Home Depot Q2 2024 Earnings Call Transcript

Presentation

[Operator]

Greetings and welcome to the Home Depot Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Isabel Janci. Please go ahead.

[Isabel Janci, Vice President, Investor Relations at Home Depot]

Thank you, Christine, and good morning, everyone. Welcome to Home Depot second quarter 2023 earnings call. Joining us on our call today are Ted Decker, Chair, President, and CEO; Billy Bastek, Executive Vice President of Merchandising; Ann-Marie Campbell, Executive Vice President of U.S. Stores and International Operations; and Richard McPhai, Executive Vice President and Chief Financial Officer.

Following our prepared remarks, the call will be opened for questions. Questions will be limited to analysts and investors. And as a reminder, please limit yourself to one question with one follow. If we are unable to get to your question during the call, please call our Investor Relations Department at 770-384-2387.

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 filings with the Securities and Exchange Commission. Today's presentations will also include certain non-GAAP measures. Reconciliation of these measures is provided on our website.

Now, let me turn the call over to Ted.

[Ted Decker, Chair, President and Chief Executive Officer at Home Depot]

Thank you, Isabel, and good morning, everyone. Sales for the second quarter were $42.9 billion, down 2% from the same period last year. Comp sales for the total company as well as the U.S. Stores also declined 2% from the same period last year. Diluted earnings per share were $4.65 in the second quarter compared to $5.05 in the second quarter last year.

All three of our U.S. divisions posted low-single-digit negative comps in the quarter. Our geographic variability narrowed significantly on a sequential basis as weather normalized particularly in our Western Division and spring-related categories rebounded relative to the first quarter. While there was strength in project-related categories like building materials, hardware, and plumbing, we continue to see pressure in certain big-ticket discretionary categories. Pro sales performance was slightly negative in the second quarter and outperformed the DIY customer. While the survey suggests that Pro backlogs are lower than they were a year ago, they are still healthy and elevated relative to historical norms. Additionally, projects in these backlogs are generally smaller in scale and scope.

In the second quarter, we were pleased with the consumers' engagement with home improvement, particularly across small projects which Billy will discuss in greater detail. Going forward, as we continue to navigate a unique and uncertain environment, our focus continues to be on operating with agility as we respond to evolving customer dynamics, while also driving productivity and efficiency throughout the business. In addition, and as we mentioned at our Investor Conference in June, we operate in a large and fragmented $950 billion-plus addressable market. We remain committed to growing the business and believe we are well-positioned to continue capturing market share.

To that end, I am pleased to announce HD Supply's acquisition of Redi Carpet, a national MRO flooring provider with a proven track record. This acquisition which closed at the beginning of the third quarter extends our current product offering in the multifamily customer vertical with 34 locations strategically located throughout the U.S.

Our team will continue to focus on what is most important. Our associates and customers, our merchants, store and MET teams, supplier partners, and supply chain teams did an outstanding job delivering value and service to our customers throughout the quarter, and I'd like to thank them for their dedication and hard work.

Before I close, I would like to send our thoughts and prayers to the people of Maui. While we are thankful that our people on the island are all accounted for, we are heartbroken by the loss of life and extreme devastation that the community must now navigate and we stand ready to help them in the days, months, and years ahead.

And with that, I'd like to turn the call over to Billy.

[Billy Bastek, Executive Vice President - Merchandising at Home Depot]

Thank you, Ted. 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.

In the second quarter, as we saw weather improve across the country, most notably in our Western Division, we saw an increase in spring sales and strength in smaller ticket projects. In addition, we saw a continuation of the trend we observed starting in the fourth quarter of fiscal 2022 with softness in certain big-ticket discretionary type purchases.

Turning to our department comp performance for the second quarter, six of our 14 merchandising departments posted positive comps, including building materials, outdoor garden, hardware, plumbing, tools, and millwork. During the second quarter, our comp average ticket was slightly positive and comp transactions decreased 2%. Excluding core commodities, comp average ticket was primarily impacted by inflation across several product categories, as well as demand for new and innovative products.

Deflation from core commodity categories negatively impacted our average ticket growth by approximately 160 basis points during the second quarter, driven by deflation in lumber. During the second quarter, we saw a significant decline in lumber prices relative to a year ago. As an example, on average, framing lumber was approximately $420 per 1,000 board feet compared to approximately $715 in the second quarter of 2022, representing a decrease of over 40%.

Turning to total company online sales. Sales leveraging our digital platforms increased approximately 1% compared to the second quarter of last year. We're excited about our customer engagement across our interconnected platforms as we continue to remove friction from the experience. We know the vast majority of our customers engage with us in an interconnected manner. Whether it be through project inspiration in research, transacting, fulfillment, or support, our customers blend the physical and digital worlds. For those customers that chose to transact with us online during the second quarter, nearly half of our online orders were fulfilled through our stores.

During the second quarter, Pro sales were slightly negative and outpaced the DIY customer. While surveys suggest that Pro backlogs are lower than they were a year ago, they are still healthy and elevated relative to historical norms. And in the second quarter, we saw strength across many Pro heavy categories like gypsum, fasteners, and insulation. In addition, we continued to see strength across smaller projects with positive comp performance in a number of categories including live goods, hardscapes, and landscapes.

Big-ticket comp transactions for those over $1,000 were down 5.5% compared to the second quarter of last year. After three years of unprecedented demand in the home improvement market, we continue to see softer engagement in big-ticket discretionary categories like patio and appliances that likely reflects both pull-forward of these single-item purchases and deferrals.

