Overview of company's operations
Home Depot had increased sales this quarter, mostly due to the unseasonably warm weather. It sees increased sales as a result of the general increase in GDP, not from a housing recovery, although it is seeing positive signs in the housing market. It is getting business from DIY customers, who want to save money on improving their homes.
Home Depot is working on merchandising tools to make sure the right product is in the right place at the time time. In the last few years, Home Depot has rebuilt its supply chain and is focused more on forecasting and replenishment. The increased demand due to the warm weather was a challenge to this goal, but the company was pleased by the response by the supply chain. As a result, its customer satisfaction scores increased and it had strong transaction growth.
Home Depot was also much better able to have labor meet sales demands and have more efficient forecasts for labor. Store managers were able to track their labor versus their sales performance on a daily basis, which they have never been able to do before. This also resulted in improved customer satisfaction scores.
Home Depot is now able to see these trends better by bringing its consumer analysis in house. It can now see purchase patterns on product and frequency, which allows it to personalize communications to customer, see broad trends, and analyze specific customer behavior.
The company has rolled out a First Phone Junior to all stores. It is less expensive than the First Phone and its combines communication with inventory look up without the complexity of the First Phone.
To improve business with pros, the company is focusing on getting them in and other of the store, and to have the right price for the product. The company approves 70% of all applications that it receives from its pros, which an average line of credit of $6,600. It is not planning any further credit programs to stimulate demand.
Home Depot introduced a number of new products for professionals: (1) new loadcenter value packs, which meet the increasing demand for electronics in the home while allowing for better customization per project; (2) expansion of the SharkBite program to new dishwasher hookups and water heater expansion tanks; (3) new brushless motor technology and power tools from Makita and Milwaukee, which use use energy more efficiently than brush motors, resulting in more work per charge and a longer maintenance-free motor life.
For DIY customers, Home Depot introduced new décor products, including new faucets and blinds, new wood stains from Behr and new fiberglass doors from Masonite and Feather River.
In May, Home Depot acquired MeasureComp, a flooring, measurement and quote building company. MeasureComp was already in-sourcing the service, and by acquiring it, Home Depot expects to provide a better customer experience and a better close rate.
Home Depot added two new stores during the quarter. It has a total of 2,254 stores. Its online business is 2 percent of its business, but it is seeing sales and traffic growth.
So far, Home Depot is not seeing any competitive impact from AmazonSupply, though its very early to expect to see anything.
Outlook on housing market
The housing market is still under pressure, and the company does not see enough improvement in the market to contribute to GDP growth. Pricing is stable, but not solid. Although inventory is decreasing, there is still the problem of shadow inventories. Moreover, there is still difficulty in obtaining credit. The repair/remodel business has been more stable than the housing market, particularly the new home build. However, with ¼ of all homes under water, it puts pressure on even repair/remodel activity, because those homeowners are unlikely to do large remodels.
Home Depot believed that growth in its pro business would be a leading indicator of recovery in the housing market. It has seen different growth between different types of pro customers. The larger pro customers are growing at a faster rate. Overall, however, pro growth (5 percent) is less than consumer growth (7 percent). Larger pros (those who spend more than $10,000 annually) grew around 11%. Larger pros are about 12 percent of the pro customer.
One possible hypothesis for the large pros recovering faster is that larger firms are more likely to get credit, and therefore, they would start to get business ahead of Home Depot's smaller customers. Further, when demand is only moderate, the large pros will get the business. The smaller pros only get the business when the large pros can't handle all demand. The large pros are improving in the number of transactions, such as repairs. There is no evidence of them getting big projects like new builds or remodeling.
Florida and California continue on a path to recovery, though their comps were below the company average due to the good weather in other parts of the country.
Sales increased by 5.9 percent year-over-year. Comp store sales increased 5.8 percent overall and increased 6.1 percent in the U.S., which better than expected. Unusually warm weather was a significant factor in the increased sales especially since the comparable winter in 2011 was cold. Good weather increased U.S. comps by 300 basis points, 80 to 100 of which would have occurred in the second quarter. Mexico and Canada also posted positive comps. Since good weather also affected the 2011 4th quarter comps by 200 to 250 basis points, those numbers point to deceleration. However, the CEO feels the stores are quite busy and the company forecasts sales to increase by approximately 4.6 percent for the year. The second quarter should be the lowest comping quarter for the year, even though the first half comps should be higher than the second half comps.
Geographically, the northern division saw double digit growth with mid to low-single digit growth in the south and west. Phoenix and New Orleans were the only regions with negative growth, but they were some of the strongest performers last year.
Total transactions grew by 3.9% and the average ticket increased 2.2%. Transactions for tickets under $50, approximately 20% of U.S. sales, increased 2.4%. Transactions for tickets over $900, approximately 20% of U.S. sales, increased 6.7%.
All departments except for 2 posted positive comps for the first quarter. Plumbing comps were flat, and kitchen comps were slightly negative. There was double digit growth in mowers, lawn care, grills, and a number of outdoor project categories. Simple décor categories also continued to strengthen. Home Depot also had positive comps in its core products.
The North American Industry Classification System (NAICS) census data shows Home Depot lost market share overall, although companies with much smaller bases, and therefore, huge gains, impacted the number. On the consumer side, Home Depot gained market share in lighting, lawn and garden, kitchens and millwork.
Gross margin was 34.7 percent, which increased by 8 basis points (7 of which were from the United States). The gross margin increases in the United States were attributable solely to benefits from the company's supply chain transformation. Otherwise, they would have been flat. Home Depot expects moderate gross margin expansion for the year.
Operating expenses were 25.1 percent, a decrease of 109 basis points. Operating expenses grew at a factor of 24 percent of sales growth, which was better than its original guidance. For the year, the company forecasts operating expenses to grow at a factor of 40 percent of sales growth.
Home Depot's guarantee of a $1 billion senior secured term loan issued by HD Supply was terminated this quarter. The reversal of that liability reduced “other expenses” by $67 million and added $.03 to the earnings per share.
Diluted earnings per share were $.68/share. Home Depot projects fiscal 2012 diluted earnings per share to increase approximately 17% to $2.90/share. This projection includes consideration of share repurchases, which will add a net $.05/share to earnings per share.
At the end of the quarter, inventory was $11.6 billion, a year-over-year decline of approximately $100 million. Inventory turns were 4.3x, up from 3.9x last year. The majority of the per-store inventory decline in inventory was in Canada. In the company's view, inventory in Canada was bloated last year.
The company has $3.2 billion in cash.
During the quarter, Home Depot repurchased approximately 19.4 million shares of stock for $1.1 billion. It intends to repurchase an additional $2.4 billion in shares through the year.
The full transcript of the conference call can be found on Seeking Alpha at the following link:
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