The Home Depot, Inc. (HD) Earnings Call Transcript & Summary

Everyone, thank you for joining us for our virtual lunch presentation. My name is Kate McShane. I'm the hardlines, broadlines analyst here at Goldman Sachs. It's my pleasure today to introduce the members of the management team from The Home Depot. Home Depot reported second quarter results recently with comps up over 23% with broad-based strength throughout the quarter. All months were over 20%, and every region comped double digits, and strong demand was carried through to the first 2 weeks of August with comps still at similar levels. 13 of 14 merchandise departments posted double-digit comps with DIY still outperforming, but Pro accelerating meaningfully versus Q1. We're very happy to introduce Craig Menear, CEO of the Home Depot; and Ted Decker, EVP of Merchandising. We're also joined by Isabel Janci, VP and Treasurer; as well as Tim Walsh and Lyndsey Burton from the Investor Relations team. Craig and Ted, thank you so much for joining us today.

Glad to be here, and thank you, Kate.

If we can maybe just level set and talk about the navigation of the current environment. As I mentioned in the opening comments, Home Depot sales grew over $7 billion in 1 quarter or 23%. And just keeping pace with that level of demand seems very, very tough and unprecedented. So I was hoping you could talk a little bit about how the company has navigated through some of the uncertainty over the last 6 months, how you pivoted to meet this demand and what are some of the bigger challenges you've overcome.

Sure. So Kate, thank you again for having us. To point, to grow $7 billion in the quarter was an interesting feat when you think $9 billion for the year. We started our thought process around 2020. We thought for the year, we'd grow somewhere in the $4 billion-ish range. So it is certainly presented its challenges, and then you layer COVID on top of that. And no doubt, it's put pressure in places. So when you think about the important elements is the complexity that it put into the supply chain, pushing that kind of volume, incremental volume through the supply chain, taking that all the way back into the vendor community, by the way, so there are raw material planning, efforts that needed to happen. Certainly, that has presented challenges. We'd like to be in a better in-stock position than we are today. We're down year-over-year, but we're gaining ground on that and improving as we sit here today. I think when you think about the tremendous growth in the digital space, having the flexibility to be able to adjust to handle that kind of volume, particularly the volume we're seeing, not only through the stores with BOPUS, but direct to customer, having the flexibility to adjust and deal with that volume was pretty important as well. We did that by shifting a fulfillment center that we had opened in the Chicago area that was going to be a market delivery center. In matter of a couple of weeks, we converted that temporarily to a direct fulfillment center, shipping product direct to customers from our dot-com business so that we could support the triple-digit growth.

Okay. And I guess within the last 6 months, we saw a real change in dynamic with regards to the DIY customer for a long time. We thought about the Pro customer as the bigger driver of growth for the home improvement industry. But this year, DIY is kind of leading the charge. And while some of this DIY might be driven primarily by people being home more, it does raise the question about whether we're going to see a new level of engagement with that customer. And whether taking on a project here and there during this time is sticky, and that will be behavior that you see for a longer period of time. So how are you thinking about the activity longer term from the DIY shopper? And is there any category that maybe you were under-invested that you can lean into a little bit more to take advantage of a longer-term trend?

Sure. I think I'd start with the Pro customer is always an important customer at the Home Depot, but we never lose sight of the fact that we have a $60 billion-ish DIY business that has been pretty important to the company for its 41-year existence. And so we're excited about seeing the engagement of the DIY customer in our space. And over the years, I've been asked a lot about what does this look like and the mix look like long term at The Home Depot with all this focus on the Pro customer, and my answer to that always is that today, we have kind of a 55-45 DIY mix. And at the end of the day, if we end up with an 80-20 Pro, we haven't really done our job because we want to grow the DIY business at the same time we're growing the Pro business, and that's been our focus all along. So we're super excited to see the engagement from the DIY customer. I think that customers have spent a lot of time around their home. They see a lot of things that they want to do. And at the same time, there's more wear and tear in the home. Our customers tell us from surveys that home is never more important than it is today. And so we're super excited about the opportunity that we see. Ted, I don't know if you want to comment on some of the category growth.

