Home Depot Q4 2024 Earnings Call Transcript

AlphaStreet
Provided by AlphaStreet
February 25, 2025
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Operator

Greetings, and welcome to the Home Depot 4th-Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Isabel Jansey. Please go-ahead.

Isabel Janci
Vice President, Investor Relations & Treasurer at Home Depot

Thank you, Christine, and good morning, everyone. Welcome to Home Depot's 4th-quarter and fiscal year 2024 earnings call. Joining us on our call today are Ted Decker, Chair, President and CEO; Anne-Marie Campbell, Senior Executive Vice-President; Billy Bastik, 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. Questions 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 Investor Relations at 770-384-23-87. 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. These statements are subject to risks and uncertainties that could cause actual results 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 most recent annual report on Form 10-K and our other filings with the Securities and Exchange Commission. Today's presentation will also include certain non-GAAP measures, including but not limited to adjusted operating margin, adjusted diluted earnings per share and return on invested capital. 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
Chair, President & Chief Executive Officer at Home Depot

Thank you, Isabelle, and good morning, everyone. Sales for fiscal 2024 were $159.5 billion, an increase of 4.5% from the same-period last year. Comp sales declined 1.8% from the same-period last year and our US stores had negative comps of 1.8%. Adjusted diluted earnings per share were $15.24 compared to $15.25 in the prior year. In the 4th-quarter, comp sales increased 0.8% from last year and comps in our US stores were up 1.3%. Adjusted diluted earnings per share were $3.13 compared to $2.86 in the prior year. In the quarter, we saw broad-based engagement across our geographies as 15 of our 19 US regions delivered positive comps. In addition, both Canada and Mexico reported positive comps in local-currency. Our 4th-quarter results exceeded our expectations as we saw greater engagement in-home improvement spend despite ongoing pressure on large remodeling projects. Throughout the year, we remained steadfast in our investments across our strategic initiatives, despite uncertain macroeconomic conditions and a higher interest-rate environment that impacted home-improvement demand. Our strategic priorities remain creating the best interconnected shopping experience, growing our pro wallet share through a unique ecosystem of capabilities and building new stores. We are always improving our interconnected shopping experience. We know that our customers want faster delivery than ever before. Recall that last quarter, I shared the progress we made with our investments in our downstream supply-chain, including an expanded assortment in our DFCs to allow for faster delivery speeds across more products. We also began leveraging our stores to offer more delivery options. Our delivery speeds are now the fastest they've ever been and customers are increasing their spend. Billy will take you through these results in a moment. Growing our share of wallet with our pro-customers is a key part of our growth strategy. We've continued investing in our store experience, fulfillment options and sales teams. These investments are delivering incremental sales growth, and Anne will discuss this in detail shortly. In June, we completed the acquisition of SRS. And while we've only owned them for seven months, we could not be happier with the business. The capabilities that SRS brings are both additive and complementary to our strategic efforts. As expected, for fiscal 2024, SRS contributed $6.4 billion in sales for the seven months we owned them. And since we acquired them in June, they have opened over 20 greenfield locations and completed four tuck-in acquisitions. We're also focusing on many cross-sell opportunities with SRS. As an example, we've talked about the opportunity of Quotecenter, our platform that provides real-time quote pricing and different fulfillment options for larger job lot quantities. SRS was already in quotecenter, but not in all markets. Today, they are in nearly every market with their roofing products. And since making this change, we have seen SRS's sales in quote center more than triple. Going-forward, we will continue to support SRS SRS's momentum and we expect their organic sales to grow mid-single digits in fiscal 2025. Our real-estate footprint remains one of our distinct competitive advantages. We are expanding that footprint by investing in new stores in areas that have experienced population growth or where it makes sense to relieve pressure on existing high-volume stores. In fiscal 2024, we opened 12 new stores, 10 in the US and two in Mexico. We are seeing great results from these stores, which are outperforming our expectations. For fiscal 2025, we plan to open 13 new stores. For fiscal 2025, we expect total sales growth of approximately 2.8%, comparable sales growth of approximately 1% and adjusted diluted earnings per share to decline approximately 2%. We remain excited about all our growth opportunities, and we feel confident that the investments we are making will set us up for continued success. I want to close by thanking our associates for their hard work and dedication to our customers in the 4th-quarter and throughout the year. Our results reflect strong execution by our stores, merchants and supply-chain teams as well as our vendor partners as they remain focused on delivering value and service to our customers. With that, let me turn the call over to.