Our merchandising organization remains focused on being our customers' advocate for value. This means continuing to provide a broad assortment of best-in-class products that are in stock and available for our customers when they need it. We will also continue to lean into products that simplify the project saving our customers time and money. That's why I'm so excited about the innovation we continue to bring to the market.

This quarter, we are excited to announce the addition of the Milwaukee brand to our assortment of electrical hand tools. Within this assortment, we will be introducing a brand new line of innovative Milwaukee hand tools that provide a high degree of precision with lasting results for our Pro customers. We've already seen positive results with our Pro customers and feel confident that the addition of these Milwaukee tools will strengthen our position as the number one destination for the electrical trade in the big-box retail channel.

Additionally, in kitchen and bath, we continue to bring innovation to the market with Glacier Bay. Glacier Bay is one of the Home Depot's top proprietary brands known for performance and style. This fall, we are excited to grow our faucet lineup to include innovative functionalities such as touchless and spring neck designs, add to our assortment of sinks and shower heads, while also expanding into new categories like disposals.

We are also extremely excited about our lineup for Halloween. Our merchants have worked with our supplier partners to put together an expanded assortment of product offerings for this Halloween season, including the return of many fan favorites as well as new collections for the Halloween enthusiast. These products bring excitement to our stores and help drive traffic and our sneak preview of our Halloween lineup was a tremendous success. We are thrilled for the full rollout in the coming weeks.

With that, I'd like to turn the call over to Ann.

[Ann-Marie Campbell, Executive Vice President - U.S. Stores & International Operations at Home Depot]

Thanks, Billy, and good morning, everyone. Our store teams have a relentless focus on cultivating the best customer experience in home improvement. We know that our associates are a key differentiator and they are essential in helping us sustain the customer experience we strive for. In order to provide the best customer experience in home improvement, we must focus on cultivating the best associate experience in retail. This means not only investing in competitive wages and benefits, but also providing tools, training, and development opportunities that make working at the Home Depot an enjoyable and rewarding experience.

I am happy to share that our approximately $1 billion of annualized compensation investment that we announced earlier this year is having the intended impact. This quarter, we continued to see meaningful improvement in our attrition rates, particularly among our most tenured associates. More consistent staffing levels have resulted in improved customer service, productivity, and safety. These improvements are exactly what we set out to achieve with this wage investment.

In addition to investing in our associates, we must also leverage technology to further simplify both the associate and customer experience. As you heard at our Investor and Analyst Conference in June, our customers' journeys differ. Depending on the project they are working on, they shop with us in different ways. There is the unassisted cash-and-carry purchase which represents the significant majority of our in-store sales and the remaining sales are assisted purchases where customers need help in purchasing a product, its service, or installation.

It is critical that we have the right products in stock in the right quantity and on the shelf available for purchase, particularly for our unassisted sales. That's why you hear us talk about our focus on improving our on-shelf availability or OSA positions. We are working to narrow the gap between what is considered in stock, meaning our systems indicate it is in-store versus on the shelf and available for sale for the customer.

We're doing this by starting to leverage new technology such as computer vision. Computer vision enables technology to do what we previously relied on associates to do and provides specific locations of deep palletized product that is stored in our overhead. To start, associates will take a picture of their bay in their HD phones. These images then feed into our systems and provide a single real-time view of inventory that can then seamlessly integrate into applications like Sidekick.

Powered by machine learning, Sidekick directs associates to key bays where OSA is low or out exists. This helps our teams prioritize the highest-value task inside their respective stores. The beauty of the machine learning model is that the algorithm is continuously learning as computer vision images are captured and Sidekick tasks are completed. So it will get better and better at directing our associates to the right bay at the right time. While it's early days as we have begun implementing this technology, we have seen meaningful improvements in OSA, increased associate engagement and productivity, and higher customer service scores.

In terms of our assisted sales experience, we have worked to improve this experience by enhancing our systems and processes and have made significant strides. Historically, our associates had to navigate dozens of different systems. Over the last several years, we have invested to simplify the order management system in our store with the introduction of Order Up. We have created a more robust intuitive system that is easy for the first-day associate to use.

The system enables any associate to more easily share customers across a number of different applications, whether that's picking up an order, placing an order, changing an order, or scheduling a service or installation. Not only does Order Up make it easier to fulfill our customers' needs, but it also frees up more time for associates to spend serving customers that needs assistance while in our stores.

These enhancements have made the average Order Up experience over 40% faster for the customer, which has led to improved customer service scores. These initiatives are just a few examples of the many different types of projects that can drive significant impact for customers, our associates, and shareholders. I am so excited about all that our store teams are doing to focus on both the customer and associate experience. None of this would be possible without our amazing associates and I want to thank them for all they do to take care of our customers.

With that, let me turn the call over to Richard.

[Richard Mcphail, Executive Vice President and Chief Financial Officer at Home Depot]

Thank you, Ann, and good morning, everyone. In the second quarter, total sales were $42.9 billion, a decrease of approximately $900 million or 2% from last year. During the second quarter, our total company comps were negative 2% with comps of negative 2.6% in May, negative 3.3% in June, and negative 0.2% in July. Comps in the U.S. were negative 2% for the quarter with comps of negative 2.6% in May, negative 3.3% in June, and negative 0.4% in July.

As you heard from Billy, during the second quarter, we continued to experience lumber deflation compared to the prior year. While lumber prices were down, we saw an improvement in unit productivity resulting in a net negative comp impact of approximately 85 basis points versus the second quarter of 2022.

