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

Yes. I mean, I remember when you guys had -- and not that they're all gone in terms of boxes, but that at Home Depot expo, some long, long time ago, just behemoth constructs. It's tough to find the right way. And you're right, what you have is kind of the right way. So you can just let it go for a while. Being supply chain is the other one that I think has just been interesting. And beyond inflation, I just mean actually product not being available when you think it's available. We've seen Costco and Sam's Club integrate all the way back to the dock for fish, all the way to the plant for chicken. Now normally, we don't think about that being such a challenge for home improvement. But when suddenly, lumber's up 10x or 12x, you start to just wonder, what is the limit for you guys in terms of upstreaming?

So I don't know that we would say that we have the expertise, if you will, within the organization to think about vertical integration at that kind of level. That, again, when we set out to look at a longer-term plan for the Home Depot back in 2015, we said, it's just as important to find the things that we're not going to do is the things that we are going to do. And part of what we said we're not going to do. And sorry, I know this goes against your comment earlier around Kingfisher. We're not going to go international. There's too much opportunity in North America. We're not going to do vertical integration. We're not doing small format stores until we actually capture all the opportunity that exists -- that we believe exist in the business in North America. And so we haven't gone down that path. I'd say the closest thing in a sense to that is what we do with our private label programs, where we design, develop and then contract basically manufacture those products. And that would probably be the closest thing that I could think of in Home Depot to what others might consider to be vertical integration. We have done that extremely well. We have gotten all of our private label brands, which we have a number of to 4-plus star ratings or above. We have multiple brands that are in excess of $1 billion. We have brands in excess of $2 billion, and we have a couple of brands in excess of $3 billion. And so these are ways for us to continue to bring value and innovation. And we've been very transparent with our supplier base on when we will go down the path to private label. And we've done that for years. It's -- when we feel like brand isn't relevant. So people have to keep brands relevant, if the innovation isn't there or if we have a value construct that is -- we're struggling to bring the right value to the customer, that's when we'll look to drive a private label program to supplement the brand house that we are.

Makes sense. Since you brought private label, one of the things we are curious about is, does that private label construct change as you get into broader professional categories. So think about always how you guys say, of the professional wallet we get $0.20 a percent or whatever the number was in some years ago. And we see that expansion. Is that new private label invention? Is it -- you take the same label and put in other components? I just get curious because sometimes in the professional space, the private label process may be a little bit harder to replicate because there's a quality badge to that, but maybe you pull it off because you've done it in tools already.

Right. No. I think what we do as it relates to product and whether this is private label or branded product, we always start with a professional end market. And so this business was built on taking care of the professional customers, having the right brands that they value, having product that eliminates callbacks for the Pro is hugely important. And as we built this business over the last 40 years, when our founders were so in tune with was the fact that the DIY customers would see the professionals buying the product in our stores, that gave them confidence that they were buying the right products. And we've carried that into the future here in the business, both in our branded products but also in our private label program. I mean, to your point, we have focused on quality, focused on making sure that we get those kind of ratings and reviews that we need to be able to satisfy the Pro that they're going to be buying product from the Home Depot that will help them complete their job, not cause callbacks because a callback destroys the first dollar profit for the Pro. So that is a real key focus of what we have going on in the business every single day.

Makes sense. On part of this private label element was also where you built your own supply chain. And one of the things we've been thinking out about a lot in terms of kind of long run, what's really changed in retail. So 5 years ago, everybody told me I messed up by leaving my nice Walmart job because there was going to be no reason for a Wall Street person to cover retail because it was all going to 0. The same as I was been thinking of. And I'm glad that turned out to be wrong. But I do think about the next thing that's scarier and it's a disruption. And the one for me is China. I worry that it's really a cold war with China and that most of the conditions in the Trump administration have continued in the Biden administration in terms of that approach. And so I'd just love to hear you guys kind of think about how do you think about globalization? There's certainly kind of a North America cost manufacturing model that's gaining traction in some spaces. But I would just love to hear that context because globalization arguably have been such a driver of this incredible consumer growth for 20, 30 years. And now that if it looks different, I'd love to hear Home Depot's view on this.

