.
Yes.
Speaker Change: Our next question comes from the line of Chuck Grom with Gordon Haskett. Please proceed with your question Hey, Good morning. Thanks, very much can you discuss Srs and the progress you've made in cross selling products and services across the two businesses.
Speaker Change: And then can you also touch on the volume contribution specifically in the third quarter.
Speaker Change: Sure. So we're very pleased with our with our progress with Srs as I said in my prepared remarks job one is to support them executing their play of growing their business, which which they do with what we would do.
Comp growth through their existing branches opening up new branches, and then doing tuck in M&A.
<unk> to do that through.
Through the third quarter they opened.
Speaker Change: A number of branches.
Speaker Change: They grew the business and even made a couple of small tuck in acquisitions. So the the strategic.
Speaker Change: Game plan for Srs is proceeding as expected on the cross sell opportunity.
Speaker Change: The initial things we're working on is to make their catalog available to our customers largely through the pro desk and through our outside sales resources and we're seeing terrific take up on that the comp sales of Srs product through.
Speaker Change: Home depot ecosystem, while obviously, a very small base is accelerating incredible sort of triple digit comp growth with those specific sales and then we're also beginning to quote our product.
Into their customer base and I'll remember their specialty trade and Theyre focused on roofers landscapers folks putting down Hardscape backyards, and then working on repairing and maintaining pools in irrigation. However, those customers do engage in.
Speaker Change: Some broader home improvement activity and we've already begun to actively quote our broader catalog into their customer base very very early days, but the sales teams are working together incredibly well and getting to know each other going on some joint customer calls.
Speaker Change: Together, so early days on that but again the strategic thesis is playing out exactly how we had hoped.
Speaker Change: And Chuck you ask for specifics they contributed $2 9 billion.
Speaker Change: In the third quarter. They are on track to deliver the expected $6 4 billion in sales contribution for the roughly seven months that we'll own them.
Speaker Change: Okay, great. Thanks, very much and then one for you Richard on gross margins down 40 basis points. It sounds like for US was the lion's share is there any way to double click on that and just some pack I think it was about 35 basis points of pressure last quarter and then just looking out.
Can we think about broader puts and takes for gross margins you know I mean relative to where you were pre COVID-19.
Speaker Change: North of 34%, how do we think about the gross margin trajectory over the next few years. Thanks.
Speaker Change: Sure well so specifically.
Speaker Change: Look when you look year over year.
Speaker Change: The major impact in gross margin versus last year was simply the mix impact.
Speaker Change: From Srs and <unk> and so that was actually an 80 basis point impact for the quarter.
Speaker Change: So, let's just let's talk about gross margin it was in line with our expectations in fact.
Speaker Change: Our guidance for gross margin for the full year has not changed.
Speaker Change: So again in Q3, the impact was around 80 basis points from Srs. So you can do the math and see that the remainder of the business was up significantly.
And was in line with our expectations and that also reflected benefits from shrink.
Speaker Change: And had mentioned and just to remind you.
Speaker Change: Srs will be for the year 2024.
Speaker Change: It will have about a 45 basis point impact on the year, because remember we will have only owned them for about seven months.
Speaker Change: But an annualized number.
Speaker Change: For Srs impacted gross margin is about 70 basis points.
Speaker Change: So if you just allow me a second to make sure everyone got that Thats 70 basis points of the expected shift in our gross margin profile from adding them to our business.
Speaker Change: Our gross margin.
Again was right, where we expected it to be a transportation expense or rather benefits from decreasing transportation expense, whereas dynamic in the first half of the year, but that's largely.
Speaker Change: Sort of going away as year over year comparisons flatten out and so we were very pleased with our margin performance and as I said, we have.
Speaker Change: We have not changed our guidance for the full year gross margin.
Speaker Change: Look as far as long term goes in June of 2023 at our Investor Conference. We laid out a base case then in essence.
Speaker Change: Says look we anticipate flat gross margin.
Speaker Change: <unk>.
Speaker Change: As part of our operating model there is a ton of productivity that our amazing supply chain team drives every single year that we reinvest in that gross margin.