In the second quarter, our gross margin was 33%, a decrease of eight basis points from the second quarter last year, primarily driven by pressure from shrink. During the second quarter, operating expense as a percent of sales increased approximately 100 basis points to 17.6% compared to the second quarter of 2022. Our operating expense performance during the second quarter reflects our previously executed compensation increases for hourly associates as well as deleverage from our top-line results.

Our operating margin for the second quarter was 15.4% compared to 16.5% in the second quarter of 2022. Interest and other expense for the second quarter increased by $49 million to $428 million due primarily to interest on our floating-rate debt as well as higher debt balances than a year ago. In the second quarter, our effective tax rate was 24.4%, up from 24.3% in the second quarter of fiscal 2022. Our diluted earnings per share for the second quarter were $4.65, a decrease of 7.9% compared to the second quarter of 2022.

During the second quarter, we opened two new stores, bringing our total store count to 2,326. Retail selling square footage was approximately 241 million square feet. At the end of the quarter, merchandise inventories were $23.3 billion, down $2.8 billion compared to the second quarter of 2022 and inventory turns were 4.4 times, down from 4.5 times last year.

Turning to capital allocation. After investing in our business and paying our dividend, it is our intent to return excess cash to shareholders in the form of share repurchases. During the second quarter, we invested approximately $800 million back into our business in the form of capital expenditures. And during the quarter, we paid approximately $2.1 billion in dividends to our shareholders and we returned approximately $2 billion to shareholders in the form of share repurchases. Computed on the average of beginning and ending long-term debt and equity for the trailing 12 months, return on invested capital was approximately 41.5%, down from 45.6% in the second quarter of fiscal 2022.

Now I'll comment on our guidance for fiscal 2023. Today, we are reaffirming our guidance for 2023. We expect fiscal 2023 sales and comp sales to decline between 2% and 5%. We are targeting an operating margin between 14.3% and 14% for the year. Our effective tax rate is targeted at approximately 24.5%. We expect interest expense of approximately $1.8 billion and we are anticipating between a 7% and 13% decline in diluted earnings per share, compared to fiscal 2022.

In addition, we continue to focus on driving productivity in the business and feel confident that we'll realize the previously-announced $500 million in annualized cost savings in 2024. We also remain focused on meeting the needs of our customers with our leading product authority in home improvement, strong in-stock levels, and knowledgeable associates. We will continue to prudently invest to strengthen our competitive position and leverage our scale and low-cost position to outperform our market and deliver shareholder value.

Thank you for your participation in today's call. And Christine, we are now ready for questions.

Questions and Answers

[Operator]

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Christopher Horvers with JPMorgan. Please proceed with your question.

[Christopher Horvers, Analyst at JPMorgan Chase & Co.]

Thanks. Good morning, everybody. So I think the big question is on -- for the industry, have we seen the bottom. You did hit a down 4.5% from the first quarter. You did hit a down 2% in the second quarter, July was flat. So how are you thinking about the trends going forward? Was there anything in the second quarter that we shouldn't extrapolate on a go-forward basis, whether that was weather shift or was there something about July that benefited that month in particular?

[Ted Decker, Chair, President and Chief Executive Officer at Home Depot]

Good morning, Chris. It's Ted. The quick answer is, yes, July really was a weather shift, we had a particularly wet and cold June and with that weather shift, the months of the second quarter were all sequentially about that same minus 2%. But to answer your question from a more macro perspective on where we see the industry and the demand, I'll just start by saying, as you all know, we looked at 2023 as a year of moderation after the explosive growth we had the prior few years, and as we called out, consumers would be shifting their spending from goods to services.

And while that shift is happening, the overall economy and the consumer, in particular, have remained incredibly resilient. As we all know, the economy continues to grow -- the number -- another great GDP print for the second quarter, and fears of a recession or at least a severe recession have largely subsided and the consumer is generally healthy. The PCE spending continues to grow, albeit at a slower rate.

And if you look at the home improvement customer, our core customer, the homeowner, they've seen continued growth in home equity over the last several years [Technical Issues] reduction in inventory, we think our inventory positions are better placed than they've been in the past few years. Our in-stock rates have been continued to improve. Our value proposition remains strong. Ms. Ann called out the wage investments are really paying off.

But given all those positives, and that we were pleased in the second quarter, uncertainties remain, Chris. We don't know how quickly or further the share shift in PCE will occur and where spending in home improvement, in particular, will ultimately settle and we don't know how the monetary policy actions which are specifically intended to dampen consumer demand, what that impact will ultimately have on consumer sentiment in the overall economy.

And as I said, while we did see the sequential improvement in our comp sales, a lot of that was a seasonal recovery in the second quarter, and as I said, specifically, in July as well as the impact of lumber is beginning to abate. And as Billy called out, we do continue to see pressure in certain big-ticket discretionary categories. So, while there's a lot of positives in the macro and with the consumer, we still see enough uncertainty really largely driven by this PCE shift and where that ultimately lands that we -- again we feel good, we just thought there was too much uncertainty to take, for example, revise our guidance from earlier in the year.

But having said all of that long answer, when we do get through this period of moderation, we remain incredibly bullish on the sector. We couldn't feel better about the macro for housing, in home improvement, in our prospects, and ability to keep taking the share in this huge and still largely fragmented market.

[Christopher Horvers, Analyst at JPMorgan Chase & Co.]

Thank you for that. My follow-up question is, is on the ticket side, I mean you are if you run stacks or CAGRs on your average ticket, it did deteriorate in the second quarter relative to the first. So can you talk about the drivers of that? And how much of that is the shift to smaller ticket projects accelerating because you're going to start to lap through that ticket pressure in the fourth quarter? So, is what you're seeing now indicative of that shift from large to small is accelerating, so we can't just assume that we sort of annualize that out in the fourth quarter?