Yes. Look, I mean, I would say that we don't have any illusion that tomorrow everything is going to kind of stop from a globalization standpoint. That's not the case. Our folks working to diversify because what we've seen happen over the past several years. The answer to that is yes. And lots of manufacturers have China operations, but they're diversifying into other parts of the globe as well. Part of that was driven long before any of the activity that took place over the past several years because of the -- what the natural evolution of rising costs are inside of China, which was the driver of the Asian product development, if you will. But it's fascinating because if you were walking factories even maybe as recent as 5 or 6 years ago, a lot of times you'd be in a factory, and you would see good, solid equipment that was brought in from other parts of the world that would be in a factory. And you would see still lots of manual labor in those factories. When you walk factories in today's environment, you're seeing more and more highly automated equipment even in a Chinese factory because everybody understands that, that's where you ultimately have to gravitate to. And I think that's part of what's driving the opportunity set, if you will, to bring more product back to North America, bring more product back to our country, as you combine the automation advancements that have taken place, and the ability to then begin to offset cost of transportation and other things, it becomes much more palatable to be able to drive value through product being produced here or in North America. And so you're seeing more of that happen. But I don't think that means that it's not going to continue to be a global environment.

Yes. And we've seen other retailers. I've been amazed at how many things -- I spend a lot time with Tractor Supply, private label. And how many of those tags have moved from China to Mexico. And I think that was underway anyway, right, to your point, that there was a process of finding the right source and at some point, transportation and other costs flattened up. I have to ask the kind of obligatory wage inflation equation, but I'll actually ask the version that came from the audience instead of mine. Several executives have been reporting tight labor markets. Kind of what level of wage inflation is kind of in your plan or what you thinking about is likely to happen? And which labor markets are most challenging for you? Is it hard to get folks at the entry level? Is it hard to get staff for your Pro Desk? Give us a sense of that?

Sure. Yes. As you know, in the back half of last year, we converted a significant portion of what was our COVID benefits, if you will, to permanent enhancements on wage for our associates. There is certainly pressure in certain areas as there always has been. So think about where there's growth and where there is a constrained potential labor market. So think big cities, think places like when things were growing like crazy in Minnesota. Those were pressured markets, if you will. Here's the good news for Home Depot. We have been able to actually hire more folks as we ramp up for season in 2021 than we did as we were ramping up to cover the 25% demand that we saw growing at this time last year. And so we really approach this the same way we've always approached it. We think about the full package that we offer to potential associates. It's wage, it's benefits, it's success sharing. But most importantly, it's a career opportunity and growth. It is the ability for us to invest in them to train and develop them. 90% of our store leadership positions come from -- have come from hourly associates on the floor of our store. If you look at our very senior leadership, so Ann-Marie Campbell, who is our Executive Vice President of Store Operations and runs Canada and Mexico, started as a part-time cashier. Our Northern division President, Crystal Hanlon, started as a part-time cashier. Our newly promoted Kelly Mayhall in the Southern division, started on the floor of the store. Hayden Chilcott in the West Coast, our division President there, started on the floor of the store. Jeff Kinnaird, who is our new EVP of Merchandising, started on the floor of the store in Canada. I mean we've got story after story after story. And it is a great story, and it's a great opportunity for associates to grow with the Home Depot. So we leverage all of that. And we've been incredibly fortunate, I knock on wood, that we've been able to attract folks and get the kind of qualified pools for the most part in our business.

Yes. I think it's an underappreciated part of retail that it gives broad career opportunities. One of the guys that I hired who worked for me in scheduling years ago was on the floor, he was a department manager. He finished his degree in Stats and came to work for me doing statistical modeling for 1.5 million people, right? And so I do think that most of what we hear is a well-benefited retailer isn't having that hard of a time. Restaurants with uncertain pay and tip dependency, having a really hard time. So I think it makes a lot of sense. One of the other things that's coming up is -- and again, I'm kind of into questions from the audience now is this kind of notion of how do we think about comp and growth in those components. And I think it's that, honestly, because you guys had a regression, and you kind of put it in the model, and it came out and it was pretty easy. And I mean not easy, it was brilliant, but that it works the way that it worked. But historically, you kind of used the GDP or housing macro framework for comp guidance. How do you think about those components in 2022? Is that still the right framework? How do people think about that world view?

