Home Depot 2Q17 Earnings Call Notes

Craig Menear – Chairman, CEO and President

Healthy balance of growth

“As Ted will detail both ticket and transactions grew in the quarter and all of our merchandising departments posted positive comps. We saw a healthy balance of growth from both our Pro and DIY categories with Pro sales once again outpacing DIY sales in the quarter.”

Housing has had a protracted recovery. Don’t seem to be any concerns

“I mean, I’d say Simeon that we’ve had obviously a protracted recovery here, and it has been clearly driven from housing which has been a steady but slow recovery in the market. You know we continually look at months of supply, there is 4.3 months of supply in the market of housing availability against a historical norm of six, that clearly is helping to drive improvement in home value appreciation, but housing starts haven’t returned to their norm yet either. The only thing that’s kind of run on an historical averages is housing turnover. So, we see this housing favorability continuing as we look forward. And I think the watch out for us is, you wouldn’t want to see affordability become an issue, but that at this point doesn’t seem to be a concern for us at all.”

Carol Tome – CFO and EVP, Corporate Services

Housing affordability index looks fine to us

“Right. As we look at the affordability index, it stands at 153%, so long ways to go before that would be a watch out for us. And recovery is a difficult thing to put your arms around. But if you look at simply PFRI dollars they’ve only recovered 70% of the loss. So, if you put that into baseball terms like [Indiscernible] 6 [Indiscernible]. The other thing that’s really interesting to us is the age of the housing stock. We’ve talked to you a lot about 66% of the housing stock being older than 30 years. Did you know that 51% of the house stock is older than 40 years and as houses age, well, they need more of repair.”

Ted Decker

Significant pivot to digital with low single digit growth

Yes. Our overall advertising spend is up, lower single digits, but as we’ve essentially made more significant pivot to digital marketing it’s over half our marketing right now. That’s a medium that you can get good insight on the return on your spend and as Craig said, the team just done a great job continuing to increase the return on that spend, so leveraging that low single digit to a much more productive return on overall ad spend.

Home Depot at Oppenheimer Conference Notes

Ted Decker

Housing fundamentals are strong

“So we see the overall macro as a positive. Love the job creation in unemployment rate like wages starting to see wages increase, people are getting more spending power, particularly pleased with household formation. So we’ve had 7 or 8 years after the peak of housing six where we were way below historical averages of housing formation which is about 1.2 million units a year. We were in the low hundreds of thousands. So you saw last year housing formation got back up to about that average 1.2 million rate. So that’s obviously good for our business. People moving out and forming households. So that the overall macro is good. And then you get a little more specific in our business beyond housing formation, we see housing turnover starting to get back to that historical average of 4% plus of housing units. So that’s about 5 million transactions and we get bumps in our sales when someone prepares a house for sale as well as when the new owner moves into the house to fix it up the way they want to live in the house. So housing turnover is strong. And then home price appreciation has — we’ve had multiple years now of year-over-year we’re averaging about 5% odd on a reported monthly basis year-over-year house appreciation growth.”

Paul Deveno

Millenials are forming homes

“I think for the longest time it was in great debate. What will this generation do in terms of homeownership. You could certainly see a trend at the time where rental, the household formation, as Ted was talking about earlier, it wasn’t happening. Where was this generation, this millennial going to set their roots. And what we’ve seen is that the cycle essentially was delayed about 6 to 7 years. And right now it’s really starting to come to fruition. And that fruition is as they are now moving into the jobs that they have secured as they are now forming families, as they are now getting their feet underneath them, we’re seeing that formation happen. And we are seeing them move into the homebuying market just as every other generation has.”

Home Depot 1Q17 Earnings Call Notes

Craig Menear – Chairman, CEO and President

Broad based growth in the US

“Turning back to the U.S. we saw a broad based growth across our store as both ticket and transactions grew in the quarter and all merchandising departments posted positive comps. Our commitment to new and innovative products continues to be a contributor of our ticket growth.”

45% of orders on HD website are pick up in store

“I think the interesting think for us is over 45% of our orders on homedepot.com the customer is actually choosing to pick up into our stores. So they are finding it incredibly convenient to blend the channels and utilize all the assets that we have.”

Don’t focus on online individually by itself

“When it comes to the profitability it’s actually this whole customer engagement is becoming a blended element between online and in-store, and the customer is choosing in some cases, they start the shopping experience online, they finish in-store or they might vice-versa, start the store and actually finish online. And so with 45% of the orders has been picked up, it is truly a blended effort and we look at that way, our merchants manage it as a total portfolio. So they see an entire blended mix of sales for the business. And that’s actually how we run the business. So we don’t focus on it individually by itself.”