[Richard Mcphail, Executive Vice President and Chief Financial Officer at Home Depot]

Well, this is Richard. First, just with respect to the stacks and progression. What we're encouraged by is we're seeing -- as cost pressures in our industry sort of abate, we're seeing ticket and transactions actually begin to converge and we think that that's actually a healthy signal in the business. So I think that's the most macro comment that we could make about ticket progression.

With respect to large projects versus small projects. Certainly, our customers and our contractors tell us that there is some stance of deferral when it comes to large projects. Customers are opting for -- they are more likely to opt for smaller versus larger and that may have some impact on ticket but we're also seeing the impacts of, what we call, softness in certain large ticket discretionary item purchases like patio and appliances. So there's a lot going on there but I think that the -- maybe the most important dynamic is just kind of that nice recovery in transactions as both ticket and transactions begin to converge or normalize.

[Christopher Horvers, Analyst at JPMorgan Chase & Co.]

Understood. Thanks very much.

[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. Given this trend of small transactions coming -- coming in and maybe even replacing large transactions. Is it more likely that you can take the low end of your guidance off the table of a down 5% comp for the year outside of some macroeconomic shock at this point?

[Ted Decker, Chair, President and Chief Executive Officer at Home Depot]

Well, Michael, I don't want to go through the answer I just went through with Chris, but...

[Michael Lasser, Analyst at UBS Group]

I hear you.

[Ted Decker, Chair, President and Chief Executive Officer at Home Depot]

That's pretty like -- I pretty much laid out the view. I mean, again, we feel really good about the second quarter. Clearly, we like the sequential improvement and as Richard said, the normalization in settling, if you will, of a much healthier balance of ticket and transactions but there's still just a lot of uncertainties. Is the Fed going to raise or even get a budget deal passed, I mean, there's so many things out there swirling that -- we just updated or reaffirmed in June that we're just more comfortable standing PAT right now.

[Richard Mcphail, Executive Vice President and Chief Financial Officer at Home Depot]

And the other thing just to at least know that we're watching is our share of PCE. We've watched this since our sales spiked in 2020, as not a perfect measurement, but certainly, a way to think contextually about what we saw during the three years of unprecedented growth. As predicted, we've seen our share of PCE -- as Ted mentioned, as we've seen share shift from goods into services, we have also seen our share of PCE steadily revert back towards 2019 levels.

When you think about the bottom end of our sales guidance, that actually corresponds with the math that would say if our share of PCE reverted all the way back to 2019 levels, that would imply the low end of the guidance. We don't see anything in our business today that tells us that that's our trajectory but that is the math of our PCE share shift.

And I'd also just repeat Ted, we're not sure where that share ultimately settles. The home is so much more important from a financial perspective for -- you'd say, all homeowners than it was three years ago that perhaps there is an elevated level of home improvement spend in PCE versus prior years. We just don't know but that low end of the range does correspond to the PCE share shift math.

[Michael Lasser, Analyst at UBS Group]

Understood. My follow-up question is Home Depot's operating expenses this year are being impacted by the $1 billion wage investment but SG&A growth over the last few years has been anything but normal. So the key debate here is, has the company entered a period where the cost of doing business has just gone up such that even if the cycle recovers in 2024, the company won't see a significant improvement in its profitability because so much will need to be reinvested back in operating expenses based on what's happening right now.

[Richard Mcphail, Executive Vice President and Chief Financial Officer at Home Depot]

But I wouldn't paint that picture, Michael. Clearly too early to talk about 2024 but we made a significant investment in wage as Ann said and we're in a much more comfortable position on a national minimum level and where we are in competitive markets. So again, as Ann mentioned, we couldn't feel better about the returns on that investment. We don't expect that we're going to need to make that outsize of an investment in the near-term planning horizon. Wage rates are still up, but we're seeing those come down. Annual increases that we track month-to-month, as I'm sure you do, are moderating. So we don't see another big wage investment and then this business as it always does will leverage with volume in those dynamics of this P&L leveraging with modest comps, that investment thesis remains intact.

[Ted Decker, Chair, President and Chief Executive Officer at Home Depot]

[Speech Overlap] It might just do to remind as we've laid out in the Investor Conference, in a market normalized case -- with 3% to 4% top-line growth in the normalized case, we expect margin expansion based on operating expense leverage that would lead to mid to high-single-digit EPS growth. So nothing is really structurally changed that much but it is worth just pointing back to our comments in June.

[Michael Lasser, Analyst at UBS Group]

Understood. Thank you so much and good luck.

[Operator]

Our next question comes from the line of Zach Fadem with Wells Fargo. Please proceed with your question.

[Zachary Fadem, Analyst at Wells Fargo Securities]

Hey, good morning. Can you help us unpack the cadence of DIY versus Pro from Q1 to Q2? Last quarter saw DIY outperform Pro for I think the first time in two years and with that reversing out in Q2, curious how you think about the moving parts between the two and if we should expect the spreads to widen or contract going forward.

[Ted Decker, Chair, President and Chief Executive Officer at Home Depot]

Zach, I wouldn't read too much into that. There was so much noise in Q1 but I'd just say that was an outlier and the theme of the Pro responding to the investments we're making in outperforming the consumer that we just saw in Q2 is consistent with what we've seen but for an outlier, very noisy Q1.

