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

Okay. Great. We're going to get started here. Thank you, everybody. Good morning, everybody, and let me, again, welcoming you to day 2 of our Ninth Annual Retail Roundup. I'm Chris Horvers, JP Morgan's broadlines and hardlines retail analyst. This morning, it's my pleasure to welcome Home Depot's EVP and Chief Financial Officer, Richard McPhail, for a fireside chat. Richard, thank you for taking your time and joining us today.

Thanks for having me here. It's good to see a lot of familiar faces, hope you all doing well.

In terms of format I've a set of prepared questions for Richard, but then we have plenty of time for questions for those in the room. If you could please use the microphones on the table because this is also being webcast, so everyone could hear the questions that you're answering.

So maybe setting the table at a very high level. Home Depot is in a rare moment of time of controversy. Your stock is one of the best performers over a long period of time, and the controversy has nothing to do with what you're doing. Has everything to do with a macro backdrop and what's going on from the share of wallet perspective. So, maybe if you could start with like an overall message in terms of, you talk to a lot of investors. What do you think that investors most unappreciate about the Home Depot's story in light of the backdrop?

Well, thank you for that question. We could talk a long time about this, but I'll try to make sure I leave a room for questions. So I think that home improvement is one of the most enduring, healthy sectors of the consumer economy in North America. And what I -- what is developed in my mind over the last 3 years is a sense that, we are building to a set of conditions that could be more favorable to us and to our sector than we've ever seen before. And I can provide some context for that if you're interested because I was around running FP&A for the company back in '08, '09, and we've built the case for -- and an hypothesis for what this could look like when we came out of the GFC. And you can actually see that, if you look back at either our 2011 or 2012 Investor Conference, we laid it all out. We knew that there would be a run in home improvement. We saw that run. And I think the conditions right now, and I'll put an asterisk on 2023, the conditions for home improvement over the medium to long term have never been this attractive. And just to give a few highlights around that, the buildup of housing wealth in the United States, if you look at the equity position that homeowners have built up, not just over the last 3 years, but over the last 12 years, you've seen home value -- aggregate home value of housing stock in the United States go from, call it, $20 trillion back in 2012 to almost $50 trillion now. And so those are round numbers. But -- and in that, mortgage debt has remained stable. So you have a much healthier homeowner than we've ever seen before. At the same time, you can -- we could talk for a long time about short-term housing turnover, short-term home price appreciation. But the statistic that has really stuck with me is the vacancy rate in the United States. It is at its all-time low. This is post World War II. That rate has hovered somewhere between 1% and 2% of housing stock being vacant in the United States for decades. It shot up to 3% just before the GFC, when we vastly overbuilt. And then since then, since 2010, we have built ourselves into a chronic condition of lack of housing. And so vacancy right now is less than 1%. I think it's 0.6% in the last reading. You combine that condition with the wealth of the homeowner in North America, and I think that much stronger conditions that have ever existed for home improvement. '23 is going to be a year with uncertainty. And as you know, we guided flat sales for '23 and that, I think, really just reflects the fact that the Fed is in the ring with us here, and monetary policy and its impact is real. And as we predicted, there was a slowdown in the consumer economy towards the end of last year. And that really sort of reflects itself in our guide for the year. We assumed flat consumer spending for 2023. We also assumed that, that shift from goods back into services, as COVID dynamics kind of reverse themselves all the way, that shift from goods to services is going to put more pressure on our market. But the Home Depot has a long history of taking market share in any environment. We intend to do that again in 2023. And so that's why we've said that any pressure from those 2 dynamics is going to be offset by our ability to take share.

That's a great segue. So share of wallet is something that we spend a lot of time focusing on, and you had a massive shift to goods. And you had a massive shift to the home category, in particular, that because of the rate structure because of the COVID dynamics. Where do you think we are in terms of that normalization? And is that something that catches itself, its done in '23, and we can rebuild from there? Or do you think there's more of a longer lag effect? As we look at the data, it looks very high, 20% versus pre-COVID, but some of that seems to be inflation. So I would love to get your thoughts on where you think we are in the share of wallet dynamic, the shift back for your category in particular? And when does that complete itself?