Ann-Marie Campbell
Senior Executive Vice President at Home Depot

Thanks, Ted, and good morning, everyone. Our thoughts continue to be with everyone impacted by hurricanes Helen and Multon as well as the devastating fires in Los Angeles. We are here as these communities rebuild with our associates and suppliers who consistently go above and beyond to serve our customers. And I want to thank them for all that they do. As you heard from Ted, growing our share of wallet with the Pro is a key part of our growth strategy and I'd like to take a moment to talk more about the progress we've made. For the quarter, all our Pro cohorts positive comp and it is clear that our initiatives are working. Over the last few years, we have made investments in our stores as well as through our pro ecosystem to improve the shopping experience for all of our pros regardless of their purchase occasion, whether they are shopping in-store, online or getting delivery from stores or distribution centers. We know that nearly all pro shop or stores. Over the years, we have been investing across our stores to simplify and enhance the in-store shopping experience through investments in our freight flow process and technology to increase on-shelf availability. Investments in inventory to provide a deeper assortment and job quantities in core SKUs, enhancements in our labor model and the introduction of CXM's or dedicated customer experienced managers and the development of selling tools to provide better insights for our associates to help serve the pro. In addition to these in-store investments, our investments in the FDC network have improved the in-store experience by taking many deliveries out-of-the store, which reduces clutter in the aisles from staged orders. As a result, our in-stock have improved and our associate availability is higher. The FDC has also enabled faster delivery, expanded fulfillment options and more consistent on-time and complete delivery of larger orders directly to the job site. We also continue to build-out a more comprehensive set of capabilities in our Pro ecosystem. These capabilities include a broader and deeper assortment of products in the FDC, dedicated sales teams that provide a higher-level of service, enhanced selling tools with CRM capabilities to better serve our customers, additional digital capabilities through our B2B website, loyalty and preferred pricing programs. It is all of these capabilities as well as enhancement in-store that have really allowed us to win a greater share of wallet with all our pros. Our initiatives are resonating with Pros and not only are we gaining traction with the larger pro that works on complex projects, we are also seeing meaningful lift in sales with all Pros across all purchase occasions. In fact, these investments have driven over $1 billion in incremental sales on an annualized basis in 17 markets. Even in these 17 markets, we are in different stages of maturity and there's still a lot to do to better serve all our pros from improving our delivery experience to building new capabilities like trade credit and order management to leveraging SRS and improving connectivity with our stores. We know that as we invest across all of our assets, it will allow us to more uniquely serve the pro. We have a lot to be proud of this year. We continue to focus on delivering the best customer experience in-home improvement. We have seen great associate engagement and historically high retention rates. Our safety performance was exceptional and we have made significant progress in shrink, driven by our company-specific initiatives. All of these efforts are positioning us well and will allow us to continue to grow with all of our customers. Thank you. And with that, let me turn the call over to Billy.

Billy Bastek
Executive Vice President, Merchandising at Home Depot

Thank you, Anne, and good morning, everyone. I want to start by also thanking all of our associates and supplier partners for their ongoing commitment to serving our customers and communities. As you heard from Ted, our performance during the 4th-quarter exceeded our expectations as we saw broader engagement across home improvement-related projects. In addition, we also saw incremental sales as a result of the ongoing hurricane recovery efforts. However, the higher interest-rate environment continues to pressure larger remodeling projects. Turning to our merchandising department comp performance for the 4th-quarter, 10 of our 16 departments posted positive comps, including appliances, indoor garden, lumber, power, building materials, paint, outdoor garden, storage, hardware and plumbing. During the 4th-quarter, our comp transactions increased 0.6% and comp average ticket increased to 0.2%. Inflation from core commodity categories positively impacted our average ticket by approximately 20 basis-points, driven by inflation in lumber and copper wire. Additionally, during the quarter, we continue to see our customers trading up for new and innovative products. Big-ticket comp transactions or those over $1,000 were up 0.9% compared to the 4th-quarter of last year. We were pleased with the performance we saw in categories such as appliances, building materials and lumber. However, we continue to see softer engagement in larger discretionary projects where customers typically use financing to fund the project such as kitchen and bathroom models. During the 4th-quarter, both Pro and DIY comp sales were positive with Pro outpacing the DIY customer. In the 4th-quarter, we saw strength across many pro heavy categories like gypsum, decking, concrete and fencing. Turning to total company online sales, excluding the impact of the extra week-in the quarter, sales leveraging our digital platforms increased approximately 9% compared to the 4th-quarter of last year. There are a lot of drivers to our online success. From the focus on continuously improving the shopping and browsing experience to enhancing the delivery and post-delivery experience to leveraging AI to enhance our chat features, product descriptions and creating rating summaries for our customers. This quarter, I'd like to talk more specifically about delivery. As you heard from Ted, we remain focused on continuing to improve our interconnected retail experience and have made significant progress on the delivery experience for our customers. We have invested in a broader assortment across our 19 DFCs, established partnerships with third-party last mile providers and made technology improvements across our 2,000 plus stores to better utilize all of our assets for the benefit of our customers. Today, we have the fastest delivery speeds across the greatest number of products in company history. Our customers also have more fulfillment options than ever before. They can choose what they want, when they want, including same day and next day delivery. We know that driving a superior customer experience, including speed of delivery drives greater customer satisfaction, higher engagement, higher conversion and ultimately more sales. We've seen these customers who are engaging in our delivery capabilities meaningfully increase their overall spend with us across all purchase occasions and channels. During the 4th-quarter, we hosted our appliance gift center, decorative holiday and Black Friday events. We saw strong engagements across all of these events with our appliance and gift center events posting record sales years. We're looking-forward to the year ahead, particularly with the spring selling season right around the corner, and we have a great lineup of new and innovative products from live goods to outdoor power equipment. We continue to see an industry-wide shift from gas-powered to battery-powered tools and we have been leaning into this trend for some time. We have the brands that matter most to our customers, including, Milwaukee, and. In our Spring gift center event, we will provide our largest assortment of battery-powered products with longer runtimes and enhanced performance across a number of battery platforms, including Rayobi-1, Milwaukee, M18 Forge, Dualt XR PowerPack and PowerStack and LXT to name a few. We're also excited about our live goods program. Each year, our merchants partner with a wide network of regional and local growers to ensure that our customers have new and improved varieties and the right localized assortments to enhance the overall garden experience. Investing in our relationships with our growers will allow us to continue to drive innovation to meet our customers' needs and improve their shopping experience while building loyalty to the Home Depot. As we look-forward to spring, we are excited about continuing to provide a broad assortment of best-in-class products that are in-stock and available for our customers when and how they need it. With that, I'd like to turn the call over to Richard.