[Zachary Fadem, Analyst at Wells Fargo Securities]

Got you. And Richard, you had talked about the $500 million in cost savings next year coming out of the base but I believe there's also about 10 bps to 20 bps of productivity benefit this year. And I'm hoping you could speak to, first of all, the differences between the two and the buckets of savings and then whether that 10 bps to 20 bps for this year is in the base today or if it builds through the year.

[Richard Mcphail, Executive Vice President and Chief Financial Officer at Home Depot]

Sure, Zach. Thanks. Yes, that 10 bps to 20 bps is something we called out at the very beginning of the year when we -- in actually in Q -- when we talked about the progression of margin and so -- but rather the range of operating margin outcomes. That -- you can think of that as really productivity that we anticipate in the ordinary course. It certainly offset expenses such as the wage investment, but it was part of our original guidance and consistent with revised guidance in Q1 and consistent with guidance today.

The $500 million cost-out that we anticipate for 2024 is separate and it really reflects our -- the rationalization, in most part of a cost structure that we had to build up as we saw product volume skyrocket in 2020 and 2021. So we've built a cost structure that isn't necessary today -- in today's volumes and so we will rationalize some of that cost structure. A good example would be a warehouse that we took a lease on to hold products during 2020 and 2021. We are looking at our real estate footprint and some of that may well be rationalized. Those are the -- and with that comes cost savings. That's the nature of the $500 million, think about it as a permanent reduction in our fixed-cost base.

[Zachary Fadem, Analyst at Wells Fargo Securities]

And all these are SG&A, right? Just to confirm.

[Richard Mcphail, Executive Vice President and Chief Financial Officer at Home Depot]

There's probably some -- there could be some geography in COGS and in operating expense but we haven't settled on that yet. To your question, let me just make sure that we're clear. That initial 10 basis points to 20 basis points of productivity is included in our operating margin guidance for 2023. No part of the $500 million is included in 2023. That has assumed a full-year benefit annualized in 2024.

[Zachary Fadem, Analyst at Wells Fargo Securities]

Got it. Appreciate the time. Thanks, Richard.

[Richard Mcphail, Executive Vice President and Chief Financial Officer at Home Depot]

Yeah.

[Operator]

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

[Scot Ciccarelli, Analyst at Truist Securities]

Good morning, guys. You talked about relative strength in the smaller project spending but in an environment with negative Pro sales and smaller Pro backlogs, how are you guys benchmarking your efforts to gain traction in the large and complex Pro business you've spent a lot of time talking about?

[Hector A. Padilla, Executive Vice President - Outside Sales and Service at Home Depot]

Hey, Scot. This is Hector. Good morning. As we mentioned at Investors Conference, what we are building as far as the ecosystem for the Pro, it is hard and it will take some time. Now the good news is, they will also be very hard to replicate as you know, and today, we're very encouraged by the signals that we're getting from our Pro customers as they engage with different pieces of the ecosystem.

We are in many markets today with the expanded ecosystem. There are pieces of the ecosystem that we don't have fully deploy, think of our order management system or trade credit but we continue to gauge our performance with our Pros. Those Pros continue to engage not only in the supply chain assets that we have built and with our outside sales resources as we expanded that team, but they are visiting our stores in a more frequent basis. So we continue to be very encouraged by what that cohort is -- how it is performing and we'll continue to invest in the efforts.

[Scot Ciccarelli, Analyst at Truist Securities]

Okay, got it. Thank you, Hector. And then just a second question, inventory was down quite a bit even with the negative comp. Would you guys expect that to mark the bottom of your destocking process or should we expect inventory levels to continue to drop? Thanks.

[Richard Mcphail, Executive Vice President and Chief Financial Officer at Home Depot]

Well, we're pleased with the progress we've made relative to our inventory position and you think about everything that's happened in the supply chain and lead times associated with that is helped. We -- listen, we still have work to do to improve productivity but we feel good about our inventory and we have low obsolescence risk and super-experienced merchant teams. So a lot of the dynamics in the supply chain helped us really.

And at the same time, I might add our in-stocks are better than they've been since before the pandemic. So we're really pleased about the inventory productivity but at the same time our in-stocks -- our ability to be in-stock below a fee as Ann called out, our OSA and so really pleased with both of those pieces.

[Scot Ciccarelli, Analyst at Truist Securities]

Got it. Thanks, all.

[Operator]

Our next question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question.

[Unidentified Participant, at Home Depot]

Hey there, this is Jackie calling on for Simeon. Thanks so much for taking our question. You were speaking earlier on small projects replacing large projects. Can you drill into the backlogs a bit more? How much have they come off of peak? How far above normal levels are they and is there any evidence you're seeing that consumers are fully pushing off or canceling projects rather than just trading down? Thanks.

[Ted Decker, Chair, President and Chief Executive Officer at Home Depot]

Well, I'll start on that one. We rely on publicly published surveys. The one that we watch is the National Association of Home Builders Index. We have seen backlogs decline sequentially, but yeah, they are well above the historical average. And so you'd really say the professional customers' been oversubscribed for so many years, that they still may have a full book of business, just not maybe oversubscribed and maybe taking phone calls again but they are very healthy. Again, if you think about the historical average and you can look this up, but historical average being a score of 50, the index is still at 61. So down from the peak but higher than average.

[Billy Bastek, Executive Vice President - Merchandising at Home Depot]

In addition to the publicly available indexes, obviously, we have millions of Pros and the field sales force that Hector mentioned. So anecdotally, we're getting loads of feedback from our customer base. They are still busy and engaged with those backlogs but it's their commentary to our sales force that they're smaller. So that's where we get the color on that dynamic.

