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

It's my pleasure to introduce the members of the management team for Home Depot and to moderate this fireside chat. Today, we have with us Richard McPhail, Executive Vice President and CFO of Home Depot, and we have also with us Billy Bastek, Executive Vice President of Merchandising. Thank you so much for being here today.

Thanks for having us.

Yes. Thanks for having us.

I wondered if we could maybe start out. Obviously, we know very well the state of the housing environment. So, I wondered if we could maybe talk to more of the areas it's coming from and how you position yourselves to continue to take advantage of that over the longer term if the macro backdrop stays the way it is?

Let's turn to Billy for specifics on that, and then we'll open it up a little bit to the broader macro.

Yes. No, we were real pleased with the Q2 results, actually overperformed what we had originally forecasted -- saw a great balance across our business. 13 of 16 categories, as you mentioned, positive comps. And I'd say more broadly, there was a lot less of our top 20 categories that made up the sequencing of that, really only a couple of them were related to the seasonal business. So, really core down the middle. I think plumbing, electrical, hardware, tools, really had a great performance, both in-store and online. So, we're really happy with the balance across the entire portfolio. There's some pressure related to some of the categories that we didn't call out, but really pleased with the performance and I think the maintenance categories. And really, the core home improvement business has really held up terrifically well, not only in Q2, but in the first half overall.

And, Kate, we think that we're accelerating our share gains. When you look at the broader macro, it's really hard to see any points of inflection in the stats that we look at. The consumer has become more pressured over time over the last 6 quarters, if you look at consumer sentiment, consumer confidence and other factors I'm sure you'll want to get into. Our job in this environment is to control what we can control and to continue to lean into investment because those investments are really the driving force behind the share capture we're seeing.

Right. And just given the share gains that you have been so successful in gaining, I mean, again, you're seeing growth. There are others where you've seen double-digit declines in the environment. Have you seen much change in the competitive landscape with smaller players and just the overall environment in terms of what's driving that share?

In an environment like this where the whole sector is pressured, we think it's a great opportunity for us to use our advantages of scale to take share. We are building off of a foundation that's been in place for the entire history of The Home Depot. Our real estate footprint will never be replicated. Our incredible associate base and our culture will never be replicated. But there are investments that we are making that we think differentiate us, whether it's tools that we're putting in the hands of our associates to make sure that it's easier for them to spend time serving customers rather than just doing tasking, from the product authority that Billy and his team bring every single day, to gains in delivery that our supply chain and our dot-com business are leaning into. And then our great Pro teams and our great Pro teams and our great Pro subsidiaries that are leaning in. So it's not just one thing that's leading to all these share gains. And some of these are really more, sort of, very recent as opposed to others. And Billy, maybe we can talk a little bit about delivery and how much of an advantage that's given us.

Yes. Certainly, delivery across, whether it's FDC delivery model, we rolled out ship from best location about 16 months ago at scale. We recently rolled out more expedited delivery out of the stores. We're seeing 65% of our parcel shipments are shipped same-day, next-day. And then exciting for us is using our network, both in stores and in our broader network, through our MDOs, 55% of our big and bulky products are delivered within 2 days, which we think has been a great competitive advantage and a great customer experience as well. So, we're really pleased with the delivery aspect, both in stores as we've lit our stores up and now with expedited delivery 2 hours or less, we're really pleased with the results we've seen across the board and the engagement from customers that have used that service, both in-store and online, and what we see from that basket from them more, go forward.

And that penetration of same-day, next-day delivery is increasing at an exponential rate. The thing that we love about it, though, is this reflects a strategy we set over 10 years ago when we said, "Look, what are going to be the 2 main growth drivers of The Home Depot? It's going to be figuring out interconnected retail, which includes e-commerce, but begins in the store, and then winning with the Pro, with the common denominator being exceptional delivery." And so we are now bearing the fruits of many years of investment. And it's exciting to finally be able to call out more directly and more bluntly. If you've looked at our marketing campaigns, if you just watch over the last 12 months, you can see we now have achieved the levels of confidence in our delivery capabilities where we're calling out bluntly, "Our goal here is delivery in 2 hours or less for a majority of the assortment in our stores, and we're working to shrink that delivery window every day."