Well, we -- it is -- if you just look at kind of the trend line, and these things are not an exact science, I would say that at the current rate of shift, you have more than a year remaining. But that's all things being equal. So when I think about pressure to our market, I look at that shift and kind of a sustained trajectory of shift, putting, call it, a couple of percentage points of pressure on the home improvement market at that kind of sustained rate. If we were to reverse all the way back to 2019 levels by the end of the year, so this would be more home improvement share of PCE, there will be further pressure. You could see kind of mid-single-digit pressure on the sector. But again, that run rate, I sort of quantify that as a couple of percentage points with some lasting shift to go afterwards. There's a question, though, it's is that wallet share penetration of 2019 appropriate to think about as the natural state of affairs? When I think about home improvements kind of right to win the wallet or maybe propensity to win the wallet, we have better conditions among our customer, than do other sectors of the consumer economy. Our customer is the homeowner. And the homeowner has seen, again, just an inflation in their balance sheet that they never anticipated. They have jobs. They've seen income gains. And so our customer is just, on a relative basis, doing very well. And so it's hard to say that we should revert all the way back to 2019, should home improvement capture a greater share of wallet because of those dynamics. That's an unknown.

So you think about that share of wallet shift, obviously, there was a big payment last year around grills, patio sets and the whole DIY outdoor space, gardening and so forth. So are there any categories or parts of the store where you think that share of wallet shift is further or what -- normalization is further along, where the lagging side of that equation, too?

There were some unique stories in 2022 that you've mentioned. '20 and '21, for all of us, were the years of the backyard. We all spent time in our homes. We all spent time outside. We all spent time grilling, and people bought a lot of patio sets. And so we've always seen hot seasons in certain categories come and go, but that's always balanced by other parts of the business. And so I -- when I think about the rest of the business, I really just think what's driving us right now is project demand for improving homes across our categories. So I may not be answering your question, but I -- we get the pullback or the pull-forward question, a lot in demand. I've been looking for pull forward in home improvement for the last 15 years. We've had half decade runs in appliances, where I thought there's no way that anyone in the United States needs another refrigerator. And yet, I just keep getting surprised every year after year. I think that the nature of it is that just because you bought a grill last year, doesn't mean you're not going to remodel your kitchen this year. I don't think that people think about, "Okay, I've spent enough on my home. I'm done now. I'm not going to spend any more." That's not what we've seen in human behavior. We see that other categories just offset each other as the year goes on. And I think that, that has something to do with another unique attribute that I think is just one of those long-term attractive attributes of home improvement. Name another consumer segment where you can improve your standard of living but making investment at the same time. You improve your home, your standard of living goes up and you're making an investment. And there's just nothing else like that. And so that's why the spend across home improvement just tends to be more -- really more general and across categories, as time goes on by our customers. And as we know, as you begin to engage in home improvement, it becomes this flywheel. The more you engage, the more you spend.

So it's a good segue in the spring side. So obviously, as you mentioned, '20 and '21 was the outdoor time for all of us. There were some giveback this year -- last year. How did you plan spring for this year? How are you thinking about some of those key categories? And is there any inventory risk in terms of carryover inventory that could lead to some markdown in promotion?

Well, we plan spring the way we plan spring every year. And spring pops in different areas of the country at different times. It's probably our most volatile part of the business, if you just think about when do you set -- when do you receive goods, when do you set, when do the sales begin to really kick in, but that's part of our operating model. Part of that operating model is also having the ability, if we need to, to carry over seasonal inventory. We did see that dynamic in '22 as we had a late spring, and so we had an inventory position that mostly reflected inflation at the end of the second quarter in 2022, but mostly -- but in a much smaller -- to a much smaller degree, reflected a little bit of seasonal carryover. And that's part of our inventory this year. That is -- or rather, we've carried it over. That forms the basis of our seasonal inventory this year, and we feel very comfortable with the inventory position. We're always getting out of seasonal inventory. It's part of our cadence. And there's nothing abnormal about the inventory position right now.

You've been at Home Depot, I think, since 2005? Peak at that, housing cycle is '05. You've seen a lot of different mini cycles within bigger cycles. And you've also lived through a lot of shocks to consumer, and obviously, in March, there's been a multitude of headwinds that have hit the consumer and not the least of which is the crisis, and you've heard different retailer restoration hardware, Williams Sonoma talk about some sort of lumpiness in March, around the shock to the consumer. So I guess from your perspective, as you've seen shocks in the history, is your consumer more not focused on things like a banking crisis, you had the gas shock last year? Is it something that right now in March, weather trumps everything and that's going to ultimately drive the business -- so the question really is, how does your consumer responds in short periods of time around shocks?