Yes. So the DIY business has clearly led over these past several months with COVID, and really all categories across the store have seen tremendous growth as we reported. In Q2, we had double-digit growth in 13 of our 14 departments, as you said. Bath was just shy of double digits. So the installation business has been are slower performing. We're starting to see Bath come back as customers get more comfortable having people in their home, in our Pros and permitting and the like to do larger installed businesses. But you talked about the engagement that we've seen with the DIY customer, and that is clearly a focus of ours to track that engagement and maintain that engagement into the future. There's so many good things going on in our segment with the DIY customer engaging. You've heard us talk a lot about Pro over the years and the things we're doing with Pro. But as Craig just said, DIY is the hallmark of the company and still the majority of sales, and we need to keep that business growing. And the engagement we're seeing with DIY customers and with the engagement in interconnected and digital, it's allowing us know that customer better than we have in the past. We've always known our Pro customer with much fewer number of customers driving that 45-odd percent of our Pro business. We have keyed up sales. We have a Pro loyalty program with lots of ways of that Pro customer. But the DIY customer had traditionally been sort of a mass anonymous. But with the advent of interconnected and digital, we have a lot more signals now that we can start to know the consumer customer to a much greater extent. So we've been working a lot on personalization in audiences. So if we might not know you to the individual, we certainly know you as a segment in an engagement model if you engage garden department more or you're painting or you're more of an interior project into core-oriented customer. Then we can get our whole marketing message and our whole product with the way we're going, new product as you enter our sites and engage with The Home Depot. There's just vast opportunity with COVID to increase that engagement. So as we build out abilities to track engagement, we like to see new customers. We like to see customers talk about that they shop in 1 aisle over, they shop in 2 aisles over. The engagement projects? How many items per basket, per transaction? Are they purchasing with Home Depot? We'd like to and are now increasingly capable of tracking their use of the capabilities we're building out. One of the big strategic reasons behind our change in our marketing tagline to How Doers Get More Done, Home Depot has always been known for product authority and know-how. So we helped the generation of time Baby Boomers engage in DIY and gain that confidence of that first project, the second project, increasing the scope of what type of projects they were working on. So now as we build out more capabilities digitally, we wanted to signal that with How Doers Get More Done. So we have our app and we have planning tools and we have project tools and calculators and wayfinding so you can pinpoint exactly where in the store your product is located or buy online, pick up in store; buy online deliver from store; buy online, have the product put in a locker for pickup. So all these capabilities that we're building, we're also able to track the engagement level. And as you can imagine, as people start to engage with more capabilities, as they start to shop 1 and 2 aisles over, as they start to gain the same confidence of the newer DIYer that is the millennials launched on their journey, we're starting to see that same behavior as the Baby Boomer back 30 and 40 years ago. And as they engage, their spend and share of wallet goes up with The Home Depot. So huge opportunity, as you said, with this new great number of customers and their increased engagement with The Home Depot.

That's helpful. I wanted to ask just in the same context of category drivers. Before the pandemic, you had cited quite often the amount of innovation that was coming to your different merchandising categories. And just with such a wide assortment of SKUs that you carry, it's a little tough for us to totally fully appreciate, I think, how much innovation really is taking place. So I wondered if you could maybe talk a little bit more recently about some of the innovation that you're seeing from your vendors. What new trends do you think can emerge post the last 6 months in terms of what you've seen demand for innovation? And I assume innovation means people are trading up, so if you can comment on that as well.

Let me make one comment around innovation in general, and then I'll give it to Ted to give you the specifics. So when you think about innovation and what the merchants are focused at, at Home Depot, it is how do you bring product to market that makes it easier for the consumer to be able to do a project and/or how do you bring a product to market that allows the Pro to be more efficient and gives them confidence in no callbacks, and that innovation is hugely important in the business.

