Isabel Janci:

Thank you, Christine, and good morning, everyone. Welcome to Home Depot's first quarter 2024 earnings call. Joining us on our call today are Ted Decker, Chair, President and CEO; Ann-Marie Campbell, Senior Executive Vice President; Billy Bastek, 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 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 presentation 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.

Ann-Marie Campbell:

Thanks, Ted, and good morning everyone. As we head into a bigger selling season, our associates continue to be engaged, excited and ready to serve our customers. As Ted mentioned, growing share of wallet with the Pro and winning the Pros working on complex projects continues to be our largest growth opportunity. We know that delivering the best shopping experience for any purchase occasion is critical to our success. That is why we continue to invest in our Pro sales teams and capabilities. We have developed new capabilities within our Pro Intelligence tool which feeds our CRM platform and leverages data science to bring better insight to our sales teams. These tools are helping us to both assist in identifying the optimal Pro targets in a market as well as the highest value cross-selling opportunities to drive action and sales. Another critical component of the shopping experience is being in stock with the right products and ensuring those products are on shelf and available for sale. We've talked to you before about SideKick and Computer Vision and are thrilled with the results we've seen so far. This year, we will continue to lean in to improve our OSA and drive productivity by creating consistent, actionable and directed task for our associates. What's really exciting is how we are also now leveraging Computer Vision for other applications across the store. For example, Computer Vision helps us maintain the integrity of our base by ensuring that the products on the shelf meets all quality standards. Maintaining high-quality damage-free product is a key component of delivery on the customer experience. Additionally, we have also deployed this technology in our self-checkout corral [indiscernible] to help us mitigate shrink. Computer Vision can identify complex carts or high-value carts and signal the cashier to help the customer with their basket to ensure all products are scanned and accounted for. While we will continue to improve upon all of these technology-enabled applications, we are thrilled with the early results we are seeing. Last quarter, we talked with you about one of our areas of opportunity within our post-sale experience, specifically within our returns process. I am excited to update you that over 70% of online orders are now able to be self-service returned from their MyAccount profile on our website. Now our customers can create their own return of an online order and drop it off at UPS with a scan of a barcode. Later this year, we will enable job site pickup or returns back to our FDC, which will be a game changer for Pro shopping experience. This enhancement will allow our customers primarily the residential pro to initiate a return from their job site versus having to return big and bulky items to the store. This is a massive win, not only for pros, but also for associates and/or stores and will drive better customer satisfaction and greater store productivity. These initiatives are just a few examples of the different ways we are improving the shopping experience for customers and/or associates. I am so excited about all we are doing to drive sales in our stores, and I look forward to the opportunity that's ahead of us. 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 Billy.

Richard McPhail:

Thank you, Billy, and good morning, everyone. In the first quarter, total sales were $36.4 billion, a decrease of approximately 2.3% from last year. During the first quarter, our total company comps were negative 2.8% with comps of negative 4% in February, negative 0.8% in March, and negative 3.3% in April. Comps in the U.S. were negative 3.2% for the quarter with comps of negative 4.8% in February, negative 1.3% in March, and negative 3.6% in April. For the quarter, Mexico posted positive comps, whereas Canada was slightly below the company average. In the first quarter, our gross margin was 34.1%, an increase of approximately 45 basis points from the first quarter last year, primarily driven by benefits from lower transportation cost and shrink. During the first quarter, operating expense as a percent of sales increased approximately 140 basis points to 20.2% compared to the first quarter of 2023. The increase was primarily driven by a benefit from a legal settlement that we are overlapping from the first quarter of fiscal 2023, as well as deleverage from our top line results. Our operating expense performance was in line with our expectations. Our operating margin for the first quarter was 13.9% compared to 14.9% in the first quarter of 2023. Interest and other expense for the first quarter decreased by $13 million to $428 million. In the first quarter, our effective tax rate was 22.6% compared to 24.2% in the first quarter of fiscal 2023. Our diluted earnings per share for the first quarter were $3.63, a decrease of 5% compared to the first quarter of 2023. During the first quarter, we opened two new stores, bringing our total store count to 2,337. Retail selling square footage was approximately 242 million square feet. At the end of the quarter, merchandise inventories were $22.4 billion, down approximately $3 billion, or 12% compared to the first quarter of 2023, and inventory turns were 4.5x, up from 3.9x last year. Turning to capital allocation. During the first quarter, we invested approximately $850 million back into our business in the form of capital expenditures. And during the quarter, we paid approximately $2.2 billion in dividends to our shareholders and we returned approximately $600 million to shareholders in the form of share repurchases. As a reminder, in March we announced our intent to acquire SRS Distribution and as a result, we paused share repurchases. As you've heard us say many times, we maintain a disciplined approach to capital allocation and that is not changing. First and foremost, we will invest in the business and expect capital expenditures of approximately 2% of sales on an annual basis. After investing in the business, we plan to pay the dividend and it is our intent to return any excess cash to shareholders in the form of share repurchases. From time to time, we will also invest in the business through acquisitions to enhance our capabilities and to accelerate our strategic objectives. Computed on the average of beginning and ending long-term debt and equity for the trailing 12 months, return on invested capital was 37.1%, down from 43.6% – excuse me, down from 43.6% in the first quarter of fiscal 2023. Now, I will comment on our guidance for fiscal 2024. Today, we are reaffirming our guidance for 2024. As a reminder, our guidance does not currently reflect any impact from the announced acquisition of SRS. The acquisition is currently under regulatory review and we expect it to close by the end of fiscal 2024. We expect total sales growth to outpace sales comp with sales growth of approximately positive 1% and comp sales of approximately negative 1%. Total sales growth will benefit from a 53rd week and we expect the 53rd week will contribute approximately $2.3 billion in sales. Our gross margin is expected to be approximately 33.9%, an increase of approximately 50 basis points, compared to fiscal 2023. We expect operating margin of approximately 14.1%. Our effective tax rate is targeted at approximately 24.5%. We expect net interest expense of approximately $1.8 billion, and our diluted earnings per share percent growth is targeted to be approximately 1% compared to fiscal 2023. It’s our intent to update guidance as appropriate once the SRS transaction closes. We believe that we have positioned ourselves to meet the needs of our customers in any environment. The investments we’ve made in our business have enabled agility in our operating model. As we look forward, we will continue to invest to strengthen our position with our customers, leverage our scale and low-cost position to drive growth faster than the market and deliver shareholder value. Thank you for your participation in today’s call. And Christine, we are now ready for questions.

Chris Horvers:

Thanks. Good morning, everybody. Can you talk about how the – how you think the bathtub effect could play out? Do you have a sense of how much maybe the weather was a net headwind year-over-year, understanding that last spring was also wonky? And related to that, Billy mentioned being pleased with spring where the weather was good and some positive commentary and some early COVID-winning categories. So where there was normal weather? Did you see comps maybe get flat or even – or maybe up around the spring business? Thanks.

Billy Bastek:

Yes. No, thanks for the question, Chris. And as Ted mentioned, I mean, if you go back and we knew that there was pull forward in a lot of discretionary categories, single item purchases, if you will. And we’re really pleased to see some of those businesses more normalize to the cyclical cycle of what you would typically see. And there’s no question that that, that was – had been an impact certainly last year and so really pleased with seeing some of that. Yes, where the weather has been great, which hasn’t been or consistent, I should say, we’ve seen great customer engagement. I mentioned our Spring Black Friday event, our spring gift center events. We’ve seen great consumer customer engagement there. And there’s still the continued pressure that we see in finance big projects as they called out in kitchen and bath, specifically in the kind of remodeling finance projects, but really pleased with some of the customer engagement, some of those pull-forward categories so far.

Richard McPhail:

Chris, this is Richard. So just from a year-over-year perspective, we saw big ticket pressure last Q1, which was more of the item purchase as customers deferred those sort of item purchases. We saw big ticket pressure this Q1 as well and yet the dynamic has changed and the dynamic really that we began to see towards the back half of last year was this deferral of large projects like Billy called out. So the pressure in those categories has actually increased. It's a different story of Q1 2023 versus 2024. And maybe, Bill, you talked about particular categories.

Chris Horvers:

Thanks very much. Have a great rest of spring.

Operator:

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

Richard McPhail:

So Simeon, I think you have to think about this short-term and longer term. So if we think about lock-in effect and the impact of housing turnover. Clearly, we've seen two years of significant decrease in housing turnover to the point where we're at really sort of at historical lows. And most folks think that, that can't get much lower. When you're thinking about current performance, obviously, that puts pressure on our business. When a customer buys or sells a home, they spend more in that year than in a year when they don't. And so there's no doubt that we're missing some of that project demand, and that's what's going on our sales as we had anticipated. Then you have to ask yourself though, the lock-in effect, the interest rate environment, at this point, a lot of subject to the macro. I think the question is at what point current interest rates become sort of the new normal. This is not something that we're making a prediction on. It's just thinking about behavior. At some point, spend on housing shifts from discretionary to something that you simply must do. We know that there's pent-up demand for household formation. And so again, I'd say short-term, it is having an impact on our customers' mindset. And it's not just housing turnover related spend. It's really all large projects. As Billy said, sort of debt finance spend where we are seeing interest rates sort of weigh on the mind of customers. And look, we're not immune to this. If you look at the national figures on what's really driving the consumer right now, its services. Goods are underperforming services and durable goods are seeing the most pressure and in particular, home-related categories. So this is not a surprise and this is baked into our expectations for the year. The question will be how it evolves over time.

Ted Decker:

Well, those are challenging to tease out. I would say our sense is we are taking share. That's from third-party reporting on 4441, but transactions, I think you have two dynamics going on, and they relate to your prior question, Simeon. We've talked about the COVID and the lap of the COVID it is sort of like the giant storm and the hurricane. And for a couple of years, after you pulled so much demand forward, you suffer from lower sales in those categories. And that's what we were talking about last year and when Billy was just reviewing this item buying, there was no doubt, grills and riders and patio sets, these big-ticket items were pulled forward. We're seeing now that sort of naturally lap sort of like that hurricane effect lapping. What is newer, and we chatted about this before, is the housing turnover, which while historically not a huge driver of demand, it's steady state demand as housing turnover is fairly steady. But in the last 18-odd months is that has dropped from over 6 million units a year, I think at some run rates in certain months, it was even under 4 million, that dramatic decrease in housing activity is sort of the newer hurricane, if you will. And we don’t see that going much lower. It’s hard to predict, but as Richard said, tough to call the macro. But at some point, people will start to lap the interest rates and the lock-in effect. We’ve already seen percentages of houses with mortgages and all the various interest rate strata the percentage that we’re in that under 3.5% is past peak. So you’re already starting to see a bit of an unlock there. But all of that then leads to your transaction question. So we are starting to see some increase in transaction as we’re lapping more of the COVID pull forward, some newer pressure with the housing turnover dynamic. But net-net, we like the trend of transactions in units per basket were also up and we like seeing that trend as well. So not unexpected, as Richard said, and all baked into our guidance for 2024.

Simeon Gutman:

Thanks. Good luck.

Zach Fadem:

Hey good morning and thank you. I want to start with a clarification on the outlook. You’ve got 1% EPS growth. I just want to confirm that this incorporates the buyback pause post Q1. And then second, transaction growth stepping in the right direction. Curious if this was more Pro or DIY driven or both? And any color on the health of small and midsized Pros versus larger Pros?

Ted Decker:

And on the Pro/DIY, each were negative for the quarter, more or less the same rate. And within Pro, the larger Pro continues to outperform particularly those engaging in the ecosystem. I’ll let Chip comment more about our performance there.

Zach Fadem:

Got it. Appreciate the color. And then, Richard, quickly, it looks like your SG&A on a per store basis was about flat year-over-year when you exclude the legal impact. And I’m curious if this is the right way to think about productivity this year or if you have any other levers at your disposal through the year.

Zach Fadem:

Thanks so much for the time.

Scot Ciccarelli:

Good morning guys. The scope of the answer here might be a little beyond this conversation. But in general, can you talk about how you plan to utilize SRS and their discrete set of Pro relationships to potentially leverage your broader complex Pro initiatives?

Scot Ciccarelli:

Very helpful. And then just, hopefully, a quickie. You talked about being in 17 markets by end of the year for the complex Pro capabilities. How many markets do you ultimately see that capability rolled out to its 17 going to x.

Scot Ciccarelli:

Awesome. Thanks a lot guys.

Michael Lasser:

Good morning. Thank you so much for taking my question. In light of the start to the year, have you – did you give any internal discussions to moderating your expectation around the way the rest of the year could unfold especially in light of what's likely to be now fewer rate cuts than was expected 90 days ago, which may mean that the overall rate of home improvement, the market may see less of an acceleration from here?

Michael Lasser:

Thank you for that, Ted. My follow-up is, there is a school of thought out there that the SRS acquisition could be assigned to Home Depot’s efforts to address the complex Pro segment of the market has just proved to be a little bit more difficult than what was originally expected. How would you respond to that?

Michael Lasser:

Thank you very much and good luck.

Chuck Grom:

Hey, good morning. Thanks a lot. Curious on the DIY side. Have you seen any changes in spending between income cohorts? And as a follow-up, you spoke to the delayed start to spring. Curious, a few weeks here into the month of May. Maybe you could frame out how business is tracking relative to the first quarter or April?

Billy Bastek:

Yes. And then, Chuck, just on the first couple of weeks of May. I mean, it really has been the same story where weather has been favorable. We’ve seen great customer engagement strengthen outdoor projects, really pleased with what we’ve seen for the weather has been favorable, which is my prepared remarks, the same kind of dynamic we saw through, especially later in the quarter as the weather got a little bit better in certain parts of the country.

Richard McPhail:

I think, we’re – so we’re executing on all cylinders. And from a transportation perspective, from the merchants managing retail and costs through one of the most volatile periods last year in our history, fantastic results. And then just to add to it, look, with respect to shrink, shrink is a problem for retail, organized retail crime is not going away it’s a problem for all of us. The external environment is only getting tougher. As a result, we've done a tremendous amount of work. It is amazing, the effort put forth by our teams in making investments that pay off with significant return on investment and so when we look at our shrink performance, I hate to say this, but the external environment is not helping. Our teams are succeeding in blunting the impact. It's still a problem, it's still a pressure in our P&L. We want to keep attacking it, but we know that we've got the best in the business facing it. And it's not only a return on investment in terms of financial performance, it's a return on investment from a customer and associate safety perspective and so we're really happy about that. I think that there's one dynamic, you asked about margin. There's a dynamic here that I think it's worth calling out when you think about the shape of the year, and so I'll just go there. It is not insignificant when you think about the price dynamic last year, and how we saw retail settle in the market during the first half of 2023 and then essentially become what we would call settled during the second half of 2023, which has continued into Q1 and Q2 of this year. So when you think about the AUR pressure within ticket, we reported ticket in spite of AUR pressure that is in essence about 2 percentage points this quarter year-over-year. And what I want to remind you of is that's a year-over-year comparison. So we had kind of the height of well, let's put it in a different way. We had a lot of retail and cost settling during the first half of the year. So that 2% pressure is an artifact of a year-over-year measurement. It is not an observation on where – what prices are doing today, and they're relatively steady. As we move through the year, that pressure have from Q1 to Q2, so you'll have about 1 percentage point of pressure in Q2, it'll have again in Q3 and then in essence, be going in Q4. So you asked the question about margin. I think that is a point with respect to shape of the year that is important to put out there.