I don't know that we're any different from other sectors of the consumer economy, if you're talking about a true material shock. I don't know that we've seen any shocks like that. The retail numbers will prove that out, at least year-to-date. Weather is a factor in our first half sales, we don't provide quarterly guidance. And we always think of the year as 2 halves. We don't think about the quarters and in particular, spring breaks right at that boundary between Q1 and Q2. And so that can vary year-to-year. We have had a wet start to the spring as a nation and as a continent. And so weather does impact home improvement demand. But that's what we call the bathtub effect. Spring always happens, and it just depends on when. But we're still early in our quarter. March is early in the year and April is a big month for Q1.

Yes. And then the other, I think, hot topic is a debate around the health of the consumer and a lot of articles in the journal, white-collar recession and tech layoffs and low-income, a lot of wage pressure there, supporting that. You serve the homeowner and the homeowner has an above-average income. So as you've observed what's happened over the past year, what's your view in terms of the performance around different income demographics?

Well, I can speak for our customer, and I do think the homeowner shows a higher degree of sustainability in their spend. That's a hypothesis, but it's proven to be true in periods that aren't the GFC. And so we have a resilient customer. At the same time, again, we're in a period of kind of a unique period where monetary policy is designed to have an impact on everyone. So it remains to be seen what that impact will be. We have a healthy customer.

It's a great segue. As you think about how you approach the guidance for 2023, it is such a unique year. Did the guidance inherently anticipate that the impact of the Fed gets worse over the year? Or did the guidance basically assume that the impact of the Fed was essentially baked in already and was not going to get worse?

We're never going to try to be that precise with reading the economic tea leaves. We really look at the year as a whole and say, "Okay, let's just take the midpoint of the economies we trust and the ones we trust, say flat consumer." When we think about the shape of the year, it's really more influenced by compares and by the lumber dynamic we see in the market. So if you want to think about the shape of the year, again, we've guided flat. From a comparison perspective, the first half faces harder compares than the second half. And the lumber dynamic, which we didn't include in guidance, but what we did say and I'll say today, is if lumber prices remain at levels that we saw at the beginning of the financial year, we could see a point of pressure to comp. That pressure is, for the most part, in the first half of the year and skews towards the first quarter. And so that's just a little more color with respect to the shape. That's how we constructed the guidance.

Yes. So my last question, then I'll open up the microphones for everybody in the room, is a great company -- something I've learned at looking at retail for 20 years, great companies focus on the customer and try -- and then the financial outcome is sort of the sort of outcome of what you're trying to achieve with the customer. Obviously, companies trying to turn the dials, but the spreadsheet doesn't lead the strategy.

Yes.

So as you think -- and that is absolutely the hallmark of Home Depot. At the same time, you are the CFO of the Home Depot. So what financial outcomes are you trying to drive for shareholders?