And, yes, it was pretty prophetic. I mean, I do remember that Analyst Day from almost 10 years ago where you declared that you're going to be investing so much in the stores and the supply chain all in the name of speed. And here we are, and that's exactly what the customer wants. I feel that's a core tenet of all of retail now is how fast you can get and how convenient you can be to the customer. So, in that regard, I think value is the other important tenet for the consumer. And I feel like the pricing environment has just been so volatile -- and that's stating the obvious -- where you've had this multiyear inflationary backdrop accentuated by tariffs last year. And then you've started to see these tariff refunds come in, in the second quarter, and we've heard a lot about promotions and price investment and things to that nature. So could we maybe take a step back and walk through how you've approached the pricing environment, how you continue to convey value? And how do you think about the next 6 months to a year in terms of that value proposition for the consumer?

No, go ahead.

Well, let me just give some, just, financial guidelines and then let Billy talk about the strategy. On our second quarter call, we disclosed that we had received significant tariff refunds. We also clarified that those refunds were utilized to maintain value for the customer, and Billy will talk about that in a second. As you know, we maintained our guidance for the year. That includes maintaining our gross margin guidance for the year. And so you really, sort of, start from that footing. And, Billy, maybe talk about what our stance has been.

Yes. I mean, we came into the year with a lot of known things, but, obviously, since we started the year, some significant input costs incremental into the P&L that we did not have in our base case. So, a lot of what we did with the tariff refunds was we're committed to EDLP and creating value for our customers every single day. And so, we used a lot of that, as I said, to offset some of the impacts. In terms of the promotional activity, we've been less promotional. I mean, our focus is we've got a lot of levers that we can use. And our focus in merchandising has been to keep that value every single day. We've been less promotional. We've used some of the historical promotional activity to continue to make sure that every day, we can keep our prices where they are today, even with the significant impacts of what we've seen incrementally in the first half, we'll do that into the back half of the year. So, we worked closely with our supplier partners. The teams have done a great job. The merchandise team has done an incredible job. When you think about planning out promotional cadence and activity, you're doing that way in advance of what we saw into Q2. So, we were very rational in how we approached it with the entire mindset of keeping value for our customers and everyday low pricing, day in and day out. And we'll continue to do that through the back half of the year regardless of any impacts that we might see in the P&L. I'm really pleased with the team. We've been less promotional. We've used that to fund keeping those prices where they are every day.

Maybe if we can move into the Complex Pro. That's another moment in time that I vividly remember where you've made the declaration of the opportunity of expanding the TAM and going after the Complex Pro at another Analyst Day. And so now it's been a few years since you introduced your strategy. You've made several acquisitions. Maybe you could just take a step back and talk to us about the strategy, how you think it's going? And what you think are the biggest drivers going forward?

So, we compete in a $1.2 trillion addressable market. Of that, about $700 billion represents the Pro market. And we have, for a long time, believed and heard from our customers that we have a greater right to win in that $700 billion market than anyone else participating in the market. We've had the right to win; we haven't necessarily had the ability to win. And so, our stores have been a powerhouse for the Pro since we opened our doors. There is no more convenient partner that carries the product authority for the Pro than The Home Depot. And so, we're already building off of an incredible advantage -- real estate positioning, brand advantage and convenience, not to mention the service model in our stores with our associates. What we knew way back 10 years ago was we're getting a demand signal at our Pro desk that is asking for delivered sales. And so, the beginning of all this actually started where we said we are now reaching a problem where if we say yes to more delivered sales out of the stores, we are going to become a staging warehouse. And there were stores that were highly penetrated by the Pro, where you literally could not shop the lumber and building materials aisles because there were deliveries being staged. And we had such limited delivery windows. The first stage was build out the flatbed distribution network so that we can send these high-cost deliveries out to a more efficient delivery model. Once we did that, we realized that there was much more demand out there than we anticipated. We could carry a broader product set, and we could carry almost infinite depth in these flatbed distribution centers. But we also realized that we had to shift our orientation from a product cash-and-carry orientation to a service model orientation. That's what it was going to take to more deeply penetrate the Pro wallet. So, we built out the FDC network. We have been consistently building out an outside sales force, building out an order management capability, offering trade credit to our Pro customers. And then I would also say enhancing AI enablement for those Pros. I'll come back to that in a second. But I think it's important for all of our investors to understand this all begins in our stores; by far, the majority of the sales volume that we generate with the Pro customer is in the store every day. And so, it starts with investments we've made at our Pro desk that allow our Pro desk associates to understand who the Pro is, to understand what they might not be buying from us and to be able to market on the spot, and also to be able to execute orders more easily in the store at the Pro desk. Then we extend that to that complex sale, which you could think of that almost as the delivered sale that requires a little bit of more assisted selling. Now we've been building those capabilities really through time, probably in earnest since 2019, 2020. What we were a little bit worried about was if we light up delivered sales, that's going to cannibalize our stores. What we found is the more points of engagement we drive with our Pro, the more they spend in our stores. The more we deliver to a Pro, the more they spend in our stores. In 2023, we began talking to SRS because what we knew was while we're building out these capabilities, SRS was the most well-managed wholesale distribution company we had ever met, and we've met most of them. It gave us the opportunity to connect a best-in-class specialty trade distributor to us, not only to continue their growth in their own right, but also to give us an example of what great looks like from a delivery execution, really from a service model perspective. And so, now we have a best-in-class distribution service model attached to the giant of home improvement, and we see gains from that every day. And so, we know our Pros tell us that we continue to have the right to win. We have posted 8 quarters in a row of positive comp sales with the Pro. And we know that's not by accident. It's as a result of all the investments we've been making.