Richard McPhail:

Thanks.

Steven Zaccone:

Hey. Good morning. Thanks very much for taking my question. I want to follow-up on Michael Lasser's question. Can you just help us understand what drives the second half improvement in same-store sales, just given the fact that the first half has been a little bit softer here with this delayed start to spring?

Steven Zaccone:

Okay. And then to follow-up on gross margin, maybe it's a question for Billy. Spring Black Friday did well. We did notice there was a new spring sale from an online-only competitor. Do you think the promotional environment is changing at all, I guess, especially on the DIY side of the business as you try to compete for that customer?

Steven Zaccone:

Okay. Thanks Billy.

Brian Nagel:

Hi. Good morning. Thanks for taking my question. So my first question, and I apologize. I know this is going to be a bit repetitive to at least a couple of the prior questions. But so I maybe ask it a little bit different way. As you look at – today, you reiterated guidance for 2024. As you think about what we see would transpire, so to say in Q1. We talked a lot through the call about the macro pressures. The macro disruption is still impacting Home Depot. So the question I have is to get to that guidance, the guidance you've reiterated today, do you need some type of change, some type of solidification in the macro environment from what you're seeing today?

Brian Nagel:

Got it. That's helpful. Then my second question, look, this with some of the macro data and there's more chatter out there about a potential reemergence, if you will, of inflationary pressures. So, I guess the question for you is, I mean, within your business, particularly maybe more the commodity side of this, are you starting to see this, a? And then, b, as you think about to the extent that we are seeing some type – potentially some type of reemergence of inflation. How do you view at this juncture, the ability of Home Depot to pass those type of costs along to consumers as it has in the past.

Billy Bastek:

Yes. And from a commodity standpoint, Brian, we've seen no impact. Obviously, we talked a lot in the last year about not only lumber, but copper, and we're pleased with the fact that there's no impact on commodities at this point and see a very stable environment.

Isabel Janci:

Christine, we have time for one more question.

Steven Forbes:

Good morning everyone. I was hoping maybe to just expand on the weakness in certain discretionary projects such as kitchen and bath, any way to help us better understand if there's line of sight to stabilization in the project size headwind this year and/or pressure rolling off, meaning is it cycling compares still? Or are you still seeing project size moderate, right, relative to some baseline, whether it's a year ago or sort of from peak levels?

Steven Forbes:

And then maybe just a quick follow-up. I think it was Chip's comments earlier about the Pro comp, right, being positive. I believe you said within those markets that are servicing the Complex Pro, so maybe just clarifying if that's what he said. And does that imply that you've seen a widening in the performance gap between those markets where you're servicing the complex Pro versus the company average? Maybe relative to what you guys stated at the Analyst Day last year?

Steven Forbes:

Great. Thank you.

Operator:

Thank you. Ms. Janci, I would now like to hand the floor back over to you for closing comments.

Operator:

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.

Isabel Janci :

Thank you, Christine, and good morning, everyone. Welcome to Home Depot's fourth quarter and fiscal year 2023 earnings call. Joining us on our call today are Ted Decker, Chair, President and CEO; Ann-Marie Campbell, Senior Executive Vice President; Billy Bastek, 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. [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 presentation 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.

Ann-Marie Campbell:

Thanks, Ted, and good morning, everyone. I couldn’t be more pleased with our operational excellence and the investments we continue to make in the business. As you heard from Ted, we remain focused on three main strategic opportunities of creating the best interconnected experience, growing our Pro wallet share through our unique ecosystem of capabilities and build in new stores. As we continue to create the best interconnected experience and remove friction from our customers shopping journey, one of our biggest areas of opportunity is within our post-sale experience. For the majority of our customers, this process has largely been unchanged for the last 44 years, and we have opportunities to improve this experience. In 2023, we made significant progress taking friction out of our online order management process. Today, we have enhanced our systems to better allow our customers to both modify orders and self-service online returns. In 2024, we will focus on building more robust capabilities to support an interconnected self-service returns process where customers will have the ability to start a return online and complete that return via mail or in-store. We have just begun all of this work in earnest and are very excited about the friction we will remove through this process while realizing significant productivity benefits over the long term. Through these enhancements and new capabilities in our returns process, we gain efficiencies by reducing transaction time and improving on-shelf availability, enabling better inventory management. We also improved customer service by allowing the customer to start and complete their return, however they want. As you've heard us say many times, we are focused on making our interconnected experience better and more convenient no matter how our customers choose to engage with us. As we mentioned at our Investor Conference in June, we plan to open approximately 80 new stores over the next five years. Our current network of over 2,300 stores throughout North America makes the Home Depot the most convenient physical destination for customers to shop for their home improvement products. We have a premier real estate footprint that provides convenience for the customer that we believe is nearly impossible to replicate. And we will continue to build out this footprint in a very strategic way by investing in new stores in areas that have experienced significant population growth or where it makes sense to relieve some pressure on existing high-volume stores. In fiscal 2023, we opened 13 new stores. Eight in the U.S. and five in Mexico. In the U.S., our eight new stores were roughly split between stores relieving pressure from higher volume existing stores and stores where we identified void in new high-growth areas. As an example, we are already seeing great results for many of these new stores and are particularly pleased with our Mapunapuna store in Honolulu, which allows us to better serve the Honolulu market. For fiscal 2024, we plan to open approximately 12 new stores. Beyond our focus on removing friction and growing to new stores, we have a lot of initiatives in 2024 geared at growing our share of wallet with the Pro. My new organization will be focused on better enabling alignment so we can more seamlessly deliver on our unique value proposition for all Pros. When we invest in new assets and capabilities to better serve the complex Pro, this also improves our Pro experience in our stores. For example, more job site delivery orders fulfilled from our distribution centers means less congestion in our stores and less time dedicated to picking, packing and staging orders for delivery. This gives our in-store Pro sales associates more time to dedicate to our Pros. Additionally, the ability to fulfill large orders through our distribution network also means that we have more product in stock and available for sale for all those Pros shopping in our stores. These improvements benefit our associates and all of our Pros. Our investments in these strategic initiatives as well as the investments in our associates has set us up for success. Recall that at the beginning of the year, we announced a significant investment of approximately $1 billion in increased annualized compensation for frontline hourly associates. As a result of this investment, we saw what we intended to see meaningful improvement in our attrition rates, particularly among our most tenured associates, which drove improved customer service, productivity and safety. I'm excited to see all of our initiatives gaining traction, and I want to thank our amazing associates for all that they do. With that, let me turn the call over to Billy.

Richard McPhail:

Thank you, Billy, and good morning, everyone. In the fourth quarter, total sales were $34.8 billion, a decrease of 2.9% from last year. During the fourth quarter, our total company comps were negative 3.5% with comps of negative 2.5% in November, positive 1.1% in December and negative 8.5% in January. Comps in the U.S. were negative 4% for the quarter with comps of negative 2.7% in November, positive 0.6% in December and negative 9.1% in January. In local currency, Mexico and Canada posted comps above the company average with Mexico posting positive comps. It is important to note that adjusting for holiday shifts and weather-related impacts in January, monthly comps relatively consistent across the quarter. For the year, our sales totaled $152.7 billion, a decrease of 3% versus fiscal 2022. For the year, total company comp sales decreased 3.2% and U.S. comp sales decreased 3.5%. In the fourth quarter, our gross margin was approximately 33.1%, a decrease of 20 basis points from last year. For the year, our gross margin was approximately 33.4%, a decrease of 15 basis points from last year, which was in line with our expectations. During the fourth quarter, operating expenses as a percentage of sales increased approximately 115 basis points to 21.2% compared to the fourth quarter of 2022. Our operating expense performance during the fourth quarter reflects our previously executed compensation increases for hourly associates as well as deleverage from our top line results. For the year, operating expenses were approximately 19.2% of sales, representing an increase of approximately 90 basis points from fiscal 2022. Our operating margin for the fourth quarter was approximately 11.9% and for the year was approximately 14.2%. Interest and other expense for the fourth quarter increased by $50 million to $458 million. In the fourth quarter and for fiscal 2023, our effective tax rate was 24%. Our diluted earnings per share for the fourth quarter were $2.82, a decrease of 14.5% compared to the fourth quarter of 2022. Diluted earnings per share for fiscal 2023 were $15.11, a decrease of 9.5% compared to fiscal 2022. At the end of the quarter, merchandise inventories were $21 billion, down $3.9 billion or approximately 16% versus last year, and inventory turns were 4.3x, up from 4.2x from the second period last year. Moving on to capital allocation. During the fourth quarter, we invested approximately $860 million back into our business in the form of capital expenditures. This brings total capital expenditures for fiscal 2023 to approximately $3.2 billion. During the year, we opened 13 new stores, bringing our store count to 2,335 at the end of fiscal 2023. Retail selling square footage was approximately 242 million square feet and total sales per retail square foot were approximately $605 in fiscal 2023. Additionally, we invested approximately $1.5 billion on three acquisitions during fiscal 2023, accelerating our strategic initiatives and providing us with better capabilities to serve our customers. During the year, we paid approximately $8.4 billion of dividends to our shareholders. Today, we announced our Board of Directors increased our quarterly dividend by 7.7% to $2.25 per share, which equates to an annual dividend of $9 per share. And finally, during fiscal 2023, we returned approximately $8 billion to our shareholders in the form of share repurchases, including $1.5 billion in the fourth quarter. Computed on the average of beginning and ending long-term debt and equity for the trailing 12 months, return on invested capital was 36.7% compared to 44.6% at the end of the fourth quarter of fiscal 2022. Now I'll comment on our outlook for 2024. First, let me point out that fiscal 2024 will include a 53rd week, so the fourth quarter of fiscal 2024 will consist of 14 weeks. We will continue to report comps on a 52-week basis, but we will base our overall guidance on 53 weeks. As you heard from Ted, we feel great about the actions we took in 2023 to position us well heading into 2024. And while there are signs that the economy is on the way towards normalization, the home improvement market still faces headwinds as we look ahead to fiscal 2024. We considered several factors that informed our outlook for fiscal 2024. On the positive side, we faced a number of pressures in fiscal 2023 that are unlikely to repeat in fiscal 2024. In 2023, we saw four increases in the Fed funds rate, a sharp decline in existing home sales and approximately 110 basis points of comp pressure from lumber deflation. However, we still expect pressures to our business in fiscal 2024. Personal consumption growth as measured by PCE is expected to decelerate compared to 2023. Our share of PCE also remains slightly elevated relative to 2019 and has been on a glide path towards 2019 levels. Higher interest rates at the beginning of 2024 relative to last year will likely continue to pressure demand for larger projects. And the effects from pull forward of demand during the pandemic as well as some project deferral could impact demand into 2024. As we consider these influences on home improvement demand, we are planning for a year of continued moderation but with slightly less pressure to comp sales than what we faced in fiscal 2023. Our fiscal 2024 outlook is for total sales growth to outpace sales comp with sales growth of approximately positive 1% and comp sales of approximately negative 1% compared to fiscal 2023. Total sales growth will benefit from a 53rd week as well as from the acquisitions we made and the new stores we opened in fiscal 2023 and the stores we plan to open in fiscal 2024. We expect the 53rd week will contribute approximately $2.3 billion in sales. Our gross margin is expected to be approximately 33.9%, an increase of approximately 50 basis points compared to fiscal 2023. This primarily reflects a lower product and transportation cost environment relative to fiscal 2023 as well as benefits from a portion of the approximately $500 million in reduced fixed costs that we will realize in fiscal 2024. Further, we expect operating margin of approximately 14.1%. This reflects deleverage from sales and pressure from targeted incentive compensation as we are overlapping lower incentive compensation paid than planned in 2023. This will be partially offset by the benefits from the approximately $500 million in fixed costs that we will realize in fiscal 2024 in both cost of goods sold and operating expenses. Our effective tax rate is targeted at approximately 24.5%. We expect net interest expense of approximately $1.8 billion. Our diluted earnings per share percent growth is targeted to be approximately 1% compared to fiscal 2023, with the extra week contributing approximately $0.30. We plan to continue investing in our business with capital expenditures of approximately 2% of sales on an annual basis. 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. We believe we have positioned ourselves to meet the needs of our customers in any environment. The investments we've made in our business have enabled agility in our operating model. As we look forward, we will continue to invest to strengthen our position with our customers, leverage our scale and low-cost position to drive growth faster than the market and deliver shareholder value. Thank you for your participation in today's call. And Christine, we are now ready for questions.

Simeon Gutman:

My first question is how much of this minus 1 comp view is an industry view plus or minus share gain, I'm assuming plus versus if you look at current purchasing trends and Richard, you noted some of the, let's say, some of the less headwinds that you noted that you expect to face in 2023.

Simeon Gutman:

I guess, that was the whole part of it. It was how much of it is a macro view versus like a forecast for housing plus market share versus you have less headwinds that you noted in the current year, plus you're combining that with how the consumer is behaving.

Simeon Gutman:

Fair enough. And then a follow-up, can we ask about the shape of the year? You lapped lumber deflation in the first part of the year, maybe some weather. So that should be better, but the second half is in theory post interest rate cuts, maybe durables get a little bit better. So how should we think about it?

Operator:

Our next question comes from the line of Zachary Fadem with Wells Fargo.

Edward Decker:

If you look at Pro versus consumer, Zach. I mean, for us, they were -- they were effectively the same in Q4. Overall, industry don't see that being too terribly much different. I can say within our Pro in any customer segment that we have, the managed account customer who is engaging in the ecosystem that we're building was the highest performing customer segment in Q4 and throughout 2023, and we would expect that to continue into 2024 as well as we continue to build out the capabilities.

William Bastek:

Yes. This is Billy. Thanks for the question. On the commodity piece, that is embedded in our forward-looking guidance that Rich had articulated during his prepared remarks. So -- and as it relates to the promotional cadence, we haven't seen any difference if you go back pre-pandemic to the promotional activity. We are in a very normalized environment. We do feel that pricing has kind of settled as we mentioned earlier. And so from a promotional standpoint, cadence, we don't see any differentiation then like I said, what we lived through prior to the pandemic. So very consistent. We really are in a solid marketplace as it relates to that and look forward to 2024.

Christopher Horvers:

So I was curious, as you think about the share of wallet, what did you learn over the holiday season? Are there any signs of life that you're seeing? You mentioned outdoor garden, I'm assuming maybe that's Christmas trees and Christmas decor. Is there any signs of life that maybe the smaller ticket softline stuff is starting to show where more decor items starting to show some signs of life. Did you see anything in appliances or on the bigger ticket side?

Christopher Horvers:

And then as a follow-up, can you talk about what drove the gross margin decline here in the fourth quarter? You mentioned the expansion here coming in 2024. And then separately, just on the SG&A side, you did have a, I think, sizable legal gain in the first quarter of last year. Is that something that will have an effect on 2024 overall?

Operator:

Our next question comes from the line of Scott Ciccarelli with Truist.

Edward Decker:

On the complex Pro, I mean, clearly, the improvements there and the expectation that the managed account engaging in those capabilities will be the strongest performing customer segment. That's embedded in the guidance of comp sales in overall sales.

