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

Good morning. We're going to start our next fireside chat session. It's my pleasure to introduce the members of management team for Home Depot.

Good morning.

Good morning. We have Ted Decker, Chief Executive Officer -- Chairman, President and Chief Executive Officer; and Billy Bastek, Executive Vice President of Merchandising.

Good morning.

Thank you so much for joining us.

I know when we were talking to investors about what they wanted to hear today from Home Depot, obviously, the macro is a big piece of it. And obviously, it's been a challenging environment for housing, specifically. But also the consumer is dealing with a lot well, separate from the housing environment. So I wonder if you could maybe start talking through what you've seen this year in terms of consumer behavior? How much do you think is housing influenced versus maybe the macro being influenced?

Right. So our -- the consumer generally has hung in right. I mean I think that's been the surprising thing of the post-COVID dynamic when everyone was questioning, not if we were going to have a recession, but when and what kind of landing we'd have. And PCE continued to perform, Personal Consumption Expenditure, which we look at very closely, we think that was largely driven two things, the wealth effect of the last several years in people's equity portfolios have been robust. And in our business, housing, in particular, house values have gone up 50%, since the end of '19. And that relates to about $18 trillion of incremental value in the U.S. housing stock, which is pushing $45-plus trillion. So there was a great wealth effect in people's equities portfolios and the value of their homes, which led to a reasonably low savings rate. Savings rates, I think, under 3% now. So all that translated into more spending. People also had good jobs with raises. Our customer, in particular, tends to have good employment, wage growth, their home, so participated in that value creation. So that's what really kept the consumer powering, which being 70% of the U.S. economy kept the U.S. economy powering and we haven't seen this recession. What's happened in our business, there are a few things to work through. One was just the amount we spent on goods is a PCE dynamic from services to goods during the pandemic, a lot of that was spent in home improvement. So we've tracked that largely back pre-pandemic levels, the share of PC and goods and services. You look at durables in particular, and housing-related segments that are reported, again, more or less back to 2019 levels. So we think that's largely played out. There's -- you all know when you go to airports and hotels. I mean a lot of people are still traveling. So not only did you have a lot of home improvement activity played out, but people are still off traveling quite a bit. And you've definitely pulled forward some projects and some durable items. We've cited things like grills and patio sets as examples. But we think most of that has played out. The dynamics that was a bit of a headwind for Aster in the last couple of years, in addition to that dynamic playing out was with the higher interest rates, housing really has struggled on the turnover side. So we've seen a dramatic fall off in housing turnover in the last 8 to 24 months. And it's something we don't traditionally talk a lot about is the demand base on housing turnover because it's been relatively stable at 4% to 5% of homes, call it, 5 million, 6 million homes turn over every year. The spend on home returns is multiples of an average housing unit that isn't turning over. And we saw about 1.5 million units drop off in a very short period of time. So if you do the math, sort of, let me pick any number, $10,000 incremental unit, that's $15-odd billion a year that's out of our space. So that's been a bit of a headwind. Everyone is expecting interest rates to come down at some point and hopefully housing turnover would return to more historic levels. But then the last thing that we saw more in the first, second quarter, in addition, I'll put weather aside, we had a strange cold, wet and then very hot weather dynamic. But more telling was -- for the first time, just some general uncertainty has put people off larger projects. And that was just when are rates going to go down, when are mortgage rates going to go down, are we going to get this recession, even things like the election, just sort of some general uncertainty that people said. I'll just put that larger project off, larger bathroom remodel, larger kitchen remodel, basement remodel, adding square footage to the house, many of those projects would be financed. So while there's this incredible store value in the home, as I said, the equity values have gone up nearly $18 trillion. Capable equity for HELOCs and the like is $11-odd trillion. People we just saw a pause to say we just -- and you can see these numbers, right? The cash out refi and the HELOC activity is way, way down. But we're optimistic all things revert to the mean and things will get back to normal and that housing turnover and remodel activity will pick up again. So we're just controlling what we can control in the meantime and focus on taking share and satisfying our customers.

And just drilling down into a couple of things. You said, obviously, housing turnover is the big headwind and that is affecting more remodel, but what about repair. So if the housing turnover does kind of bump along the bottom here, you don't see any relief over the next year. Is there some combination of needed repair? And maybe even pent-up demand because transactions have been negative for quite some time now, where you could return to growth in a scenario where housing turnover doesn't fully unlock?