Richard McPhail
Executive Vice President & Chief Financial Officer at Home Depot

Thank you, Billy, and good morning, everyone. In the 4th-quarter, total sales were $39.7 billion, an increase of $4.9 billion or approximately 14% from last year. Fiscal 2024 included a 53rd week, which added approximately $2.5 billion in sales for the quarter and the year. During the first -- during the 4th-quarter, our total company comps were positive 0.8% with comps of negative 1.7% in November, positive 6.6% in December and negative 2% in January. Comps in the US were positive 1.3% for the quarter with comps of negative 2% in November, positive 8% in December and negative 1.4% in January. It is important to note that holiday shifts positively impacted December while negatively impacting November and January. Our results for the 4th-quarter include a net contribution of approximately $220 million in hurricane-related sales, which positively impacted total company comps by approximately 65 basis-points for the quarter. Additionally, foreign-exchange rates negatively impacted total company comps by approximately 70 basis-points for the quarter. For the year, our sales totaled $159.5 billion, an increase of $6.8 billion or 4.5% versus fiscal 2023. For the year, total company comp sales decreased 1.8% and US comp sales decreased 1.8%. In the 4th-quarter, our gross margin was approximately 32.8%, a decrease of 25 basis-points from the 4th-quarter last year, reflecting a change in mix as a result of the SRS acquisition, which was in-line with our expectations. For the year, our gross margin was approximately 33.4%, an increase of approximately 5 basis-points from last year, which was in-line with our expectations. During the 4th-quarter, operating expense as a percent of sales increased approximately 30 basis-points to 21.5% compared to the 4th-quarter of 2023. Our operating expense performance was in-line with our expectations. For the year, operating expenses were approximately 19.9% of sales, representing an increase of 75 basis-points from fiscal 2023. Our operating margin for the 4th-quarter was 11.3% compared to 11.9% in the 4th-quarter of 2023. Excluding intangible asset amortization in the quarter, our adjusted operating margin for the 4th-quarter was 11.7% compared to 12.1% in the 4th-quarter of 2023. Our operating margin for the year was 13.5% compared to 14.2% in 2023. Excluding intangible asset amortization, our adjusted operating margin for the year was 13.8% compared to 14.3% in 2023. Interest and other expense for the 4th-quarter increased by $150 million to $608 million due primarily to higher debt balances than a year-ago. In the 4th-quarter, our effective tax-rate was 22.9% and for the year was approximately 23.7%. Our diluted earnings per share for the 4th-quarter were $3.02, an increase of approximately 7% compared to the 4th-quarter of 2023. Diluted earnings per share for fiscal 2024 were $14.91, a decrease of 1.3% compared to fiscal 2023. Excluding intangible asset amortization, our adjusted diluted earnings per share for the 4th-quarter were $3.13, an increase of approximately 9.4% compared to the 4th-quarter of 2023. Adjusted diluted earnings per share for fiscal 2024 were $15.24, essentially flat compared to fiscal 2023. During the year, we opened 12 new stores, bringing our store count to 2,347 at the end of fiscal 2024. Retail selling square footage was approximately 243 million square feet and total sales per retail square-foot were approximately $600 in fiscal 2024. At the end-of-the quarter, merchandise inventories were $23.5 billion, up approximately $2.5 billion versus last year and inventory turns were 4.7 times, up from 4.3 times last year. Turning to capital allocation. During the 4th-quarter, we invested approximately $1.1 billion back into our business in the form of capital expenditures. This brings total capital expenditures for fiscal 2024 to approximately $3.5 billion. And during the year, we paid approximately $8.9 billion in dividends to our shareholders. Today, we announced our Board of Directors increased our quarterly dividend by 2.2% to $2.30 per share, which equates to an annual dividend of $9.20 per share. And finally, during fiscal 2024, we returned approximately $600 million to our 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, return on invested capital was approximately 31.3%, down from 36.7% in the 4th-quarter of fiscal 2023. Now I will comment on our outlook for 2025. As you heard from Ted, we feel great about the investments we made in 2024, the progress we've made throughout the year and the significant opportunities we have as we look-ahead. And while there are signs that the home-improvement market is on the way towards normalization, uncertainty still remains. As we look-ahead to fiscal 2025, we expect the underlying momentum in the business that we saw in the back-half of 2024 to continue into 2025. However, we are not assuming any meaningful changes to the macroeconomic environment. We expect our consumer will remain healthy. We are not assuming a change in the rate environment nor improvements in-housing turnover. As a result, we would expect continued pressure on larger remodeling projects. Given these factors, our fiscal 2025 outlook is for total sales growth to outpace sales comp with sales growth of approximately positive 2.8% and comp sales growth of approximately positive 1% compared to fiscal 2024. Total sales growth will benefit from the SRS acquisition, the new stores we opened in fiscal 2024 and plan to open in fiscal 2025. And for the year, we expect SRS to deliver mid-single-digit organic growth. Our gross margin is expected to be approximately 33.4%, essentially flat compared to fiscal 2024. Further, we expect operating margin of approximately 13% and adjusted operating margin of approximately 13.4%. This primarily reflects natural deleverage from sales and continued investments across the business as well as reflecting the mix impact from the SRS acquisition. Our effective tax-rate is targeted approximately 24.5% and we expect net interest expense of approximately $2.2 billion. We expect our diluted earnings per share to decline approximately 3% compared to fiscal 2024 when comparing the 52 weeks in fiscal 2025 to the 53 weeks in fiscal 2024. And we expect our adjusted diluted earnings per share to decline approximately 2% compared to fiscal 2024. On a 52-week basis, it would be essentially flat compared to fiscal 2024. We plan to continue investing in our business with capital expenditures of approximately 2.5% of sales for fiscal 2025. We believe that we will grow market-share in any environment by strengthening our competitive position with our customers and delivering the best customer experience and home-improvement. Before opening the call for questions, we are pleased to announce that we will be holding an investor conference on December 9, 2025 in New York City. We will share more details in the future, but for now, please hold the date. Thank you for your participation in today's call. And Christine, we are now ready for questions.