Scot Ciccarelli:

Okay. Can I ask a follow-up on that? So just so I can understand that -- yes, I understand the managed accounts are kind of the fastest growing. But -- like are you guys able to kind of disaggregate, let's call it, the typical engagement you would have with those accounts. versus the expanding capabilities you're providing in certain markets? Or is it just too difficult to kind of separate those?

Operator:

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

Richard McPhail:

Well, just to hit it on the most fine point here, really the last three quarters, we've seen kind of the most stability and the -- I'd say, three quarters ago, we saw a marked recovery in transactions and think about that as a proxy for units, but units followed similarly. Over the last three quarters, we've seen nice stability. And as we've said before, we define a healthy home improvement market is one where ticket and transaction are both positive. What we have seen on the good side here is that ticket and transaction have begun to converge and in fact, have sort of really much more tightly converged over the last three quarters. . They were still both negative for the quarter, but that's really just reflective of the macro pressure that continues. From a geographic perspective, we aren't really necessarily able to tease out differences in recovery and transactions or units more of a national dynamic.

Richard McPhail:

Sure. I mean the basics are you can imagine with no management intervention, the natural rule of leverage or deleverage is about 10 basis points per point of comp up or down.

Michael Lasser:

As we look back to the last couple of downturns in home improvement, there was a pretty robust recovery in the subsequent years after a few periods of negative comps. Are you seeing any evidence or signs that this recovery whenever it happens, would be different?

Michael Lasser:

That's very helpful, Ted. If I could just add one more question. It's on Richard's comment about the rule of thumb of 10 basis points of margin expansion for every 1 point of comp. And understanding that this is theoretical, does that move in a linear fashion, meaning if you get back to the trajectory of mid-single-digit comp eventually that you would see a better than trend rate of margin expansion at the higher the growth rate. And there was also a comment that rule of thumb would be outside of actions that would be taken. So can you discuss what actions might be taken to bend that curve on the upside over time?

Operator:

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

Edward Decker:

Absolutely. I mean as we've said for the longest time, home turnover is a base of home improvement demand, but it's been pretty steady. If you look at 4.5-odd percent of housing stock is a multiyear percentage of turnover, and that equates to 5-ish million units. The reason we're calling out that is a factor in these last two years is the dramatic decrease. And there's definitely an understanding that there's an improvement in place cycle if you don't move and you stay in your house, but there's a lag effect. And arguably, that lag effect is a bit longer this time because of the interest rate environment and people are just being conservative of when they kick off a larger home improvement project in a home that they're going to ultimately stay in for a longer period of time. So that's the dynamic of housing turnover. We think that plays out. We're literally at a 40-year low in turnover, don't see that going lower. So you're going to cycle through that kind of a two-year pressure. And then do we get back to growth? Absolutely. I'd say, we have a neutral look on housing for 2024. We don't think there's incremental pressure nor do we think that we're quite ready for a hockey stick recovery. Richard has been talking for some time, and the Fed's stance of hire for longer. I think we now we have an appreciation that longer is going to go through the first half of this year. So even a lowering cycle in the back half, there's some timing effect to get mortgages, move homes, take a HELOC loan out, et cetera, to get a bigger project going. So that's why we're kind of calling for a slighter moderation to continue into '24. But as we said, the back half is marginally stronger. And we think all the macros line up for return to normalcy following that and with the capabilities that we're building, and we're taking share today with x percent of these capabilities complete. Super optimistic about how we're hitting the ground running as we continue to build going into a stronger market and the share gain opportunity.

Richard McPhail :

Yes, I'd tell you, the best way to look at this is that we are now - our P&L provides you with an appropriate jumping off point for your models, there's a lot of noise in operating expense. If you think about the geography of the settlement in Q1, you think about the geography of costs that we incurred, then you think about the geography of the $500 million in cost out, two-thirds of which will be realized in OpEx, one-third of which will be realized in cost of goods sold, and you just have a lot of noise. Again, the main driver of operating expense growth is going to be just at inflation on our base of operating expenses. And we think that if you look at our gross margin and our operating margin guide, these offer you the appropriate jumping off points for your modeling.

Operator:

Our final question comes from the line of Steven Forbes with Guggenheim.

Ann-Marie Campbell:

Yes, I'll kick that off. Thanks, Ed. First of all, we're in our early stages. And just as a reminder as well, HD Supply does trade credit today. So we're -- as we architect our program, there's a lot of learnings there. But what -- to me, typically in the room and Chip, you have a lot of it here with trade credit and his experience is helping us also form some of the intricacies of how we think about it. So I'll turn it over to Chip.

Operator:

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

Operator:

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.

Isabel Janci:

Thank you, Christine, and good morning, everyone. Welcome to The Home Depot's Third Quarter 2023 Earnings Call. Joining us on our call today are Ted Decker, Chair, President and CEO; Ann-Marie Campbell, Senior Executive Vice President; Billy Bastek, 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. [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 presentation 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.

Ann-Marie Campbell:

Thanks, Ted, and good morning, everyone. Let me start by saying that I'm very excited about my new role and the alignment this will create between the outside sales and services business and the global store organization. As you heard at our investor conference in June, capturing a greater share of the Pro's wallet is one of our largest growth opportunities. It represents roughly $475 billion in addressable market, and today, we have relatively little share. The beauty of The Home Depot is that we have unique competitive advantages. Our convenience stores, our leading brands, our engaged associates, our expansive fulfillment options that are unmatched and that can be leveraged for the benefit of our customers. And that's exactly what we aim to do. To do that, our new organizational structure will create stronger momentum with our teams to drive success with the Pro. Hector Padilla will focus on improving the experience for Pro's shopping in our stores. His 29-year tenure and knowledge of our store operations and new Pro capabilities will be instrumental in achieving our goals. And Chip Devine, our Head of Outside Sales, brings nearly 30 years of distribution experience. He will work on building out capabilities to better serve more complex private needs. Ultimately, we must focus on removing friction within our operations, so our customers have a great experience every single time no matter how they choose to shop with us, whether in the aisles of our stores, picking a product at the store, receiving product at their job site with a sales associate or digitally. We know that most of our Pros use many of these capabilities across our ecosystem when shopping with us. For us, we are building trust and a partnership that lasts for decades and across generations. This means we have to work hard to deliver a great experience regardless of their point of interaction. As you know, we have identified additional growth opportunities with the Pro, which requires us to invest in new capabilities and functionalities across the business. Think about the initiative we are undertaking with the complex Pro. This customer interacts differently. They are accustomed to interacting with their suppliers in a different way than our traditional business model. Pros working on complex projects want to reserve product, use trade credit and have products delivered to their job site in a staged manner. While these capabilities exist in the market today, we are incorporating them in our full ecosystem to serve Pro customers in a way no one else can. I could not be more excited about the opportunity that lies ahead. And for the in-store experience, over the last several years, we have talked about the importance of in-stock, and ultimately, on-shelf availability or OSA. Having the right products in stock in the right quantity and on the shelf available for purchase is critical, and we've implemented several initiatives to help us do this more effectively and efficiently. In the past, we've talked about GSR or get stores right. GSR drives productivity by using our proprietary space allocation model coupled with our tenured field merchandising teams to determine which categories to invest in on a store-by-store basis. More recently, we have talked to you about our rollout of Sidekick and computer vision. Using machine learning technology, computer vision helps our associates quickly find de-palletized product in the overhead and Sidekick helps direct associates to key bays where OSA is low or outs exist. Today, these tools have been deployed across all U.S. stores. And while early days, they have driven meaningful improvement in our on-shelf availability. The beauty of these initiatives is that they also drive productivity. They make it easier for associates to restock product, have a greater depth of high-velocity product and ensure we remain in stock with more products on the shelf and available for sale. As a result, we enable our associates to focus on the most important tasks and allocate more time to deliver a better shopping experience. These are just a few examples of the many different types of initiatives that can drive significant value for our customers, our associates and our shareholders. Despite a challenging year, our amazing associates have remained engaged and ready to serve our customers, and I want to thank them for all they do. With that, let me turn the call over to Billy.

Richard McPhail:

Thank you, Billy, and good morning, everyone. In the third quarter, total sales were $37.7 billion, a decrease of approximately $1.2 billion or 3% from last year. During the third quarter, our total company comps were negative 3.1% with comps of negative 2.1% in August, negative 3.4% in September and negative 3.7% in October. Comps in the U.S. were negative 3.5% for the quarter with comps of negative 2.5% in August, negative 3.8% in September and negative 4.1% in October. In local currency, Mexico and Canada posted comps above the company average. It is important to note that adjusting for storm-related overlaps and some seasonal shift, monthly comps were relatively consistent across the quarter. In the third quarter, our gross margin was 33.8%, a decrease of approximately 20 basis points from the third quarter last year, which was in line with our expectations. During the third quarter, operating expense as a percent of sales increased approximately 120 basis points to 19.4% compared to the third quarter of 2022. Our operating expense performance during the third quarter reflects our previously executed compensation increases for hourly associates as well as deleverage from our top line results. Our operating margin for the third quarter was 14.3% compared to 15.8% in the third quarter of 2022. Interest and other expense for the third quarter increased by approximately $30 million to $438 million. In the third quarter, our effective tax rate was 23.3%, down from 24.4% in the third quarter of fiscal 2022. Our diluted earnings per share for the third quarter were $3.81, a decrease of 10.1% compared to the third quarter of 2022. During the third quarter, we opened 7 new stores, bringing our total store count to 2,333. Retail selling square footage was approximately 242 million square feet. At the end of the quarter, merchandise inventories were $22.8 billion, down $2.9 billion or 11% compared to the third quarter of 2022. And inventory turns were 4.3x flat to 1 year ago. 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 quarter, we invested approximately $670 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 $1.5 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 38.7%, down from 43.3% in the third quarter of fiscal 2022. Now I will comment on our guidance for fiscal 2023. As you heard from Ted, with one quarter remaining in fiscal 2023, we no longer expect the end points of our previous guidance range as likely outcomes, and therefore, we are narrowing our guidance for 2023. We expect fiscal 2023 sales and comp sales to decline between 3% and 4%. We are targeting an operating margin between 14.2% and 14.1% 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 9% and 11% decline in diluted earnings per share compared to fiscal 2022. In addition, as you heard from Ann, we continue to focus on driving productivity in the business. We have taken a number of actions that will help us realize the previously announced $500 million in annualized cost savings in 2024 and are fully confident that we will deliver on this commitment. 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.

Simeon Gutman:

In thinking about inflections and when we might see one, looking at the spread maybe between DIY and Pro is the story of this quarter that maybe DIY has stabilized, but the Pro is getting a little bit worse? And then if that's right, and feel free to correct if that's wrong, would that mean that it could take a little longer than for the Pro sort of normalizing to play out? And actually, the overall comp could get a little worse before it gets better?

Simeon Gutman:

And then maybe the follow-up, you mentioned GDP. Given that home prices seem to be pretty sticky even with pretty weak turnover and may not get any better, how should we think about GDP -- should we revert to GDP as maybe a better proxy for how the business could do?

Operator:

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

Richard McPhail:

Thanks for that question. Margin expansion is largely a function of top line growth. There is a point there in the low positive comp digits where you see expense turn from deleverage to leverage. We're not going to take on 2024 guidance today. What we have done is we have put in place measures, and in fact, now have essentially completed actions that will provide us with a $500 million cost buffer heading into 2024. And so regardless of the outlook, that provides some buffer in margin.

Richard McPhail:

We've had part of that spent throughout the year. I think it is still a correct assumption that, that favorability will be fully offset by the end of the year. And so I really point you to our guidance as the best jumping off point for your modeling.

Scot Ciccarelli:

So in some other retail verticals or a lot of other retail verticals, we're seeing a return to pre-COVID purchasing patterns where you probably see more activity, purchasing activity on weekends and around holidays and events with, frankly, bigger lulls in between. So the questions are

Edward Decker:

And we will always -- Scot, we will always focus on EDLP. I mean we have events during certain seasons that they're a lot of fun. They're engaging with the associates. They're engaging for our customers. But day in and day out, 12 months a year, we strive to be an EDLP retailer with great values every day.

Richard McPhail:

No. We called out in my prepared remarks, categories like portable power and so forth, where we have seen great engagement. And candidly, we're thrilled with the innovation that we continue to partner with our supplier base on that we bring to the market. And where we continue to see innovation, we continue to see great engagement with both the Pro and the consumer.

Christopher Horvers:

So a couple of follow-ups to prior questions. My first one is, with the gross margin decline in the third quarter, can you talk a little bit about what drove that? You were lapping storm-related demand and you had some commodity deflation. So I would have thought that those would be positive. So is that fair? And what were the offsets to that drove it lower?

William Bastek:

Yes. I mean, as you mentioned, the inflation environment seems to be behind us. Prices absolutely settled in. And again, I reiterate what I said, work in a very rational market. And the other thing I'd add is this is no different than any other time frame, frankly. We have a portfolio approach to how we take on, whether it's lumber deflation that we've talked a lot about throughout the year or other ins and outs as it relates to the P&L. So a very normalized environment, rational and really a stabilization that we've seen across the board as it relates to pricing.

Richard McPhail:

Chris, thanks for the question. There's a lot of kind of 2024 conjecture built into that answer. I'll tell you that -- you're right. So I think when you're talking about changes in the nature of our labor model, the degree of change in transactions really isn't material enough to say that changes the nature of our labor model.

Michael Lasser:

You talked about the promotional environment discounting being very rational. If the cycle or the downturn for home improvement remains protracted and extended, under what conditions would you expect that discounting will be more intense than it was in 2019 across the industry? And if that were to be the case, would Home Depot choose to remain true to the everyday low price and the portfolio approach that it has or would it look to protect market share and participate in some of that activity?

Michael Lasser:

Got you. Very helpful. My follow-up question is, historically, Home Depot has underpromised and overdelivered in just about all facets. Is it realistic to think that you took the same approach when building this $500 million of net cost savings for next year such that there could be upside to that number?

Operator:

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

Ann-Marie Campbell:

Steven, thank you so much for the kind words there. Chip is in the room, and he has been intimately knowledgeable about that. And so I'm going to throw it over to Chip, and he'll talk a little bit about some of the capabilities that we continue to leverage and some of the functionalities and capabilities that we will continue to build.

Steven Zaccone:

Okay. I wanted to revisit Simeon's question about inflection because I know it's a challenging backdrop to predict. But I guess as you think about the business, what are the key building blocks to take the business from this period of moderation to a more stable market backdrop when you talked about low single-digit market growth? I'm curious if you could opine on, is it really the PCE shift? Is it rates? Just any help you provide would be helpful.

Operator:

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

Edward Decker:

Well, the number one way that we're focused to drive demand is with the complex Pro. So it's -- that is our key strategy and that's what we're focused on. It's a $200 billion space as we've defined the $950 billion split evenly pro and consumer. And if the $475 billion that's Pro, there's $200 billion that is larger pros, more complex spend that we're building out the capabilities to serve that demand. And that, Brian, is what we're very, very focused on and I think for years and years, that is going to be a driver of our business as we take share in that sort of $200 billion white space.

Richard McPhail:

Our performance in the first 2 weeks is on track to achieve our full year 2023 guidance.

