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

Yes. We watch all housing metrics, and we discuss them regularly. But if you think about what's really helping the consumer think about their homes as an investment is really what we've seen with home price appreciation, right? It ended 2020 in the double digits. It's been double digits every month in 2021. And that's really being influenced by the lack of inventory. So inventory is around 2 months of supply. In a normal environment, it's 6 months of supply. And builders are just not getting enough houses out of the ground. And so that deficit is going to probably exist for some time, which bodes well for our business, right? If you view your house as appreciating in value, even if you don't know what the numerical value is, it's an investment. And for a lot of people, it's their largest asset. And so you're going to maintain that investment. So we think that certainly bodes well for the business, short term and long term.

And you can maybe -- while there may be some price imbalance and supply imbalance, during the last 12, 15 years, we have seen different numbers, but something along the lines of a cumulative 5 million housing units were underbuilt. So with housing peaking at 2.4-odd million units all the way back in '05, '06, we ran at 6,000, 7,000, 8,000 units for years and years. And the cumulative effect of that is we're 5-odd million housing short in this country. So while there may be supply and demand and price dynamics over the next several months, back to this medium-term, long-term dynamic, it's extremely healthy for our space.

Yes. I think it's going to be virtually impossible for that to change anytime soon, those dynamics. It just wouldn't make sense because you're going to have that supply shortage. So with that, though, are you seeing any correlation between your sales rates and where you're seeing the biggest home price appreciation? Is there any kind of direct correlation on that? Or is it kind of all boats-type scenario right now?

Yes. Right now, I mean, we track all that. Our 19 regions and our 40 principal markets all had double-digit comps. We called out 13 of our 14 departments had double-digit comps. So there's no correlation at this point that we've seen on any of the markets, whether the prices are at the high end or depreciation at the lower end, it's an all boats scenario, as you say, Scot.

Got it. Okay. So if I want to be the -- if I want to take a more cautious view, what is that you guys are looking at for kind of warning signs of maybe we're just too overheated at this point? People have pointed to interest rates and just the magnitude of home price appreciation, but you guys have much more granular data than any of us will ever have. So what is it that you're looking for specifically as kind of warning signs of we might be starting to see a change here?

Well, I think you said it, it's hard to see the dynamic changing meaningfully anytime soon, so when you're down to 2 months of supply on housing. We're hearing all the stories as well that someone lists a house, and that weekend, they get multiple bids, at tens of thousands of dollars of cash over asking price. All that can certainly slow down the pace of housing turnover. We've said household formation, housing turnover, home price appreciation, all are supportive of our space. We're seeing more in-home price appreciation, so people would see a project being an investment in their home. If transactions start to stall out, we've been 4%, 4.5% housing turns over every year. But if you see that start to stall out, that is helpful to our business. We have houses to turn over. But again, if then people will invest in their homes if they're not able to move, so rather than buy the house, you'll finally remodel basement or do the kitchen. So fortunately, we benefited in both scenarios and, again, point to the medium to long term that you might have some short-term blips for this dynamic, but things are constructive for the foreseeable future.

Yes. So Ted, how would you kind of compare and contrast today's environment to the prior housing boom/bust we saw in kind of the early to mid-2000s? And are there any similarities? Or it's just a completely different situation today?

Well, I mean, it's -- there's some similarities in the outcome, right, the pricing of houses, the purchasing over asking price. Those are similarities, but I think the fundamentals are healthier. I mean, today, it is a supply and demand, again, millennials, the largest generation, entering the housing market. I don't think there's a flight from cities, but certainly, you're having some movement out to the suburbs. And again, that's just life cycle of the family. You start a family. You need more space. You move out to the suburbs. But what is different is it's not speculative. I would say '06 -- '05, '06 certainly got speculative. You had home construction being built on spec. You have had people who have never been in the housing market, leaving their day job and saying, "I'm going to be a developer," and building houses. Banks, obviously, incredibly liberal with mortgages, with no-doc loans and all the HELOCs. I think -- what have we peaked at? $400 billion, $500 billion a year being pulled out with HELOCs. None of that's happening. I think that the builders have been much more conservative and balanced on their land acquisition and new home development. Programs, banks and mortgage companies have certainly been much more responsible. Even at these high rates, people -- these are all cash bids. These are significant amount of money down, as opposed to '06, where it was no doc, nothing down, variable interest rates. Now you can get -- you can still get a 30-year mortgage for 3-odd percent. So I think the fundamentals, the financial bubble aspects that we saw in '05 and '06, are not what we're seeing today. Today, we're seeing this fundamental supply and demand.

Well, the consumer balance sheet is also -- was also stronger going into the pandemic. And then with government transfers, that also helps consumers' balance sheets, right? They have a tremendous amount of wealth today.

Right. Yes.

And we think we've seen -- what's 20 -- is it $20 trillion?

I think it's just under that amount.

In housing equity, that's built up post the crash, so much healthier balance sheet and much more responsible dynamic on the buy and sell.

Yes. And it's something we've talked about, and you are at all-time highs in terms of home equity. And then if you look at home equity usage, lines of credit, et cetera, it's the only debt category that continues to decline month after month, and has for the last 10 years at this point, which is crazy. So thank you for that. You have talked about how your investment in stores and technology and supply chain enabled you guys to manage the pandemic far better than you could have otherwise. So can you give us an example or two of how today's capabilities differ from what you had 3 to 4 years ago, whether it was on product movement, product acquisition, how quickly you transition the technology, kind of open floor on what you think is the best highlights?

