The Home Depot, Inc. (NYSE:HD) Q1 2023 Earnings Call Transcript

The Home Depot, Inc. (NYSE:HD) Q1 2023 Earnings Call Transcript May 16, 2023

The Home Depot, Inc. beats earnings expectations. Reported EPS is $4.09, expectations were $3.8.

Operator: Greetings and welcome to the Home Depot First Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Isabel Janci. Please go ahead.

Isabel Janci: Thank you, Christine and good morning everyone. Welcome to Home Depot’s first quarter 2023 earnings call. Joining us on our call today are Ted Decker, Chair, President and CEO; Billy Bastek, Executive Vice President of Merchandising; Ann-Marie Campbell, Executive Vice President of U.S. Stores and International Operations; and Richard McPhail, Executive Vice President and Chief Financial Officer. [Operator Instructions] If we are unable to get to your question during the call, please call our Investor Relations department at 770-384-2387. Before I turn the call over to Ted, let me remind you that today’s press release and presentations made by our executives include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to the factors identified in the release and in our filings with the Securities and Exchange Commission. Today’s presentations will also include certain non-GAAP measures. Reconciliation of these measures is provided on our website. Now, let me turn the call over to Ted.

Ted Decker: Thank you, Isabel and good morning everyone. Over the past 3 years, we grew our business $47 billion or 43%. After this period of unprecedented growth, we expect the demand would moderate in fiscal 2023, which our first quarter results reflect. Sales for the first quarter were $37.3 billion, down 4.2% from the same period last year. Comp sales declined 4.5% from the same period last year and our U.S. stores had negative comps of 4.6%. Diluted earnings per share were $3.82 in the first quarter compared to $4.09 in the first quarter last year. Our sales for the quarter were below our expectations, primarily driven by lumber deflation and unfavorable weather. Particularly in our Western division as extreme weather events in California disproportionately impacted our results.

As you will hear from Billy, where weather was favorable, we saw strength in key spring-related categories such as live goods and other garden-related categories. As we look beyond weather and lumber deflation, our underlying performance in the quarter was mixed. We saw more pressure across the business compared to what we observed when we reported fourth quarter results a few months ago. While there was relative strength in project-related categories like building materials, plumbing and hardware we had many departments with negative comps in the quarter and continue to see pressure in a number of big ticket discretionary categories. DIY customers outperformed the Pro in the quarter, but both were negative. While internal and external surveys suggest that Pro backlogs are still healthy and elevated relative to historical norms, they are lower than they were a year ago.

Additionally, recent external data points suggest that the types of projects in these backlogs are changing from large scale models to smaller projects. Though we are only one quarter into the year, we believe the underperformance this quarter relative to our expectations, lumber deflation and continued uncertainty around underlying demand warrants a more cautious sales outlook for the remainder of the year. Richard will take you through the details in a moment, but we are now guiding to a comp sales decline between 2% and 5%. Reflecting this updated comp guidance, we now expect our operating margin rate to be between 14.3% and 14% and earnings per share to decline between 7% and 13%. We continue to navigate a unique environment. We remain agile and respond to evolving customer dynamics while always being an advocate for value.

In addition, we feel confident that the investments we have made in wage are driving the intended results. As Ann will discuss, in the short timeframe since our most recent wage enhancements took effect, we are attracting a greater number of qualified applicants and attrition is down. Lastly and as you would expect, we will continue to focus on driving productivity and efficiency across the business. While the near-term environment is uncertain, we remain bullish on the medium to long-term outlook for home improvement and our ability to grow share in this large and fragmented market. We look forward to sharing our perspective on the many opportunities ahead when we meet at our Investor and Analyst Conference coming up on June 13. Our team continues to focus on what is most important, our associates and customers.

Our merchants, store met teams, supplier partners and supply chain teams did an outstanding job delivering value and service to our customers throughout the quarter. I’d like to close by thanking them for their dedication and hard work. I’d also like to introduce Billy Bastek, who is recently named EVP of Merchandising. Billy is a 33-year veteran of the Home Depot and brings tremendous experience to the role, having spent its entire career with us in various roles of increasing responsibility throughout the merchandising organization. Not only is Billy a world class merchant leader, he is also a fantastic steward of our culture. And it’s my pleasure to welcome him to the call today.