[Unidentified Participant, at Home Depot]

Got it. That's helpful color. And just one quick follow-up. Shrink was the only real COG on the gross margin line. Can you talk about how that trended in the quarter? Did it get worse or any better? And are there any actions that you're taking to kind of mitigate that impact going forward?

[Richard Mcphail, Executive Vice President and Chief Financial Officer at Home Depot]

From a financial perspective, shrink has been a consistent pressure over the last several quarters and even the last few years and it's something we're tackling every day and maybe...

[Ann-Marie Campbell, Executive Vice President - U.S. Stores & International Operations at Home Depot]

We are certainly in the back -- a battle in retail as we kind of think about shrink but we've always continued to lean into initiatives that we've seen that can have impact to mitigate overall. And I know it's early as we think about the INFORM Act but the INFORM Act is one of the key components as we think about organized retail crime that I think will help give us a little bit more visibility in some of the things that are happening out there but certainly, it's been largely in line with what we've seen in the last several quarters. We certainly have key initiatives to help mitigate that and we need our kind of government partners to help on their end as well to help us in retail to really mitigate what we've seen out there.

[Unidentified Participant, at Home Depot]

Got it. Thanks so much.

[Operator]

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

[Steven Zaccone, Analyst at Citi Research]

Great. Good morning. Thanks very much for taking my question. I was hoping you could comment a bit more about that homeowner engagement that you talked about. It sounds like it was a bit of a sequential improvement. Was that largely weather driven or are you actually seeing some elasticity of demand as inflation eases in some categories?

[Ted Decker, Chair, President and Chief Executive Officer at Home Depot]

Yeah. Thanks, Steven. No, I think we articulated earlier about the weather patterns. We actually talked in Q1 about the impact that the West had. The West was our best-performing region -- best-performing division for Q2. So we saw a lot of that engagement back into those spring categories. We pushed a little bit around from June to July with some of the weather and the heat as you saw more in ACs and fans. So a much more normalized balance to the quarter, outside of just some shifting of some of those smaller seasonal pieces.

[Steven Zaccone, Analyst at Citi Research]

Okay, great. And then just a clarification on second-half expectations. Is there any difference in how you're thinking about the business in the third quarter versus the fourth quarter comps? And then maybe a more near-term question, if July benefited a bit from weather, how has August to date trended? Is it fair to say you're kind of back within that full-year guidance range?

[Ted Decker, Chair, President and Chief Executive Officer at Home Depot]

Right. So the first two weeks of the third quarter have been a little better than our first half comp but we have 24 weeks -- 24 weeks left in the year. So we think the guidance range is appropriate.

[Steven Zaccone, Analyst at Citi Research]

Okay. And then just third quarter versus fourth quarter, should we just kind of look at the one-year -- one-year comparisons?

[Ted Decker, Chair, President and Chief Executive Officer at Home Depot]

We're not going to provide quarterly guidance. And again, we've got 24 weeks left in the year. So we think the range is appropriate.

[Steven Zaccone, Analyst at Citi Research]

Okay, thanks. Best of luck in the back half.

[Ted Decker, Chair, President and Chief Executive Officer at Home Depot]

Thank you.

[Operator]

Our next question comes from the line of Chuck Grom with Gordon Haskett. Please proceed with your question.

[Chuck Grom, Analyst at Gordon Haskett Research]

Thanks very much. Great quarter. You committed to investing $1 billion in wages this year, but as comps and transactions have remained negative and the flexibility that you have with the transaction-based labor model, is there the potential for that full amount not to be realized or be reinvested in other parts of the business?

[Ted Decker, Chair, President and Chief Executive Officer at Home Depot]

Yeah, from a financial perspective, of course, there is an assumption around how many hours would be utilized during the year. There is something that has to be multiplied against the wage. But I wouldn't say this is a material -- you're not going to see a material change in our financial profile. And again, our guidance is the best guideline for you to look at with respect to our annual -- likely annual performance.

[Chuck Grom, Analyst at Gordon Haskett Research]

Okay, great. Thank you. And then for Ann, just can you elaborate a little bit more on the computer vision technology? How quickly is that going to be rolled out across the chain, and maybe elaborate on some of the benefits you think you could see in the near term.

[Ann-Marie Campbell, Executive Vice President - U.S. Stores & International Operations at Home Depot]

Sure. So first of all, we started with our Sidekick application with direct associates to pass down products from the overhead. And so Sidekick is a task tool. Computer vision helps the associates see where the product is in the overhead. So which is a complementary component to drive overall productivity. So we are certainly bullish. We have that in our -- a region that's fully rolled out already. We have that in what we consider pilot stores across every single region and we expect that to be rolled out later this year. We are seeing some really really good output finding products that takes a ton of time in our stores. So, I've been around for a long-time. My neck looking up in the overheads, trying to find products for customers and we have thousands of associates that's doing that every day. So, complementing, directing the task, and then finding exactly where the product is in the overhead drives a ton of productivity for us and we expect to roll that out later this year.

[Chuck Grom, Analyst at Gordon Haskett Research]

Great. Thanks, Ann.

[Ann-Marie Campbell, Executive Vice President - U.S. Stores & International Operations at Home Depot]

You're welcome.

[Operator]

Our next question comes from the line of Brian Nagel with Oppenheimer. Please proceed with your question.

[Brian Nagel, Analyst at Oppenheimer]

Hi, good morning. Thanks for taking my question. So, this may be a bit of repetitive, it could have been maybe a bit repetitive. I just -- with regard to inflation, I guess maybe now disinflation, so as we're starting to see and I know you mentioned in your prepared comments that lumber price dynamic there where you were seeing improved unit demand. But the question I have is, we're seeing -- we're moving past maybe peakest inflation and getting orders to disinflation. How are you seeing the overall business flex both from a -- I guess from what you're doing as well as how your consumers reacting generally?