Well, to me, it's all about operating profit, dollar growth and return on invested capital, making sure that I can drive -- we can drive earnings growth as fast as possible and deliver an appropriate return on the capital required to make that happen. And the building blocks of that are absolutely growing the top line faster than the market and then delivering operating expense leverage as we flow volume through our business, and that's been a hallmark of the Home Depot. We have always generated operating expense leverage, and we intend to continue that. That is our operating model. If you think about -- again, if we are able to drive superior earnings growth, and we think that the case is set for that, I worry less about the componentry of the P&L. If we have outstanding earnings growth, I worry less about product mix, for instance. But I would also just make some comments about margin because everybody has the question. We focus on operating profit dollar growth. Part of that will be operating expense leverage with volume. We operate in a rational environment. There's really nothing in our market that would suggest anything but stability in gross margin. And so those are kind of the building blocks. As we find opportunities to outgrow the market, in a perfect world, what we are pursuing, particularly with the Pro, we can talk a little bit more about that. In fact, I'll talk about it now. There is a -- there's a part of our market -- of the Pro market -- so we've just spend, $900 billion addressable market. About half of that is the Pro. We've always been the destination for the smaller Pro. We're a convenience destination, the cash-and-carry destination. Delivery has always been a part of what we do, but it's been ancillary. We certainly, over our history, have not led with our delivery capabilities. What we have identified, though, is that there is an opportunity for us to win the larger project. We're a project retailer. We sell across categories. When we think about the Pro plan purchase, which really means the Pro is planning a purchase ahead of time, and it's typically having that product delivered to the job site. The overall mix of a home improvement project doesn't really change with the size of it. But in order to win the larger order, a larger project, we have to develop different capabilities. And so we're doing that. We've built an incredible Pro ecosystem that begins with our digital relationship with the Pro, where we have our Pro actual loyalty program embedded in a unique application and digital experience for the Pro that allows faster ordering, allows job segmentation and has proven to be incredibly sticky. And then that extends into the brands that we sell once they're purchasing from us. No one carries the brands, the Home Depot cells. We are the destination for the brands that the Pros trust. And then we're building delivery capabilities in one supply chain that allow us to be the preferred delivery partner to the Pro. We've never been in that position before. And we still have a ways to go. To truly win that larger project, we have to have a different stance on extending credit to the Pros. We have to have a different stance on billing and pricing and order management and order staging, but we're getting there. And back to your -- to the question on operating dollars and rate. If we do it right and we win that entire large project, there's really no reason that, that mix should be any different from the mix we see today. There may be a phasing as we begin to make inroads with that larger Pro of, okay, do we need to -- by its nature, if you win the front end of the project, you're more likely to win the back end, and that front end tends to be maybe more commodity-heavy. But over time, no reason that mix should change.

Great. Awesome. So with that, I'd love to open it up for Q&A. Please remember to pick up the mic.

I have a couple of margin questions. So when you have seasonal carryover from last year, is that margin accretive or margin dilutive just because of the costs baked in?

We've always managed that as part of our business. And so I wouldn't consider it to be a dynamic that has an impact on us.

Okay. Great. And then on the Pro side, is there a big difference in margins on the larger versus the smaller Pro? Or do you assume, you need more services in -- on the larger, but I could be wrong there.

What we're building doesn't exist in terms of a value proposition to the Pro. And so I think that's why it's hard to say because what our Pros tell us in markets where we're more mature with the ability to sell the whole project is, we've never been able to work with only one supplier. There's a value to that. And so we have to be very thoughtful about how we deliver that value and at what price.

Richard, can you quantify -- I know you guys have been very open with some of the additional compensation arrangements that you made increased compensation for frontline workers for workers across the organization. Can you quantify just on per hour, what's kind of the -- what's been the increase in average hourly wage over the last several years with the multiple initiatives that you guys have implemented? And then secondly, have you seen a change in the quality of the work, however, you quantify the quality of the work. And I guess I'm particularly interested, not as much in the people who are more on knowledge-based have probably always received an above-average kind of wage rate, but maybe the reliability of kind of the cashiers and the staffers that maybe were at the lower end of your tier of labor.

We don't typically break it out or quantify average wage and how that's evolved. We have always strived to make sure that we are -- we pay competitive wage, but we also have a competitive total package. That includes career pathing. We can tell a much different story to an incoming associate than we think most retailers can. I want to give you an example, but I will answer your question. I was at our store manager meeting last week. This is where we bring in all store managers and a number of other folks to our annual meeting. And I was presenting, and I just asked because I wanted to highlight what I would say are the legends of the Home Depot. I said, "Everyone with 20 years of tenure or more, please stand up." And I was expecting not a massive population, a vast majority of the room stood up. And I'd know that. I have the stats around it, but it's pretty overwhelming to realize that the leadership team of the Home Depot, which is really the nexus of that is the store manager, is someone who has dedicated their entire career to the Home Depot. I don't think you find that anywhere else in retail. And so when we think about taking care of our associates through compensation, one thing that -- we've made several wage moves across the last few years. And we're all -- the entire economy is observing wage inflation that has remained more persistent than product cost inflation. We're all managing through that. We felt like we've managed appropriately. We felt like we've been able to maintain the customer experience, that we're accustomed to offering. But we also expect wage inflation to persist, and we felt that there was too much risk in the turnover levels that we had observed continuing too much risk, that the customer experience could deteriorate. And we also knew there was a dynamic that I think is true across the economy, the dynamic of compression. Lots of retailers are increasing their entry wage. But in our $1 billion wage investment that we announced at the end of the year, a significant proportion of that investment actually went to highly tenured associates as well. Every hourly associate received a wage increase, no matter what the tenure. And we increased our starting wages, and now there's no market where starting wage is lower than $15 an hour. And that number varies with respect to market dynamics across the country. Chris, you kind of said -- you paraphrased it but I'm going to use the line from burning markets that we run the company on the basis of. If we take care of the associates, they will take care of the customer, and everything else will take care of itself. This is the reason why in 2020, March of 2020, we announced an extended paid leave program and took almost $1 billion charge, because we knew that the most important investment in our company is the trust our associates have in it. That's what is behind the wage as well as just the persisting wage inflation that we're all working through. I may have missed a part of your question, but...