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Operator

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star to if you 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. Thank you. Our first question comes from the line of Laura Ng with Morgan Stanley. Please proceed with your question.

Simeon Gutman
Analyst at Morgan Stanley

Good morning. It's Simeon Gutman from Morgan Stanley. My first question is on the macro housing backdrop and the ingredients to a 1% comp. So existing home sales look like they're set to grow mid-singles. And if that's the case, home-improvement demand could arguably be a little stronger than maybe a one comp or whatever assumption you're using. What's your take on that? I know Richard said we're not assuming any improvement in turnover. Is there anything changed about -- any change about your forecast due to people staying in their homes longer and rates being stubborn.

Ted Decker
Chair, President & Chief Executive Officer at Home Depot

Hi, Simeon. Yes, at this point, while we've seen a little life in turnover in Q4, we're not expecting meaningful increase off that 40-year low. We've likely reached the bottom of housing turnover at about 3% of units, but we're not expecting a big rebound nor significant increases in new housing starts. However, if you just step-back, I mean if you look at our customer, they remain very healthy. We look at our customer today, we think about $110,000 average income. Those incomes have been growing. We've talked about the increase in-home equity values up 50% since the end of '19 and then wealth effect through stock market and other investments. So our customer is very healthy. And as you say, if they're staying in their homes longer, they will take on larger remodeling projects as opposed to moving those that are locked into to lower interest rates or just not wanting to get mortgages with the higher rates. But we're not anticipating a large decrease in mortgage rates will be more an issue of cust of consumers getting used to these higher rates. And to take on a larger project, it's usually financed and that financing is through HELOCs. And we've started to see a little increase in each of cash-out refis as well as draws on HELOCs. But there's literally trillions of dollars of equity built-up in US housing. And as homes continue to age and people are staying in those homes and realize that we're highly unlikely to see the low-interest rates we saw over the past two, three years that they'll eventually tap that equity and do the larger remodeling projects. We're just not sure if sure that turn comes in 2025 at a dramatically accelerated pace.

Richard McPhail
Executive Vice President & Chief Financial Officer at Home Depot

And to follow-up on the 1%, just to explain that, Simeon, obviously, this is a triangulation. We look at exit run-rates of the business and as we said, keep in mind that Q4, while certainly showing signs of momentum growing from Q3, still had some benefit from hurricanes that won't fully repeat in 2025. So a slight dampening of the run-rate and then the assumption of continued pressure on larger projects. With the shape of the year increasing slightly through the year, which also includes the inclusion of SRS in our comp, and you'll see them in our comp for the last seven months of the year.

Simeon Gutman
Analyst at Morgan Stanley

Okay. That's helpful. The follow-up, if comps do end-up being a little stronger than one, does each point flow-through at this 10 points of leverage to the margin is -- or is there a scenario, whether it's better DIY, more pro, more complex project or do you spend more? Is there a mix-shift that could alter that relationship above 1?

Richard McPhail
Executive Vice President & Chief Financial Officer at Home Depot

No, I think look, the 10 basis-points is a good rough estimate of leverage from that point.

Simeon Gutman
Analyst at Morgan Stanley

Great. Good luck.

Richard McPhail
Executive Vice President & Chief Financial Officer at Home Depot

You're not going to have meaningful shifts in mix. Even if mix shifts, you're not going to have meaningful -- meaningful differences in that leverage number.

Simeon Gutman
Analyst at Morgan Stanley

Thank you

Operator

Our next question comes from the line of Christopher Horvers with JPMorgan. Please proceed with your question.

