Home Depot 3Q16 Earnings Call Notes

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The Home Depot’s (HD) CEO Craig Menear on Q3 2016 Results

Lifting guidance

“Turning to the macro environment, we believe home price appreciation, housing turnover, household formation and the aging housing stock in the U.S. continue to support growth in our business. As Carol will detail, we are reaffirming our sales growth and lifting our earnings per share growth guidance for the year.”

Don’t see any of the drivers changing in 2017

“obviously we’re not prepared to talk about ’17. We’ll do that on our next call. But what I would say is if you look at the drivers of growth, we don’t see significant change in the drivers of growth. We’ve had foundational GDP growth. We’ve had in housing home value appreciation, housing turnover, new household formation and then layer on top of that 65% of the housing stock in the U.S. is now in excess of 30 years old. All of those are drivers of business for us. There’s nothing that would indicate that we see that those would change. And as Carol said, there’s varying degrees of recovery amongst different parts of the country. So we don’t see anything on the horizon at this stage that would say anything should change in terms of the growth drivers in our business.”

The Pro is very strong

“I would say the Pro is very strong. One thing we saw this quarter is we’ve always talked about the high-spend Pro and the low-spend Pro. The low-spend Pro comp was on par with the high-spend Pro. So that’s nice to see not only geographical but the high and low spend are each comping at that stronger rate in consumer. And as we look across departments, virtually every department had higher Pro spend comp than consumer. So the Pro is strong across the business. We continue to be extremely pleased with our lumber, building material business. Our tool business in particular just continues to accelerate and we’re taking meaningful share in the tools business.”

Ted Decker

Strength in the DIY customer

“At the same time, we also saw strength with the DIY customer as they undertook various projects around the house. This project business drove strong comps in special order carpet, tool storage, laminate flooring and vanities. Weather remained favorable throughout the quarter and extended the outdoor project selling season.”

Carol Tome

Homeowners have seen a 95% increase in their home equity since 2011

“I think it’s important to just step back and look at where we are in terms of the cycle and focus on home price appreciation, because that’s a big driver of our business. Since 2011, homeowners have seen a 95% increase in their home equity. That’s come about because of rising prices as well as if you have a mortgage, you’ve been making mortgage payments since 2011. So homeowners really do view their home as an investment and not an expense. So the question is, okay, great, well what does it mean for 2017 and beyond? While we see home prices have recovered in certain parts of the country, there are other parts of the country where we are still double-digit down from peak. Those areas include Chicago and Atlanta. So in terms of where we are for the cycle, you can’t look at the averages because the averages will kill you. You have to look at the market. And when you look at the market, we see real opportunity for continued improvement”

Interest rates could rise a lot before mortgage payments hit high levels of income

“So we look at the affordability index, which is over 150%, so that’s good news. So now we went back and looked at, okay, historical percentages of household income used for mortgage payments. If you look at the years 1995 through 2000, 22% of homeowners’ income was used for their mortgage payment. It’s down now to about 14%. Interest rates could go up to 7% and no one is suggesting that will happen. But interest rates can go up to 7% and we would be back to about 22% of household income used for mortgage payment. So we got a long way to go before there’s any impact we think to our business from rising interest rates.”