Speaker Change: But that's reflective of of our position as the sharpest value in the market for our customers and that's our intention.
Speaker Change: But again the acquisition of Srs does.
Speaker Change: Sure.
Speaker Change: Rent a shift in our margin base for the business.
Makes sense. Thank you.
Speaker Change: Our next question comes from the line of Seth Sigman with Barclays. Please proceed with your question.
Speaker Change: Hey, good morning, everyone nice progress in the quarter. My main question is around market share, obviously macro and housing matters a lot here, but youre also doing a lot to better serve your customer and all the different types of customers I guess in that context. It does seem like home depot as performance improved relative to the industry. This quarter can you speak to.
Speaker Change: That in any specific categories, you would call out where you do think you are gaining more share.
I'll hit on the broader topic and pass over to Billy as we've always said it is tough to parse out market share, but if you look at the PC expenditures and home furnishings.
Speaker Change: We're deeper negative as reported in governance statistics and our results. So if you look at that broader macro we would the highest level macro we would say we took share and then we obviously.
Speaker Change: Look at reported.
Speaker Change: Results from competitors, who are functioning.
Speaker Change: Product categories that we operate in and again in most of those we see our businesses outperforming those of <unk>.
Speaker Change: Likley.
Speaker Change: Traded companies results and Bill if you want to hit on some categories.
Speaker Change: As we said in our prepared remarks, certainly our seasonal performance, we saw increased great engagement across our seasoning related categories and that includes Halloween.
Speaker Change: Paint continues to be a great story for us and while we did see some exterior business just related on the weather that we called out was certainly making great progress with the pro the paints our partnerships with their people.
Speaker Change: <unk> are in service in store service model enhancements, our job site delivery expansion has really helped us grow share in that segment and really pleased with the performance of the team there.
And then you know you talk about building materials continue to see really strong performance.
Speaker Change: Performance in our building materials, that's multiple quarters on top of multiple quarters. So as Ted mentioned pretty hard to kind of parse that out we look at a lot of different data sets, but.
Speaker Change: Feel very confident than any market, we're going to continue to take share, but that's a few of the areas that we've seen great continued acceleration and as I mentioned in building materials, specifically ongoing terrific improvement there.
Speaker Change: Okay. That's helpful. I guess, a follow up question would be around big ticket more specifically it does seem like it took a step down this quarter, even in light of hurricane certain categories, you mentioned like generators how do.
Speaker Change: You categorize that I mean, you mentioned interest rates do you think there were some election noise.
Speaker Change: I guess ultimately we're trying to think about what needs to change in your view to really get those categories inflicting.
Speaker Change: Well maybe.
Speaker Change: Maybe I'll just.
Step back on how we look at this.
Speaker Change: Overall environment and what we're seeing I mean clearly.
Speaker Change: Our sales during the quarter as we said were more favorable than we expected a lot with weather and hurricane.
Speaker Change: Related demand and don't forget on whether it's not just that.
Speaker Change: Youre doing garden, because the weather's nice think of.
Speaker Change: Limited days loss from a pro because they can be out of the job site through virtually every day in October. It was it was drive throughout the country. The issue. We continue to watch are the macroeconomic uncertainties in the higher rate environment that continues to pressure larger remodeling.
Speaker Change: Projects. So we look at the reversion of personal consumption from goods to services. That's largely worked its way out and we've largely navigated our way through the pull forward of demand that we saw during the pandemic. So again today this higher rate environment.
Speaker Change: Inmon is pressuring the larger <unk>.
Speaker Change: Normally that financed remodeling projects as well as existing home sales. So we all know that the fed's cut interest rates two cycles here, but from the cut in September mortgage rates have actually increased about 60 basis points so to ray.
Speaker Change: It cuts a combined 75 basis points, yet the 10 year and then therefore the mortgage rates are up about about 60 basis points that continues to impact.
Speaker Change: Housing turnover.
Speaker Change: We're just about 3% of homes, turning over which is a 40 year low at this point.