Christopher Horvers
Analyst at J.P. Morgan

Thanks. Good morning, everybody. I wanted to go at a similar kind of question, maybe on a different angle. Appliances were up, paint was up, you know, was that -- was that volume-driven? And to what extent do you think the category was up versus Home Depot continuing to gain share? Because as you look-forward, the replacement cycle dynamics should get better from 4Q levels. You'll be five years out. Ted, you've talked about in the past, every well was paint in the US in 2020, but we're getting further from there. So doesn't that replacement part of the business further accelerate? And curious if you're going to say like, well, X percent of the business is replacement versus y percent is more like big-ticket remodel, which would we expect to continue to be an anchor?

Ted Decker
Chair, President & Chief Executive Officer at Home Depot

Sure, Chris. Let me make a broad comment and then Billy can give some detail on particular categories. Look, if we just step-back and look at this quarter, we're happy with it, right? Sales exceeded our expectations. And we're happy with positive comps, obviously, for the first time in two years and particularly happy with positive transaction comps, which has been negative for over three years. And as you say, the business has strengthened across many categories and in many geographies. In fact, we haven't seen this broader base performance in over two years and maybe even closer to three years. And if you go back, Chris, to your comment on COVID, I'd say that shift of spending back to services post-COVID and the pull-forward of demand during the pandemic, those have largely played out. There may be a category here and there, but I'd say that PC shift in-home improvement pull-forward have largely played out. And engagement in repair and smaller updates and decor oriented updates is strengthening and Billy can give some detail on the categories.

Billy Bastek
Executive Vice President, Merchandising at Home Depot

Yeah. Listen, as Ted mentioned, the broader-based performance, I talked about the 10 of the 16 departments that posted positive comps. We had an outperform, Chris, as you mentioned in appliances in our gift center business, which we had record sales candidly in that -- in those areas across the store. So I mean, we had a healthy balance of transactions and unit performance, which to Ted's point, we hadn't seen in a while. With that said, still the pressure we know in finance projects, we had great performance across many of our pro heavy categories. I mentioned gypsum and decking, concrete, fencing. And while there was some hurricane impact in there, we're pretty pleased with the broad-base of performance not only across the merchandising departments, but certainly across the country. But there's just no denying that you know the deferral that we're still seeing. We are pleased with the pull-forward that we think is largely behind us at this point from a go-forward standpoint. So all those things bode well, but still the pressure in some of the more finance projects we're still continuing to see to see that exist.

Christopher Horvers
Analyst at J.P. Morgan

Got it. And then, Richard, can you talk about the monthly US comps adjusting for the for the holiday shift? There's been a lot of questions I think over the past five, six-weeks on what's going on with the consumer. You saw F&D talk about a slowdown relative to what they saw in the 4th-quarter and they talked about weather. So can you talk about do you think you know that the weather had any influence on the business in January and any comment on exit-rate. Thanks very much.

Richard McPhail
Executive Vice President & Chief Financial Officer at Home Depot

I think that -- so the monthly progression was absolutely influenced by holiday shifts, again, to the benefit of December to the detriment of November and January. But no doubt weather was horrible in January. We've had two years in a row of tough January, but this one was particularly tough. And so that's why we don't read a tremendous amount into it when we think about exit run-rate, but no doubt weather had an impact.

Christopher Horvers
Analyst at J.P. Morgan

Great. Thanks very much. Have a great spring.

Richard McPhail
Executive Vice President & Chief Financial Officer at Home Depot

Thanks.

Operator

Our next question comes from the line of Michael Lasser with UBS. Please proceed with your question.

Michael Lasser
Analyst at UBS Group

Good morning. Thank you so much for taking my question. What market-share assumption have you embedded into your 2025 outlook? And why wouldn't it be reasonable for us to assume that Home Depot's market-share gains should accelerate from here and be above where they've been historically in light of you now having SRS as well as many more capabilities given the investments that have been made over the last several years. Is that a sign that you think your DIY market-share is starting to peak and that could have an impact on the overall -- overall share gains for the enterprise.

Ted Decker
Chair, President & Chief Executive Officer at Home Depot

Hi, Michael. Thanks for the question. As we look at the overall market for 2025, we see it but overall being flat, maybe up slightly, those expectations have come down over the last several months. And our plus one, as Richard explained, is a continuation of some of the underlying strength in the business and our initiatives that we absolutely are gaining incremental sales for us. So that's why we peg our comp growth at 1%. Now if you look at the combination of what's driving our share gain for both Pro and consumer in the core, it is all the capabilities that we're putting in the marketplace. We talked a lot about interconnected and all the investments we've made on the interconnected journey and then certainly all the investments on our Pro ecosystem. And I'll have Jordan spend a few minutes more on what we're doing on interconnected. And then you add what we're doing with SRS, SRS will grow faster than the core and we believe they're taking share in each of their three verticals. So we're very pleased with what SRS is doing. So all that with our new stores, which are starting to add some meaningful dollars to our growth, gets us to the 1% comp and 2.8% overall growth in a flat market. So we wouldn't say our share has peaked by any means in DIY or Pro. And then, Jordan, if you chat about what we're doing to drive share in Pro and consumer with interconnected.