So in -- product authority is what we stand for in merchandising at Home Depot, and innovation is the hallmark of that. So we're working with our supplier partners, customer back, deep into their product development of what should we be focused on in innovation. And it really goes across the whole store. You've heard us talk a lot lately about cordless battery technology in power tools. That is now exploding in outdoor power equipment, so categories that were exclusively gas for decades and decades are quickly shifting to cordless technology. The lineup of product that we have coming in our outdoor -- and we have great product now, but the lineup of products that we have coming in the spring of 2021, what you were going to be able to do in terms of size of job and run time and power of cordless technology and outdoor power equipment is incredible. But this type of innovation is really across the store. I mean it goes through building materials into core categories, certainly appliances. We just -- I mean something you might not get that excited about, but we do at Home Depot, we just reset our entire grout bay. And we have an exclusive relationship with custom building products, which is by far the largest share in the category, and they've just come up with an incredible array of floor levelers, large-format tile, quick adhesion grouts that are ANSI-approved for dust emissions, which is required for nursing homes and hospitals, premixed grout for either a quick job for a DIY or making a job easier for a Pro. We have color consistency, all at great value. So we just finished resetting our entire grout and tile set material bay over the last several weeks. The performance is incredible. So again, something you won't think a lot about innovation in tile set material, but it really is remarkable, all the new product that came in that reset.

One question that we got a little bit before the pandemic but certainly has become more prevalent is the changing in migration or population, and you're seeing big cities like New York City and San Francisco being impacted by people moving to the suburbs or just moving away. But I was wondering what you were seeing in your business currently. I know there was some dynamic in the first quarter. It seems to even out in the second quarter. But longer term, how do you think about some of these population trends and how your stores are positioned in urban versus suburban markets?

So I'd say first comment would be we're actually thrilled with our overall footprint that we have throughout the country. It's interesting because there's a lot of talk and a lot of dynamics. And it takes me back to 2015 and earlier when there's a lot of conversation around the fact that, gosh, the whole millennial generation, everybody is going to move to inner cities and the millennials were never going to own anything, they were only going to rent, they would never have a car, they would never have a tool. That's what we heard through all of this. And our research that we did, deep research in 2015 indicated that none of that was actually actual based on the research that we had with the millennial generation and that they would, in fact, act the same way other generations had. It was just a delayed cycle. And we're actually seeing that play out, by the way. So as a millennial generation got married, kids come along, you need more space. They move from the city centers to a more suburban environment, and they need more space. It's more affordable. We are actually really pleased with the overall footprint, and we think that, that plays out pretty much the same going forward. Will there be movement from the city centers? Of course. That's what our research said was going to happen in 2015. And so when you think about what we're doing right now, we've actually been able to finally, after sometimes a decade-long effort to secure new sites in urban centers to take pressure off of really high-volume stores, we've been able to open a few of those. And we'll continue to look for those kind of opportunities. But migration is something that we always deal with in that we always will adjust footprint accordingly in given markets when you see migration happening whether that's in or out. That's just part of what you have to do as a retailer.

Craig, I think we lost your sound. Oh.

Can you hear me?

I can hear you now.

Okay. Yes, Kate, the last comment I was making was migration and making sure that you're covering footprints with stores where it needs to be is something that you always deal with as a retailer, right? Again, opening stores to try to take pressure off a high volume in big urban markets or doing infills in a suburban market that might be growing more rapidly today than what it was 10 years ago. Those are things that you just naturally do as retailers.

Okay. Maybe if I could pivot to the competitive landscape. Just given the fragmentation of the home improvement market, it is difficult to have a sense of exactly what's happening with independents and smaller players. We wonder if you could give us a sense on how the pandemic maybe has affected some of the smaller players. Is it something in which you maybe saw an opportunity for more consolidation, and now you've had almost a second breath of life because demand has been so strong for home improvement? And how do you think about that longer term?