Yes. I'll hit a couple, and then -- we remain so focused on merchandising. And our merchandising gets better every year, and I'll have Jeff hit on that. But just from 2, I'd say, our supply chain and our customer experience is so much better than 3 or 4 years ago. So we had put in a new forecasting system, for example, in '19, 2019, and it had to have a year to kind of bed down, if you will. And thank goodness, we had that forecasting system. Because we talk about being able to be agile and react to the dynamic that's being thrown at us, and that new forecasting system behaved beautifully to keep us in stock with that crazy demand that we saw. And then the supply chain, the ability to flow the goods. Mark Hollifield and team that are sort of year 3 of the 5-year build of our enhanced supply chain. All those assets performed beautifully, and we're receiving record amounts of product into our stores and through our supply chain week after week. And without that new forecasting system and without the number of new buildings that we had up in the RDCs that continue to get better, and we now mechanize most of those to drive the productivity in the supply chain, we would not have been able to handle the $21-odd billion of growth last year and the $9-odd billion in growth just in the first quarter this year. And Jeff, as I said, merchandising is better every year.

Yes. No, it's -- I'll just touch on the forecasting capabilities. We are forecasting further out with our suppliers than we ever have in using those capabilities to drive the acquisition of product across our entire business, which is working effectively and as we manage through the environment. Then a second, I'd say, we are -- Ted accomplished something that hasn't been accomplished in the company's history. That's one brand standard, I mean, we've got one brand standard across our entire business. That's the foundation in terms of the store experience, to build the wayfinding experience, the ability for our customers to find product quickly, the ability for our associates to serve customers effectively and find product effectively. So that one brand standard is helping enormously. On top of that, we're investing in merchandising capabilities in-store. So throughout all of this, we had a small pause of store investment as we dealt with the early stages of the pandemic. But you get into -- post the summer last year, we started up the investment engine again. And we've got multiple store investments that are improving the customer experience. They're expanding key categories. Spoken a lot about lithium-powered products, outdoor power, lawnmowers, I spoke about the flooring program, portable power. There's categories across our entire business we're investing in. We're investing heavily to grow share in-store and online. And then I'd also say we're investing heavily in the digital experience, the mobile experience and our app experience. Our app has improved significantly. And it's now easier to locate a product in-store at home, make that purchase and have it picked up or delivered than it ever has been in our stores. Then on top of that, I'll say just picking up on the supply chain comments and on the amount of inventory we have in our stores, our focus is around productivity. We still think we have an enormous opportunity to improve productivity of our store associates, of our customers through how we merchandise. And with our supply chain capabilities and the work we have going on in the stores, we have an opportunity to improve that experience and improve productivity across the business. So significant investments that have supported our growth up to today and for tomorrow.

That's a super helpful, guys. And unfortunately, the time is moving quickly on us. I guess, one of the last questions we want to throw in, I know Isabel wants the ESG topic, so we'll make sure we hit one of those. But you guys have been pretty vocal about your sustainability efforts. You are very well held in the ESG community from a shareholder perspective. I guess, the question is, what would you highlight that the company is doing on the ESG front that might not be quite as appreciated by investors?

Well, the focus on ESG, we welcome it. It's something with our values, and culture has been a hallmark for us. Do the right thing, giving back to communities, that's something we've always focused on and not necessarily talked about. And ESG and the reporting is, in a way, forcing us to not be as humble about our activities. But I would say, if we think about people and community, our people, our communities that we operate in and sustainability, briefly hit on each of those, the way Craig led The Home Depot through the pandemic and how we took care of our people and our customers, doing things like cutting back on all the promos and the traffic. And why would we be driving traffic to a store during a pandemic? So we killed all of our promos last spring. We limited customer counts. We reduced store hours. We gave upwards of $2 billion in enhanced benefits in health care and pay benefits to our associates. So really took care of our people, our communities. We've always been incredibly engaged with our communities, both at a corporate store support center level, but also at each individual store level. And what we do in our communities and engagement in the communities, we call them builds because we're very active. We're not just writing checks. We're out with the communities, with our associates, doing these projects, whether it's a garden raise, garden beds at the senior center or new playground at an elementary school, with a focus at the corporate level on veterans. So our primary cause has been veteran causes and housing for veterans. And we've committed $500 million to those veteran causes. And I think we're at about $350 million so far. So we had a goal of $250 million, which we quickly surpassed, and doubled that to $500 million. And then lastly, on sustainability, we were the first to acquire all of our wood fiber products to be certified for us, whether it's WaterSense water-controlled toilets and faucets and shower heads, whether it's lithium ion batteries and power tools versus combustion engine, whether it's all of what we did first in CFLs and now LED lighting. Not only have we transitioned all of our stores to LED lighting, but almost our entire product line of light bulbs is now LED. So unbelievable savings in electricity cost, but also consumption by what we're doing ourselves as well as introducing consumers to just great product at great value that's very helpful to [ live on ].

Yes. And one of the things that left a big impression on me, I mean, you talked about the values of Home Depot. And I remember, early in the pandemic, having a conversation with Isabel and the rest of her excellent IR team, and her comment was, "We're not trying to be capitalists right now." No one knew what was happening, like the world was shutting down. And I just thought that was a powerful statement at that time. And with that, guys, we are out of time. Unfortunately, I'd love to have another hour with you, but the time allocations don't work that way. But thank you again. Excellent job, and truly appreciate it.

Thank you, Scot.

Thanks, Scot.

Thanks, Scot. Thank you.

Bye, guys.

Take care.