Jordan Broggi
Executive Vice President, Customer Experience and President, Online at Home Depot

Sure. So I mean we -- Billy, Billy shared the excitement we have had on dotcom sales performance, and that's really across both the consumer and the Pro, both of them up healthily online and it's been a combination of investments that we've that we've made that have helped deliver that from the site experience and really making that journey so much better from a -- from a browse and search perspective and finding the right product to the fulfillment, Billy mentioned that we've had the fastest delivery speeds in the history of our company, same-day delivery, next day delivery, whether that's concrete and lumber or whether that's a light bulb or power tool. It's been really fast. And all of those investments have come together to really drive an improvement in conversion rate on the site. And then what we see is an increased engagement across channel with more purchases that come in-store. So we're really excited about the momentum there and see the investments that we've made really, really paying-off.

Michael Lasser
Analyst at UBS Group

Thank you for that. My follow-up question is on what's been happening as of late. There's been a lot of focus on the impact that the government efficiency measures and/or immigration policy implementation could have on the US consumer, how did you factor that and those considerations into the guidance? And while you had just indicated that weather was really the underlying cause of some of the results in January, are you seeing any evidence that these factors are having an impact on the business? There's been talk about housing inventory in the Mid-Atlantic starting to creep higher, so anything you can provide that would be very helpful.

Ted Decker
Chair, President & Chief Executive Officer at Home Depot

Michael, I don't think we've seen anything specifically. If you tick through some of the things you mentioned in some -- some I'd add, tax policy would be, you know, one of the most important to Home Depot is a full taxpayer. So we'd be very pleased if the corporate rate stays at 21%. Tariffs is obviously a lot of discussion on what rates would be and what countries would be impacted and what categories of goods. We've been through that before and I think we have the best team to manage through any tariff environment, which would impact the industry broadly, I'd say our diversification efforts out of certain concentrations in countries has been quite good over the last six or seven years. You mentioned immigration. You know, we've talked about having a shortage of skilled trades folks in this country for some time. We believe it's like 400 odd thousand trades folks short and not sure how that number would change with any meaningful change in immigration. And then specifically to the government efficiency in Mid-Atlantic, no, we've not seen -- seen anything there.

Michael Lasser
Analyst at UBS Group

Thank you very much and good luck.

Ted Decker
Chair, President & Chief Executive Officer at Home Depot

Thank you.

Operator

Our next question comes from the line of Scott with Truist. Please proceed with your question.

Scot Ciccarelli
Analyst at Truist Financial

Good morning guys. Dan talked about a $1 billion of incremental sales in the 17 markets where you start to build-out complex Pro capabilities. How do you actually measure that? And then what kind of ramp would you expect in those markets in '25 as you continue to phase-in order management credit expansion, et-cetera, some of the other capabilities that you've discussed. Thanks.

Ann-Marie Campbell
Senior Executive Vice President at Home Depot

Yes. Thank you, Scott. Yeah, as we mentioned that we're incredibly pleased with what we've seen so-far. We generated $1 billion and growing. So that's been fantastic. And as we mentioned as well, it's geared across all particients. The way we measure that is the incremental sales in the 17 markets versus what we see in the top 40 markets. So the $1 billion of annualized sales is that in those 17 markets, we have been outperforming other top 40 markets. And so when you think about 2025, we are focused on really maturing the capabilities in these 17 markets, which is really important, not only maturing the existing capabilities, but really, really rolling out new capabilities as well. So whether it be delivery, expanding our sales force, those are key things that we'll continue to focus on as well as new capabilities as we talk about trade credit, order management, account management. Those are opportunities that we have to continue to grow in 2025. And Ted talked about SRS and there's also an opportunity for us to really drive cross-selling opportunities across SRS portfolio. Our last but not least, we have more FDCs in the pipeline as well. We have our three FDCs under-construction. We have more in the pipeline. So we're incredibly pleased with what we've seen in 2024 when you think about the 17 markets across our company and compared to the top 40 markets, but more importantly, what we've seen with the Pro ecosystem across the country as well and making sure that we're doubling down on the opportunities that we see?

Scot Ciccarelli
Analyst at Truist Financial

Appreciate that. What's the biggest sticking point as you roll this out? Is it building the specialty sales force? Is it the recognition from your complex Pros, etc. Like what's the toughest piece that you've kind of learned that you have to -- what's your toughest hurdle you have to clear?

Ann-Marie Campbell
Senior Executive Vice President at Home Depot

Yes, Scott, this is what we continue to find, this is an entire ecosystem, right? So it's not just one component of the ecosystem, right? When we talk about the outside sales or we talk about delivery or we talk about order management and account management, it's all of those things working in concert. So what is always kind of difficult is as you roll these capabilities out and there are different levels of maturity, our focus is to refine and really perfect what we're seeing. And that takes time in a market, especially when you're building relationships. We don't want to create new relationships with our new capabilities with our pros and then have big failure points. So the difficult part is making sure that we're doubling down and moving at a speed that drives outcomes, but at the same time that we focus on perfecting within the market. So it's incredibly complex. It is really important that we do this right. And in 2024, we saw some really, really great progress and that's what makes us excited about what we will do in 2025 and beyond.

Scot Ciccarelli
Analyst at Truist Financial

Thank you.