Peter Benedict:

Another one on average ticket here. So pre-COVID average ticket around $67. I think now it's kind of trending closer to $90, so up 35%. Richard, I just wonder if you have any perspective on kind of the like-for-like SKU inflation component there versus the big-ticket mix? It sounds like your like-for-like inflation is -- seems to be stabilizing. I know there's innovation that can make things not like-for-like. But just curious, as you think about the big-ticket exposure there and what could potentially play out there? How big of a deal is that?

William Bastek:

Yes. I mean -- and I'll just -- Ted's response back to Brian on you see categories like drywall where we have capabilities, roofing, insulation, portable power where we've added innovation, we continue to see great both Pro and consumer reaction to just the innovation and things we're seeing. As it relates to big-ticket, obviously, you've seen some deferral and so forth, as we talked about. Certainly, the pull forward is probably still playing a part in that as we continue to get further away from the pandemic. So we'll watch that closely. We don't see anything. As I mentioned, stabilized pricing, rational environment and we don't see anything different from what we've seen over the last multiple months now.

Richard McPhail:

Thank you. We've maintained a position very close to that 2x debt-to-EBITDA leverage ratio and we intend to do so in the foreseeable future. We will also really maintain consistency with respect to capital allocation. We invest in the business first. We pay our dividends. And then as we determine excess cash, we flow that to our shareholders in the form of repurchases. To your point, to date, we've repurchased $6.5 billion. There's really no change in our stance. And so I think that's the important takeaway there.

Michael Baker:

Okay. Just thinking about the fourth quarter, if we take the midpoint of the implied guidance, it does suggest a little bit of a deceleration yet. It does seem like your business has been consistent. Is that just a function of -- am I reading too much into that? Or do we expect a deceleration? And maybe a second part of that, as you said, Halloween was really strong. Historically, all into your trim a tree or your holiday decorating business. I think it's like in 10 of the last 14 years, your fourth quarter comp has been better than the third quarter. Why should this year be different than that?

Michael Baker:

Okay. So sounds like it's -- like I said, it's just a function of getting to the middle of the range. If I could ask one other question. You talked a little bit about storms and seasonality. I think a lot of retailers have said it's been a warm fall. How does that impact you? Do you need it to get cold in -- as we go through the fourth quarter to drive your business? How should we think about that?

Operator:

Our next question comes from the line of Steven Forbes with Guggenheim.

Ann-Marie Campbell:

Yes. I'll start off by just saying that the capabilities and functionalities that Hector and Chip have been working on over the last several years are certainly going to help us engineer a deal of momentum and success with the Pro. And Chip, I'll throw it over to you again because of how intimately you are knowledgeable about that. But there is -- this is -- the Pro ecosystem is what we are focused on. Now -- and not the in-store side -- or not only the in-store side, but the complex Pro. And as we build out these capabilities and we see the effectiveness of these capabilities, we're going to continue to leverage those. And Chip, I'll throw it over to you to kind of give a little bit more details on Dallas.

Steven Forbes:

Maybe just a quick follow-up for Richard or Billy, all the ticket conversations here, any way to just sum up how the quarter for big-ticket progressed relative to expectations? It sounds like it performed better than expected. You have sort of stabilization in multiyear big-ticket comp trends. I would imagine that wasn't the expectation. But any way to help us frame on how the quarter progressed for big-ticket versus internal plan?

Richard McPhail:

I think it's important to thematically just to sort of repeat the point, this stance by the Fed of higher for longer is sort of coming across in surveys. There is a deferral of larger projects. And so if you just want to zoom all the way back to the true macro here and the forces on ticket that we're watching, that's probably the largest macro for us.

Operator:

Our final question comes from the line of Dean Rosenblum with Bernstein.

Richard McPhail:

Well, taking your last part first, it's an ecosystem like Ann said. We're actually not we don't have goals or targets with respect to the separation of store and delivered sales. The point is actually lifting all sales. And that's what we've seen consistently in every market where we've rolled out capabilities. Originally, we worried, okay, our delivered sales is going to begin to cannibalize the store. The opposite has proven true. And so we are progressing in a way that we're pleased. With respect to your first question, factually, the Pro did outperform the consumer in Q3, albeit at the narrowest margin we've seen in quite some time. If you actually normalize for commodity impact, the Pro was essentially flat for the quarter.

Richard McPhail:

We infer from category sales and from class sales. When you look at categories that are more likely to sell at higher volumes in larger projects, kitchens, flooring, millwork to an extent, we are doing some inference. We also ask our customers what they're seeing and what kind of projects they're working on. We use external survey data that tells us that the nature of projects is kind of shifting from larger to smaller. And so it's a triangulation.

Isabel Janci:

Thanks, Christine, and thank you, everyone, for joining us today. We look forward to speaking with you on our fourth quarter earnings call in February.

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.

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. 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.

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.

Operator:

[Operator Instructions] Our first question comes from the line of Christopher Horvers with JPMorgan. Please proceed with your question.

Ted Decker:

Good morning, Chris, it’s Ted. The quick answer is, yes, July really was a weather shift. We had a particularly wet in 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, 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 with a 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. There’s 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, strong job growth and increases in wages. So the core customer remains strong. And if you look at Home Depot, you look at our operations, what we can specifically control, we feel great about where we are halfway through this year, as you saw, the meaningful 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 continued to improve. Our value proposition remains strong. And as 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 – well, 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 and home improvement and our prospects and ability to keep taking share in this huge and still largely fragmented market.

Richard McPhail:

Well, Chris, this is Richard. First, just with respect to 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 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 and normalize.

Operator:

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

Ted Decker:

Well, Michael, I don’t want to go through the answer I just went through with Chris but - that’s pretty – that’s 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 uncertainty. Is the Fed going to raise? Are we going to 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.

Michael Lasser:

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:

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

Operator:

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

Ted Decker:

Zach, I wouldn’t read too much into that. There was so much noise in Q1 that 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.

Richard McPhail:

Sure. Zack, thanks. Yes, that 10 to 20 is something we called out at the very beginning of the year when we – or – and actually Q – when we talked about the progression of margin. And so – or rather the range of operating margin outcomes. That – you can think of that as really productivity that we anticipate in 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 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 product 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.

Richard McPhail:

There’s probably some – there could be some geography in COGS and in operating expense, but we haven’t settled in that yet. To your question, let me just make sure that we’re clear, that initial 10 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 is assumed full year benefit annualized in 2024.

Operator:

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

Hector Padilla:

Scot, this is Hector. Good morning. As we mentioned in the 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 that it will also be very hard to replicate, as you know. And today, we’re very encouraged by the signals that we are 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 deployed. Think of our order management system or a 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 always performing, and we’ll continue to invest in the efforts.

Billy Bastek:

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 has helped. 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 feed as an called out or OSA. And so really pleased with both of those pieces.

Operator:

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

Richard McPhail:

Well, I’ll start on that one. And if we rely on publicly published surveys, the one that we watch is the National Association of Homebuilders Index. We have seen backlogs declined sequentially. But yes, they are well above the historical average. And so you would really say the professional customer has been oversubscribed for so many years that they still have a full book of business, just not maybe oversubscribed. They may be 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 for 50, the index is still at 61, so down from peak but higher than average.

Jackie Sussman:

Got it. That’s helpful color. And just one quick follow-up. Shrink was the only real call-out 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 are taking to kind of mitigate that impact going forward?

Ann-Marie Campbell:

No, we are certainly in the battle in retail as we kind of think about shrink. But we have always continued to lean into initiatives that we have 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 have 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 have seen out there.

Operator:

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

Billy Bastek:

Yes. 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.

Richard McPhail:

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 left in the year. So, we think the guidance range is appropriate.

Richard McPhail:

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

Richard McPhail:

Thank you.

Chuck Grom:

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 will you reinvest it in other parts of the business?

Chuck Grom:

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.

Chuck Grom:

Okay. Thanks Ann.

Brian Nagel:

Hi. Good morning. Thanks for taking my question. So, at the risk of being maybe a bit repetitive, I just – with regard to inflation, I guess maybe now disinflation, so we are starting to see – and I know you mentioned in your prepared comments the lumber price dynamic there where you have seen improved unit demand. But the question I have is as we are seeing or we are moving past maybe peak-ish inflation and getting more disinflation, how are you seeing the overall business flex here, both from a – I guess from what you are doing as well as how your consumers are reacting generally?

Billy Bastek:

No. I would say we are encouraged by the improvement in transactions and as we see the normalized pieces that Richard spoke about earlier, but we don’t see a deflationary environment as we go forward.

Billy Bastek:

Yes. I would say, Brian, that we commented 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.

Billy Bastek:

Thanks.

Michael Baker:

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

Michael Baker:

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

Ted Decker:

Yes. I think the big story with housing now as it’s playing out is values have held up. And Case-Shiller just came out with some data and Redfern just – Redfin just came out with some data that, that drop-off in values has been erased and that we are 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 in to 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. So, many people are below 5%, even at 3% mortgage rates. So, values are holding if not now back increasing fundamental imbalance again of 2 million to 3 million to 4 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 7%-ish, but there is just not that much available to purchase.

Richard McPhail:

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

Operator:

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

Richard McPhail:

But it’s – 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:

No, I was just going to say that the consumer – the nearest term view of 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 of them on their homes, up 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’s not 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.

Richard McPhail:

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

Isabel Janci:

Christine, we have time for one more question.

Steven Forbes:

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?

Billy Bastek:

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

Hector Padilla:

Yes. No, Steve, this is 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 are 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 platform. So, continue to be very encouraged about the performance. For us, Dallas has been a success so far. And we will 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.

Operator:

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

Operator:

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

Isabel Janci:

Thank you, Christine and good morning everyone. Welcome to Home Depot’s first 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. [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 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.

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. As you heard from Ted, during the first quarter, our sales were below our expectations, primarily driven by lumber deflation and unfavorable weather. We also saw a continuation of the trend we observed in the fourth quarter with consumers pulling back on big ticket and some discretionary type purchases. However, where weather was favorable, we saw strength in smaller ticket outdoor projects. Turning to our department comp performance for the first quarter, 4 of our 14 merchandising departments posted positive comps, which are building materials, hardware, plumbing and millwork. During the first quarter, our comp average ticket increased 0.2% and comp transactions decreased 5%. Excluding core commodities comp average ticket was primarily impacted by inflation across several product categories as well as the demand for new and innovative products. Deflation from core commodity categories negatively impacted our average ticket growth by approximately 335 basis points during the first quarter driven primarily by deflation in lumber. During the first 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 $1,170 in the first quarter of 2022, which is a decrease of 64%. Turning to total company online sales. Sales leveraging our digital platforms decreased approximately 2.9% compared to the first quarter of last year. For those customers that chose to transact with us online during the first quarter, over 45% of our online orders were fulfilled through our stores. DIY customers outperformed the Pro in the quarter, but both were negative. Pro results experienced a disproportionate impact as a result of lumber deflation and a wet start spring – wet start to spring negatively impacted both customer cohorts. Big ticket comp transactions or those over $1,000 were down 6.5% compared to the first quarter of last year. We saw some big ticket strength across Pro-heavy categories like portable power, gypsum and pipe and fittings. After a couple of years of unprecedented demand in the home improvement market, we continue to see softness in big-ticket discretionary categories like patio, grills and appliances that likely reflects deferral of these single item purchases and pull forward. In addition, we’ve seen demand soften across other parts of the business, including flooring, kitchen and bath. This softer demand may reflect consumers moving away from larger to smaller projects. And while there are factors impacting the home improvement market, our merchandising organization will continue to focus 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’re bringing to the market, whether it’s Leviton’s Decora Edge, Viega Copper press fittings or the launch of Behr Dynasty exterior paint, just to name a few. At our upcoming investor conference, I look forward to sharing more about these products and some of my favorite product innovations with you in person. It’s the power of our vendor relationships, coupled with our best-in-class merchant organization that allows us to offer our customers the best brands with the most innovation to solve pain points, increase functionality or enhance performance at the best value in the market. Now let’s turn our attention to spring. While we’ve had a slower start to the season, we continue to be excited about the lineup of products we have for our customers and remain ready to help them with their outdoor projects or outdoor living needs. As you’ve heard us say many times, we have a great lineup of outdoor power products and our assortment of RYOBI, Milwaukee, DEWALT and Makita offers something for everyone building on an ecosystem of innovative tools powered by the same battery platforms, and our live goods look incredible. We’re ready for spring with everything from shrubs to a variety of flowers, herbs, vegetables for every type of gardener. With that, I’d like to turn the call over to Ann.

Richard McPhail:

Thank you, Ann, and good morning, everyone. In the first quarter, total sales were $37.3 billion a decrease of approximately $1.7 billion or 4.2% from last year. During the first quarter, our total company comps were negative 4.5% with comps of negative 2.5% in February, negative 7.5% in March and negative 3.7% in April. Comps in the U.S. were negative 4.6% for the quarter with comps of negative 2.8% in February, negative 7.5% in March and negative 3.7% in April. Our first quarter comp sales missed our own expectations, particularly in the months of March and April, driven primarily by 2 notable factors. First, lumber deflation drove a negative comp impact of approximately 220 basis points versus the first quarter of 2022. Second, unfavorable weather, particularly in our Western division further impacted our results. In the first quarter, our gross margin was 33.7% a decrease of 8 basis points from the first quarter last year, primarily driven by increased pressure from shrink. We continue to successfully offset supply chain and product cost pressures while maintaining our position as the customer’s advocate for value. During the first quarter, operating expense as a percent of sales increased approximately 25 basis points to 18.8% compared to the first quarter of 2022. Our operating expense performance during the first quarter reflects the planned compensation increases announced during our fourth quarter 2022 call as well as a onetime benefit from a legal settlement. Our operating margin for the first quarter was 14.9% compared to 15.2% in the first quarter of 2022. Interest and other expense for the first quarter increased by $72 million to $441 million due primarily to interest on our floating rate debt as well as higher debt balances than a year ago. In the first quarter, our effective tax rate was 24.2%, up from 23.9% in the first quarter of fiscal 2022. Our diluted earnings per share for the first quarter or $3.82, a decrease of 6.6% compared to the first quarter of 2022. During the first quarter, we opened 2 new stores, bringing our total store count to 2,324. Retail selling square footage was approximately 241 million square feet. At the end of the quarter, merchandise inventories were $25.4 billion, essentially flat compared to the first quarter of 2022 and inventory turns were 3.9x down from 4.4x 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 first quarter, we invested approximately $900 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 $3 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 43.6%, down from 45.3% and in the first quarter of fiscal 2022. Now I will comment on our guidance for fiscal 2023. As you may recall, last quarter, we provided flat sales and comp guidance for fiscal 2023. As we mentioned last quarter, our guidance did not include potential impacts from lumber deflation, which we noted could negatively impact our performance for the quarter and the year. As a result, lumber negatively impacted comps by approximately 220 basis points in the first quarter. Given the negative impact of the first quarter sales from lumber and weather, further softening of demand relative to our expectations and continued uncertainty regarding consumer demand patterns, we are updating our guidance to reflect a range of potential outcomes. We now expect fiscal 2023 sales and comp sales to decline between 2% and 5%. As a result of the change in our sales outlook, we are now targeting an operating margin between 14.3% and 14.0% 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. As Ted mentioned, we expected 2023 to be a year of moderation in the home improvement market, driven by monetary policy actions to dampen overall consumer demand. In our view, we are in a transitional period in the consumer economy. Setting the short-term impacts of monetary policy aside, we know that the home improvement customer is healthy and we believe the medium to long-term underlying fundamentals of home improvement make it one of the most attractive markets in retail and the economy as a whole. We believe that we are well positioned to meet the needs of our customers with a broad assortment of products, strong in-stock levels and knowledgeable associates. The investments we’ve made in our business have enabled agility in our operating model. As we look forward, we will continue to prudently invest to strengthen our competitive position, 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.

