Home Depot Earnings Call Insights: REO Turnkey Program and PayPal Test Results

Home Depot (NYSE:HD) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

REO Turnkey Program

Dennis McGill – Zelman & Associates: I guess first question, Carol, I think it was a couple years ago. You had mentioned an REO turnkey program for banks on the foreclosure side, and I think that business is probably still growing and you’ve got an emergence of single-family rental companies out there as well that are going to be a little bit more institutionalize than maybe national. Can you just talk big picture kind of what that program looks like today and how you guys are thinking about maybe agreements that could get you into the maintenance side on the single-family part of the business on the rental side?

Carol B. Tome – EVP, Corporate Services and CFO: I’ll start and Marvin maybe you want to kick in, we are pleased with this business. On a relative basis, Dennis, it’s pretty small for us, but we are seeing nice growth and we will continue to use our services organization to expand this across the country. What we are more excited about actually is what Frank’s commented on is the strength in our pro-business and REO would not be inside of that pro-business necessarily, but we are really excited in that regard. Marvin any color you want to add?

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Marvin Ellison – EVP, U.S. Stores: Dennis, the only thing I’ll add is as you know the business is shifting from traditional foreclosures with banks to private equity funds going in purchasing of groups of properties. So, we’re shifting and adjusting, but I think Carol’s point is most important. This is the small business. It’s something that we are very interested in. We think that we have unique competencies with our pro-business, with the products we sell and our key is really two things, leveraging our GC network that we have because we are in the services business and the pro-business, but also leveraging product pull-through. We want those customers to come to our stores to buy products and those products to be the fixtures, the faucets, the plumbing supplies, et cetera that we put in those homes from a remodel and from a maintenance standpoint. So, so far so good, but it is a relatively small business.

Dennis McGill – Zelman & Associates: Roughly how big would that be too?

Carol B. Tome – EVP, Corporate Services and CFO: We haven’t disclosed that, Dennis…

Dennis McGill – Zelman & Associates: Second question, as you talked about double-digit comps in California for the quarter, can you maybe go into a little bit of detail as far as categories that you see driving that performance? And then maybe Frank, just big picture how you think about that maybe being a lean indicator to other parts of the country as home price inflation gains momentum as well?

Frank Blake – Chairman and CEO: Well, let me take the latter first, Dennis. What we’ve seen over the last several quarters is some of our most hard hit markets, the markets that were really ground zero of the housing collapse recover and that’s California, Florida, moving into Arizona, now even in Las Vegas and Nevada. So, it’s really part of how badly those markets suffered previously and now starting to return to more normal performance. I’d like Craig and Marvin comment, but I’m not aware of any particular differences in terms of what’s being sold in those markets. We’re really selling across the store there.

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Craig Menear – EVP, Merchandising: Yeah, it really is broad-based when you look at virtually every department we have, all posted positive growth in the California area. So, we’re very, very pleased that it’s a broad-based sales pattern.

Carol B. Tome – EVP, Corporate Services and CFO: It is that saying, the rising tide lifts all boats the entire business is lifting.

Craig Menear – EVP, Merchandising: Correct.

Dennis McGill – Zelman & Associates: Pretty bullish. Thanks guys.

PayPal Test Results

Gary Balter – Credit Suisse: Just two questions. One is, could you talk about, you’ve been doing these different tests with PayPal and other ways of servicing the customer from a payment point of view. Could you just discuss where you’re going with that and what’s been the results of some of the tests and what are you rolling out et cetera?

Carol B. Tome – EVP, Corporate Services and CFO: On the PayPal front, we are very pleased with the year-over-year performance. It actually doubled in penetration. But Gary, it’s very, very small. We brought PayPal into our business because our customers wanted to use that as a form of tender and so we’re delighted to have the relationship with them. As we look ahead, we’ve got our eyes wide open as to what may be available to retailers from a mobile wallet perspective and there are a number of things that are being talked about. As you know, there’s a consortium of retailers. We are not part of that consortium, but we are watching what they are doing – that’s MCS – we’re watching what they’re doing. Obviously, we’re watching what Google is doing. There’s announcement today about Google. So, we’re eyes wide open. We want to be with where the customer is going. We don’t necessarily want to lead the way.

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Gary Balter – Credit Suisse: And Lowe’s being part of that consortium doesn’t really impact your decisions or anything.

Carol B. Tome – EVP, Corporate Services and CFO: Eyes wide open. We want to do the right thing for our customers.

Gary Balter – Credit Suisse: And the second question, your productivity now by (indiscernible) calculation (we saw) was about $326 per square foot. You’ve peaked out about $100 higher back in the good old days and just comping in the high-singles you’re going to get near there. As you look at your staffing in the stores and the way the stores are set, do you feel like you could – the capacity is fine for getting up to those levels or do you feel that may be you’ll start stretching your stores again and you have to start changing the way you come to market a little bit?

Carol B. Tome – EVP, Corporate Services and CFO: Well, it really depends on the nature of the sales growth. As you know, we forecast sales growth 50% coming from transactions, 50% coming from ticket growth. As you saw in the first quarter, our growth came from ticket growth. That hasn’t impacted on our staffing model, because it’s an activity based staffing model. But Marvin, you’ve got tons of flexibility to do what you need to do to serve the customer.

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Marvin Ellison – EVP, U.S. Stores: Yeah, Gary, we do in fact. If you go back to the old 60-40 initiative, over the last four years, we’ve reinvested roughly 500 hours per store per week back to the stores for service and that’s the reallocation, not an incremental add. So, that’s really allowed us to continue to sustain a service level while making sure that we respond to the needs of the business, but I think Carol’s point is very key and that is we have an activity-based system, driven by transactions and ticket. So, where sales are picking up, our staffing has increased. We think we’ll be in a perfect position to keep up with the trends. We work hand-in-hand with Craig’s team. So, as we forecast events, new product introductions, we will adjust our staffing to make sure we have customers served in a most appropriate way. So, we feel really good about the future and how we can keep up with the business.

Frank Blake – Chairman and CEO: Gary, the one other point I’d add to that on the store, we’re pleased with the size of our store. We don’t see a need to substantially remodel our stores or expand them, but one thing that we’re dealing with between Marvin and our supply chain team is buy online, pickup in store and buy online ship to store and buy online ship to store particularly that we’ve had some pretty good customer interest in that, and so we are thinking about how do we segment parts of the store to more efficiently serve that customer who is coming in and has bought online and just wants to pick it up in the store. So, Marvin and his team are working on, gee, what would we do with the store layout, but that’s a slight alteration. It’s not a remodel.

Carol B. Tome – EVP, Corporate Services and CFO: It’s a really interesting statistic. If you look at the first quarter, 22% of the sales placed online were actually picked up in the store and 10% of those were BOSS related, buy online ship to store related, isn’t that interesting?

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