[Ted Decker, Chair, President and Chief Executive Officer at Home Depot]

I mean broadly on the inflation piece. Well, we still expect that the overall year will have a net inflationary impact on our costs and in retails but as we go into the second half, it is moderating. When you look at just the activity of cost increase requests, I mean there is -- they are negligible, I mean, there are a couple, and we were in the billions of dollars at one point of cost in and so net new requests for cost and certainly cost increases in the supply chain, that's all completely abated.

As we go into the second half, when you think of product cost, transportation -- overall transportation costs, and then what we would ultimately do in retails, inflation has certainly abated. Commodity is certainly down meaningfully from the peak as well as year-over-year, as well as even shorter-term but beyond commodity, and the fact that we don't have increased inflation, we're not expecting a deflationary environment. I think Richard used the term settling. We're kind of settling into these non-commodity price levels and as the Pro and consumer customer has gotten used to those over the last few years, you're seeing the normalization in transactions, as Richard called out. So, we're encouraged that the cycle of inflation is essentially behind us. And Richard, I don't know if you or Bill, if you have anything else to add to that.

[Billy Bastek, Executive Vice President - Merchandising at Home Depot]

So I'd say, we are encouraged by the improvement in transactions as we see the normalized pieces that Richard spoke about earlier but we don't see a deflationary environment as we go forward.

[Brian Nagel, Analyst at Oppenheimer]

That's very helpful. And then the second question I have and I know it's going to be a bit nuanced, but just trying to understand how your consumers really reacted here. So if you look at the West Coast, you called out, I think as the point of strength in the quarter as weather may be normalized a bit. But the question I have is, as you're watching that consumer reengage with Home Depot amid more normal weather conditions, is there anything there surprising, or is the consumer coming back like you would normally expect with the weather shift like we've seen?

[Billy Bastek, Executive Vice President - Merchandising at Home Depot]

Yeah, I'd say, Brian, that we called it out in Q1 because of the impact that we saw and it played out precisely kind of how we thought in the West. As I mentioned, that was our best-performing division. Customers engaged heavily in our seasonal businesses that were so pressured into Q1. And so it really did play out precisely how we had thought.

[Brian Nagel, Analyst at Oppenheimer]

Okay. I appreciate it. Thank you.

[Billy Bastek, Executive Vice President - Merchandising at Home Depot]

Thanks.

[Operator]

Our next question comes from the line of Michael Baker with D.A. Davidson. Please proceed with your question.

[Michael Baker, Analyst at D.A. Davidson]

Okay. Thanks. Two please, if I could. One, bigger picture, I think last quarter, maybe was in the June Analyst Day, you said that you thought the housing market will be down mid-to-high single-digits in 2023, that was sort of the industry baseline. There's been some indicators of housing being a little bit better. Is that still the way you're thinking about the industry right now, down in that mid-to-high single-digit range?

[Ted Decker, Chair, President and Chief Executive Officer at Home Depot]

Well, we've said that there are some economists who might call for that. We were uncertain and that's really because when you look at supply and demand imbalances in the market, we've worked our way into a structural deficit of housing in North America. And what's interesting to us is, you've actually seen sequential improvement month-over-month in home prices for the last four months. So, I think if you just look at observed data, home prices have for the most part remained steady versus last year and so better than many economists' predictions at the beginning of the year.

[Michael Baker, Analyst at D.A. Davidson]

Okay. So but has your view changed at all or too much uncertainty?

[Richard Mcphail, Executive Vice President and Chief Financial Officer at Home Depot]

We didn't describe any housing benefit to our guidance for 2023. And we think long-term, those supports for home improvement demand are there and we do think that supply-demand imbalance is an important part of that along with the aging of the housing stock. So again, we're bullish on the future of this market.

[Ted Decker, Chair, President and Chief Executive Officer at Home Depot]

Yeah, I think the big story with housing now as it's playing out is, values have held up. Case-Shiller just came out with some data and Redfin just -- Redfin just came out with some data. That drop-off in values has been a race that we're now back to record highs of home values in the United States and sequential improvement as Richard just said.

The near-term story in housing is that with so many people locked into the incredibly low mortgage rates that there just isn't a lot of inventory available for sale. So transactions are at certainly near-term lows in terms of nominal number of houses that are turning over in a percentage of the housing stock as so many people are below 5%, even at 3%, mortgage rates. So values are holding, if not now back increasing fundamental imbalance again at two million homes to three million homes to four million homes and the issue is inventory and people are getting used to it. We understand new buyers have sort of digested the increase in mortgage rates to the 7ish percent, but there's just not that much available to purchase.

[Michael Baker, Analyst at D.A. Davidson]

Yeah. Okay. Makes sense. No, sorry, that was one question. The follow-up is this if I could, you had said, I hate to be so short-term focused, but August was better than the first-half comps. But any comment on August versus the second quarter comps?

[Ted Decker, Chair, President and Chief Executive Officer at Home Depot]

Again, first two weeks of the quarter were a little better than our first half comp. We have 24 weeks left and so we just would point you back to our guidance.

[Michael Baker, Analyst at D.A. Davidson]

Okay, fair enough. Thank you.

[Operator]

Our next question comes from the line of Karen Short from Credit Suisse. Please proceed with your question.