Chris Horvers:

Thanks. Good morning, everybody. So I have two questions on the ticket side. Average ticket was flat in the first quarter. I think last year, you had same-SKU inflation ex commodity of the high single digits all year. So how much of the ticket deceleration relative to 1Q last year was just simply a same SKU disinflation on a year-over-year basis versus things like project size and trade down?

Chris Horvers:

So as you look ahead, and how are you thinking about how much of a headwind that becomes over the year? And what should you incorporate in the guidance? And then related to that, transactions are sort of back to ‘19 levels, but in the first quarter, tickets still up 37% versus the first quarter of ‘19. I’m guessing maybe a third of that is same SKU. So just trying to put into context the risk around ticket in terms of disinflation and then also project size and trade down?

Chris Horvers:

I guess just in terms of – do you think – if you sort of look at the trend on project size, does that become – will that cause ticket to become negative over the years? Is that how you’re thinking about it?

Chris Horvers:

Got it. Thank you very much.

Steven Zaccone:

Great. Good morning. Thanks for taking my question. I was hoping you could comment a bit on what you’re seeing in the second quarter to date, just given the fact that weather has been so volatile across the U.S. And then just in the context of that, how should we think about second quarter maybe versus the back half of the year? What can kind of get you to the high end versus the low end of your full year guidance range?

Steven Zaccone:

Great. Thanks for all the details on that. And then I wanted to follow-up on the comment about this being a transitional period for the consumer. In the context of the question is how do you think about this year as a potential trough in demand for home improvement versus it potentially being a multiyear trend and maybe 2024 is another step down. And I know you’ll have a – there is a lot of moving pieces, and you’ll have an Analyst Day in a month. But if you could comment on that at all would be helpful.

Steven Zaccone:

Thanks for all the detail. Best of luck for the remainder of spring.

Zach Fadem:

Hey, good morning. Can you help us bridge the gap from the 15.3% EBIT margin last year to the 14% to 14.3% today? And specifically, how should we think about the moving parts around gross margin versus SG&A? And then specifically for Q1, cost controls were a bit better than expected. Can you talk us through the impact of the legal settlement? And anything else you’d highlight there?

Zach Fadem:

Got it. Appreciate the color. I’ve got a big picture question. Could you talk about the macro and housing indicators that you believe are now most correlated to your business today? And then considering the golden handcuffs of sub-3% mortgages out there, do you think this takes longer now for housing turnover to materially recover.

Zach Fadem:

Thanks, Richard. I appreciate all the color.

Operator:

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

Ted Decker:

Michael, great question, I wouldn’t say we have gone into that level of detail by category. Certainly, a number of those categories were elevated. The ones you called out, patio grills, appliances were elevated on retails with innovation, as well as units with outsized demand. I think when you think of normal replacement cycles and pull forward on some of that product, that’s just going to take a little bit of time to normalize. Other categories that we haven’t talked so much about that are – that are really booming frankly, are categories like building materials where we are seeing unit volume still running quite strong. We see units in lumber picking up meaningfully and as prices come down and you get attachment with building materials. And then hardware, which attaches to both building materials in lumber, we are seeing our strongest hardware unit productivity and attach rate to those project starter categories, I think Billy, it’s the highest attach rate we have ever recorded.

Michael Lasser:

My follow-up question is, if we consider 2023 to be the transition year and comps for The Home Depot do return to growth in 2024, would you start seeing leverage on your expenses on the first dollar of growth, or will there be some catch-up like Richard, you mentioned legal expense, you expect to give back of that over the course of this year? Presumably, there will be an incentive comp benefit as you lowered your guidance. So, will you see some of those items come back next year such that if we have in our models a positive comp, we wouldn’t necessarily expect you to leverage your expenses on the first dollar growth next year?

Ted Decker:

And obviously, we manage cost and price independently, Michael, and transportation costs are a market dynamic. And so we will make sure that we are positioned as the customer’s advocate for value with respect to price. But as Ted said, we will get more into this in 2023 – sorry, in June, June 13th.

Richard McPhail:

Right. No, again, we manage cost and price independently. As Ted said, we don’t expect broad-based deflation in this market.

Operator:

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

Ted Decker:

Good morning.

Ted Decker:

Yes. Brian, thank you. So, weather as we have said, was most pronounced in the West in a very unique weather pattern. This wasn’t a bad weekend. This was record rain and even things like snow in Southern California. So, where weather was sustained and bad when we look at the West versus our Northern and Southern divisions, the impact was a multiple of what we saw in the other parts of the country. And generally, we have talked in the past about the bathtub effect, and we wouldn’t have updated guidance base on stronger relatively weaker sales in Q1 based on weather because we would look to get that back. So, when you think of a shorter spring season in the North where people are going to get that activity done in a limited number of weeks. If you don’t get it done in the first quarter, people tend to make it up in the second quarter. The dynamic in the West, this went into our guidance of the minus 2 to minus 5, is the West, it’s more level weather patterns. We have very large stores, very high Pro-concentration. And when you get bad weather, you are not really looking at a bathtub effect to make it up in a short season. You just sort of missed that selling week. So, the difference geographically was pronounced in the West, and we just look at that as sort of lost selling weeks. In the north, the behavior is more typical to the bathtub. I mean we didn’t have many good weekends but when we did sales were incredibly strong. So, we are certainly hoping for better weather in Q2.

Richard McPhail:

That’s right, Brian. That’s why we gave the range. I mean you would say that particularly at the bottom end of the range would assume greater deceleration than we have observed to-date. And it’s consistent with the hypothetical case we laid out at the beginning of the year which was to say, look, if our share of PCE reverts to 2019 levels by the end of the year, that is what you would see. And again, that would be an accelerated rate of reversion versus what we have seen. So, the negative 2, again, sort of has – it takes into account the fact that we saw a sharper reversion than expected in Q1 and that we would hold that share through the end of the year. It’s not a perfect science, and that’s why we gave you a range.

Ted Decker:

Thanks.

Scot Ciccarelli:

Good morning guys. So, Richard, you talked about protecting a 14% operating margin even with the wage investments that you guys have made this year at this point. What other – I mean, how much flexibility do you think you have on the SG&A line, because I know labor is your biggest kind of plus bucket, but you are actually investing more in labor, not less. So, like how should we think about how you guys are managing that component?

Scot Ciccarelli:

And just a quick follow-up, with higher interest rates in the marketplace, does that change how you guys are thinking about capital allocation, not necessarily from a strategic basis, but how aggressive you want to be in terms of issuing debt to buy back stock? Thanks.

Ted Decker:

But we feel good about where we are from a leverage perspective.

Operator:

Our next question comes from the line of Brad Thomas with KeyBanc. Please proceed with your question.

Ted Decker:

Yes. I will let Hector talk a bit about the Pro and what we like that we are seeing. But from the broadest perspective, don’t forget the Pro was disproportionately impacted by lumber and then, again a very strong Pro business out West. But we like what we are seeing with our customers as they engage with our capabilities.

Brad Thomas:

Great. And as a quick follow-up, obviously, some moving pieces here with weather and deflation. I believe your prior outlook for the home improvement market was a decline of low-single digits. What are you assuming in your new outlook?

Brad Thomas:

Great. Thanks so much.

Simeon Gutman:

Hey. Thanks. Good morning everyone. I want to ask about home prices. There has been a case that’s made that demands decoupled a bit from turnover and that prices could matter more. I want to ask specifically about how that could inform the cadence of the year, because if you are restrict adherent to prices, the lag effect could suggest that the back half core gets a little bit worse. I am just curious how you think about that?

Simeon Gutman:

Okay. That’s fair. One more question around the updated guide for Richard. The midpoint of this negative 2% to negative 5%, just to clarify, that assumes that the core worsens from Q1 as well as the impact of lumber worsens from Q1?

Simeon Gutman:

Right. Okay. Thank you.

Seth Sigman:

Hey everybody. Good morning. I wanted to follow-up on that assumption that home improvement wallet share will normalize back to 2019 levels. And obviously, that implies things get worse from here. But I guess there has also been some prior cycles where wallet share overshoots on the downside and goes lower than where it was before, and we talked a lot about pull forward already today. But how do you think about that scenario and why that scenario would be wrong this time?

Seth Sigman:

Okay. Fair enough. Just one follow-up on the EBIT margin guidance for this year, I think what you laid out here at the low end, so 14% margin on negative mid-single digit comps very consistent with the scenarios you talked about last quarter, but it does include that Q1 SG&A benefit. Can you just help us better understand, does that imply the underlying is actually lower? I think you may have said there is an offset to that. Maybe you can just clarify that point. Thank you.

Seth Sigman:

Okay. Thanks very much.

Operator:

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

Billy Bastek:

Yes. Thanks Steven. This is Billy. As we talked about, Richard mentioned in his previous comments, we do anticipate the greatest pressure from lumber in the first half. For the total year, we think lumber deflation impact to the comp is about 100 basis points. Now with that, we are seeing strong unit movement across plywood, dimensional lumber, PT decking, it’s 220 basis points, as we mentioned in Q1, another 120 basis points roughly in Q2, which is in the guide. And then we don’t expect a material impact from lumber for the back half of the year, but still seeing really strong unit performance in that categories I called out.

Billy Bastek:

Well, as the pricing normalizes year-over-year, you will see the units reflect in that as we get towards a more rational state that we had in the back half of last year.

Isabel Janci:

Thanks for that question, Steve. I think what you will hear us talk about is the updated TAM that we will lay out for you, our growth opportunities to go after that TAM and a little bit more about why we are so excited about the sector and the business.

Isabel Janci:

You’re welcome.

Isabel Janci:

Thanks Christine and thanks everybody for joining us today. We look forward to speaking with you at our Investor Conference on June 13th.

Isabel Janci:

Thank you, Christine, and good morning, everyone. Welcome to Home Depot's fourth quarter and fiscal year 2022 earnings call. Joining us on our call today are Ted Decker, Chair, President and CEO; Jeff Kinnaird, Executive Vice President of Merchandising; Ann-Marie Campbell, Executive Vice President of US Stores & 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. 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 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.

Ann-Marie Campbell :

Thanks Ted, and good morning everyone. I'm very excited to have the opportunity to spend a few minutes talking about the best team in retail and the many ways we are investing in the associate experience at The Home Depot. 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. So what does this mean to us? 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 and enjoyable and rewarding experience. As Ted mentioned, we are making a significant investment of approximately $1 billion in compensation for frontline hourly associates. This is a meaningful investment that we believe will position us favorably in the marketplace. But this is just one component of the associate investment story. We know that the key to an engaged and committed workforce is investing in the person, taking an interest in them and in their development. To that end, we began the year with a new store leadership structure, the first time we have changed the structure since our company was founded. The driving forces of these changes were customer service and associate development. We created new management positions focused entirely on the customer service experience, increasing the number of managers on the floor at any given time. This frees up time for other store leaders to devote to associate training and development. The net result of all this is both an improved customer and associate experience, while also creating new career paths for our associates. Another important element of a best-in-class associate experience rests on simplification, how can we simplify processes and systems in our stores to enable associates to deliver a better customer experience and how can we simplify and streamline paths, so that an associate can spend more time serving our customers. One example we have talked about before is the work we've done to simplify order management in our stores with the order up initiative. Historically, our associates have to navigate dozens of systems but with order up, we have been able to streamline multiple systems into one that is simpler and more intuitive. We took simplification even further this year with the introduction of the new HD phone and associated applications such as Sidekick. The rollout of our HD phone was a direct result of associate feedback on the limitations of our first-generation in all devices known as first phones. For the first time ever, every associate on the floor will have an HD phone in their hand with enhanced communication features, tools and training capabilities. This increased accessibility to real-time support is significant in helping our associates better serve our customers. In addition to enhancing the customer service experience, the home -- the new HD phone provides real-time access to tools and applications such as Sidekick that helps associates prioritize the highest value tasks more effectively. Powered by machine learning, Sidekick directs associates to key bays where on-shelf availability is low or out exist. The HD phone empowers our associates to provide a best-in-class customer experience, increase operational efficiency and generally makes an associate job much easier. These are just a few examples of the many ways we're investing to enhance and improve the associate experience at The Home Depot. Our associates are trusted advisers for our customers and are the heartbeat of our company, and I want to thank them for all they do to take care of our customers. We will continue to invest in them with a focus on listening to their needs, maintaining competitive wages and benefits and continuing to enhance our tools, training and development opportunities. With that, let me turn the call over to Jeff.

