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

Good afternoon, everybody. Thank you for joining us virtually at Raymond James 42nd Annual Institutional Investor Conference. For those that I have not had the chance to meet, I'm Bobby Griffin and cover consumer hard lines and retail here at Raymond James. This afternoon, I'm pleased to introduce Ted Decker, President and Chief Operating Officer of The Home Depot. Also in attendance virtually from Home Depot are Jeff Kinnaird, EV of Merchandising; and Isabel Janci, VP of Investor Relations and Treasurer. Ted, first, thank you for joining us. We appreciate the support, and I must say I'm pretty excited to be covering Home Depot again.

That's great. Thanks for having us, Bobby, and we're thrilled to be here, and congratulations to you and Raymond James. I guess this is, what, your 42nd of the or just sort...

Ted, we might have lost you. Can you still hear us? We might -- Isabel, maybe we'll just go -- we'll dive in and go to you and Jeff kind of for this. And as Ted rejoins, we can throw them back into the Q&A once he gets back in.

Okay. Sounds good.

Yes, absolutely.

So I think where Ted was going, Bobby, was just a congratulations on your 42nd event, and we're thrilled to be here. And there is Ted now.

Absolutely. All right. We're back.

Yes. Sorry.

No worries.

Like I said, sorry, we're not there in person. We wouldn't have phones dying and we were reflecting when we chatted yesterday. I think this was all our last trip to be down Orlando with you. So -- sorry about that.

Absolutely. No worries. Next year, I do look forward to doing it back in person, hopefully, and it will go a little easier.

So -- but maybe just -- we're going to get started, to get us kicked off, you guys just released a great fiscal fourth quarter. Maybe you can just talk a little bit about what you're seeing from the customer growth in certain product categories, price points, anything like that kind of get this conversation kicked off.

Sure. No, we're really just thrilled with 2020. It was a great year for The Home Depot. And it really got stronger as the year went on. Our fourth quarter was the strongest quarter. But beyond the fourth quarter being so strong, it was remarkably consistent. So we've had 9 months now that the past 3 quarters, that's more or less 25-odd percent comp, grew the business over $21 billion. It was a remarkable mix of ticket and transaction, the consistency of about 10% ticket and 13-odd percent transaction growth across the year. Our Consumer stayed strong throughout the entire period. Our Pros, as we know, when there's some job sites shutdown earlier part of the pandemic, took a bit of a hit, but those Pros have recovered month by month. We've seen strength in the Pro customers as the year progressed. They exited the fourth quarter the strongest. We've seen that customer. We understand our consumers are engaged and have backlogs to continue working on their homes. And our Pros order books, they're telling us, are as strong as they've been all year as they've gotten stronger all year. So we just had a great year and ended on a strong note and look forward to that continuing into 2021.

Yes. And yes, and going off of that a little bit. Clearly, demand has been incredible. But how do you think the pandemic has changed the competitive environment moving forward, ex out the demand side of it, but basically, your positioning, maybe even some of the investments of the One Home Depot strategy and kind of the ability to take market share, which Home Depot has done pretty consistently over the last 5, 6, probably decade, if we go back.

So yes, Bobby, that's something that we always look to be able to do is take share profitably in any demand environment and drive productivity and increasing returns for our shareholders. And with the investments we made, recall 3 years ago, at the end of 2017, we set out a 3-year accelerated investment strategy. We certainly didn't appreciate that the pandemic would hit, but we did appreciate that customer expectations were changing and expectations were getting higher and customers were looking very much for an interconnected shopping experience. So you have to offer a terrific in-store experience for the customer, but increasingly, our customers, each of our Pro and our Consumer customers often start their shopping journeys online. A Pro can be looking at inventory levels, can be looking at price points or specifications of a product. Our Consumers can be looking for inspiration, can be looking to what's the right type product to satisfy either the problem they're trying to solve or the opportunity, the improvement that they're trying to enhance their home. And we know that, in some cases, the Pro and Consumer will go to the store, they'll get things delivered, they'll get things installed. They'll pick things up using things like curbside or blockers to pick up smaller parcel-type items, they'll get things delivered on flatbed. They'll get things delivered, parcel more traditionally with like the likes of UPS or FedEx. And that's really what we had invested in over the prior 3 years. Digital engagement, whether it's our app or mobile web or desktop. We knew traffic had been growing and exploded last year. So the fact that we had been ahead of the game there, investing in all those capabilities, we were able to hit this really just unbelievable traffic flow that's gone on in the business the last 9 months.