Operator

Our next question comes from the line of Karen Short with Melius Research. Please proceed with your question.

Karen Short
Analyst at Melius Research

Hi, thanks very much and good to talk to you. So I had one question regarding guidance and then another totally related. So ex the intangibles in terms of operating margin guidance. So should we look at that as the right way to think about the relationship between sales growth and operating margin growth, i.e., excluding intangible impact from SRS on your guidance.

Richard McPhail
Executive Vice President & Chief Financial Officer at Home Depot

Yes. Yes. Karen, we believe that removing the non-cash amortization expense-related to the amortization of intangible assets is the best way to look at our underlying operating margin. And so that's where we would -- we have guided for the last couple of quarters and we'll continue to guide on the basis of moving forward.

Karen Short
Analyst at Melius Research

So how should we...

Richard McPhail
Executive Vice President & Chief Financial Officer at Home Depot

And Karen, by the way, it includes -- it includes -- we -- the operating margin is adjusted for all non-cash amortization expense at the Home Depot? Not just that related to SRS.

Karen Short
Analyst at Melius Research

Okay. Thank you. So how should we think about the relationship on total sales growth versus operating margin or operating profit growth on the way you define it.

Richard McPhail
Executive Vice President & Chief Financial Officer at Home Depot

Delevers is essentially the same when you're looking at adjusted operating margin versus GAAP operating margin. So there's no change needed in the way that we've talked about leverage or deleverage in the past overall.

Karen Short
Analyst at Melius Research

Okay. And is 2.5% of sales the right run-rate to think about on capex going-forward?

Richard McPhail
Executive Vice President & Chief Financial Officer at Home Depot

So historically, we've said 2% is a -- is sort of a rough expectation. And we have increased that percentage really to reflect two things. Number-one, obviously, we're -- we are happy with the investments we've made. They are generating exceptional returns. And so we're leaning into those investments. But second, a big part of that investment portfolio are our new stores. And it's worth calling our new-store program out. In 2023, we announced we would build 80 stores over five years, including the year 2023. We are 25 stores into that program. So-far, the results have been fantastic. We're tracking ahead of expectations. So we are going to continue and we will complete that program this year will be the third year of the program. We'll complete it by year five, which is 2027. So that 2.5% of sales is reflective of that new-store program as well as leaning into investments that are working.

Karen Short
Analyst at Melius Research

Okay, great. Thank you so much.

Richard McPhail
Executive Vice President & Chief Financial Officer at Home Depot

You welcome.

Operator

Our next question comes from the line of Steven Saccone with Citi. Please proceed with your question

Steven Zaccone
Analyst at Smith Barney Citigroup

Hey, good morning. Thanks very much for taking my question. I actually want to follow-up on Karen's question there and maybe dig into the SRS contribution a bit more. Can you help us understand how that's impacting the bottom-line for 2025? Because you gave the organic mid-single-digit growth for the business, maybe how is the bottom-line tracking versus expectation? Dollars

Ted Decker
Chair, President & Chief Executive Officer at Home Depot

To our top-line from seven months of ownership. They hit that on the button and we feel great about their P&L top-to-bottom. And so from a -- as we discussed during the deal, we expected this to be cash accretive within the first year of ownership. We'll be coming up on that first year anniversary soon. They're already contributing to top and bottom-line. And so we feel really happy about that. Now just to be clear, to make sure that everyone understands this, obviously, we report our results on a consolidated basis. If you think about the pro-forma impact of SRS, the reflection of SRS and its mix impact on the Home Depot, there's about a 40 basis-point full-year of a mix impact to the Home Depot. And so think about Home Depot in total being impacted by about 40 basis-points, but that's a mix effect and we'll take that all day long. They are leaders in their spaces. They're performing exceptionally well and we're happy with that.

Steven Zaccone
Analyst at Smith Barney Citigroup

Okay, thanks. The follow-up question I had was just on maybe the pricing environment. In the past, I think you've talked about prices kind of settling. Do you feel like we're at a point now where we should see sort of a natural return to a normal environment for pricing? And then how does the potential for tariffs kind of fit into that view?

Billy Bastek
Executive Vice President, Merchandising at Home Depot

Well, thanks, Steven. It's Billy. Listen, as it relates to just the general pricing environment, and then I'll talk for a minute about tariffs. I mean we are in a very rational market just by definition. And prices, as we've mentioned on the last couple of calls really have settled to your point. And the promotional activity is the same as it's been kind of pre-COVID as well. So no differences in that. And as I mentioned, again, the last couple of quarters, pricing has settled into the market accordingly. As it relates to two tariffs, and we've spoken a little bit about it this morning, I mean, listen, we've been through this before. We'll continue to assess just how these impact our business from a go-forward standpoint. We've been focused on diversifying sourcing for several years. So we'll continue to assess that going-forward. But our number-one job in merchandising is to be the customer's advocate for value. We have great, great vendor relationships and with our scale, we feel that we're as well or better-positioned to -- than anyone in the marketplace to navigate the environment going-forward.