Speaker Change: And you might say that the worst is behind us how much slower or are we going to go usually worried about 455% turnover I think we actually touched on sort of $2 99. So one could argue we're near the low there, but then the larger projects often require financing whether it's cash out.
Speaker Change: Financing or or home equity lines of credit those are down so our HELOC those track more directly the drop in short term rates. So those are down 75 basis points, but still historically high at over 8% so with that.
Speaker Change: We're encouraged with certain.
Speaker Change: Green shoots if you will in the business with the pull forward working its way through the categories ability.
Speaker Change: Went through but what we're looking for is just one is the timing.
Speaker Change: Homeowners starting those larger remodeling projects. So we remain super bullish on the outlook for home improvement.
Speaker Change: We will have to work our way through this current macro uncertainty and the interest rates pressuring home improvement demand, but this is a market after all in markets return to equilibrium.
Speaker Change: And remodeling will as well, we just don't think we're quite there yet.
Speaker Change: Got it thank you so much.
Speaker Change: Our next question comes from the line of Stephens, who come with Citi. Please proceed with your question.
Speaker Change: Great. Good morning, Thanks, very much for taking my question I wanted to follow up on gross margin, particularly so in.
Speaker Change: In the quarter was there any mixed pressure on gross margin from the higher hurricane related sales and then just to follow up on the longer term. It's a good amount of discussion around shrink you have made a lot of progress. There can you help us understand how much of an opportunity that is over the medium term is this something thats in the 10 to 20 basis points or could it be.
Speaker Change: Something more meaningful over time.
Speaker Change: Right, yes so.
Speaker Change: As far as gross margin goes for the quarter. There was a slight amount of mix pressure to margin and just think about how <unk> characterize it at the beginning of.
Speaker Change: Hurricane Prep and then through cleanup Youre, just selling higher volumes of lower gross margin good yet and so there was there were some slight pressure there.
Speaker Change: And as far as shrink goes look.
Speaker Change: Frankly, just head down and the teams are working so hard every single day.
Speaker Change: They have made major investments.
Not just financially but also.
Speaker Change: And the amazing.
Speaker Change: Number of initiatives they have brought forward to combat.
In essence the <unk>.
Speaker Change: Results of organized retail theft and other other crime.
Speaker Change: This is a problem for all of retail.
Speaker Change: It's hard to quantify.
Speaker Change: What we can tell you is that our investments are paying off they have led now to multiple quarters of benefits year over year tangible results from investments we've made.
Speaker Change: That does not mean that the operating environment is getting any easier and in fact, it's getting harder and harder. So our hats are off to our teams and it's it's an everyday initiative.
Speaker Change: But our teams are fighting every single day.
Speaker Change: Yeah understood.
Speaker Change: My follow up question I know Theres, no 2025 guidance today, but I think as we I'm curious like as you look at the backdrop right to view for 24 was like housing was going to be net neutral as you sit here today, it's tough to call rates, but as you think about 25.
Speaker Change: Would you think the housing backdrop turns a little bit more favorable for you or is it still like think about housing is net neutral as kind of the base case scenario.
Speaker Change: Well Steven.
Steven: The comments I just made one could could argue that the rate environment is settling down in turnover certainly even under 3% last reported period would be at a low but just don't know.
Steven: Obviously ready to talk about 25.
Steven: Not ready as we sit here today to call that.
Steven: As a turn on larger remodeling projects.
Okay fair enough. Thank you.
Speaker Change: Our next question comes from the line of Scot Ciccarelli with <unk>. Please proceed with your question.
Speaker Change: Thanks, guys I apologize for the tech initiatives.
Speaker Change: Richard I know you outlined the impact of hurricane related sales, but is there a broader estimate for the weather impact in the quarter.
Speaker Change: Then second can you guys give us an idea of the magnitude of difference in performance in the 17 markets, where you've rolled out incremental pro capabilities versus the rest of the base. Just so we can better understand the impact that those capabilities are having.
Speaker Change: So the first part of your question.
Speaker Change: Scott.