Okay. Maybe let's dive in a little bit to the Pro business. Another question we've been getting and trying ourselves wrap our head around to is, somehow we're thinking about the backlog in the Pro. So from a high level, at least my point of view, it seems almost impossible to everybody that wanted to get something done in their house this year could get it done with the pandemic and things like that. So maybe just first, you guys talk to your Pro customer an awful lot. What are you hearing about their availability for demand and their request for jobs or anything like that to help put the backlog into context?

Well, the Pro, as I said, got hit early from the pandemic. Some states shutdown up sites. People didn't want pros into their homes, et cetera. And as that's eased, the Pro got busier as the year went on. And we have lots of engagement with Pros and focus groups and contacts with our Pros. They're all extremely busy. They all point to large and increasing backlogs. They would tell you that the biggest issue they would have is labor at this point. They have more jobs than they can get done. And if they had more crews, if they could get more skilled labor, they'd be able to put more folks into their projects. But the background is very healthy. We see it in our numbers. We see the recovery of both what we call the smaller Pro and the larger Pro. And we know that the consumer is still engaging as well and some people are more apt to do it themselves. And we love that a healthy consumer business at 55% of our sales are DIY-oriented. We also like a healthy Pro and people that like things done for them, and that equates to the 45% of our business that we call our Pro. So both channels are very healthy right now.

Okay. And maybe another big development in 2021 was the closing of HD Supply. So I guess a few questions kind of to switch over to that. But what are some of the initial integrations you and the rest of the leadership team would like to accomplish here in the first year now that the acquisition is closed?

Well, let me first say, we're just thrilled to have HD Supply back in the Home Depot fold. This was one of our first entries into non store-based Pro. We think the MRO, the maintenance repair and operating Pro, who is servicing, we call it, livable spaces so think multifamily housing, think senior living, hotels, hospitals, et cetera, is a very close adjacent category for us. It was a business we've always loved, we loved it so much that we acquired Interline Brands when we sold off HD Supply, and included in that was the legacy maintenance warehouse, the MRO business. So just getting this business back, which is clearly the #1 business in the $55 billion MRO space. We had acquired the #2 business, Interline brands. Again, we like that space so much. Now having the #1 and #2 players in this $55 billion space, combined were 10-ish share, and there's really -- I don't think there's another player specifically focused on multifamily that even has 1% share. So we have an unmatched capability set in terms of customer list, in terms of product catalogs, in terms of distribution capabilities. This is the type of business that you want to receive an order in the afternoon today, be able to deliver it the next day, if not the next morning. We have over 1,500 owner-operated Home Depot drivers who are out delivering the product. It's very much a relationship business. And those drivers in the distribution delivery is a key component of our capability set. This is a relationship-driven total solution cost of ownership sale. And we have over 2,500 now combined trained sales associates out there nationwide. And the 2 businesses, Bobby, had -- they both had very large multifamily businesses. But IBI had a large [ gen sand ] business, and so what we call an institutional business. And HD Supply had a very developed hospitality in senior living business compared to IBI. So it's MRO, but they bring slightly different flavors of MRO and the capabilities to service those slightly different channels in addition to that largest of them, the multifamily channel. So we want to take our time. There's no rush. We have just a super opportunity with, again, the 2 best assets in the space. We want to really understand their capability sets. It's been some time since we've had supply. They were out of the family for about 13 years, I think, it was. they've done a terrific job evolving, particularly in their digital assets. So we're going to take the best of both in each of these channels, each of these verticals and customer sets, and look to put together, by far, the best set of capabilities to go after that $55 billion marketplace.

And the supply chains between the 2 MRO businesses and their overlap, HD Supply's, and then obviously, your prior existing Interline business that you've been developing and growing, too.

Yes. There's -- so again, both of them were essentially nationwide. But because they had slightly different channels, some of these distribution assets overlap, and we'll look to appropriate integrations. And then some are unique capability sets that we'll be able to leverage for the particular channel that they serve. But we're going to go slow on those and look, listen and learn. And then act with the customer in mind and continue driving share in that space.

Okay. And when you look into the demand drivers of the MRO market, how do they differ, if they do, in your traditional end markets that you participate in? And what was the COVID impact of that end market? And how does that position it for 2021 and beyond?