I guess the [indiscernible].

We weren't happy with the level of turnover that we were observing through kind of '21 and '22, and that was part of the reason behind the wage move. Since we have made the wage investment, it's been very well received. We expect that we will see real benefits from that investment.

Matt?

Just a follow-up on the wage piece. I guess, the $1 billion investment, is that intended to get you back to a baseline where you can just grow in line with labor inflation? Or was the intention to go beyond that with the upfront investment and sort of put yourself in an advantaged position?

There was a consideration given to entering our most important hiring season, the spring. And so we wanted to -- we felt like now was the appropriate time given the importance of spring. And so we know it's our job to procure assets at market clearing levels, right? We know it's our job to make sure that we are -- our expense base reflects the fact that we're the low-cost provider. That will be a position that we will seek to extend indefinitely, right? There -- that's part of our economic flywheel. We must remain the low-cost provider. But we are going to make sure that we stay a pace of wage inflation. We don't know how long that will persist, but our thinking was, our associates are too important. The spring selling and hiring season is important, so we're going to make this smooth now.

Just tying together 2 separate things. One is the potential move from shift from goods to services and then maybe staying there and then your aspiration to build something bigger in Pro. If I put those 2 things together, are there -- is there any appetite for M&A and a whiteboard, if you will, of what you might want to look at to expand your...

So we always look at buy versus build, right? We have a vision and a strategy. And our job is to make sure that we build assets in the fastest but wisest way to get us where we want to go. M&A could always be a part of that. HD Supply, that acquisition was a part of it. And just a shout-out to that part of our company. The integration of HD Supply with our legacy MRO assets, which were -- came from an Interline acquisition, that integration has gone exceptionally well. HD Supply participates in a $100 billion segment of that $900 billion addressable market. We are the largest player in that residential MRO segment. But yet, we feel like we're vastly underpenetrated. And we've got -- we are the low-cost provider in that market, and we've got a long way to run there, and we intend to lean into that business. So we feel proud of our acquisition track record. We have made acquisitions over time that have been small from a P&L perspective, but extremely important from an overall enterprise perspective, acquisitions of data science companies that have allowed us to price in a smarter way. And so, it will always be a part -- an option for us, but it's always a buy-versus-build decision.

I'll follow up on that. So I think there's a lot of actual confusion amongst the investor community and what your Pro initiative actually is, and where you are in terms of having scale ability to take share in those markets. So you mentioned the MRO, $100 billion opportunity. Can you talk about like how much of your business -- how much share you have in that market is represented by MRO? And then the other side is the Pro plan purchase. That's been part of the supply chain build for the past 5 years. Where are you in terms of being in terms of accelerating the growth there? Do you have the capabilities? Or are we still building those capabilities such that, that opportunity, which is a bigger market, I think, is a bit further out?