Richard McPhail:

Thank you, Jeff, and good morning everyone. In the fourth quarter, total sales were $35.8 billion, an increase of approximately $100 million, or 0.3% from last year. During the fourth quarter, our total company comps were essentially flat at negative 0.3% for the quarter. As Jeff mentioned, lumber prices in the quarter negatively impacted comp sales by approximately 70 basis points. We had comps of negative 1.3% in November, positive 0.8% in December, and negative 0.1% in January. Comps in the US were negative 0.3% for the quarter, with negative comps of 0.4% and 1.4% in November, positive 0.7% in December, and negative 0.1% in January. For the year, our sales totaled a record $157.4 billion with sales growth of $6.2 billion, or 4.1% versus fiscal 2021. For the year, total company comp sales increased 3.1% and US comp sales increased 2.9%. In the fourth quarter, our gross margin was approximately 33.3%, an increase of seven basis points from last year. For the year, our gross margin was approximately 33.5%, a decrease of 10 basis points from last year. Gross margin was in line with our expectations, reflecting planned investments in our supply chain capabilities. Throughout the year, we continued to successfully offset significant transportation and product cost pressures as well as increased pressure from shrink during the back half of the year and we did this while maintaining our position as the customer's advocate for value. During the fourth quarter, operating expenses were approximately 20% of sales, representing an increase of 32 basis points from last year. Our operating expense deleverage is driven largely by charges unique to the quarter related to litigation in California storm-related expenses and an unfortunate fire in one of our stores. For the year, operating expenses were approximately 18.3% of sales representing a decrease of 13 basis points from fiscal 2021. Our operating margin for the fourth quarter was approximately 13.3%, and for the year was approximately 15.3%. Interest and other expense for the fourth quarter increased by $85 million to $408 million due primarily to higher long-term debt levels than one year ago. In the fourth quarter, our effective tax rate was 22.6% and for fiscal 2022 was 23.9%. Our diluted earnings per share for the fourth quarter were $3.30, an increase of 2.8% compared to the fourth quarter of 2021. Diluted earnings per share for fiscal 2022 were $16.69, an increase of 7.5%, compared to fiscal 2021. During the year, we opened six new stores and lost a store in California due to a fire bringing our store count to 2,322 at the end of fiscal 2022. Retail selling square footage was approximately 241 million square feet at the end of fiscal 2022. Total sales per retail square foot were approximately $627 in fiscal 2022, the highest annual figure in our company's history. At the end of the quarter, merchandise inventories were $24.9 billion, an increase of $2.8 billion versus last year and inventory turns were 4.2 times, down from 5.2 times from the same period last year. Moving to capital allocation. During the fourth quarter, we invested approximately $900 million back into our business in the form of capital expenditures. This brings total capital expenditures for fiscal 2022 to $3.1 billion. During the year, we paid approximately $7.8 billion of dividends to our shareholders. We look to grow our dividend every year as we grow earnings. And as Ted mentioned today, we announced our Board of Directors increased our quarterly dividend by 10% to $2.09 per share, which equates to an annual dividend of $8.36 per share. And finally, during fiscal 2022, we returned approximately $6.5 billion to our shareholders in the form of share repurchases including $1.5 billion in the fourth quarter. Computed on the average of beginning and ending long-term debt and equity for the trailing 12 months, return on invested capital was 44.6% compared to 44.7% at the end of the fourth quarter of fiscal 2021. Now, I'll comment on our outlook for 2023. As we think about how 2023 might unfold, we think it's helpful to look back on our performance since 2019. From 2019 through 2022, we grew sales by $47.2 billion, a compound annual rate of 12.6%. During the first five quarters of this period from the first quarter of 2020 through the first quarter of 2021, our sales were driven by significant ticket and transaction growth. This growth reflects factors unique to home improvement, as homeowners spent more time in their homes and took on more projects, as they saw their homes significantly increase in value over that period. The home improvement market also captured a greater share of the consumer's wallet, as spending on goods outpaced spending on services during the period. Beginning in the second quarter of 2021 and continuing through the fourth quarter of 2022, we reported strong sales and earnings growth driven by ticket while transactions steadily normalized back towards 2019 levels as the broader consumer economy shifted from goods and back into services. During this time, we continued to report positive sales growth in every quarter up to present. As we set targets for 2023, the context of the past three years led us to consider three factors that will likely influence our performance this year. First, the starting point for our target setting this year is our assumption regarding consumer spending. We've assumed like many economists that we will see flat real economic growth and consumer spending in 2023. Second, over the last seven quarters, we have seen our transactions gradually normalize as consumer spending has shifted from goods to services. We believe that if this shift continues at its current pace, the home improvement market would be down low-single digits. And third, as an offset to this pressure, we plan to continue to capture market share. Our competitive advantages, the investments we have made over many years and the unique advantage that our orange-blooded associates give us over our competition position us to take share in any environment. Taking these factors into account, we are targeting approximately flat sales and comp sales growth for 2023. Further, our operating margin target of 14.5% reflects approximately 60 basis points of impact from the compensation investment we announced today. Our effective tax rate is targeted at approximately 24.5%. Our diluted earnings per share, is targeted to decline by a mid-single-digit percentage. Outside of this target setting, if lumber prices remain at current levels for the remainder of our fiscal year that would equate to approximately 100 basis points of pressure to comp sales and an insignificant impact to earnings. At today's current price, this would imply more pressure in the first half than in the rest of the year. We plan to continue investing in our business with CapEx of approximately 2% of sales on an annual basis. After investing in our business and paying our dividend, it's our intent to return excess cash to shareholders in the form of share repurchases. We believe that we have positioned ourselves to meet the needs of our customers in any environment. The investments we've made in our business have enabled agility in our operating model. As we look forward, we will continue to invest to strengthen our position with customers, leverage our scale and low-cost position to drive growth faster than the market and deliver shareholder value. Thank you for your participation in today's call. And Christine, we are now ready for questions.

Michael Lasser:

Good morning. Thanks a lot for taking my question. Ed, in this environment, we're all just kind of guessing, but we assume that your guesses are a lot more educated than any of the rest of us. And in that case, what do you see as the downside risk for the home improvement market in turn, Home Depot this year, both in terms of the depth of a potential decline and the duration of a downturn. And in that case, how would Home Depot's earnings look in that scenario?

Richard McPhail:

So -- yes. So Michael, just to recap quickly, the way that we set our target and our guidance for the year was to first start with the assumption of flat consumer spending. And then with respect to the goods sector of the economy, as I said over the last seven quarters, we've seen that shift across the consumer economy from goods to services. So, we would anticipate this would put slight pressure on our market. And then, we look to overcome that by taking share in the manner that we've done consistently over the past several years. So we're targeting flat. If you -- there are so many factors that influence our market right now, as Ted alluded to. But if you were to take a hypothetical situation, let's just think about that share shift that we call out. So we look at the share that we currently capture as a share of consumption PCE. And we've tracked that through the COVID period and over the last few years. As we said in our guidance, that share shift continued at the rates at which we have seen theism [ph] behave. Currently, we would expect the market to face low single-digit negative pressure. But if you were to take perhaps a more extreme case and say, if that share of PCE that our market holds were to shift all the way back to 2019 levels by the end of the year that would imply pressure of call it mid-single-digit percentages. And so that would sort of be one way to get your mind around a hypothetical case, where share shift happens more rapidly than it has been.

Richard McPhail:

So, just to keep it simple, because share shift is not a perfect science. In a hypothetical case, and again, we're not guiding this way, this is not a downside case, but in a hypothetical situation that share shift. If our comps were to be mid-single-digit negative, we would see operating margin around 14%, as kind of a corollary to that hypothetical situation.

Jeff Kinnaird:

Yeah. Thank you, Ted. So yeah, in general to your comments more broad than what we saw in the third quarter, but still very good project demand. If you look at the seven departments that outperformed the plumbing business building materials millwork hardware tools, and paint above our company average and just reflected the strength of the project business. To your point, Michael, we're watching categories like flooring very closely. We're working assortments. We're working different opportunities in the market to look at what's happening in categories like flooring, but some broader-based sensitivity, but still good strength in the overall business.

Operator:

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

Ted Decker:

Sure, Scot. I think, the last two years, we've had the same guidance that we're having this year, and that is that, whatever inflation is represented in our average unit retail in ticket, would be offset by transactions. So we started the year thinking about a balance of ticket and transaction, and that higher ticket driven by inflation would be offset with transactions. The outperformance of the prior two years was that we didn't see that much sensitivity. The consumer, our customer was much more resilient sort of purchase through that elasticity curve if you will. What we are seeing now is some more sensitivity and we had almost an exact one-for-one offset in Q4. That's what we're expecting for 2023, that there is still inflation. I mean, we are still in an inflationary environment, as we saw from CPI and PPI results last week. Although, it is abating and its abating more I would say in our industry, our costs on the table are much lower than they had been. Our wraparounds some price moves going into 2023 will be much lower than they had been in the prior two years. And so, while we're still expecting an offset in transactions, because the ticket won't be as high the negative transactions won't be as low, but still net to that flat guidance for 2023.

Ted Decker:

Yeah, big ticket would be the ones that I called out before, that have continued with softness. In the geographies, while we had a little more variability of our comp range. There's no particular geography that you call out other than weather-impacted ones that would show anything off the mean for us.

Operator:

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

Richard McPhail:

Thanks, Simeon. On home prices, we know over the long-term that our business does correlate to price appreciation. Obviously, we've had unprecedented growth and appreciation since 2019. Home prices peaked in June of 2022. In fact, at that point, they were 45% higher than they were at the end of 2019. They have regressed by about 3%, since that point. So we've seen some modest correction. But I can tell you, we have not seen an impact on a market-by-market basis, since that peak. There's no relationship with comp sales and the home price appreciation or correction that we've seen. On housing turnover, there's just that interesting dynamic of whether -- what is actually happening in housing turnover. They just aren't the willing sellers out there to the degree that they have been in past eras. We're in such a healthy -- our customer our homeowner customers in such a healthy position that you just think about their motive for selling. As you know 90% -- over 90% of US homeowners either own their homes outright or have fixed rate mortgages under 5%. And so that incentive to sell and move to a higher rate mortgage just isn't there. And in fact, the incentive is really there to improve in place. So it's hard to say what the housing economy -- how the housing economy might impact us, but no to answer your first question to date since 2022, we haven't seen a relationship.

Richard McPhail:

I think the only thing I look at really is the trajectory that we've observed. I think that's the best information we can use. We're not making an assumption about whether in your terms there's full digestion or not.

Ted Decker:

And Simeon I would say this -- as we said this is a unique period and hard to gauge on the shortest horizon. But we are just so incredibly bullish on the longer horizon for this industry. Just all the dynamics that we know about, starting with the fundamental shortage of housing, I mean we're still whether it's one million, two million, three million units short in with household formation and population growth and aging housing stock, all the things that we talk about. I mean that is all very much in place. And as the market works its way through PCE reversion or not or level of that and inflation mortgage rates that will all settle and what you're left with is still a market that is underserved in housing units built. And over half the homes are over 40 years old. And as Richard said, they remain in place with owning the home in low mortgage rates. People are going to want to make more significant improvements on those homes. So -- remaining just couldn't be more bullish on the longer term view of this industry.

Operator:

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

Isabel Janci:

Brian, you're breaking up. Can you repeat that?

Jeff Kinnaird:

Brian, it's Jeff. As we talked about price sensitivity earlier, we are seeing some additional sensitivity or saw some additional sensitivity in Q4 versus Q3. But let me give you a real-time example of how we're looking at the business and I'll go to the cleaning business as an example. As I spoke about in my prepared remarks, we launched in this quarter Ecolab, which is a premium cleaning brand in the market, which we're seeing exceptional performance. It is a trade-up category for many consumers, many pros and we're just really, really excited about the partnership and the long-term opportunity in that category. At the same time, we're expanding our HDX cleaning lineup and that's just a great everyday value brand for our customers and we're seeing a great pickup in that brand as well. So our merchants take the time by category to engineer what results they want to see and cleaning is a great example there. At the same time, we're watching categories very closely like appliances, like patio furniture, like grill that we spoke about in Q3 and earlier today to ensure that we are positioned right for the current environment.

Operator:

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

Ted Decker:

I don't know if we saw a rate of change Chris. The highlight remains the high spend Pro. I mean, that's still the strongest piece of the business. But I wouldn't say there was a rate of change much beyond that.

Richard McPhail:

Right. So Chris, our guidance assumes that we'll comp slightly lower in the first half than the second half. The lumber pressure we called out is sort of outside of guidance. There's so much volatility in that that we would not want to put that in guidance. There is 100 basis points of pressure to the year. If the number remains at current prices that pressure exists predominantly in the first half.

Richard McPhail:

And Chris, another reason we leave that sort of lumber hypothetical case outside of guidance, if that pressure does exist and come through we would not see any material impact to earnings.

Richard McPhail:

That's correct. You got it.

Operator:

Our next question comes from the line of Steven Forbes with Guggenheim. Please proceed with your question.

Ted Decker:

Sure. Yes, Steven and Ann will take you through some of the detail on the rates. But just to talk about this investment, we feel just great about doing this for our associates. Customer service at The Home Depot starts with our associates and we believe this investment is consistent with our values and is going to position us favorably in the market. We've been operating successfully in a pressured labor market. We all know labor has been tighter and rates have been higher. But just last year we were able to hire 200,000 associates. But we believe this move is going to protect our customer experience for the near medium and long-term. We'll be able to track the most qualified candidates and retain the exceptional associate base that we already have. So we not only increased our starting wages again, Ann will go into some detail but we increased wages for every single frontline associate. And there's a term in retail you get compression when you raise the starting rates with tenured associates. We addressed compression in a meaningful way in this $1 billion investment. So our tenured associates saw real wage increases with this move. And we hope to improve retention through this. That's why we call it an investment, and it's going to improve the customer experience through a more effective associate who's just in the building longer, understands our procedures and is much more effective engaging with the customer and selling. And we harken back to our values wheel of investing in our associates and what our founders said that, if we take care of our associates, they take care of the customer and everything takes care of itself. And that's what this investment is all about. But Ann, you can give some more detail, please.

Ted Decker:

And Steven, while we don't disclose average wages and we've always and will continue to be competitive on a market-by-market level, and we've been competitive, it's why we're able to hire the 200,000 people last year, but after this change our starting rate in any one market, there'll be no market under $15 for a starting rate. And starting rates go much higher than that depending on the market. And then the average wage, again, particularly with the investment in every associate, including tenured with addressing compression, we have an average wage that is well, well above the $15.

Richard McPhail:

Well, we're still -- while we know that global supply chains are improving, at least relative to where we were last year at this time. We're still pulling forward inventory. We still see extended lead times. And we think that 2023 is going to be a year of continued improvement in supply chains. So, we are encouraged by the inventory movements in our business. The year-over-year inventory increase was the smallest quarterly increase of the entire year. And so we feel good about our inventory productivity. And again, we've been managing in kind of exceptional circumstances. But yes, I think over the long run, you will see us heading back to convention with respect to working capital.

Richard McPhail:

You’re welcome.

Karen Short:

Hi. Thanks very much. Good to talk to you. The first question I just want to ask is, looking at the relationship on sales growth versus EBIT growth, and I'm actually talking about this excluding the $1 billion investment, obviously EBIT growth on a one-year basis is decently below sales growth. So, wondering just how to think about that relationship, including or excluding but going forward. And then, wondering if you could just talk a little bit about what you're seeing on 1Q to-date in terms of comp performance?

Karen Short:

It was just -- could you -- any color you could provide on 1Q performance in terms of comps?

Karen Short:

Okay. Thanks very much.

Zach Fadem:

Hey, good morning. Richard it sounds like most of the margin pressure in 2023 is expected to land at the operating expense line. And I'm curious if you could talk to the puts and takes to gross margin specifically. And is it fair to assume the inflection we saw in Q4 to slightly positive is a fair year-over-year run rate from here just given the bulk of your supply chain investments are running their course and then freighted commodities could be a tailwind?

Zach Fadem:

Got it. That's helpful. And then following up on the $1 billion in wage investment. Can you talk about where this puts you competitively versus your peers? And then if for whatever reason if your comp appears to be falling short of that flattish expectation range, would you still make the planned investments in 2023, or could you spread them out over a couple of years?

Zach Fadem:

Got it. Thanks for the time.

Operator:

Thank you. Our final question will come from the line of Steven Zaccone with Citi. Please proceed with your question.

Ted Decker:

Well, as we've said, we're thrilled with the share, we captured and the sales we drove. And while we don't love the moderation, you can't fight the tide, if you will with PCE spend going back to services, people traveling and whatnot. But the two main things, that we're going to stay focused on, to take share, one, I say the consumer, the consumer rights to check for all projects, even if the Pro is doing the work. But for the consumer, we are laser-focused on delivering the best interconnected frictionless, shopping experience. I mean, retail as we know, is all about interconnection, physical world in the digital world. And we are laser-focused. Matt Carey and his team is focused on taking out all friction in that. And as we continue to delight customers, with that frictionless experience, we'll look to gain more share. And then, we haven't talked much about the Pro in this call, but we are still 100% focused on building out all the capabilities that Pro ecosystem, that is going to allow us to capture more share of wallet with the Pro and move up to larger plan purchases. And extremely pleased with the results, we're seeing as we continue to put those capabilities, in the marketplace. So that's what we're going to do to keep taking share regardless of the environment, or the duration of the environment.