Well, there's -- you're looking at really 2 aspects of that market. One is very much MRO, maintenance and repair. So it's sort of a break-fix environment for multifamily housing or, again, hotels. But there's also a renovation angle. So while you flip -- you have a break-fix, a leaky faucet, et cetera, when someone is living in this space, you have activity when a unit turns over. You might freshen up paint, you might replace some blinds or carpeting, a modest refresh. And then you have a longer cycle refurbishment. So there are really 3 phases of demand in that space. And I'd say the latter 2, the turnover was down in those spaces. And certainly, cash flow was an issue with some of the properties, so they weren't building out or doing the refurbishment work to the level they have in the past. So we have a significant opportunity as normal turnover in apartments and refurbishment budgets are back online in that space. We think the demand for multifamily will obviously continue. We have some movement to single-family household, which is obviously great for our home improvement DIY business, but you're still going to have turnover in people moving in between apartments that has been suppressed in the past year with the pandemic.

Okay. Very good. Another -- maybe switching gears is a tiny bit, but another hot topic right now is inflation. So can you briefly maybe talk on what product categories you're currently experiencing inflation in? And then more secondly, the second part of that question really is during prior times in Home Depot's history, you guys have gone through inflation and deflation many times before. But just how have you handled the inflation from a price increase, balancing prices with demand and all that stuff.

Well, I'll take the easier part of the question and then hand over to Jeff, our new Head Merchant. But on the inflation piece, it starts with lumber. I mean lumber is at record highs right now. We're over $1,000, 1,000 board feet. That's up roughly 1.5x from last year. Our sales in 2020 alone on price inflation in lumber was impacted about $1.7 billion. So a significant inflation in lumber. Similarly, in copper, we're seeing significant inflation. But those are commodity markets that are priced weekly, if not daily, and we mark-to-market those in the normal course. So we don't plan for inflation in lumber or copper. We just manage it, again, on a weekly basis as those market is largely set market to market. But broader inflation in how we run the portfolio, I'll have Jeff comment, if he would.

Yes. Thank you, Ted. And as Ted said, on the commodity front, we manage it daily, in many cases in looking at pricing, understanding price. And then for the broader assortment, we do manage very large portfolio of goods. And I'll tell you the -- you look at the last many years of development, we've developed tools that help us manage price. We manage cost at an item level. So we have teams of associates that look at cost, understand the components and work with our suppliers on total cost. So it is an enormous effort we've guided on the cost inside. And then also on the cost outside, I mean we talk inflation in certain categories, but we also approached the business with a line review mindset. We have, in many years, upwards of 100-plus line reviews taking place, review assortments. We look at cost, we understand -- an understanding of brands and how they function in a bay, for example. And we understand cost components. So it is managing a portfolio of goods. We have, as in any year, we have a cost in, in situations that we have cost out. And we have a great process in place to manage the market and manage retails as we look forward.

Okay, very good. And then maybe switching back to the DIY side of the business. Very strong trends, obviously, but one thing that's interesting is kind of new engagement from maybe a younger consumer or the millennials becoming home generation, homeownership, I could speak for myself, I've attempted to do some projects, keyword attempted there. But can you maybe talk about some of the programs and initiatives that you're putting in place to capture that new heightened engagement from a new customer to The Home Depot?

Yes. If we focus on the consumer for the moment, as you say, we have loads of new customers and loads of customers who have increased their engagement with The Home Depot. And that's obviously just a great thing for our business. Housing has been very strong. Household formation, in particular, had its strongest year in 2020. And I think our household formation was even higher than the peak years of '05 and '06, at the tail end of the last housing boom. So we have loads of customers engaged. We have a millennial customer who is forming households. I don't speak of millennial as it's really any different than any other consumer segment. It's just that they were such a particularly large cohort generation who were a bit delayed getting actively engaged in homeownership and in DIY. There was a lot of questions going back several years ago. I remember there was a lot of talk in the rental economy, and that were the millennials with that generation going to engage in home formation and ownership and then ultimately DIY at the same level that the baby boomers who were the last particularly large cohort in our population base. And we had done a lot of research, Bobby, that suggested that the millennials would, they were just delayed in getting that job in the geography that they wanted to put down roots to where they would form homes and start to engage in DIY. And what we saw in 2020 was, that research was accurate in that, yes, the millennials were going to engage, if not a bit delayed. So we saw terrific engagement with these new customer sets. And what was great about our investment program that I mentioned a bit ago that the 3 years that we had essentially doubled our investment and capabilities in the business, knowing that the customer is looking for an interconnected experience, knowing that there's going to be digital engagement, knowing that delivery capability would have to be more robust than prior years. And those are all the things that we focused on. And those are the very capability sets that the millennials are engaging in. So tremendous confidence to engage digitally, to explore, get great ideas for projects, learn about products, learn how to. Home Depot has always been the source of knowledge and how-to for doers. It's in our tagline, How Doers Get More Done. And these consumers are engaged and are doing, and they're leveraging things like curbside and pickup lockers and full flat bed building material deliveries and wayfinding in our stores off of our app, et cetera, all the capability sets that we built. So we're just thrilled that we had built so much of that capability out and we are ready for this millennial customer, in particular, when they're engaging at the levels that they are.