Billy Bastek: Thank you, Ted, and good morning, everyone. I want to start by also thanking all of our associates and supplier partners for their ongoing commitment to serving our customers and communities. As you heard from Ted, during the first quarter, our sales were below our expectations, primarily driven by lumber deflation and unfavorable weather. We also saw a continuation of the trend we observed in the fourth quarter with consumers pulling back on big ticket and some discretionary type purchases. However, where weather was favorable, we saw strength in smaller ticket outdoor projects. Turning to our department comp performance for the first quarter, 4 of our 14 merchandising departments posted positive costs, which are building materials, hardware, plumbing and millwork.

During the first quarter, our comp average ticket increased 0.2% and comp transactions decreased 5%. Excluding core commodities comp average ticket was primarily impacted by inflation across several product categories as well as the demand for new and innovative products. Deflation from core commodity categories negatively impacted our average ticket growth by approximately 335 basis points during the first quarter driven primarily by deflation in lumber. During the first quarter, we saw a significant decline in lumber prices relative to a year ago. As an example, on average, framing lumber was approximately $420 per thousand board feet compared to approximately $1,170 in the first quarter of 2022, which is a decrease of 64%. Turning to total company online sales.

Sales leveraging our digital platforms decreased approximately 2.9% compared to the first quarter of last year. For those customers that chose to transact with us online during the first quarter, over 45% of our online orders were fulfilled through our stores. DIY customers outperformed the Pro in the quarter, but both were negative. Pro results experienced a disproportionate impact as a result of lumber deflation and a wet start spring – wet start to spring negatively impacted both customer cohorts. Big ticket comp transactions or those over $1,000 were down 6.5% compared to the first quarter of last year. We saw some big ticket strength across Pro-heavy categories like portable power, gypsum and pipe and fittings. After a couple of years of unprecedented demand in the home improvement market, we continue to see softness in big-ticket discretionary categories like patio, grills and appliances that likely reflects deferral of these single item purchases and pull forward.

In addition, we’ve seen demand soften across other parts of the business, including flooring, kitchen and bath. This softer demand may reflect consumers moving away from larger to smaller projects. And while there are factors impacting the home improvement market, our merchandising organization will continue to focus on being our customers’ advocate for value. This means continuing to provide a broad assortment of best-in-class products that are in stock and available for our customers when they need it. We will also continue to lean into products that simplify the project, saving our customers time and money. That’s why I’m so excited about the innovation we’re bringing to the market, whether it’s Leviton, Decora Edge, Viega Copper press fittings or the launch of Bar Dynasty exterior paint, just to name a few.

At our upcoming investor conference, I look forward to sharing more about these products and some of my favorite product innovations with you in person. It’s the power of our vendor relationships, coupled with our best-in-class merchant organization that allows us to offer our customers the best brands with the most innovation to solve pain points, increase functionality or enhanced performance at the best value in the market. Now let’s turn our attention to spring. While we’ve had a slower start to the season, we continue to be excited about the lineup of products we have for our customers and remain ready to help them with their outdoor projects or outdoor living needs. As you’ve heard us say many times, we have a great lineup of outdoor power products and our assortment of RYOBI, Milwaukee, DEWALT and Makita offers something for everyone building on an ecosystem of innovative tools powered by the same battery platforms, and our live goods look incredible.

We’re ready for spring with everything from shrubs to a variety of flowers, herbs, vegetables for every type of Gardener. With that, I’d like to turn the call over to Ann.

Ann-Marie Campbell: Thanks, Billy, and good morning, everyone. We believe that in order to provide the best customer experience, we must focus on cultivating the best associate experience in retail. Last quarter, I spoke about the investments we have made to make it easier for associates to succeed at the Home Depot. We also announced that we would be investing approximately $1 billion in annualized compensation for frontline hourly associates. Today, I want to update you on key areas of improvement that we’ve seen thus far. Our ability to attract qualified pools of candidates and higher on the top tier of these pools has improved even in our higher-volume stores. And in March, we saw the greatest year-over-year improvement in our attrition rates across all associated tenure cohorts that we have seen in some time.