Sure, absolutely. First of all, I mean, if you just lap the headwind, which if a somewhat near-term normal is this level of housing turnover, well once you lap that and that is the level you don't have the drag. We've talked a lot about our AUR. It was about 150 basis points of pressure in the first half, dissipating as the year goes on. So all that sort of price stabilization that happened following the crazy supply chain dynamics during COVID, all that sort of played out. We don't see deflation. So the absence of headwinds in of itself when you have a GDP were north of 2, just your normal activity with normal pricing and normal repair activity would -- that would be sort of a base case comp for us. Billy, I don't know if you add...

The break fix part of our business continues to be strong. Some of the pieces that Ted mentioned, have been more challenging. Certainly, the finance piece is bigger projects and that certainly weighs on the AUR piece of 150 basis points. We kind of call it down the middle of the store. We're really pleased with what we see down the middle of the store. Houses are getting older, so there is that repair maintenance that needs to be done. We feel very good about the portions of our business and our Pro engagement in those businesses as well as it relates to that and just cycle through some of the things in the macro and then we'll see on the bigger, larger projects. But on break fix, we feel very good about that. Obviously, if you've got you might repair a faucet versus buying a new faucet, there's some of that in there probably, but we're really pleased with kind of the middle of the store and how that's performing versus some of the things that are a little more maybe out of our control. And we got to continue to focus on operational excellence and you go through the demand curves that we've had in the last 4 years and taken some muscle memory for us to get back to some of the operational excellent things. We're doing both in merchandising and on the operations side. So feeling good about the controllables and what we can control as it relates to that.

And then if I can just kind of round up the macro conversation that I think in the past, you've talked about the sweet spot for mortgages maybe coming down to the 5% to 6% range to maybe see that housing turnover unlock. But what kind of lag do you expect from that? Would you expect to see business come back right away? Or would there be some kind of lag?

Yes, there'll definitely be a lag. And we referenced the 6% rates, I think, toward the end of last year came down toward that level. We instantly saw mortgage application and housing transaction respond and then rates quickly went back up towards 7%. So we're now 6.5%, 6.4-ish, rates have come down 50-odd basis points the last several weeks in expectation of this cut. But this won't be an immediate thing. When you think of buy homes, get the mortgage, close in 2, 3 months, move into the home, hang some pictures, figure out what project you might want to do. There's definitely a lag for projects when you buy a new home. There are some things that are instant, right? I mean it's -- I kidded about hanging pictures, but go to Home Depot and go to the hardware department and get picture hanging up. So there are things that are immediate. But projects like, okay, we want to change a bathroom, change a kitchen, remodel, add some square footage, that will be a bit of a lag. But anything to get housing turnover back to historical rates would be obviously a super positive for the business.

Okay. Could we maybe talk about the dynamics around DIY and DIFM? DIY has remained challenged. I think Pro is still outpacing DIY. Can you talk about the dynamics there and why you're seeing more pressure in one versus the other? And Billy, I wondered if there were any category differentials between the 2 categories in terms of performance and strength?

Yes. I mean yes, I'll take the first part of your question up front. If you think about the Pro business, which is still strong and you talk to Pros and we do our intercepts. And there's certainly well above historical norms, there's certainly been a reversion backwards a little bit. But that Pro is also, in many cases, the arm of the consumer. So that we kind of see them as closely tied together that project that our consumer is going and hiring a contractor for. So they kind of go hand in hand. As it relates to categories, and we talked about this a little bit on the earnings calls, we've seen great performances in vinyl plank flooring as example, paint, outdoor power equipment, which you talk about a category that had a lot of pull forward as part of the pandemic and we started to see that minimize. And we're really -- and Ted mentioned a couple of other businesses earlier, but we're really seeing -- we're probably not all the way through it from that standpoint, but really seeing some performance there. So we've got a fair amount of green shoots as it relates to that. Those aren't financed projects where we're continuing not to beat that drum. We continue to see that pressure. And even in a category like vinyl plank, great engagement from both the consumer and the Pro. We've seen great share gains across those categories and some others. And so again, not to beat that drum, but that finance piece is still creating some pressure. But that Pro, you talk to Pros they're still engaged. They've got a book of business. It's come down some, but from a historical norm standpoint, our Pros still have plenty of business.

And you've mentioned market share gains a couple of times. I think before the pandemic, I remember, the comp bill to be something like in line with GDP plus a little for market share. How are you thinking about market share contribution to the comp today? Has it accelerated? And how are you gaining that share and from where?