Anything interesting in project size or besides the tendency to shop online, maybe, but anything else interesting in their behavior patterns or that new cohort of new Home Depot customers' behavior patterns from purchases or anything like that?

We track our -- the use of the various capabilities. And the millennials are engaging like no one else in terms of all the different capabilities that we have built. Now certainly, some of them will just come to a store in cash and carry and buy and leave the store. But in terms of the full digital engagement, the delivery engagement I mentioned, app downloads, time spent on the app. We track all these things and the engagement is across the capability set. But Jeff, you may have some other thoughts.

Yes. No, it's an exciting opportunity. If you look at the engagement in the live good category, vegetables, fruits, planting. You look at the engagement in categories that had -- it really started to deteriorate, you look at woodworkers. And we see folks of all ages, customers of all ages tackle new projects and woodworking and experimenting with new tools and, again, new categories. So a couple of examples of the products we're seeing in terms of the engagement. And then I'll say -- or categories that is. And then I'll say on the product side, you look at the tool assortment that we've got with Milwaukee and Makita and DEWALT, we see an engagement with tools, which is -- just speaks to some long-term opportunity around projects.

And during 2021, you guys talked about having deferred a little bit in-store strategic investments. Maybe just touch on the time line for those coming back, what areas might have been deferred. And is it more demand-dependent, where if demand just remains robust, you don't have the opportunity to touch the stores the way you would from the investment, so you have to wait a little bit?

I'll let Jeff cover what we're up to next. But I'd like to just comment for a moment on what we did complete. We did defer things, some merch resets that Jeff can speak to. But what we did complete is our brand standard was one very important thing. I think when we started the progress -- process, we might have had as many as 4 different sign packages, maybe even 5. And I don't think the Home Depot had the same look and feel, that same brand standard with the sign package since maybe the first 2 stores opened in 1979, we probably started to iterate way back then. And we finished up 2020 having updated the entire internal look and feel of the store on the same sign package. And that's extremely important for a brand standard. We also implemented wayfinding. It was one of our customer research pain points, obviously, a big store with a lot of product. And so our wayfinding app that allows you to go down to the aisle or bay to find the product, that's been completed across the chain. We spiff the floors and painted the walls and cleaned the ceilings and putting a lot of new roofs and parking lots and HVAC systems and restrooms and break rooms. So just we're a working warehouse. We want to be a clean, safe environment, but we are a working warehouse that needs a certain standard. Ultimately, The Home Depot is one of the most powerful consumer brands in the United States, if not the world, and bringing that up to a standard at 40-years plus old now, it was very important, and we finished that work and are just thrilled. We're -- a lot of LED lighting conversions. Our stores are cleaner, brighter, more modern with an up-to-date brand standard. So we completed a lot, and Jeff can talk about what we have yet to do.

Yes. No, thank you, Ted. And we paused on in-store, a lot of in-store activity, and that is reflective of our priority of safety for our associates and for our customers. I'll say as we paused, we learned how to do things more efficiently and in a safe manner. And so now we -- as we went into the fourth quarter and finished the fourth quarter, we had ramped up investments again. And as we head into 2021, we're ramping up investments even further. You look at the investments we're making, I'll call out our outdoor power equipment category. We've just completed a set across the entire business that is a senate built by brand. Think of the power of RYOBI. It's a platform with 100 million plus batteries in the market, and it's certainly a piece of us being the #1 retailer in outdoor power equipment. So that's one example of the resets. We've got a lot of reset activity now taking place in a very safe manner across our stores as we hit into 2021.

Okay. And then we talked on the recent earnings call, we talked a little bit about you guys, when you introduced the One Home Depot strategy, you went on a very deliberate investment plan, capital wise, as well as the corresponding expenses, supply chain and all that. With a large part of the kind of the SG&A side of the investments behind it, can you talk a little bit about returning to more normal leverage and the productivity of The Home Depot business model that investors have come used to?