Great. I think for the longer-term algorithm, obviously, the Complex Pro gives you the bigger TAM, it gives you more growth opportunity. But I do think the flow-through is maybe a little bit less just given the nature of the business. So, how should we think about maybe the longer-term algorithm when considering the growth of the Complex Pro within the Home Depot enterprise?

So, I'm glad you asked that because I do think that there's a misunderstanding on Pro margin. So, if you think about some of the acquisitions we've made -- SRS, GMS -- they happen to be in categories that reflect margins that are lower than the company average for Home Depot, but that are very similar to our margins in the same categories we sell at Home Depot. But if you look at our Pro customer that represents more than half of our sales, their margin profile is the same as the margin profile of the consumer. The vision here is to sell across the entire project, which means that we should be able to earn margin that reflects the entire project, which would be more similar to today's margins. Acquisitions tend to have mix shifts. But, again, we are every day working on that vision to be able to say yes to any product sale within the project. And also, Kate, go back to that service model orientation. If we create the superior value proposition in the market, we should be able to earn margin from that value prop in the market. And so, we don't think that over the long term, it should necessarily be dilutive, although you might see some product mix impacts from time to time.

Okay. And I know there's a significant cross-selling opportunity here, too. You disclosed that 90% of Home Depot stores have facilitated or closed a sale through SRS over the last 12 months. I think you have a goal out there to do $400 million in cross synergies this year. So, could you maybe talk about that opportunity and where you see that going longer term?

Sure. Well, I think you start just at where SRS has begun to build cross-selling in its own right, where they've added GMS and then an HVAC platform. When you combine those with the power of The Home Depot, we are now able to approach customers like homebuilders -- small, medium, even large -- with the ability for them to consolidate their supplier base. And that cross-selling is -- the majority of the $400 million that we think we will generate this year in cross-selling is that combined sales effort of the SRS platform and The Home Depot selling into the builder and very large remodeler channel. But I'm going to come back to the point that it all starts in the store. You mentioned QuoteCenter. QuoteCenter is our internal platform we've used for many years to farm out orders that The Home Depot could not fulfill. By adding SRS and GMS into the enterprise, we now shift all roofing orders that we can't fulfill from Home Depot to SRS, wallboard, ceiling tile, steel stud to GMS. And that is growing -- the use of that, as you said, 90% of our stores have had SRS fulfill an order for them over the last year. And the growth in nominal dollars is quite exceptional. And so, while we think it's $400 million in cross-sell in 2026, we're looking forward to an even larger number in '27. And this also includes -- we don't talk a lot about HD Supply, but HD Supply has that sales channel into multifamily opportunities. HD Supply can now introduce SRS when they see a roofing opportunity at a multifamily complex. And so, we're really building an ecosystem of businesses that can cross-sell effectively. And we're in the very first innings of being able to actually create a streamlined process to do that cross-selling, and we're still gaining ground.

And just from a strategic standpoint, do you think you're at a place now where the business has kind of, been built out to what you envision it to look like? Or do you think you'll have to make other acquisitions along the way?