Home Depot Executive Insights: Margin Opportunities, Science & Math

On Tuesday, Home Depot, Inc. (NYSE:HD) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Margin Opportunities

Gary Balter – Credit Suisse: Just one question and just a follow-up. Your current guidance (provides) to about a 10% operating margin and that’s with no strong – with nothing really in the housing market as you mentioned and just the beginning of the contract business coming back. In a stronger market, as you look at your – what you have done internally, what type of margin assumptions, where do you think you could get to?

A Closer Look: Home Depot Earnings Cheat Sheet>>

Carol B. Tome – EVP, Corporate Services and CFO: Well, Gary, we have an Investor Conference coming up on June 6th…

Gary Balter – Credit Suisse: Am I going to (indiscernible).

Carol B. Tome – EVP, Corporate Services and CFO: Thank you for teeing it up for us actually. We will talk about our longer-term margin opportunities. We are not stopping at 10%. We have an opportunity we believe to grow our margins. If you remember, our peak margin back in 2005 was 11.8%. We will give you a lot more color on June 6th.

Gary Balter – Credit Suisse: Could you talk about share gains this quarter? Your comps were much stronger than one of your competitor’s. The other one obviously hasn’t reported. What do you think you did in terms of market share for different categories?

Frank Blake – Chairman and CEO: So Gary, we look at share two different ways. We obviously look at the census data from Nyack’s. That would actually indicate that we lost share. Although there are companies in there that, much smaller base that had huge gains, which affects the number. Then when we look at the consumer side of independent tracking, which doesn’t include our pro business, we gained in four departments out of our total; that would’ve been lighting, lawn and garden, kitchens, and millwork. When we try to triangulate the data working with our suppliers, we do feel that we are gaining share in a number of our business categories, but those two indicators are what they are.

Session 2:

Colin McGranahan – Bernstein: Wondered about pull forward in demand. This is going to be a little confusing, but if I look at the fourth quarter your 5.7% comp, I think at that point you said weather was a benefit of 200 to 250 basis points, and I may be getting a little too nuanced here, but if I were to back that out, I’d say the fourth quarter weather adjusted comp then was maybe 3.2% to 3.7%. If I look at this quarter, you comped at 5.9% and said 300 basis points. So again, little nuance, but backing it out would suggest a 2.9% weather-adjusted comp. So I guess my first question is, is that reasonable and do you think the underlying business actually decelerated by something about 50 basis points or so?

Frank Blake – Chairman and CEO: Well, these are – it’s an art as much of a science in terms of what weather impacted, and obviously for us the fourth quarter is a little bit anomalous because it’s our lowest volume and heavily driven by how we perform on the seasonal holiday which was very strong for us in the fourth quarter. I would tell you, it didn’t feel like the business decelerated, but weather – I mean as Craig mentioned, and Marvin’s here for the store side, boy, our stores were very, very busy and we had huge transaction growth in the first quarter. So, I understand your point Colin on weather-adjusted, did we decelerate but I would say it didn’t feel like that.

Colin McGranahan – Bernstein: That’s fair, and again, I know it was a very nuance kind of thing, just trying to make a little bit more science out of it that probably is worthwhile, but then if I think about the pull forward of demand, I guess my second question is, how do you measure that? How comfortable do you get with that 80 to 100 basis point estimate? And if that’s the right number, should we think about this quarter being something around a 3 comp, the first quarter being something around a 3 comp on a weather-adjusted basis and then back out 80 to 100 to think about 2Q comps, something more like in the 2% range?

Carol B. Tome – EVP, Corporate Services and CFO: Well, let me just share with you the math behind or the science behind the art, because we do try to apply some science. We will take five years of garden business, looking at the relationship between the first and second quarter. We’ll come up with a ratio that then we regress against the first quarter results, which will give us a factor to apply against the second quarter projected sales against our plan and that’s how we determine what we have pulled forward. Again, 80 to 100 basis points of our total comp growth pull forward, that’s about $120 million to $150 million. We then, Colin, do an eyeball test and we look at the categories where we saw the sales growth that would be one-time categories, be it our riding lawn tractor or walk-behind mowers that sort of thing where typically you’re only going to buy it once in the season to give us some comfort that our math is more or less correct. Craig is just asking me to make sure it’s clear that when we say weather impacted of 300, the 80 to 100 is in that 300 number.

Craig Menear – EVP, Merchandising: Correct, it’s not additive.

Colin McGranahan – Bernstein: And then my follow-up question, Carol, while it got you here just on OpEx, you said you were within $8 million of the plan from the beginning of the quarter. It seems like obviously you probably hadn’t planned for comps this strong. So were you able to just deal with the labor as it was because the productivity is so much better or did you add labor as sales picked up and found other places to take out?

Carol B. Tome – EVP, Corporate Services and CFO: Well, we leveraged payroll in the first quarter, but the stores did an awesome job of staffing up to meet these sales demand. Marvin, you might want to comment on that.

Marvin Ellison – EVP, U.S. Stores: Yeah, Colin, we put in a new labor system, scheduling system last year. It was part of our 60-40 initiative work with Matt and his team to get this in place. It was a big undertaking, but it really paid dividends this quarter because we are able to have our labor meet our sales demand and schedule and forecast to that in a more effective manner. For the first time, our store managers were able to track their labor versus their sales performance on a daily basis. We’ve never been able to do that before. So that enabled us not only to meet the demand but also to make the right investments in departments like live goods where for the first time we actually experienced a customer service score increase in the live goods area doing (season). Typically for us, Q1 we take a really big decline in service scores in that seasonal area. So we made a labor investment based on the new system and we actually saw improved sale as the numbers reflect, but in addition we saw improved customer service score. So, we feel good about the process and we feel good about the leverage we are able to create because the leverage was created on top of increased sales and on top of increased customer service scores.