Yes. So obviously, as we went into this year, and we don't know yet for '22, there's so much uncertainty that it's just really hard to understand in the near term where things might go, how customers will react as the economy opens back up, which it's obviously doing. What will that mean for customer buying patterns? Those are all big uncertainties. The historical measurements we disconnected from some time ago, clearly, GDP was a key component, and it's something that historically you thought about and building your models. But as we saw last year, GDP went negative, you had massive unemployment, but at the same time, you had an influx of money, people's bank accounts have never been better. They're savings accounts are as high as they've been, the savings rates since the '70s. And we saw tremendous demand. So I guess I'd say, Brandon, that short term, it's hard to predict. When we look at the big picture environment for longer term for home improvement, we feel that it's very, very solid. And that the longer-term outlook from a housing standpoint, from a -- and so many factors in housing, home ownership by the millennial generation, their engagement in home improvement, home value appreciation, partly driven by a post-World War II shortage of housing that exists in this country that, that problem won't be solved anytime soon. It's going to be multiple years to solve that. Aging household populate base in the U.S., all of those things point to a solid environment for home improvement for the longer haul, it's just the uncertainty that exists in the near term. We can't predict that. What we've learned, and I think I'd say hats off to the team. They've done a phenomenal job. What we've learned is, for us to be agile and flexible and be able to deal with whatever gets thrown our way is what's most important in the environment that we live in today. And I'm really proud of how the team has accomplished that over the past 4 quarters.

Yes. It's like remarkable to see all of the investments made in the ability of response to customer demand and so on and so forth, that despite the disruptions, it was frankly not as bad as it probably should have been, except for all of the forecasting of the work and the intuitive understanding. One of the other things as people talk about kind of pre-COVID post-COVID, one of the other questions from the audience is, we kind of focused on building out more B2B Pro network. Obviously, there were some logistics investments inside of that. Just if there's an update on that and kind of any learnings that have happened in the progress that was made to that point?

Sure. We are building out a network of capabilities to better serve not only Pro customer, but the DIY customer as well. And these capabilities are really important when you think about growing with a planned purchase with our Pro customers, which is a larger opportunity for Home Depot. We're investing and we called this out at the beginning of our incremental investment cycle in 2018. We're investing about $1.2 billion in a supply chain that will give us the capability to serve roughly 90% of the population with same-day next day capability or delivery on every type of product we sell, whether that's something that's going parcel to a customer, or whether that is a pallet of goods that need to go on a flatbed, will the off it to a job site. That's really our goal and to be there for however the customer wants to engage. I'd say we're in the -- kind of the early middle innings of that. We're following a very similar pattern to what we did when we built out our RDC network, our rapid deployment center network. In the first year, we actually -- you create the concept, you open a facility, you work through the operational aspects of that and fine tune. And then you go in and you actually open a few more of those. And you kind of pilot through and prove out all your operational processes that they are replicable and can go into multiple buildings. And then from there, you begin to accelerate the rollout -- finish the rollout. And we're in that year right now where we're making sure that the operational processes that we developed are replicable and can go into multiple buildings. So we have -- we've opened every type of building that we're -- that we intend to open. We are at different stages in that. We have full direct fulfillment centers. We have a number of those open and have for a few years. And those are all going well. We have our market delivery operations facilities, which are smaller facilities that are kind of cross docks where product comes in and they move on to a delivery truck, direct to a customer's home or job site. We have a number of those that are open. We are running about 38% of our deliveries through those facilities at the end of 2020, that will accelerate in '21. We have -- Mark called out, we have 4 flatbed distribution centers that are in various stages of operations right now. We really like what we're seeing there, and we believe that will take pressure off of our stores who, today, they do all the big and bulky delivery. And these buildings are designed to do just that type of product, and they're much more efficient than doing that through store. So we're making good progress. We see great customer feedback. And we're driving growth in that area with orders, for example, in the flatbed distribution centers that we would not be able to serve from a store environment.

Yes. That's -- in my mind, those are your new stores, right? Like a flatbed distribution center with the Home Depot professional look and feel and style of service. It's a new store. And I think it's going to be pretty phenomenal when you guys get going on those things and it's all worked out. One quick reminder. Guys, we do have a hard stop in about 8 minutes or so, so everybody can make it to their meetings. Pigeon hole is open. I've got a couple more questions I'm going to go through from the audience. This is your last chance to get anything in there that is not already posted. This is an interesting one. If home prices continue to move up due to low inventory, there's a suspicion that maybe multifamily is the outlet. And I know you guys are prepared and remodel, but total housing activity is a part of that factor, right? And so there's this notion that if everybody wants to sell their house but nobody can move, but somebody asked to move that goes to multifamily. Do you guys have any of the exposure to multifamily? Or is it just a little bit of MRO that shows up inside of those kind of maintained properties?