Well, first, on the MRO space, we have single-digit percentage market penetration in that residential MRO space. And yes, we're the #1 player in it. It's vastly fragmented, and we see the ability to gain share, and we're very optimistic about that. We have a great team in place. On the larger Pro-planned purchase side, we are building something that has never existed before. So if you think about the economy that has supported that Pro plan purchase in the competitive set that has, it's very fragmented. It can tend to be product-specific. And as our Pros in Dallas, which is probably our most mature Pro market tell us, I work with a dozen vendors. I work with a dozen suppliers when I'm doing a remodeling project. If you can be my only supplier, that changes the game for me. But there are capabilities -- we've built some of what we need. We never wanted to build capacity for a 20-year vision, though. That was never how we designed it. We designed one supply chain to build several years of capacity to prove the point. And kind of something we don't talk a lot about, but one supply chain was designed -- and we'll make it a little bit more real, a component of one supply chain, our flatbed delivery centers, where we are able to deliver orders from DCs instead of from our stores, which is the way we've historically done it. But we've built it on the back of the network that replenishes lumber in our stores. So we -- when we envision this, we said we're going to build capacity to be able to deliver to the job site, but the most economic way to do it, is to do it along the same rails that our building materials are replenishing our stores. And so most of those facilities actually share functionality. One truck is going to the store, another truck is going to the job site. As we grow -- and look, and selling to that larger Pro does take a different approach. It takes a sales force. It takes differentiated pricing, smarter pricing. It takes a deeper understanding of assortment. It takes a different level of delivery capability. But all these things exist in the world today. What doesn't exist is a supplier like us that has relationships across all product categories. That's the differentiator. And so that's what we're building on. Everything else that's required exists out there in the world. We're not building anything unique. The uniqueness is our position across all product categories.

And then from the asset...

But if -- but, Chris, if this was easy, everyone would do it, right? We want to be smart. We want to scale appropriately. This is not a 1-year vision. This is a long-term vision that will allow us to outgrow the market over -- we see as a very long extended period of time.

How many markets will you have that are in sort of a Dallas capability, maybe not a Dallas scale, but Dallas capabilities by the end of '23?

We will be -- I hesitate to say, we're at our full power in any market. And so I would perhaps characterize it as, we'll be in a majority of the major markets in the United States in '23, '24 with a full complement of distribution capabilities. We will continue to build on those other capabilities that allow us to win [indiscernible] orders from that kind of base of incumbents. But again, what I'd emphasize is our vision has evolved and even grown since, we first began to think about Pro plan purchase. It really began as, we have deliveries coming out of our store every day going into the flatbed truck. Think about the inefficiency of that cost model. Okay. We've brought product into the store. We've set it in the bay. We then have a workforce, who is not a true warehouse order pick workforce, picking extremely large orders of building materials, walking them back out of the store, putting them on a flatbed that's in a Class A retail space driving around consumer cars. That's a horrific experience and a bad economic model, but we've had it forever. So what do you do? Well, you say, "What's the lower cost, more capital-efficient model?" Take the order, send it to a DC that has more inventory depth. So think about a Pro who has a large order quantity, they're likely to need us to pick from a number of stores to be able to fulfill that order. Hard it is to coordinate an order we're picking from 5 different stores to send to one job site at the same time? That's not what we were built for. We can do that from these DCs. And so the early part of the vision was, let's just do what we do better and cheaper and faster and become a more efficient delivery company in home improvement. As we begin to have success is we realized, "Gosh, we can penetrate with customers that we never had the right to win with before." I don't know the boundaries of that, and that's why it's so exciting. But we're going to do it the right way. This is something -- The Home Depot wasn't built overnight. It was built through meticulous planning and meticulous getting the model right. And then once we got the model right, yes, there was that period of, "Okay, let's go." We're not there with respect to the Pro plan purchase, but that's what we're building towards.

Mitch?

Richard, you said that the Pro market is about $450 billion, I believe. Could you just talk about how that segment between small, medium and large? And then just talk about the competitive set that you're facing in large? Are there regional players? National players? Or kind of how do you perceive the competitive environment?

Thank you. So as we last measured it, at the $450 billion, about $100 billion of that, we would say, is the residential MRO. So the remainder of that $350 billion is really what you would call the market for our product, right, whether it's -- and this isn't new construction. There's a tiny part of that $350 billion that maybe we sell into right now. But for the most part, it's remodeling and repair and then just general home improvement as executed by the Pro, right? That market breaks down loosely, half and half, small, large, but you kind of have to be careful with definitions there because we're really after the large order, right? And so as project demand builds and shifts, then perhaps a larger part of that $350 billion is going towards larger projects. So it's not an easy number to calculate. But our history has been built on that small Pro. We're not taking our eyes off of that. We have not shifted any capability whatsoever away from serving the small Pro. If anything, what's good for the large Pro is good for the small Pro. And so those capabilities for building in the Pro Extra app, the ability to order online, just all of the points of relationship we're building with all Pros, we're in a different stage than we were 3 years ago.

And then on the competitive side? The MRO business seems to be more defined. Who are you competing with on the Pro plan purchase?