Yes. So I mean that's always a tough one to triangulate the market share when we think about $1 trillion TAM, and that's broken out between chains such as ours and hardware stores and distribution and a lot of private companies in the space. So hard to pinpoint share. But we're confident we're taking share. We do look at the reported industry associations. Most every sector has the industry association, whether how many squares are being produced and sold in roofing, water heaters, et cetera, there's industry data. So we look at how we perform against that. We look at our manufacturer partners and what they report as selling in market and how we compare what our purchases are from those suppliers. And of course, we look at like companies reported sales growth. So if you look at all those, you'd say, yes, Home Depot is absolutely taking share. And the goal is to take share in any environment. When you look at the huge demand boost in 2021, '22, we grew $43 billion, $45 billion. I mean, just as you look at the nominal growth, no one even came close to that. And then in this period of moderation, our down hasn't been as steep as others. So on the down we're taking relative share. And then with something like the SRS acquisition in their model of driving same branch sales, greenfield and then infill M&A, they continue to perform. We reported they grew 8% in the first half of their year. We didn't own them that whole period of time, but they're taking share. They operate in 3 verticals: roofing, pool and landscape. They have 3 mirror-image publicly traded companies. We're not going to segment report, but we're clearly internally looking at that, and feel very good and outperformed each of those segments in the first half of the year and in the second quarter. So we're not going to, Kate, ever put it like, "Hey, we're going to get this many dollars and this many basis points from share gain." But every single regional Vice President, operating their 100-odd stores, every one of Billy's merchants, I mean, we wake up every day, how do we put the best value and customer service in the marketplace, satisfy the customers and take share.

When we talk about the $1 billion -- the $1 trillion TAM, we have 17% share. So we are laser-focused, almost healthy paranoia, I'd say on how do we go get share and how do we continue to look at all the data that Ted mentioned, but we only have a 17% share at the end of the day. So there's lots of opportunity for us in the market that we're in today.

You mentioned SRS, and that's probably, I think, with regards to our investor questions where we're getting the most questions. So I wondered if we could maybe back up a little bit because I think the SRS acquisition was done in an effort to grow your complex Pro business. And I think we start to hear more about the complex Pro at your June Analyst Day 15 months ago or so. Could you maybe level set us and just talk to us about who the complex Pro is? And what you're trying to accomplish with this specific customer? And the role SRS is playing in going after the complex Pro?

Sure. So if you go back to just take the complex purchase occasion, we look at this enormous TAM and the real good news is virtually every customer set in that TAM is a current customer of Home Depot. So everyone in handyman and electrical, plumbing trades, small homebuilders, while we don't service the scaled homebuilders, I mean they're even going into Home Depot store for an emergency pickup. So we have the customer set. It's a matter of on what purchase occasion are they shopping at Home Depot. In the smaller repair modelers and handymen, they are spending the vast majority of their wallet in our channel. And fortunately, the majority with Home Depot. The overall $1 trillion TAM is about 50-50 consumer-driven and Pro driven, as Billy said the consumer, the homeowner writes the check in all instances, but whether you're going to do it yourself or have someone do it for you. That market is about 50-50. Our business is about 50-50. So Pros always been super important in our satisfaction of the Pro needs in terms of everyday value, brands, assortment, service, depth of inventory, job lot quantities, et cetera. But what we realized is, while we have virtually 100% of share of wallet of the Solar Pro or our channel does, the larger Pro is using Home Depot for an emergency purchase and infill convenience because we're open later at night, we're open weekends. But their principal material purchase for their jobs is coming from distribution. And we've always known this. It's no secret and it's no mystery of what you need to build to satisfy that customer. So when we -- I mean, I've been at Home Depot almost 25 years. And I mean I can't tell you the number of strategy decks that we've written that says, "This is what you need to do to capture more share of wallet." And if I went and pulled the strategy deck from 25 years ago, it would say the same thing. You need a sales force. This is a relationship business. It's a solution selling business. These customers, these pros want a point of contact. So you need a field sales force that's knowledgeable that can solution sell with that customer. You need order management. So these are more complex checks. They cover more categories of goods. They are sequenced over a period of weeks, if not months, to do a job. You need to sell on open credit, and it's not even so much open credit as to bill when shipped. So when we take even a special order that will be weeks, for, say, a special window package, we're taking payment today. No Pro is going to pay distribution upfront for something they're not going to take delivery up for weeks in advance. So you need order management, and then you need delivery. And delivery is probably the critical piece. This is all job site delivery and it needs to be done at scale, repeatable fashion on time and complete. So these building blocks, we've always known what we have to the capability set we need to build to capture that purchase occasion. And you might say, well, that's great, Home Depot, even if you do that, I mean, that Pro is being satisfied today, every share dollar, every dollar you get in revenue is going to be taking share from someone else, the value prop that we're offering is in deep research on this. And what we're seeing with the Pros that we're working with today is we can simplify their project. They are dealing with so many different people on their job sites. They're dealing -- every trade distribution vertical that they are working with have their version of those capabilities I went through. So they're getting multiple salespeople on a job site. They're getting multiple bills, they're getting multiple delivery trucks, very, very complicated. Our value prop is if we can give you that same service level. Make your job easier, we're never going to get 100% of the spend or all the different categories of goods. But if we can take your 15 down to 12 or you're 15 down to 10, make your life easier. You have one sales representative. We understand your entire project. You have one billing department to work with, et cetera, will that make your business run better and simplify your go-to-market strategies? The answer is a resounding, yes. And as we build out these capabilities, as they mature and as our larger Pros engage with them, they are the highest comping customer in our portfolio. So those are the green shoots of the strategy coming to life, but not saying it's not challenging. It's a lot of technology to build. It's a lot of distribution, delivery last mile, sustainable capability to build. It's a lot of sales people to hire and train and make sure they live the Home Depot values. These are incentivized sales forces. But at the end of the day, you need to live by The Home Depot culture and values and what we think makes our company special. So all this is coming together. We don't want to get ahead of ourselves because you cannot disappoint this customer. They have a crew on job site and they're waiting for the material, and it doesn't show up. That's not a good day for anybody, so we don't want to disappoint them. And we'll continue to build this out and drive incrementality in the prize here is we've identified is $200-odd billion of TAM that we really don't meaningfully address today. So as Billy said, we have 17% share, you pick up each share point is a lot of revenue for Home Depot.