Carol Tome

Only 3.2m Americans have negative equity in their homes

“This is really nothing statistic to me. There are 76 million owned households in the United States and of those there are only 3.2 million that having negative equity in their home. And you go back to 2011, 11 million of those household had negative equity in their home. So the amount shows that since 2011 homeowners have enjoyed 130% increase in wealth, if you will, coming from home price depreciation. So on average $50,000 per household. So, you can imagine at some point, to Ted’s point, they’ll take that down out and do a bigger millwork or total remodel job.”

Home Depot at Institutional Investors Conference Notes

Kevin Hofmann – President of Online and the Chief Marketing Officer

55% of our marketing spend is now digital

“In this case – here we go, we’ll start with marketing. We’ve made a pivot, a significant pivot over the last few years towards more digital marketing. You might be surprised to know that a better part of 55% to 60% of all of the marketing that we deployed now is in the new media or digital world. Now, that doesn’t mean the old media world of TV and you’re getting an early view here of our Spring TV spot that’s playing in a few markets right now.

On the far left there, we still do a ton of TV. We still do a ton of traditional radio. There still is a place in the world for print advertising. But we’ve seen the customers’ behaviors change where everybody is spending their screen time, where everybody is doing dual screen watching when they’re at home. It’s changed dramatically and especially with the explosion of mobile. So, we’ve changed dramatically our marketing habits where we deploy our marketing spend.

So, as you can expect, the traditional world on the left, the digital world with both paid channels, very active with Google search terms, we manage over 18 million different keyword combinations with Google and partners like Google. We have a very, very active social media practice. We do a lot of retargeting for customers and are constantly looking at ways to make our marketing and advertising more personal, more contractually relevant for the customer and also more location aware. So, talking to you based off the weather patterns that you’re experiencing in your local neighborhood, those are all things that we have and we’ve deployed in our marketing spend.”

Contractors are adopting digital like everyone else

“–there is a theory out there that the contractor is a late bloomer when it comes to e-commerce and we actually don’t see that so much. Especially the millennial contractor, very, very much lives on their mobile device and so, heavy usage of interconnected tools for the millennial contractor. And then what we find is that if we just can get them exposed to it, they love it. When I mention the buy online, pick up and store, it’s one of the most delightful things we can introduce to a contractor. So, we’ve seen really, really nice uptake from the Pros.”

Home Depot 4Q16 Earnings Call Notes

Craig A. Menear

Once BOPUS now BODFS

“This quarter, we completed the roll-out of BODFS, or Buy Online Deliver From Store. BODFS was built on the foundation of our new Customer Order Management system, or COM, which was fully deployed in all U.S. stores during the second quarter of 2016. We’re pleased with the positive customer response to this enhanced delivery option, which streamlines the delivery experience for both our customers and our store associates.”

Carol Tome

Home equity up 107% since 2011

” If you look at home equity, since 2011, home equity is up 108%. On average, that equates to $50,000 per household. And we believe that’s contributing – as people use the equity of their house to spend back into their house, we believe that’s contributing to our growth, so we factor that into our guidance, and that’s how we got to the 4.6%.”

There are some categories that haven’t fully recovered from the downturn

“If you look at sales by category, peak to trough, while we’ve more than fully recovered everything we lost during the downturn, we haven’t recovered every category. We still have $1.4 billion of sales that haven’t fully recovered, and those are in low-margin categories. We want that to grow, and if housing continues to grow, it will.”

We think mortgage rates could go up to 7% before affordability is impacted

“Yeah, our analysis would show that for every 25-basis point increase in mortgage rates, it costs the homeowner who’s applied for a mortgage $40 more per month. So that helps sort of dimensionalize the pressure associated with rising rates. With the median home price in the country of $250,000, mortgage rates could go up to 7-ish percent before the Affordability Index would fall at 100 or below. So there’s (42:45) a way to go before we’d be concerned. And you know what, mortgage rates stand today at 4.2%, 4.3%, something like that, the historical mean is 5.8%. So even if a return to the mean, you’re still below that inflection point.”

Mark Holifield

Fuel does look like it’s firming up

” yes, fuel does look like it’s firming up. We use the Department of Energy to base our plans. The forecast there is $2.72 against what it was in 2016, $2.31. And right now, we’re at about $2.58. But that’s incorporated in our guidance.”

Home Depot 3Q16 Earnings Call Notes

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.”

