The Home Depot, Inc. (NYSE:HD) Q2 2023 Earnings Call Transcript
The Home Depot, Inc. (NYSE:HD) Q2 2023 Earnings Call Transcript August 15, 2023
The Home Depot, Inc. beats earnings expectations. Reported EPS is $4.65, expectations were $4.46.
Operator: Greetings and welcome to The Home Depot Second Quarter 2023 Earnings Conference Call. [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: Thank you, Christie and good morning everyone. Welcome to Home Depot’s 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 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. [Operator Instructions] 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: 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 our 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 surveys suggest 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 are 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 in the days, months and years ahead. And with that, I’d like to turn the call over to Billy.
Billy Bastek: Thank you, Ted 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. 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, 6 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 thousand 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 and research, transacting, fulfillment or support, our customers blend the physical and digital world. 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 continue 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 or those over $1,000 were down 5.5% compared to the second quarter of last year. After 3 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.
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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 enthusiasts. 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: 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 endurable 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 effects.
This quarter, we continued to see meaningful improvement in our attrition rates, particularly among our most tenured associates. More consistent staffing levels are resulting 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 a significant majority of our in-store sales. And the remaining sales are assisted purchases, where customers need help in purchasing a product, a 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 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 are doing this by starting to leverage new technology such as computer vision. Computer vision enables technology to do what we previously relied on associate eyes to do and provide specific locations of depalletized product that is stored in our overhead. To start, associates will take a picture of bays using their HD phones.
These images then feeds 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.
Order Up 14:54: Not only does Order Up make it easier to fulfill a customer’s 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: 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 8 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 4.4x, down from 4.5x 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 will 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.
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