Scott: Look we had outstanding weather across the country. So it becomes harder to parse out what the weather impact is when you literally don't have a control group.
Scott: However, we know when the Sun was shining our customers, we're engaged and that's huge Testament too.
Scott: Our merchants and our operators for.
Scott: For inspiring them to do outdoor projects and the like so it's hard to parse out weather and therefore, we are cautious.
Scott: With respect to extrapolating Q3, just given how favorable the weather truly was across the country.
Speaker Change: And chip maybe you can talk about pro markets I'll jump in and I'll turn it over to chip and Hector that as we've mentioned just tremendous opportunity as we think about where the share of wallet with the complex trial and we invest in across the end to end experience.
Speaker Change: We have talked about previously of what we're doing with capabilities on the complex side of the business and today I highlighted a lot of great work that had to and his team is doing with the in store pro and when we think about it across the entire ecosystem, we want to have a great experience outside our stores and we want to have a great <unk>.
Speaker Change: Inside the store so we have to be working on these initiatives simultaneously to your point the more they engage with our capabilities, we have seen tremendous upside and it's important for us as we think about 17 markets to ensure that we're delivering an excellent experience.
Speaker Change: Where we build the level of confidence.
Speaker Change: Chip I know you continue to work on some key capabilities and if you tie it open a head on some of the things you're doing in store, yes, Thanks, Andrew and Scott, We're very encouraged and what's going on in the 2017 investment markets, where we've been building out the ecosystem and referenced the.
Speaker Change: The investment in our foundational capabilities breadth and depth of inventory supply chain delivery and importantly, our salesforce has led to share gains and outperformance in all those markets low single digits.
In those markets. So very very pleased as Billy mentioned these customers that are interacting with our ecosystem. Our some of our very best performing customers. Just as an example, we've launched our trade credit offering where it's early days, but it is really resonating with our customers and we've been able to take share in some of their projects.
Speaker Change: Normally cannot participate in so very pleased with.
What's happening after yes, Scott I would just add that we are super pleased with engagement of our teams in store to drive just a great experience that in store Pro had mentioned some of the strategic adjustments that we made going into the second half of the year to drive that engagement from our leaders we're laser focused.
Speaker Change: On driving <unk> for checkout for approvals, making sure that we are driving in stock on large quantities of products or what customers need.
Speaker Change: Integrating the tools and resources and features that chip and team are developing fully outside pro there are also adding value to the in store experience. So we're just like how the ecosystem is coming together in those markets and beyond.
Speaker Change: Okay.
Speaker Change: Does that complete your question.
Speaker Change: Okay.
Speaker Change: Our next question.
Our next question comes from the line of Michael Lasser with UBS. Please proceed with your question.
Michael Lasser: Good morning. Thank you so much for taking my question.
Michael Lasser: Are you looking at the multi year home improvement outlook.
Speaker Change: The longer that risks remain elevated.
Speaker Change: More homeowners.
Speaker Change: Homeowners are deferring projects and as soon as rates come down that will lead to a more robust recovery. So there is a relationship between what's happening right now.
Speaker Change: The magnitude of the recovery and I guess as part of that if rates don't come down next year can the home improvement industry grow in 2025.
Speaker Change: Yes, Michael we think about that quite a bit as you can imagine I mean, certainly rates have been high.
Speaker Change: They are pressured turnover, most specifically, but even HELOC extraction HELOC extraction is something like 25% right now of more recent period.
Speaker Change: Extra actions, so clearly rates are impacting but.
Speaker Change: I'm not sure that we've talked about when rates came down towards the 6%. We immediately saw activity in housing and we're seeing that just a matter of weeks.
Speaker Change: Weeks months ago before this latest change when rates actually went up.
Speaker Change: I think theres, a little bit of so much discussion about where rates are going and the certainty of that they were going down has caused people to wait for that lower rate, but if you get stability at sort of any rate might be more important at this point.
Speaker Change: No one once rates settle and theres, probably a gradual using of rates, but I don't think we need a dramatic drop we just need the talk of the big drops are coming.