Jeff Kinnaird:

Hi, Steven, it's Jeff. No nothing specific to call out on the promotional environment, as we head into the first quarter further into the first quarter. We're excited about the value, we're ready -- we're offering our customers. And our spring sets, have gone exceptionally well, and we're looking forward to the spring season. But no change, that we can predict in the promotional environment.

Operator:

Thank you. Ms. Janci, I would now like to turn the floor back over to you, for closing comments.

Operator:

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

Isabel Janci:

Thank you, Christine, and good morning, everyone. Welcome to Home Depot’s third quarter 2022 earnings call. Joining us on our call today are Ted Decker, Chair, President and CEO; Jeff Kinnaird, 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 and one follow-up. If we are unable to get your questions 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.

Jeff Kinnaird:

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. As you heard from Ted, during the third quarter, we continued to see solid demand for home improvement projects and strong execution from our teams and supplier partners. Turning to our comp performance during the third quarter

Operator:

Thank you. [Operator Instructions] Our first question comes from the line of Michael Lasser with UBS.

Ted Decker:

Hey. Good morning, Michael. Thanks for the question. A lot of detail there that I won’t get into specifics but assure you that we’d look forward to taking share in any environment. There is a lot of noise around housing and home improvement. And you’ve heard some of this before, but if I can just step back a minute and lay out the environment the way we see it. I mean, we still feel very good, Michael, about our business. We just reported another strong quarter and reaffirmed our guidance for the year. And remember, we’ve grown this business $47 billion in the last two and three quarters a year. From our core customer, we think our customer is still healthy. I mean, our customer tends to have a good job, growing wages, strong balance sheets. They own their home and have seen increased home equity. However, as Richard said in his prepared notes, I mean it is a unique environment, lots of cross-currents, inflation and rising interest rates, et cetera. But given all that, our customer has remained resilient and engaged. As we said, both our Pro and DIY customers grew again in this past quarter. Project demand, in particular, is very strong. Our Pro sales are strong and our Pro intercepts with our customers indicate that their backlogs are still very healthy. Customers are still spending lots of time at home. We’re not all back at work five days a week. These homes continue to age. And they’re worth 40% more than they were pre pandemic. Now, I’m sure we’ll get into some housing questions and housing values may go down a bit, but we’re still going to be up meaningfully on a two-year basis. We did see some deceleration in certain products and categories. And again, that’s difficult to get at a root cause. Is it a consumer pulling back in general? Is there a reaction to price inflation? Do we have some pull forward in certain categories that people bought so much of certain categories during the pandemic, or are they moving on to other projects? Our transactions have been stronger than initially thought with this inflation. I mean, that’s why we have raised guidance throughout the year is that the price sensitivity wasn’t as strong as we thought it would be. However, our guidance implies that fourth quarter comps will be the lowest for the year, albeit positive and we have tougher comps from Q4 last year. So, with all of that as a backdrop, I mean, as I said in my comments, we believe we have the team, the strategy, the initiatives with each of our consumer and Pro that we’ll continue to take share in any operating environment. And while there may be some of these cross-currents in the next X quarters in housing, we still feel the backdrop of housing, the fundamental shortage of housing in this country and the aging of homes is incredibly strong for our space in the medium to long term.

Ted Decker:

Well, we’ll talk about ‘23 after our fourth quarter earnings call in February. Again, we remain incredibly bullish. There are certainly factors outside of our control. Are the Fed actions going to ultimately take us to a recession? If so, how deep that might be? Those are things that we’re all wrestling with and everyone has an opinion. But we’re focused on what we can control, rolling out our strategies, delighting our customers and taking share in any environment.

Simeon Gutman:

Focusing on housing. So housing metrics are decelerating much quicker than your comps or your comp stacks. Is this just a lag effect? I don’t know if this lag is longer than other lags or -- and Ted, you just made the case that maybe sales decouple from these metrics. I assume it’s temporary because of home equity, and we’re spending more time in our home, or are you suggesting that maybe it’s not temporary because we’re spending more time in our home?

Simeon Gutman:

That’s helpful. A follow-up on another very easy to forecast variable inflation. Can you frame maybe what percentage of your sales could be at risk from disinflation? Is it 100? Or it shouldn’t be 100 because some parts of your product mix aren’t going to be vulnerable?

Operator:

Our next question comes from the line of Chris Horvers with JP Morgan.

Ted Decker:

That’s -- yes, I think that’s a fair representation, Chris.

Ted Decker:

Well, I would say that the healthiest thing we see -- and as you can imagine, we look at every data set and by geography and category, et cetera. The healthiest thing about the business is the project nature of the demand. We are a project-oriented business and all the categories that Jeff called out that is driving that project demand remains incredibly strong. And we look at it with both our Pro customers, household Pros versus consumers, and that project demand remains strong with each of the Pro and the consumer. Some of the caution is -- and again, was it pull forward? Is it finally some price sensitivity on some of these whole good items? We’ve talked about certain appliance categories or grills. Those definitely have come off the boil. And again, as everyone has purchased in the last three years, a lot of those categories, and they’ve moved into more project and home improvement, or is there a reaction to inflation. That’s what’s a little harder to tease out. Here’s a case in point. You look at our indoor garden business, two big categories, you might say, are more discretionary grills and patio. Grills was down. But patio, we had one of the strongest patio quarters that I can remember. So, there are definitely some mixed signals. It’s definitely got our attention, and that’s why we’re cautious.

Jeff Kinnaird:

Look, we see some normalization back to 2019 in terms of the consumer trend. In the last couple of years, we’ve seen pull forward in concerns of supply chain-driven shortages across retail. So, we do see potentially just the return back to more normal holiday spend by the consumer. As I commented in our prepared remarks, we feel very good about our Black Friday, our gift center, our decorative holiday assortments, and we’re excited about the overall Black Friday season.

Operator:

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

Richard McPhail:

It was relatively minimal. So, we think we had about $120 million impact from hurricanes this quarter. But keep in mind, we were overlapping a similar amount from last year. So, these hurricanes and storm impacts extend across quarters. What we’re more concerned about is the health and safety of our customers and our associates. And our minds and hearts are certainly with them right now.

Jeff Kinnaird:

We’re managing margin closely, Steven. We look at it quarter-on-quarter. There’s a lot of ins and outs when it comes to margin as we look forward.

Operator:

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

Ted Decker:

Thanks for the question, Scot. Actually we couldn’t be more excited as we’ve identified a $450 billion addressable market. And an understanding of what capabilities we need to deliver to get a larger share of wallet with that large Pro repair remodeler. I’ve been here, as you may know, over 22 years, and we’ve always known what we needed to do to capture or share of wallet with that Pro. And what’s so exciting is that Hector and his team right now are actually building out the capability set to get more share of wallet with that large Pro. And as we build out these capabilities, introduce them to the customers, we’re seeing the engagement and the incrementality of sales growth take off. And Hector, could give us a little more insight of what your building would be great.

Scot Ciccarelli:

Is there a way to potentially size or at least for us to conceptually think about kind of what the potential revenue ramp is as these capabilities get filled out?

Ted Decker:

But I can say, I mean, we don’t break out these numbers, but each of Pro and consumer grew again this quarter, and the Pro yet again grew meaningfully faster than the consumer. And our large Pro, the ones who are engaging with what Hector and team are developing, are growing the fastest yet.

Chuck Grom:

Overall transaction is down a little over 4%. I was wondering if you could pack that for us across the Pro and DIY customer base.

Chuck Grom:

Okay. All right.

Chuck Grom:

Okay, makes sense. And then on the cost pressure front, as costs start to ease, how do you think about the pricing environment? Do you think you and peers are likely to hold on to prices as costs start to moderate and you retain that margin as a result, or are you likely to lower prices and try to maintain the same gross profit margin dollars?

Ted Decker:

But -- and on the cost side, Chuck, it’s definitely easing. So, you look at commodities, in particular, commodities have been down 6, 7 months in a row. Lumber is obviously way down from peaking at nearly $1,500 to now under $500 from peak to current during these last three years. However, we still see inflation across the store. So while some will be coming down in certain categories with costs and retails, our forecast at this point is that net inflationary cost pressures continue into 2023.

Brian Nagel:

So, my first question, I think I want to ask that -- Chuck’s question, maybe a little bit differently. But I mean, with regard to inflation, what we’ve seen now for a while as Home Depot has done a remarkable job kind of strategically passing along inflation. So Ted, you’ve mentioned a few times now you’re starting to see some inflationary pressures ease. I guess, the question I have is, are you seeing or would you expect that as inflationary pressures ease, even if pricing doesn’t necessarily slowly go down, you see some type of elasticity and demand meaning that unit demand would pick up in that type of environment?

Brian Nagel:

Got it. That’s very helpful. And then my follow-up and a quick one, just for Richard, you gave us like the cadence of comps through the quarter, obviously, we saw the reiteration of guidance, but any commentary more specific on just the trend of business here into Q4?

Operator:

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

Richard McPhail:

Zack, I may have to get you to repeat the second part of the question. On the first part of the question, look, we’re really pleased with our consumer business through the year. Q1, we had what we always refer to as bathtub effect in some respects. And so, we had a seasonal impact to consumer in Q1 of this year. Q2 and Q3 have both been positive, and we’re very happy with that business. Could you -- would you mind repeating the second part of your question?

Richard McPhail:

Well, I don’t think that there’s any way to conjecture that. I do think that what we love about this business is it’s all end customer demand regardless of the channel that appears through. But we are -- we don’t have a target Pro penetration for the business. And what we’ve seen through cycles is that, number one, we do very well with both. And you can see some fluctuation between the two. But really, what we have going right now is what we’re observing, which is the Pro business is leading the Company that shows us that the demand for large projects is very healthy right now.

Zach Fadem:

Got it. And when you think about your sixth straight quarter of transaction declines and the fact that there is a more stable repair and maintenance component of your business, to what extent do you believe we fully cycled away from all the pull-forward in excess discretionary category demand in 2020 and 2021? And when would you expect this to translate to a more normalized positive transaction cadence?

Operator:

Our next question comes from the line of Mike Baker with D.A. Davidson.

Jeff Kinnaird:

Mike, it’s Jeff. Yes, we’ve had an exceptional fourth quarter. We’ve -- in the past years, we’ve built the business on the backs of decorative holiday. And we are the customer’s advocate for value in that category, and we have great involution and again great value for our customers. Second, we’ve built the business of gifting in our gift centers. And you look at the innovation that we’re delivering to our Pro and to our consumer, it’s exceptional. I spoke earlier about the M18 Milwaukee drill/driver combo kit, the innovation is just exceptional, as Ted talked to earlier. And then appliances. Appliances is an enormous category for The Home Depot. It’s been a category that we’ve built at an incredible rate. We’re investing in capabilities like I spoke earlier, in terms of delivery. We’re investing in dot-com capabilities, in terms of our customers’ willingness to review and purchase online. Then, I’d also say we’re building a great project and business in the fourth quarter. The fourth quarter is a great time for a project. We see a lot of consumers eating, doing smaller projects around their home and getting ready for the holidays. And then finally, I’d say, storage. Storage organization. We have an incredible storage event. We gain on the customer’s advocate for value when it comes to storage across the business. And then finally, we’ve built an incredible dot-com business. And this is -- we called out the performance in Q3. We’re expecting a great Q4 with Cyber Monday and a big part of that is our digital performance, our app performance. I’ve got Jordan Broggi here, our President of online. Jordan, do you want to make a couple of comments around the app?

Mike Baker:

Great. If I could ask one more follow-up. Your buyback did slow a little bit this quarter. Is that maybe a function of higher borrowing costs, or how should we think about buybacks going forward? Thanks.

Operator:

Our next question comes from the line of David Bellinger with MKM Partners.

Jeff Kinnaird:

David, we had -- as I commented earlier, we had record sales, both in-store and online in Halloween that included the infamous Skelly, which has been one of our best sellers in terms of the innovation and value we offer our customers is really unmatched in the marketplace. And we couldn’t be happier with our Halloween performance. If I turn to the fourth quarter, we’re really excited about our decor holiday assortment. We’ve got great innovation and great value for our customers across the assortment, if it’s trees, if it’s lights, if it’s decorations, we feel very good about the category. And our consumers are reacting exceptionally well to it.

Richard McPhail:

Well, so look, investment in inventory and our One Supply Chain facility is certainly one of the factors in inventory growth year-over-year. But the primary factor is really just inflation as part of the inventory value. And then, we made strategic decisions to land inventory earlier in the year than we have prior. And really, just to give you some numbers around that and to reflect the fact, we feel fantastic about our inventory position. In Q2, we grew our inventory 38% year-over-year. In Q3, that number dropped to 27% year-over-year. And actually, if you look throughout our history, we actually typically build inventory from Q2 to Q3. In this case, our inventory actually came down by $400 million from Q2 to Q3. Our inventory is healthy, and we’re happy with our position.

Operator:

Our final question will come from the line of Steven Forbes with Guggenheim.

Ted Decker:

Yes. Steven, thanks. Yes, another great quarter for HD Supply. We mentioned this last quarter and they are just doing a terrific job. Shane O’Kelly and his team are running the largest and the best focused MRO business for multifamily housing and hospitality, extended living, et cetera. We are -- remain well ahead of all our financial projections, and we made the acquisition. Their integration is tracking, they’re integrating sales forces, customer records and now starting the work or on their way in the work of integrating the supply chain. So, that one has just been a terrific acquisition that we’re super happy about.

Richard McPhail:

Well, we don’t break HD Supply out. But as Ted said, we’re so happy with it. On the difference between sales and comp, we’ve always seen a gap there. It just comp reflect sales from the POS, sales reflects sales as they’re actually delivered or installed. You’re going to see that number there. We’ll probably -- through the year, sales will be a little higher than comp guide, but the important guide here is comp because that’s our activity-based metric around sales.

Isabel Janci:

Thank you, Christine, and thank you for joining us today. We look forward to speaking with you on our fourth quarter earnings call in February.

Isabel Janci:

Thank you, Christine and good morning, everyone. Welcome to Home Depot’s second quarter 2022 earnings call. Joining us on our call today are; Ted Decker, CEO and President; Jeff Kinnaird, 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 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 press 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.