Home Depot 2Q16 Earnings Call Notes

The Home Depot’s (HD) CEO Craig Menear on Q2 2016 Results

Continue to see broad based growth

“We continue to see broad-based growth across our stores both ticket and transactions grew. All of our merchandising departments posted positive comps and we saw a healthy balance of growth among both our Pro and DIY categories with Pro sales outpacing our DIY business in the U.S.”

Tailwinds in housing could lead to home value appreciation for the next couple of years

” First of all there’s about 4.6 months of supply, average historical is about six months. So that certainly means there’s opportunity as you go forward, that’s also helping to keep home value appreciation going. And there is projections in the market out there from various sources that would say home value appreciation continues for the next couple of years for sure. And so, I think this is a tailwind that we see for the foreseeable future in the guidance window that we’ve given.”

Ted Decker

Slight commodity price inflation in materials and lumber

“Total comp transactions grew by 2.2% for the quarter, while comp average ticket increased 2.5%. Ticket growth was driven by an increase in items per basket as project business continued to show strength. Our average ticket was also positively impacted from slight commodity price inflation, mainly from building materials and lumber.”

The rising tide of Prime Day lifts a lot of boats

“Interestingly on Prime Day there is so much activity in the market place. It draws a lot of shoppers online and our customers respond, and we have a good day dropping off Prime Day.”

Carol Tome

Kitchen remodeling is seasonal

“You’d expect to see some seasonality in our kitchen business. People are on vacation during the summer time, putting a new kitchen into your home isn’t really top of your mind. We expect the kitchen business to come back in the fall time, because it typically does.”

Haven’t seen any change in home improvement patterns

“We haven’t seen any change. The fundamentals which, Craig, pointed out for housing and then the impact to home improvement are really, really good, and you go back to household formation. If the number of people in households were they drop to the 2000 plus, it would create 4.3 million new households. Now will they all go into single family owned households? No. But we serve both. ”

Home Depot 1Q16 Earnings Call Notes

The Home Depot (HD) Craig Menear on Q1 2016 Results

Housing data indicates continued tailwinds

” Though it is early in the year, our view of the macro environment remains consistent. We believe that housing data indicates continued tailwinds for our business.”

Response to question about weak consumer

“We see the consumer continuing to engage in big ticket sales with transactions above $900, growing at 9.5% in the quarter. So while our Pro business was strong, and we’re pleased to see that, we’re also very pleased to see the growth in our DIY business.”

Our research shows that millenials have the same aspirations but are acting with a six year delay

“We actually have done a fair amount of research here and it was part of our strategic planning last summer, where we had several groups of millennials work on what Home Depot looks like 8 to 10 years out as well. What our research tells us is that basically this is a delayed cycle, that the millennial generation has many of the same desires that generations prior to them have, we’ve seen as household formation goes up roughly a third or so of those formations are happening with millennials at the tail end of that age group. It appears there’s about a six year delayed cycle here. But our research indicates that in many ways they’ll act the same as previous generations.”

Ted Decker

Spring has not yet arrived in many of our markets

“While weather positively impacted our sales performance in the first quarter, spring has not yet arrived in many of our markets.”

Strength in pro heavy categories

“Pro heavy categories continue to show great strength, as we saw double-digit comps in fencing, pressure treated decking, boards, fasteners, doors and conduit. In addition, the core of the store continue to perform well and we saw strength in maintenance and repair categories across the country. Tool storage, commercial and industrial lighting, portable power, power tool accessories, hand tools and wiring devices had double digit comps in the quarter.”

Carol Tome

Home equity values have increased by 94% since 2011

“we’ve seen home equity values increase 94% since 2011. How is that possible? Because home prices are up 25% and people have been continuing to pay down our mortgages. So there’s a wealth affect that’s occurring with home owners. And this wealth effect as we’ve talked at length, if you feel like your home as an investment and no an expense you spend differently in your home, anything set in our big ticket categories.”

The average age of a new home buyer last year was 33

“Yeah, the average age of new home buyers last year was 33 years old, that’s the edge of the millennials. So that another proof of age that at some point they want to own a home.

Expecting 5% home price appreciation

“We factor that in to our longer term forecast, and now this year we believe home prices will be up around 5%. It’s important to note that if not fully recovered even with that 5% and it’s certainly different in different parts of the country. So if we take 5% this year and then we take next year maybe 3%, the year on after that, and so it continues to crack the point because it is just ongoing home price appreciation.”