Speaker Change: Market equilibrium will set in either that or <unk>.
Speaker Change: People simply get get used to the higher rates, which historically are still pretty decent rates.
Speaker Change: And life cycles will continue new household formation.
Speaker Change: Increasing size of home decreasing size home second homes that normal equilibrium of housing activity will will be reestablished. We've just had such a dramatic increase in value increase in rates followed by the.
Speaker Change: Expectation of a meaningful short term drop in rates over a very short period of time that has changed that stable turnover rate that we've seen for years and years to be what now you would argue could be a.
Speaker Change: A low so I don't think again to answer your question.
They have to drop.
Speaker Change: Quickly and meaningfully they just need to stabilize and all the talk of what the fed's going to do sort of gets out of the national conversation.
Speaker Change: Got you that's very helpful. My follow up question is I wanted to get the team's perspective on tariffs.
So as part of that what percentage of sales for the home depot could be subject to tariffs in China and what about some other countries and is the bigger risks and tariff related to the sheer increase in merchandize cost or the indirect impact of potentially accelerate re accelerating inflation.
Speaker Change: And that impact on consumer spending thank you.
Speaker Change: Sure and I'll, let bill in John <unk>, who runs our supply chain comment on on tariffs I would say first and foremost whatever happens in tariffs will be an industry wide impact it wont discriminate against.
Speaker Change: Different retailers and distributors, who are importing goods the type of product.
Speaker Change: As an industry is generally sourced from the same countries. There has been some diversification of those sources, but clearly.
Speaker Change: A bit of concentration in southeast Asia, and China in particular.
Speaker Change: We source.
Speaker Change: Well more than half of our goods.
Speaker Change: Domestically in North America.
Speaker Change: But there certainly will be an impact.
Speaker Change: But again, given given our scale our experience going through the previous tariffs on at 25% on it.
Speaker Change: Yes, It was a couple hundred billion dollars.
Speaker Change: The industry import goods going back a number of years ago.
Speaker Change: I'd bet on this team's ability to work with the type of suppliers, we have to work through this.
Speaker Change: In a differentiated manner than others in the industry, but billion John Let me give some input yes, Michael it's Billy thanks.
Speaker Change: As Ted mentioned, our teams have been through this before.
Speaker Change: We anticipate we'll manage through any new tariffs similarly to how we've done this in the past as Ted mentioned the majority of our goods are sourcing in North America and listen we've been focused on diversifying soy.
Speaker Change: Sourcing for several years and.
Speaker Change: We will continue to assess that going forward and I'll hand, it to John I mean, we're focused on that but frankly, there is some other things that John and the team are also focused on yes more near term we're focused on the resolution of the east coast Port situation.
Speaker Change: Any implications that might have on our ability to move product through our supply chain is visibility and Ted said, we have a law.
Lot of experience in this area in terms of being able to manage through.
Speaker Change: These types of disruptions in these types of changes in terms of trade policy and and we feel very confident with our ability to manage through whatever is to come in the future.
Speaker Change: Thank you very much.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question.
Speaker Change: Hi, Good morning, everyone first a short term question on Q3 to Q4, you mentioned Q3 exceeded expectations ex the hurricanes.
Speaker Change: There was weather and you mentioned that weather helps as well and thinking about the movement to Q4, it looks like it's a DSL on stacks and obviously the absolute number.
Speaker Change: Is the assumption that weather is less helpful or is there some conservatism or any other things that change into the fourth quarter.
Richard Mcphail: Thanks, Simeon, it's Richard but bottom line, we don't expect the fundamentals of our business to decelerate.
Richard Mcphail: We're just being cautious about extrapolating Q3 results saw significant benefit from weather and also just as a reminder.
Richard Mcphail: The guidance for approximately negative two and a half comp sales.
Speaker Change: Okay fair enough.
Speaker Change: And then second on the macro this is trying to get a sense of how youre thinking and I know a lot of this call is helpful in that regard.