Jeff Kinnaird:

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. As you heard from Ted, during the second quarter, we continued to see strong demand for home improvement projects and strong execution from our teams and supplier partners. Turning to our comp performance during the second quarter. All of our merchandising apartments posted positive comps. Building materials, plumbing, millwork, paint and hardware were all above the company average. Electrical, decor and storage, kitchen and bath, outdoor garden tools, appliances, indoor garden, lumber and flooring were positive, but below the company average. As you heard from Ted, while our seasonal businesses posted positive comps in the second quarter, they underperformed our expectations for the first half -- first half of the year, driven by categories like grills, fertilizers, chemicals and mowers. Keep in mind that we are up against very tough comparisons versus the last two years, and in these categories, when our customers focus on outdoor living and these are some of our best performing departments. During the second quarter, our comp average ticket increased 9% and comp transactions decreased 3.1%. The growth in our comp average ticket was driven primarily by inflation across our product categories, as well as demand for new and innovative products. On a three-year basis, both comp average ticket and comp transactions were healthy and positive. Deflation from core commodity categories negatively impacted our average ticket growth by 14 basis points during the second quarter, driven primarily by lower lumber prices. Big ticket comp transactions or those over $1,000 were up 11.6% compared to the second quarter of last year. We saw a big ticket strength across many Pro-heavy categories like pipe and fittings, gypsum and fasteners. During the second quarter, both Pro and DIY sales growth was positive, with Pro outpacing DIY. We're encouraged by the continued momentum we are seeing with our Pros and they tell us their backlogs remain healthy. During the quarter, we saw a robust project demand across the business. This can be seen in the double-digit comp performance of our building materials, plumbing and millwork departments as well as in certain project-related categories like fencing, siding, conduit boxes and fittings, tubs and showers and countertops. We continue to introduce new and innovative products aimed at simplifying the project, saving our Pros time and helping them take on more jobs. One example in building materials, where we launched nationally Henry's Tropi-Cool Roof Coatings. This new formula offers maximum reflectivity, helping reduce cooling costs. Henry's Tropi-Cool can be applied in any season, is 100% waterproof and rain-safe within 15 minutes of application. And this product is exclusive to the Home Depot in the big box channel. In bath, we're excited about the success we're having with our great assortment of Delta Tub & Shower wall combinations. Delta Classic 500 series is a simple tub or shower system that delivers a big transformation to a bathroom in a fraction of the time. It is easy to install and its acrylic surface makes it easy to clean. This series is exclusive to The Home Depot in the big box channel. Turning to our online sales. We are very pleased with the performance of our digital assets as we delivered the highest sales dollar volume in company history. Sales leveraging our digital platforms increased 12% during the second quarter. This was driven by our continued investments, which are resonating with our customers, enhanced search capabilities and improved Pro site experience and more robust fulfillment capabilities help drive online conversion. For those customers that chose to transact with us online during the second quarter, more than 50% of our online orders were fulfilled through our stores, a testament to the power of our interconnected retail strategy. As we look forward to the back half of the year, we remain committed to being our customers' advocate for value. Last quarter, we highlighted several new innovative products for our customers. This quarter, we're excited to announce the launch of Makita's new XGT 40-volt and 80-volt Max system of cordless equipment and tools in our outdoor power categories. The XGT system is engineered to achieve the optimum power required for heavier load applications without sacrificing run time. And these one-battery solution tools are exclusive to The Home Depot and the big box channel. We're also excited to build on the success of our Hubspace Smart Home platform, expanding our assortment across several categories such as door locks, lighting control, fixtures and ceiling fans. Hubspace makes it easier to set up and manage your smart home products and pairs well with voice-controlled operating systems. This platform is exclusive to The Home Depot. And in garage organization, we'll be rolling out our Milwaukee PACKOUT and RYOBI LINK wall systems, utilizing the same locking technology across the system that can be customized to meet your organizational needs from the workshop to the workplace. We're also 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. 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 upcoming weeks. With that, I'll turn the call over to Richard.

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 Michael Lasser with UBS. Please proceed with your question.

Ted Decker:

Hey good morning Michael. We have not seen that yet. In fact, with the strong performance this quarter, the variability across our regions has been the lowest in markets, has been the lowest that we've seen in some time. So we all appreciate the headlines and follow those very closely. But we have not seen anything in our business yet from macro housing.

Ted Decker:

Sure. And Michael we'll get to Dallas and Hector will take us through some of the things we're seeing with our Pro, which is incredibly strong. But what we're seeing overall in the business, the questions about housing and the economy, all very real questions, again, things we're following closely. But I mean we just couldn't feel better about our business. We just reported record quarterly sales and profits and reaffirmed our guidance, and that's on top of the $40 billion in growth in the past two years. We see a very engaged customer, each DIY and Pro. And as Richard said, though, we are operating in a unique environment with many cross currents inflation and interest rates and supply chain disruptions and the like. But given all that, our customer in our markets has been incredibly resilient. As Jeff said, project demand is incredibly strong. Our Pro in particular, is very strong and their backlog remains healthy. In DIY, we did see some seasonal weakness. But as we parse through that, it's difficult to say is that weakness in the seasonal businesses the overlap of the two prior incredibly strong years? Is it the weather where we had a really bad and late spring and then it turned incredibly hot across the country or are they fundamental demand pressures? Again, we have not seen a broad-based fundamental demand pressure in the business. So we couldn't be happier with the overall business, watching it very closely. And I can just say, as I said in my comments, Michael, whatever comes, we are an agile business, an experienced management team, and we look to take share in any environment. And Hector, if you can give some color on overall Pro and specifically Dallas would be great.

Michael Lasser:

Thank you very much and good luck.

Simeon Gutman:

Good morning, everyone. Hope you're good. I wanted to ask an oldie, but goodie on the reversion given the significant gains that have occurred post-COVID. One of the ways that we've been looking at it suggests that most of the unit reversion is basically in the base. So we've kind of rebaselined a significant part of the business in 2022 and that it opens the door to growing next year. I'm not asking for any endorsement on 2023, but curious how you're looking at this reversion question and anything interesting on units as you look at it?

Ted Decker:

And, Simeon, we've been watching, obviously, all those metrics in PCE and share on goods and share on services and clearly, the US consumer has reengaged in activities outside the house and travel is incredibly strong, right now, in eating out, in hospitality. So there has been the movement in PCE to services as we thought. But home improvement, in particular, has been, again, just incredibly strong, as Richard laid out, which led us to increase our guidance from what was essentially flat at the start of the year to the 3% we just affirmed. But we just don't -- we don't see a slowdown from that and remain incredibly bullish about the engagement level. It's really all the dynamic of the home improvement. Again, so many cross-currents in the economy, but when you think of the wealth that our core customers and their home equity up $9-odd billion, the excess savings rates, the strong jobs and earnings growth of wages and the fact that we're just continuing to spend more time at home in general, people are still super engaged in improving that home that they're spending more time in. So we're certainly benefiting from that longer-term dynamic.

Simeon Gutman:

Yes. And my follow-up, I think, Ted and Richard, you basically answered it. I was going to ask why you think the backlogs are still so healthy, because looking at the other high-ticket spending across the consumer complex, a lot of it is contracting and yet you're basically saying, we're not really seeing that or expecting it. I think it's partly the vibrancy of the housing market, to your point. I don't know if it's income cohort, but if there's anything else, because you mostly answered it in the response to the last question, but curious if there's more.

Simeon Gutman:

Thank you.

Scot Ciccarelli:

Good morning, guys. So at the sake of asking, I guess, a shorter-term question here, it's hard not to notice that July sales ticked up a couple of hundred basis points on a stack basis. And I guess I'm wondering, would you guys point to anything specific, be it weather, the slight easing we've seen in interest rates or gas prices? Any kind of color on that might be helpful.

Scot Ciccarelli:

Okay. That's helpful. And then just can you size the adverse impact on seasonal in the first half? Obviously, it came a little short of expectations. Is there a way to provide a magnitude of that for us?

Scot Ciccarelli:

Thanks, guys

Richard Mcphail:

Thank you.

Stephen Zaccone:

Good morning, guys. Thanks for taking my questions. Ted, I was just hoping we could revisit your comments about the macro backdrop. Are you concerned there could be a lag in the sense that demand could slow over time? Because in the past, you've looked at home price appreciation as a key factor for home improvement demand. You're concerned that home prices could stay flattish or potentially decline from here and does that alter your view on the demand outlook for the near to medium term?

Stephen Zaccone:

Great. Very helpful. Just a quick follow-up on inventory levels. Maybe how much is inventory up on a unit basis, if you could share. And do you feel like you're at the right level of in-stocks in the business now?

Stephen Zaccone:

Thanks very much. Best of luck in the back half.

Brian Nagel:

Hi. Good morning. Nice quarter, congratulations.

Brian Nagel:

So I have a couple of questions. First off, historically, having followed Home Depot now for a long time, your company has done a very good job so to say, understand the macro inputs and building a model and then forecasting your own sales off of that. So the question I have is -- this is somewhat, I know a follow-up on some of the prior questions. But as you -- with your models right now. I mean you look at the various variables out there, the various macro factors, is your business tracking consistent with where it should be, or you actually -- is there some type of break where you're actually performing better right now than the macro variables would dictate?

Ted Decker:

Yeah, Brian, if I can add to that, on, are there any parts of the business doing better than we expected. I mean, we truly are just thrilled with what we're doing with the Pro as Hector outlined. This Pro ecosystem that, we're building I mean, we are truly building a set of capabilities that is not seen in our marketplace. And in talking to our Pros and the research we did, they are more than comfortable to do more with Home Depot as we develop capabilities to serve their larger plan purchase. And Hector talked specifically about Dallas, but it's different parts of this Pro ecosystem come online, we have a number of one supply chain buildings now open in many large metro markets, we're starting to increase the size of the sales force, our quoting capabilities and integration of our B2B website, which I mentioned in my prepared remarks, all of this is really coming together to drive what is that incredibly strong Pro and larger Pro comp. So as we updated our TAM to $900 billion earlier this year with $450 million of that being in Pro, we just see tremendous opportunity. And I would say, yes, that is a category that we are outperforming and happy for it.

Jeff Kinnaird:

Brian, we are – we have higher average unit retail growth, and that's higher than inflation. So really not seeing any trade down, we've got strength in our ticket above $1,000 and that speaks to the project into the Pro customer. We will say in categories like grills, mowers, laundry and a few other bigger ticket items, it's possible there is a price sensitivity. But as Ted commented, there's COVID pull forward, there's stimulus effect. We went from a very wet and cold spring to a very hot summer in the majority of our markets. And the consumer is focusing on other projects. You think about that consumer has shifted. You think of the last year, it was all about the backyard. This year, it's about categories like paint and other large renovation categories, and we're seeing that across our business. Then I'll also say, we continue to see the consumer and the Pro trade up around innovation, and I couldn't be more proud of the merchants and our supplier partners and what we delivered around innovation for our customers. We've got a lot of products helping our Pros finish the job faster and simplifying the project for our consumer. So, no significant trade down taking place.

Operator:

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

A - :

Yeah. Chris, I will share with you that is the performance of our high spend Pro has been very consistent over the last several quarters. So we're very pleased to see that. We're seeing other areas of our Pro business as far as the customer size accelerate quarter-over-quarter. So we just feel really good. We spent a substantial amount of time with them talking about backlogs, and we feel very good about where they're positioned for the next couple of quarters.

Richard McPhail:

Our large Pros were the best performers this quarter. That's right, Chris.

Richard McPhail:

We're not going to break that out any further, but let's just say that demand is strong with the larger professional customer.

Ted Decker:

Well, Chris, that's a great question. And frankly, when we -- given the strong first half and the strong second quarter, to reaffirm guidance, which implies a lower comp in the second half, that's really the question for us. And frankly, we don't know the answer. We're super comfortable with Pro; that continues to motor on. But the question for the second half and the opportunity to do better than that implied comp is if the consumer hangs in there. As Jeff said, of the various potential reasons for seasonal relatively underperforming in the first half, if it's things more like weather, and having focus for so long in the backyard for two years if they went and did other things, go to the beach, et cetera. And then they get back in the fall and reengage, that will obviously be great news. But with these crosscurrents, we just haven't called that. And that's a little bit of conservatism in the second half.

Operator:

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

Jeff Kinnaird:

Chuck, good morning. Look, we are prepared for the continuation of the project customer when it comes to innovation and value. I point at Halloween and how we launched Halloween a few weeks ago and saw just great success in the early launch, and we'll set in stores in the upcoming weeks and look forward to that category performing. When it comes to the Pro, we'll be there in terms of innovation and job-lock quantities and leveraging our supply chain capabilities and the other capabilities that Hector spoke to. So planning the continuation of the project business, the Pro business, and we'll be there for our consumer when it comes to Labor Day, coming up in a few weeks. We've got a great program planned for Labor Day, as we move through Halloween, as we head in the Black Friday timeframe, we'll be there for our customers with great value. And we'll continue being the advocate for value for our customers.

Chuck Grom:

That's obviously good to hear. Just switching gears a little bit to the next couple of years. Just wondering if you guys can discuss the new facilities that you've opened up across the country and the benefits you're seeing, you touched on it in Dallas a little bit. But how much of a tailwind can that be over the next couple of years as you largely complete that rollout?

Ted Decker:

Chuck, you asked what do we think tailwinds are as we build this out and John mentioned, HD Supply is part of a pivot on what we were building for one supply chain. I'd like to -- I’ll just say that, we couldn't be happier with the HD Supply acquisition. Shane O'Kelly and his team are just doing a terrific job. That integration is going incredibly well on product catalog, on customers and sales force integration, and they are just off to a great start and that business is performing incredibly well. Remember, we put together the number one and two multifamily players and have a leading position in multifamily. And then with the supply acquisition picked up additional verticals in hospitality and healthcare, government, et cetera, all of them are doing incredibly well, and we couldn't be happier with HD Supply.

Operator:

Our next question comes from the line of Steven Forbes with Guggenheim. Please proceed with your question.

Jordan Broggi:

Thanks for the question. This is Jordan Broggi from the online team. We don't break those out. But what I would say is, we're super happy with our loyalty customers. They are outperforming the average and the customers that are logged into our B2B experience, online outperformed pretty significantly to customers on our consumer side. And Steve -- I'm sorry.

Steven Forbes:

And then -- and just a quick follow-up, maybe for Richard. I think Ted mentioned that 100% of the stores qualified for Success Sharing. Any color on how that payment compared to last year or, I guess, to the original plan for the year, as we think about the expense build?

Steven Forbes:

Thank you.

Mike Baker:

Hi, guys. So I just wanted to ask, a lot of moving parts, obviously, in the environment, but through it all, it looks like, at least according to your guidance, you guys are going to comp at about 3% with flattish operating margins. Is that the right way to think about the business longer-term? Is that where you sort of target the comp and the margin breakeven at about 3%, you'd be breakeven, something above that, maybe margins go up, et cetera. Just wondering about the long-term view.

Mike Baker:

And so if I could follow-up on that, what that sounds like to me, both of those comments leverage operating expenses, but focus on gross profit dollars. Is it fair to say, you're willing to let gross margins continue to tick down? I think they've been down something like six of the last 10 quarters in each of the last couple of years, not by much, just by 10 to 20 basis points a year. But is that the idea that we're okay with gross margins ticking down a little bit as long as it's driving comp and leveraging the SG&A?

Mike Baker:

Perfect. Makes sense. Thanks for the color.

Operator:

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

Hector Padilla:

Look, we're not going to break down the specific performance for Dallas. But again, I would tell you that Dallas has been towards the top of our performance when it comes to the Pro segment of our business. We're seeing just great reaction and engagement from our customers, and those who are trying our capabilities are repeating purchases with us and those baskets continue to grow. So, we're excited to continue to enhance the ecosystem. We just expanded,, for the second time, our outside sales resources and those team members are doing great or servicing our Pro customers. So, we're just very encouraged about what we're seeing in Dallas and other markets. But again, it's just -- it's early in the transformation, early in the build-out of the ecosystem but great signals coming back from our customers. And they really want to consolidate their purchases. When you think about our Pro customers coming to our stores over 60 times a year and then having to go to other retailers for complements of their projects, we can serve those needs to our Pro customers and they want to consolidate other purchases with us.