[Karen Short, Analyst at Credit Suisse Group]

Hi, thanks very much. So, two questions. The first is when you think about the dynamics on DIY versus the Pro in terms of the impact to your second-half comp and then into '24, how are you thinking about DIY in terms of recovery, I think it's pretty clear where you stand on the backlog with the Pros but I think DIY is the big question in terms of how that customer will feel and is going to feel in the second half.

[Billy Bastek, Executive Vice President - Merchandising at Home Depot]

But it's -- we don't -- I think at the end of the day, it's all the same demand and whether the Pro is fulfilling that demand or not, it's sort of all the same. So I wouldn't -- I actually would view it as saying, we feel good about where our Pro business is. We feel good about the entirety of it really. We don't know where those trends will go. But again, we know our Pros say their backlogs are healthy.

[Ted Decker, Chair, President and Chief Executive Officer at Home Depot]

I would say the...

[Karen Short, Analyst at Credit Suisse Group]

And the second question is...

[Ted Decker, Chair, President and Chief Executive Officer at Home Depot]

No, I was just going to say that the consumer -- the nearest term view of the consumer is the engagement in seasonal is led by the consumer, certainly the garden business but also things like exterior painting and stain and when the weather improved, consumer responded and it was really steady constructive demand. So what we expect going forward, I think you look at all those macro comments we mentioned earlier that our consumer is a homeowner, 80 odd percent of them own their homes. A tremendous equity value in that home. Great jobs, great income and it's a very healthy consumer segment in the overall economy. So seeing their engagement in Q2 as weather improved, seeing their engagement in something like Halloween, I mean, it started an enormous business for us but to say unbelievable engagement, Billy, in that product category, which is 100% discretionary is a pretty decent telltale of engagement in the sector.

[Karen Short, Analyst at Credit Suisse Group]

Okay. That's really helpful. Thank you. And then my second question is, Richard, you always discuss your ability to flex SG&A with respect to labor, but then also inventory rapidly based on the comp in order to maintain stability with operating margins. So I guess my question is, with the recent wage investments, do you still have the same flexibility within the same timeline in general to -- with that rule of thumb in mind.

[Richard Mcphail, Executive Vice President and Chief Financial Officer at Home Depot]

Absolutely. I mean you'd say that the jumping-off point would be post-wage investment but post-wage investment, we have the same degree of flexibility we have always had.

[Karen Short, Analyst at Credit Suisse Group]

Okay. Thanks very much.

[Isabel Janci, Vice President, Investor Relations at Home Depot]

Christine, we have time for one more question.

[Operator]

Thank you. Our final question comes from the line of Steven Forbes with Guggenheim. Please proceed with your question.

[Steven Forbes, Analyst at Guggenheim]

Good morning, everyone. So just two quick follow-ups. The first on ticket. Curious, if you could expand on DIY ticket versus Pro ticket trends as we think about sort of second-half complexion. And then maybe if you could just speak to what the full-year comp implies in terms of ticket, if it's still positive, as you see it today.

[Ted Decker, Chair, President and Chief Executive Officer at Home Depot]

We've -- I'll just -- I'll answer the second part first and I'll turn it to Billy. Again, we've got 24 weeks to go. We're not going to break out ticket and transactions within our guidance. Other than just to repeat, we're encouraged by what we've seen with respect to settling of tickets and recovery in transactions. Billy?

[Billy Bastek, Executive Vice President - Merchandising at Home Depot]

Yeah. And as we called out, just on the lumber piece alone, we'll see that abate as we get to the back half of the year and then it will be much less of an impact than we saw in the first half overall.

[Steven Forbes, Analyst at Guggenheim]

And then just lastly, as we think about the Dallas market, the 350 basis points you guys noted as of 2022 at the Analyst Day presentation. Any update on how that market is trending year-to-date in 2023 versus the company average?

[Hector A. Padilla, Executive Vice President - Outside Sales and Service at Home Depot]

Yeah, no, Steven, it's Hector again. We continue to be very encouraged by the results in Dallas and we have scaled a lot of the capabilities that we first implemented in Dallas to all the markets. And we're seeing very similar and encouraging results as we see the customers engage not just with the delivery sales, but also again back in our stores and through our online digital platforms. So continue to be very encouraged about the performance. For us, Dallas has been a success so far and we'll continue to deploy capabilities to round out the ecosystem in Dallas and again, in other markets as we test and learn and deploy capabilities at scale.

[Steven Forbes, Analyst at Guggenheim]

Thank you.

[Operator]

There are no further questions at this time. I would like to turn the floor back over to Ms. Janci for closing comments.

[Isabel Janci, Vice President, Investor Relations at Home Depot]

Thank you, Christine. And thank you for joining us today, everyone. We look forward to speaking with you on our third quarter earnings call in November.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Isabel Janci, Vice President, Investor Relations
• Ted Decker, Chair, President and Chief Executive Officer
• Billy Bastek, Executive Vice President - Merchandising
• Ann-Marie Campbell, Executive Vice President - U.S. Stores & International Operations
• Richard Mcphail, Executive Vice President and Chief Financial Officer
• Hector A. Padilla, Executive Vice President - Outside Sales and Service

Analysts

• Christopher Horvers, JPMorgan Chase & Co.
• Michael Lasser, UBS Group AG
• Zachary Fadem, Wells Fargo Securities
• Scot Ciccarelli, Truist Securities
• Unidentified Participant
• Steven Zaccone, Citi Research
• Chuck Grom, Gordon Haskett Research
• Brian Nagel, Oppenheimer Holdings Inc.
• Michael Baker, D.A. Davidson
• Karen Short, Credit Suisse Group AG
• Steven Forbes, Guggenheim