Home Depot 4Q15 Earnings Call Notes

Craig A. Menear – Chairman, President & Chief Executive Officer

EPS +16%

“We achieved sales of $88.5 billion, the highest in company history. We also recorded the highest net earnings in company history and fiscal 2015 earnings per share grew 15.9% to $5.46. Sales for the fourth quarter were $21 billion, up 9.5% from last year. Comp sales were up 7.1% from last year and our U.S. stores had a positive comp of 8.9%.”

Continue to see positive signs in housing data

“Turning to the macro environment, while 2016 consensus U.S. GDP growth projections have moderated, we continue to see positive signs in the housing data with home price appreciation, housing turnover and household formation being the key drivers of growth for our business. We expect 2016 comp growth of approximately 4.5%. ”

Some segments of our business are best in store

“There are segments of our business – we’ve shared in the past that we believe the best business model is in the store. And the customers, they’re smart, they have a tendency to gravitate to the best business models. And so we think there are elements of things like concrete and soils and mulches that make sense, and that’s where the customer will find the best value to purchase the product.”

Carol B. Tomé – Chief Financial Officer & EVP-Corporate Services

Our business was good and continues to be good

Peter, we’re not seeing that. Our business was good and continues to be good.

65% of the homes in the US are older than 30 years

“65% of the homes in the United States are older than 30 years and there’s external research that shows that spending on older homes is higher. John Burns would suggest it’s something like 7.5% higher, our own internal research suggests it’s 8% higher, so this aging housing stock bodes very well for us. And if we could take you back to the last mild recession, and I’m talking a lot here and I apologize, but if I take you back to the last mild recession of 2001, the housing stock was a lot younger 10 years ago.”

Inventories are in the best shape we’ve seen

“So our inventories are in the best shape we’ve seen and I’ve been here, this is my 21st year, so I can speak from authority, they’re in really great shape. We have one-tenth improvement in inventory plan for 2016 and Mark Holifield is here and I would say we might want to try to get even better than that, but that’s the plan.”

Mark Holifield – Executive VP-Supply Chain & Product Development

West coast port disruption led to artificially low inventory last year

“Just one thing, just color on inventory, one thing to keep in mind is last year we had the West Coast port disruption which led to artificially lower inventory, so we’re actually very pleased with where our inventory is and on top of that, we’re very, very pleased with where our in-stock is compared to last year which we’re really seeing a material improvement in-stock versus last year because we’re overlapping those port disruptions from last year.”

Home Depot 3Q15 Earnings Call Notes

The Home Depot’s (HD) CEO Craig Menear on Q3 2015 Results

Craig Menear – CEO

Strength across the store

“we continue to see strength across our store. All of our merchandising departments posted positive comps and we saw healthy balance of growth among both our Pro and DIY categories.”

The retail environment has been and is changing

“The retail environment has been and is changing. Our customers, both Pro and DIY, are changing the way they shop for our products and services. Our goal is to provide our customers with the convenient and fulfillment options they require.”

How El Nino could affect things

“It really depends on obviously how this plays out. It could potentially play to a warmer northern, which means we might have a year where we have more outdoor project business running deeper into the season. The potential offset to that is a much cooler, wetter southern situation. It really depends on how this plays. We’ll be in position as we always are to try to make sure we take advantage of whatever categories will be the drivers in the different geographies and then with any luck it brings rain to California, which is desperately needed.”

Acquire where we can gain capabilities

“What we’ve said Aram is that we will look at acquisitions where it gives us the ability to gain capabilities that we might want to go build ourselves. And so if you think about some of the acquisitions that we’ve done, the BlackLocus acquisition gave us a data science capability that’s being leveraged by our merchants for assortment and price.”

Did see trading up although not more dramatic

“I wouldn’t say it’s any more dramatic than we’ve talked about before, but we do look at sales by price point and again this quarter we had a progression of higher comps as you went up price points in an assortment.”

Texas actually outperformed

“all of our major markets in Texas actually outperformed the company average comps and we’ve seen strength across the store.”

Carol Tomé – CFO

Aging home stock is a catalyst

“One thing we learned looking at data coming out of the Harvard Joint Center for Housing Studies as well as John Burns Real Estate Advising Firm, is that homes that are older than 45 years tend to be, have higher repairs. And in fact, the amount of money spent on repairs on those older homes is 5.6% higher than the amount of money paid to repair a home that’s about 20, 24 years old. There are 40 million homes in the United States that are older than 40 years. As the housing stock ages, it just bodes very well for big-box home improvement retailers to sell to those customers who need to make repairs in their homes.”