And then, Kate, if I could just add one thing to the SRS piece, because I think it's important to note. We took our TAM up $50 billion when we acquired SRS. And while they have a tremendous amount of capabilities that service what we call complex Pro for what we're going after there, they're in the specialty business with 3 distinct verticals. So we -- as I said, the capabilities they have that we can bring to market with our other avenue here is really a distinct difference than what we outlined last year, June and what we've been managing throughout getting more of that business and how do we learn and continue to learn. But it really is a distinct opportunity on the SRS side, which is why we took that TAM up $50 billion after the acquisition.

And then for my last question, before we get into the lightning round of questions is how does the supply chain work into the complex Pro strategy? You had made a very big investment in your supply chain for a multiyear period. I think ultimately, so you can deliver to the jobs -- job site, high level. So now that, that is completed. How do you see that working with to accomplishing what you need to do with the complex Pro? And is there a lot more room for efficiencies and innovation when -- I'm sorry, automation when it comes to the supply chain?

Yes. There's loads of room for productivity because we're still really new at this, in having this type of supply chain. We've largely completed the bulk of that initial build-out that we articulated. We've put up 150-plus facilities around the country. Different type facility for different type products. But the one that really has a very powerful sort of productivity flywheel are our bulk distribution facilities because there will be 3 phases in what they do or 3 district capabilities that they do. First and foremost is they replenish the stores. So each of these buildings is daily full truckloads of building materials virtually every day to each of our 2,000 stores in the United States. So the tremendous productivity loop and scale of product movement from replenishment. The second thing they're doing is taking existing delivery business out of the stores. So we've run delivery with third-party think of large flatbed 18-wheel trucks that are circulating on kind of milk runs using our stores as the distribution point to deliver to consumers' homes and job sites today. Think how inefficient that is. How many times you're touching the product going from the suppliers, manufacturing, the suppliers' distribution to our warehouse distribution, our bulk distribution facilities to the store, maybe going up in the overhead with the forklift then being pulled down again, staged in the aisle, blocking customers only to be loaded back on a truck again to go to a job site. So now we're pulling that delivery volume, existing delivery volume out of the store using these same replenishment assets. So again, getting that scale. And the third capability is incremental new complex purchase occasion that we've chatted about that will go directly from those distribution centers to the job site. And again, with these larger pros, the volume redefinition of job lot quantity when you're coming from a DC versus picking from a store. So that's a tremendous flywheel as these buildings mature. But again, they're new. I mean in the scheme of a 45-year-old Home Depot, some of these buildings are, I think, the one in L.A. opened a few months ago. So this is new, new capability and process that we'll get better at.

