Home Depot Earnings Call Insights: Sales Outlook For H2 and Second-Look Program

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

Sales Outlook For H2

Gary Balter – Credit Suisse: Carol, just following up on your comments near the end, you sounded more confident. What causes – obviously the results should cause that confidence, but what causes that confidence going forward? What do you think competitively in terms of pricing or anything on those lines as gross margin look solid given this shift in mix?

Carol B. Tome – EVP, Corporate Services and CFO: We look at a number of factors, both internal and external to arrive at a point of view as to how our sales will perform in the back half of the year coming off obviously a very strong first half of the year. The best thing we can look at are current trends, and I will tell you the current trend of the business is good; sales are quite brisk. Now competitively, Craig, you might want to comment.

Craig Menear – EVP, Merchandising: Yeah, Gary, from a competitive standpoint, we saw the last quarter that we just exited here, pretty comparable. Most folks went hard after the seasonal business given the late start to the business and certainly in big ticket; it appears we still need to stimulate the customer to buy, but not a radical change and, kind of, would expect that going forward.

Gary Balter – Credit Suisse: There’s been a lot of talk – and then I’ll get off the phone – there’s been a lot of talk of interest rates rising and the impact that could have on housing and you guys et cetera, what are your thoughts on where we are?

Carol B. Tome – EVP, Corporate Services and CFO: Well, as you know, 30-year mortgage rates are up. They are at the highest-rates that they’ve been since October of 2011 at about 4.4%. The affordability index is still at a historical high, Gary. So if the rates were to move up, it would impede that affordability index, but we’ve got a long way to go before it should have a dramatic impact we believe for mortgage availability or the attractiveness to a consumer or homeowner to take out a mortgage. All that being said, however, we’re watching it.

Second-Look Program

Dan Binder – Jefferies & Co.: I was wondering if you could comment on two things. One, on sort of the bigger ticket project business what you are seeing, and kitchen and bath in particular, and then also if you could comment on credit availability. I know you guys had started doing that second-look program. Any color around that?

Craig Menear – EVP, Merchandising: Dan, on the big ticket, we did see very nice strength in tickets above $900 growing at 15.5% in the quarter. That was largely driven with appliances; things like riding mowers which were strong throughout the quarter. We saw flooring projects as well as our kitchen business, all contributed to that. And then certainly the continued strength of our pro business, which carries a higher average ticket overall, helped that as well.

Carol B. Tome – EVP, Corporate Services and CFO: On the credit front, during the quarter, we opened 1.4 million new private label credit card accounts, so we were very pleased with that. The penetration of our private label card grew 44 basis points in the quarter, now standing at 22.6%, so that’s the good news too. We also saw an increase in bank card. So it appears that consumers are willing to use our bank cards, our bank card penetration up 30 basis points year-on-year. If you look at what’s going on within our private label portfolio, we see consumer approval rate hovering around 68%. That’s good news too, because as you know, they were dropping as a result of some of the changes coming out of Durbin, but now we see it hovering around 68%. The average line approved is $5,800. That’s up $200 year-on-year at a FICO at about (716). On the commercial front, the average approval rate there is 70%; the line approved is $6,800, that’s also up $200 year-on-year. We are coming behind our pro customers because they are so very important. Either with second-look programs or we work with the underwriter to extend the credit lines on a case-by-case basis. So credit obviously is an important part. It’s not the entire story here but it’s certainly part of the story.

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