Sure. On the overall investment profile, we were going to put about 50% of that accelerated investment into the stores. And as Jeff said, we've largely got that done other than some of the things we paused for safety, so that will be a catch-up in 2021. We invested in our associates, and we accelerated that investment with the wage increase that we did earlier in 2020. And the next 2 areas of focus of investment, one was supply chain. And we'd always said the supply chain was going to be more like a 5-year investment profile. And we're standing up about 150 new supply chain buildings that I won't go into a ton different nuances of what these buildings are and all our acronyms. But what we're basically doing, Bobby, we're building facilities that will increase productivity of restocking a Home Depot store, improving on-shelf availability and driving productivity. And then we're building different assets to deliver different type product to our Pro and consumer customers. So think of parcel facilities, where you're leveraging UPS and FedEx to deliver to the consumer's house, all the way to large flatbed-oriented facilities that are delivering building material product to the Pro job site for a planned purchase. We have each of those type facilities up and running. And the next 2 years are going to be very significant scaling of those facilities. So in 2021 and 2022, we'll be putting up tens upon tens of these buildings as we scale out our ambition to be able to deliver anything and everything The Home Depot sells next day to 90% of the United States population. The last thing we're working on is digital. And while digital is never done, we've done a tremendous amount already on our digital properties as part of the initial investment profile. We completely replatformed our website and not just that we put it up in the cloud, but we really completely rebuilt it from scratch. And that has been able to handle the incredible growth in traffic, in commerce that operates on that site. We're the fifth largest e-commerce site in the United States now. And even if people aren't actually purchasing on the site, the traffic for product knowledge, inventory levels, pricing, et cetera, grew over 50% last year. And our platform was able to handle all that volume. And we continue to work on the experience for the customer, continue to take out friction and continue to improve our checkout, our search, our product discovery, with continuous online investments with an agile team approach to continue to improve that website. So that's just a little flavor of what we've been up to and and what we still have to accomplish.

And I guess we had about -- I think we've got about 4 or 5 minutes left, so maybe 2 final questions. And I don't know if this one's best for Jeff or you, Ted. But first, on the spring selling season, can you maybe talk, this year's spring selling season is probably going to be a lot different than what typical ones are, given what's going on in the world. So can you talk a little bit about how you're preparing for this year's season, different things that you might be focused on that might not have happened here in the past?

Yes. Bobby, I'll jump in on that. I mean we have learned a lot throughout the pandemic and right from the beginning stages where we had a lot of stores, limited hours. We had canceled a lot of promotional activity. Again, it was the safety of our associates and customers in mind. And then as we went through the year, we learned a lot in our Black Friday program. Traditionally, Black Friday would be a weekend or a week-long event, and it would be a series of activities. We consolidated those activities into one large, month-long event. And that was a resounding success with our customers and our associates in terms of how we manage that event. And so we've learned a lot as we head into the spring, you'll see us continue to capitalize on those learnings. And I'd like to say also that we're ready for spring in terms of how we loaded in inventory. Our suppliers have been there for us, and we're ready for the customer.

Great. And then maybe lastly here, 1 or 2 more final ones. We talked -- you guys put out a 14% op margin target for 2021 on even flattish comps. So talk about kind of what -- the confidence on what you're seeing in the business, the ability to be able to leverage SG&A, the cost side of things, anything there to help investors think about some of the optionality you might have given that demand right now is robust, but there is a high level of uncertainty out there.

Well, I'd say we specifically did not provide guidance, Bobby. So I have to say that. We did a math exercise to say if demand continues along the lines of what we experienced in 2020, and apply an estimate of seasonal curves, we should see flattish to slightly positive or that's what the math would indicate. And we believe with -- there are lots that goes ins and goes outs in the expenses from 2020. There are some expenses assumed with some continuation of COVID cleaning and the like of the stores, getting back into some of these investments that we'll catch up on and all those expenses and some fair estimates of what things may be got us to that. Again, an articulation of what the math would imply. I'd say we've learned agility in 2020. If it's one thing we've learned, is that we can stretch more than we ever thought, and we can be agile to approach the business. And rest assured that we're looking to always take share profitably in any environment, and we're always looking to drive productivity and improve returns for our shareholders. And we'll do that regardless of what may come in 2021.

Absolutely. Will that, right there, I think, brings us right to 2:00, right on time. So Ted, Jeff, Isabel, I would like to thank you guys for the time for joining us today and for the support. Best of luck here in the calendar year, the first quarter. And if everybody watching virtually, have a great rest of your day.

Thanks very much, Bobby. Appreciate it.

Thank you, Bobby.

Thanks, Bobby.

Thank you.