It's just -- it's a highly fragmented market that tends to be regional or local of distributors, mom-and-pops, showrooms. And so it's fragmented, with respect to how you think about the home improvement retail segment, which is also still fragmented. We have 17%, give or take, of that larger market. So plenty of room for us to grow in all areas, plenty of room to grow with the consumer, plenty of room to go with the Pro. And I do want to mention that. We've talked a lot about the Pro. We've emphasized a lot about the Pro. We've got to win every home improvement occasion. We're not taking our eyes off any of it. They're -- and so when you think about the consumer, what we think is probably most important is delivering the most -- the best experience in retail for that consumer. And there are examples of changes that we've made in our model to improve our experience and take friction out. We've built a network of market delivery operations founded around the idea that our appliance delivery experience was worse than we'd like it to be, to put it mildly. And the reason it was worse than we like it to be is because, once we made the sale, we lost all connection with the customer experience. We had a third-party company managing all of our customer deliveries. And so what we did over the last 5 years was build out a network and begin to take control of the last-mile delivery experience. And so, we now own it all the way up to installation. When there's a problem, if there is a problem, we can take care of it immediately on the spot. 4 years ago, there may be days that went by before we knew there was a problem for our customer. That's one example of where we've seen VOC just go to a different level. And we know with more complex transactions with the Home Depot, the -- it's harder to get it all right. And when you have an appliance delivery that our customers think about that, they may take a day off of work to have an appliance delivered. We got to make sure we deliver that appliance or we were able to notify our customer in time so that they can adjust their plans. It's that kind of improvement in the experience that is driving a tremendous amount of our focus. We've got to get better every single day to take friction out of our customers' lives.

A follow-up on the -- back on the Pro. To the extent that an order to a job site is now being delivered from a distribution center or a flatbed distribution center instead of the store, to the extent that, that project delivery also includes things, besides building materials, right, you can sell them tools, you can sell all that kind of stuff. Is that coming from a store? Or is everything coming from a distribution center in that example?

Well, we're always going to aspire to what we call ship from best location. And sometimes, that includes the store. It's entering the evolution of thinking on -- back in 2008, everyone said that physical stores are an anchor. In our case, they're the hub of our experience. And we've actually learned that there are deliveries that are best executed from the store. That's not going to tend to be the building material side. But we have a -- we've built the capability really through car and van delivery to deliver almost all of our assortment same day, next day in major markets. And we know the demand there, is healthy and something that we'll continue to support. So it really is a ship from best location. There are other DCs besides the flatbed DCs that we've built. We call these DFCs, direct fulfillment centers. We had -- we've had 4 of them for quite some time that are -- think about them as national delivery centers going to any ZIP code. But what we've built over the past several years are similar buildings that are concentrated around local market delivery that enable big and bulky delivery. And so if you think about the promise of that, number one, those will be utilized per delivery. So there will be a part of the assortment that goes out on a box truck instead of a flatbed truck. But you think about the possibilities of freeing up space in our stores, if we're able to deliver a big and bulky vanity or patio set or riding ore or grill to use same day or next day versus having the stock in the store. It's a productivity measure, as well, as a customer service enhancement measure.

Then the other question was, you highlighted the fact that to the extent that Home Depot can deliver to a large Pro to the job site advantage versus you, as one supplier versus multiple suppliers that the Pro may have used in the past, what's a more important driver for that decision for the Pro? Is it dollar savings, because you're going to deliver it cheaper than 10 different suppliers that were used in the past? Or is it more of the simplicity, the efficiency of dealing with one versus multiple suppliers?

You have to be able to execute. So if a customer gets better execution out of 12 suppliers versus 1 -- and by that, there's an indirect dollar savings. If you can get the product to the job site the minute that I need it -- or maybe not the minute, but the day, I'm not wasting any labor. But if you can't, I'm wasting labor. And so that's what's on their mind more than product cost. When you think about remodeling, labor is not an insignificant component of that job. That's what they're managing. And so it really has more to do with execution than it does kind of cost savings per se. But again, we're building something that doesn't exist. And we will continue to manage that economic model to drive shareholder returns.

Awesome. That's a great endpoint. Thank you so much, Richard.

Thank you.

Thank you everybody who joined the meeting. Have a great day.

Thank you all, for being here.