Speaker Change: The way that Youre thinking about in terms of capital equity, which we've talked about recently versus something like housing turnover, both impacted by rates, but could this topical equity idea become like a lock in effect at some point when does that kick in kind of kick in even with rates being higher.
Speaker Change: Yes.
Speaker Change: The question is often posed to us hey, with housing turnover.
Speaker Change: Obviously more spend and if you don't move then you remove place and while we haven't seen the decrease in moving one does the the repair or the remodel in place.
Speaker Change: Clearly that has been delayed.
And we would point to.
Speaker Change: The higher rates, but even more importantly, our surveys over the prior several months more than cost of project.
Speaker Change: And higher rates the number one issue.
Speaker Change: People were citing in our surveys where general macro macro economic and even political uncertainty so as those.
Speaker Change: Dissipate.
Speaker Change: I think you'll you'll see people again with the lower rates Helocs are variable. So those are down 75 basis points since the cuts in.
Assuming we're going to get another cut here in December.
Speaker Change: Huge amount of comparable equity that has nearly doubled since the end of 19 and went from just under six.
Speaker Change: To $11 five trillion dollars trillion.
Speaker Change: Trillion with a T. So tremendous amount of tangible equity.
Call back in the housing boom.
Speaker Change: I think folks were taking out as much as $120 billion a quarter.
Speaker Change: That was more recently.
Speaker Change: 60, 80, a quarter and now we're down to 20 a quarter. So don't think it goes much slower when people get some confidence back in macro and political dynamic.
Speaker Change: It's a big project and for somebody to make that decision to pull the trigger on $25 50 to 75000 dollar project. There is a certain amount of con.
Speaker Change: Confidence that goes into that.
Speaker Change: 101 would hope that we're headed towards a change in overall comp sales.
Speaker Change: Thank you.
Speaker Change: And Christine we have time for one more question.
Speaker Change: Thank you. Our final question comes from the line of Steven Forbes with Guggenheim. Please proceed with your question.
Steven Forbes: Good morning.
Speaker Change: Appreciate the color around cross selling opportunities.
Speaker Change: But I wanted to explore maybe some of the learnings youre gaining from monitoring the sales force over there. So can you remind us on how large the sales force is today Srs and what Youre tracking maybe inform your decision on how youre thinking about scaling the sales force at HD.
Speaker Change: Right so.
Speaker Change: Their outside sales force is about 2500 people. They also have inside sales force capabilities and account managers.
Speaker Change: Observing what they do and how they do it has given us.
Confidence in what our approaches in terms of variable compensation in terms of of management structure.
Speaker Change: And how we go to market. So clearly we're in the hundreds of outside sales folks that are multiples of that and.
Speaker Change: The way the way they're compensated managed.
The tools they use to go to market.
Speaker Change: All that is reinforcing what we're doing chip mentioned the credit credit credit's, a huge unlock for these larger projects.
Speaker Change: Almost all of their sales are on open account house account and as we.
Speaker Change: Introduced and again, it's just hundreds of customers at this time.
Speaker Change: Seeing.
Speaker Change: Much much larger purchases the type of purchase that you just wouldn't get from from putting it on a credit card.
At our pro desk at home depot stores, So yeah, great learnings chip and his team are in contact regularly with with the Srs sales team.
Speaker Change: Just going really really well.
Speaker Change: And then maybe just a quick follow up on that can you maybe just update us on the current timeline or our thinking behind the full rollout of bill upon delivery capabilities within the order management system.
Speaker Change: Yes, Hi, Steve its chip, we plan to rollout order management by the end of 2025. There is elements of order management that are being turned on as we speak including inventory reservation, which is.
Speaker Change: Key win for us as pros manage larger projects to be able to reserve that inventory for future delivery is a big win. So we will wait that up through the course of 2025 with completion at the end of the year.
Speaker Change: Thank you.
Speaker Change: Okay.
Speaker Change: Thank you Mr. Nancy I'd like to turn the floor back over to you for closing comments. Thanks, Christine and thank you all for joining US today, we look forward to speaking with you on our fourth quarter earnings call in February.
Speaker Change: 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.