Richard McPhail
Executive Vice President & Chief Financial Officer at Home Depot

And actually, I want to go back one question and just follow-up on Steven's question. So Steven, I -- just to put a year-over-year comparison together for you and talk about how SRS impacts year-over-year from an operating margin perspective. Now so as you can -- as you see in our guidance, we're guiding to a 13.4% adjusted operating margin from a 13.8%. That's a 40 basis-point decrease. And here's how that 40 basis-points breaks down. It's coincidental to the pro-forma impact, but the year-over-year is different. So that 40 reflects 20 basis-points of natural deleverage. And recall, we think this business levers about a 3% comp. So at a 1% comp, we're getting about two comp points of deleverage, so 2 times about 10 basis-points per is 20 basis-points. Then the inclusion of 12 months of ownership of SRS compared to seven months of ownership is reflected in 15 basis-points of mix-shift. So you've got about a 15 basis-point impact of that year-over-year comparison of 12 months versus seven months. And then finally, the comparison versus a 53-week year also shifts margin by-5 basis-points. So you've got 20 bps from natural deleverage, you've got 15 from SRS impact and you've got five from the 53rd week comparison. Within that, I think it's worth saying, look, we are leaning into investments. We're paying for those investments through productivity. And so that's also within that operating margin guidance. There's productivity inside as well as leaning into investments. And I hope that makes it a little bit more clear.

Steven Zaccone
Analyst at Smith Barney Citigroup

Yeah, that answers our question. Thank you so much for that follow-up.

Operator

Our next question comes from the line of Seth Sigman with Barclays. Please proceed with your question.

Seth Sigman
Analyst at Barclays

Thanks. Good morning, everyone. I do want to follow-up on that last point around the flow-through. If you step-back and look at your sales over the last several years, I think since 2019, sales are up maybe 45%, SG&A is actually up a similar percent. Along the way, there have been investments and plenty of cost pressures. I guess the real question is, to the extent that comps start to improve here, they progress throughout 2025, are we at that point where sales should grow faster than expenses and you can really start to see that flow-through come through?

Richard McPhail
Executive Vice President & Chief Financial Officer at Home Depot

Seth, I would point you back to our investor conference back-in 2023, right? Once this market normalizes, we would expect a base-case of 3% to 4% top-line growth. We would expect -- and within that, we expect flat gross margin as kind of a base expectation. And then we do expect operating expense leverage. And so that takes you to the earnings per share expectation of mid to-high single-digit growth once our market is normalized and once we are back to that level of sales growth. And that view hasn't changed since 2023.

Seth Sigman
Analyst at Barclays

Okay, great. Thank you for that. And then just on that point around the gross margin, you are guiding flat in '25. You still have some SRS dilution wrapping into this year. Can you talk about some of the underlying assumptions for core Home Depot and speak to the offsets that would be helping mitigate that SRS dilution? Thanks so much.

Richard McPhail
Executive Vice President & Chief Financial Officer at Home Depot

Sure. I'd point to, you're right about that. That. We still have a little bit of a lap. And so there's pressure from SRS mix. Just two great call-outs. Number-one, our outstanding supply-chain and merchandising teams finding productivity, and you know, I could go on and on about it, but the benefits we've seen in supply-chain productivity alone are really encouraging. And we would call-out our fantastic store operations team who have now driven improvements in shrink for about a year and a half year-over-year, quarter-by-quarter. We expect that to continue into 2025. And so it's really a story of SRS mix being offset by supply-chain productivity, some other great things the merchants are doing and our fantastic store ops team.

Seth Sigman
Analyst at Barclays

Thanks. Appreciate it.

Isabel Janci
Vice President, Investor Relations & Treasurer at Home Depot

Christine, we have time for one more question.

Operator

Thank you. Our final question will come from the line of Zahan Mah with Bernstein. Please proceed with your question.

Zhihan Ma
Analyst at Sanford C. Bernstein

Hi, thank you so much for taking my question. Just a final quick one. How does your Complex Pro initiatives impact your long-term ROIC expectations taking into account that you are extending more trade credit and potentially holding more inventory with a broader assortment from here? Thank? Thank you.

Ted Decker
Chair, President & Chief Executive Officer at Home Depot

I wouldn't expect a meaningful impact on ROIC through capital investments as we've talked about driving incremental sales and profit dollar growth. That business has a different margin profile, but certainly incremental sales and profit growth. But it's really a reasonably asset-light investment. We leased the DCs, we lease trucks, we bring on-sales teams that are commissioned sales forces that sort of earn their keep as they build their portfolios. Trade credit, as we scale that, we're, we're tiny, tiny exposure at the moment. But as we build that, it's just not going to be a meaningful balance sheet item given the scale of our overall balance sheet.

Zhihan Ma
Analyst at Sanford C. Bernstein

Yeah. Great. Thank you.

Operator

MS. Jancy, I would now like to turn the floor back over to you for closing comments.

Isabel Janci
Vice President, Investor Relations & Treasurer at Home Depot

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

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day

Corporate Executives
  • Isabel Janci
    Vice President, Investor Relations & Treasurer
  • Ted Decker
    Chair, President & Chief Executive Officer
  • Ann-Marie Campbell
    Senior Executive Vice President
  • Billy Bastek
    Executive Vice President, Merchandising
  • Richard McPhail
    Executive Vice President & Chief Financial Officer
  • Jordan Broggi
    Executive Vice President, Customer Experience and President, Online
Analysts

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