Great. We're asking 5 questions for every company. Some are more applicable than others, depending on who we're talking to. But to start with expectations for the environment in the second half of '24 relative to what you've seen in your recent results, better, worse or the same?

Well, if I had the Magic 8 ball, yes -- no. It's -- we've had a couple of factors. We had AUR in the first half, as we called out on our earnings call of 150 basis points of impact. We saw the consumer in the back half of Q2. I think Ted mentioned, step back a little bit, not only the financing, but a lot going on in the macro and elections and so forth. We'll see what happens with rates and so forth and again, the election and our business is fairly normalized as it relates to what we saw in the first half. We won't be lapsing 150 basis points of AUR. There are some things that we're lapsing in terms of just maybe at the bottom on some of these things, but it's still going to take some time. And certainly, through November and we'll see kind of what the balance of the year holds for the rest of the year. But as we said on the call, similar performance so far as we had in the first half.

So probably their updated guidance, same is -- that's our update.

On the topic of margins, and this is more of a '25 question, but materials and labor and then maybe tariffs, would you expect these cost pressures to be the same, better or worse next year?

Yes. I mean we've fairly normalized through the cost environment. We saw some transportation flow into P&L. We talked about that on our call. But from a cost standpoint, we've seen that fairly normalized. Along with labor, we've talked a lot about our labor investments that we've made. And so we think that's more normalized. Tariffs is another discussion. We'll wait and kind of see on that. We've got some experience around how do we manage that. We've been working on diversification for some time as part of what happened post 2016 and certainly during the pandemic we manage diversification. We probably got hung up a little bit on just total supply. So -- but from a cost standpoint, it's really normalized in the environment.

Okay. do you expect to have more or less points of distribution in the U.S. next year? I feel like I can ask these now to you guys because there's more distribution coming, right? Yes.

That will be the 775-odd SRS branches. And while we're largely built out on supply chain, there's still some markets that we haven't built that building material distribution capability that I just described. You got -- these are big sites on rail lines, and there's still some major metros that we haven't secured that real estate. But you'll open single-digit numbers of these each year, but more or less the same other than that big SRS branch increase.

And new stores?

And new stores, yes, thank you for bringing that up. It's really important we're building new stores. Our industry, we stopped building housing largely in '08, and we have a fundamental shortage in housing. So people wonder, is this 50% increase in housing is going to be a repeat of the great financial crisis that was housing led. I'd say definitively, no. That was a speculative housing boom, this is fundamental imbalance of supply and demand. 2 million to 4 million housing units short in the United States, and we're not even making a dent. We're building barely to annual need. So we're going to have a shortage of housing for a long time. So we stopped building housing and then our sector stopped building stores. Everyone finished up whatever pipeline they had in '07, '08, '09. And other than an odd store here or there, we haven't built. And we took a step back and said, since the industry has stopped building, the nation has grown about 35 million, 40 million people with tremendous migration to the Sunbelt as well. So we fired up the real estate team and said, dust off the models and take a look and we see a very rich pipeline, modest compared to the build-out of Home Depot nationwide, when we are building as many as 200 stores a year, but we'll do 25-odd stores a year. The ones we've opened, and we're starting to open these now. They're all performing better than pro forma. We feel great about the real estate site selection and the modeling. And 25 a year puts a lot of energy and positive momentum into the business. So we'll have those as well.

Great. And then last quick question. You guys are EDLP. You're not very promotional, but just as you look towards the back half of this year versus last year, how do you view promotions both for Home Depot and in the industry?

Yes. It's -- we've often said we really do live in a rational environment. When we think of promotions, we think about creating excitement and driving traffic into our stores. How do we create the best value for our customer, and like I said, driving traffic into our stores. There's been -- go back to pre-pandemic, we're kind of in the same cadence as it relates to creating those events and times in our stores. Labor Day. We've got a big selling season coming up with our gift center events as it relates to that and driving that excitement there. But from a promotional activity, it's really normalized to the pre-pandemic levels. And you've got some challenges in the category like appliances, but other than that, it's quite normalized, and we're pleased with kind of the -- going back to the levels that we were pre-pandemic.

Great. Well, thank you for being with us today. Appreciate the time.

Thank you, Kate. Appreciate it.