Yes. No, it actually -- this is why we did the HD Supply acquisition. Was to really position ourselves to much better serve the multifamily operators, which really control about 50 million households out of the 130 million occupied households in the country. And we want to be able to not only serve customers that are in multifamily directly, and there's needs that they have, whether that's cleaning needs, other type of things that they do, but we want to be able to serve those property owners as well to be able to not only handle their maintenance cycles but actually do their capital refresh work when that is needed. And that's the beauty of bringing Home Depot together with the multifamily wholesale distribution is that we can marry up those customers and serve those needs when they get into their capital refresh cycles. So we believe that by this ownership that we actually gain greater access and capability to serve on a broader basis, those 50 million households that today we serve in a more limited way than we do in a single-family homeowner. So we're pretty excited about that opportunity, actually.

Yes. Those historically are radically underserved. I know that we had stores, old Walmart days, where we could not keep single-serve coffee makers in stock because those small little shops or small little -- this is pre Airbnb. But small little hotels would literally not be able to get them, and they would come buy them at Walmart. And there were all these categories of those types of either rental or hotel or small use that were just underserved. And I think that's a huge opportunity. One of the other things that has come up is kind of this broader conversation, I think, on housing, which says this. The long run construct for housing, millennials household formation, all those look really, really good. We just -- we used to, and maybe the rules are cool. We used to have to have, I don't know, some sort of a housing recession at some point where prices went down before that happened. And so we just leave it open to whatever you want to share with this, but it just feels like structurally, it looks like almost a cyclist process, but it just feels nerve racking to me and to other folks who cover the space that we'll just go through this and there'll never be a point where housing has to dip at all. So just kind of an open question for those nervousnesses that we have another share.

Yes. Look, I mean, if we all had the crystal ball that was completely accurate in this, we -- none of us would be doing our jobs, right? We'd be living on a beach somewhere. But here's how we think about it. So you are at a post-World War II low in terms of housing availability. And when I -- we're not in new construction. But when I talk to homebuilders, they think that's a multiyear effort to begin to get housing where it needs to be in this country. And so in the meantime, what that means is, to your point, home values continue to go up because, in part, the ability for people to move is there because the new home development isn't available. And so I don't know that we'll see the kind of appreciation that we've seen over the last couple of years. But as long as home values go up, even if it's 1% or 2%, people feel good about investing in their homes. And if you can't move because the housing availability isn't there, you have a tendency to do a remodel, which plays right into our hand. And so -- and it's kind of interesting, just anecdotally, when I drive home, it's funny, how many houses I pass and have a dumpster in the driveway. And you know they're doing a remodel, right? It's happening. So it's pretty interesting. We think when we look at the overall housing environment and how that plays over a period of time. We think the indicators are all pretty positive reinforcement for our business and the drivers of our business. Our key Pro is a repair remodeler. It's a handyman. It's -- yes, we serve the trades, but that's the heart of what we do. And again, when people feel comfortable about investing in their homes, that's a good thing for our business. To your point, the millennial generation engagement in home ownership and, by the way, in DIY was significantly accelerated during 2020 and homeownership has been growing for the past several years. That's a great thing. Largest population base now getting into the homeownership. And generally, they're buying in areas where they can afford, which means they need -- they want to fix up and do projects, and we see them engaging in projects that's another positive sign for our business. So we're reasonably bullish on the longer-term future of home improvement in what we think is ahead of us.

Sounds great. Well, thank you so much for the time. Greatly appreciate the breadth, always a fascinating view on not just what Home Depot does, but what's happening in the sector and what's happening broader and the overall industry. So thank you for your time. Greatly appreciate it. And thanks, everyone, for joining in. Again, if there are any follow-up questions, you can e-mail me directly, and we'll find our way to get those answers for you. Thanks so much for the time.

Brandon, thank you very much. Really appreciate it.

Cheers. Bye.