Two comments there. We've shared in the past that when you aggregate up independents in pretty much any category that we play in, they own the lion's share of the market. And so that's always an opportunity. And part of what we're investing in to create this interconnected experience, hopefully, will give us an edge to be able to gain share and grow faster than the market. Second comment that I'd have is, look, when you look at independents and independents that came through 2008, 2009, 2010, right, those are really good business operators. People that survived that environment, people that will survive this COVID environment are really good operators that you have to gain a lot of respect for. And so there's always going to be independents and competition, but we're investing to position The Home Depot to grow faster than the market in any environment that we get thrown into, whether it's good or whether it's bad, and that's really what we're trying to get done.

And then if I could ask about pricing and promotions. I'm sorry, Craig, if I'm talking over you. There's just a little bit of a delay. I'm sorry.

No, you're fine.

Okay. If I could ask about pricing and promotions, if demand remains very strong, is there a possibility that you could see a further pullback on promotions in the back half of the year?

Well, that's something that we have tried to approach the business from an everyday low-price approach. Events have always been part of how you drive excitement, and I'll let Ted address that. Yes, there's definitely changes.

Yes. So again, we always strive to be everyday low price. We do have events to create excitement. It's as much to [indiscernible], whether it's our spring sets and patio sets, it's our decorative holiday or our gift center in a lot of our tool categories. So it's as much to bring the excitement of the product in new product innovation to life. But certainly, we have special buys where we worked with our supplier partners to bring in product specific to that event at specifically sharper prices. We price as much as possible not to simply have a lot of percent offs to signal an event under our categories such as appliances that is hard to get away from a percent-off gain, but we are always looking to move our events more product-centric and excitement and seasonal relevance-centric than percent off. And what this environment has really forced us to do are a number of things because we're trying to put safety first and foremost and encourage social distancing in our store. We tried to limit the amount of product we're putting down in the walkways of the store. So we work with our supplier partners to really focus on key items, larger and deeper buys that get even better values on key products, leveraging our end caps in our swing areas more than the racetrack of our store and by winnowing down the number of SKUs that's allowed us do that to promote social distancing and safety. The other thing we're doing is we're expanding the time frame. So you think of a Black Friday, while we're not as big traditionally as a Black Friday player as some other retailers, we've built up quite amount of business and foot traffic and excitement around Black Friday. We'll try to limit that single day focus, and you'll see us having that product and those values over a much longer period of time. There'll be a few things that we do on Black Friday, but things like have to come to the store this specific period of time, very short quantities. We just think today that, that might not be as responsible from a safety perspective as it could be. So we'll still have events. We'll still have great innovative product. We'll still have great values. They'll just be shown over a longer period of time and an opportunity to really leverage their interconnected experience. So all these are available online as well for ship to home or buy online and pick up in store. So we'll have events, just slightly different going forward.

And when it does come to holiday and positioning around holiday, as we kind of emerge from the March and April time frame, was that enough time to pivot or to chase some inventory for categories in which you think will be more important for holiday as it became more clear that people wouldn't be traveling, maybe staying home, maybe focused more on home decor?

One of the learnings we've had over the years from storm situations, in the earlier days, we used to think about if a storm hit in a particular area, that we would go in and extract like holiday decor from those markets, thinking that the customer, that's not what their mindset was going to be. And what we learned over the years is actually, it's exactly where their head is. They want some form of normalcy in their life, and so they actually focus in that area. So we didn't really hold back our thought process around the events in Q4 as it relates to holiday because we suspected that the customer would react in the same way that they do in a storm situation and that they want that kind of normalcy overall. So we're prepared for the...

Yes.

Fourth quarter holiday events.

Okay. I'm just going to pivot my questions to costs. You're still in the midst of a multiyear investment plan, and we're just wondering if this year's surge in activity led to any big changes in the timing of what you'll be rolling out with regards to your supply chain investments or your store remodel investments, et cetera.