As a result, we are seeing improvements in key customer service metrics as well as benefits to our operations in the form of consistent staffing and less safety incidents across all our regions. These improvements are exactly what we set out to achieve with this wage investment. The consistency and talent of our workforce is an important foundation for driving both customer service and productivity. It also gives us the ability and confidence to accelerate other key initiatives that are yielding positive results with respect to customer service and productivity. We have implemented changes to our order fulfillment processes to drive speed and efficiency when picking and staging orders for customers. Historically, we have allocated fulfillment hours based on overall order volume.

Now we have transitioned to allocating hours more accurately based on the types of products being picked. Just for example, it takes us less time to pick and stage [indiscernible] versus a patio set. We are also grouping fulfillment orders in batches so that associates can pick multiple orders at one time. We also continue to focus on simplification. We’ve talked about leveraging the Sidekick application to help associates prioritize the highest value task more effectively. Powered by our machine learning logic, Sidekick direct associates to key bays where on-shelf availability is low or out exist. Since Sidekick was rolled out last year, we have seen improvement in our on-shelf availability for all SKUs, but we have seen the most improvement in our high-velocity SKUs or the products that are key drivers of our business.

This has translated to an increase of approximately 300 basis points in our self availability customer service scores. While this app is helping us to be more efficient with our task in activity and improving our customer experience in the process, Sidekick is just getting started. These initiatives are just a few examples of the many different types of projects that can drive significant impacts for customers, our associates and our shareholders. I am so excited about all that our store teams are dealing to focus on both the customer and associate experience and look forward to sharing a lot more in a few weeks. None of this would be possible without our amazing associates, and I want to thank them all for what they do every day to take care of our customers.

With that, let me turn the call over to Richard.

Richard McPhail: Thank you, Ann, and good morning, everyone. In the first quarter, total sales were $37.3 billion a decrease of approximately $1.7 billion or 4.2% from last year. During the first quarter, our total company comps were negative 4.5% with comps of negative 2.5% in February, negative 7.5% in March and negative 3.7% in April. Comps in the U.S. were negative 4.6% for the quarter with comps of negative 2.8% in February, negative 7.5% in March and negative 3.7% in April. Our first quarter comp sales missed our own expectations, particularly in the months of March and April, driven primarily by 2 notable factors. First, lumber deflation drove a negative comp impact of approximately 220 basis points versus the first quarter of 2022.

Second, unfavorable weather, particularly in our Western division further impacted our results. In the first quarter, our gross margin was 33.7% a decrease of 8 basis points from the first quarter last year, primarily driven by increased pressure from shrink. We continue to successfully offset supply chain and product cost pressures while maintaining our position as the customer’s advocate for value. During the first quarter, operating expense as a percent of sales increased approximately 25 basis points to 18.8% compared to the first quarter of 2022. Our operating expense performance during the first quarter reflects the planned compensation increases announced during our fourth quarter 2022 call as well as a onetime benefit from a legal settlement.

Our operating margin for the first quarter was 14.9% compared to 15.2% in the first quarter of 2022. Interest and other expense for the first quarter increased by $72 million to $441 million due primarily to interest on our floating rate debt as well as higher debt balances than a year ago. In the first quarter, our effective tax rate was 24.2%, up from 23.9% in the first quarter of fiscal 2022. Our diluted earnings per share for the first quarter or $3.82, a decrease of 6.6% compared to the first quarter of 2022. During the first quarter, we opened 2 new stores, bringing our total store count to 2,324. Retail selling square footage was approximately 241 million square feet. At the end of the quarter, merchandise inventories were $25.4 billion, essentially flat compared to the first quarter of 2022 and inventory turns were 3.9x down from 4.4x last year.

Turning to capital allocation. After investing in our business and paying our dividend, it is our intent to return excess cash to shareholders in the form of share repurchases. During the first quarter, we invested approximately $900 million back into our business in the form of capital expenditures. And during the quarter, we paid approximately $2.1 billion in dividends to our shareholders, and we returned approximately $3 billion to shareholders in the form of share repurchases. Computed on the average of beginning and ending long-term debt and equity for the trailing 12 months, return on invested capital was approximately 43.6%, down from 45.3% and in the first quarter of fiscal 2022. Now I will comment on our guidance for fiscal 2023. As you may recall, last quarter, we provided flat sales and comp guidance for fiscal 2023.

As we mentioned last quarter, our guidance did not include potential impacts from lumber deflation, which we noted could negatively impact our performance for the quarter and the year. As a result, lumber negatively impacted comps by approximately 220 basis points in the first quarter. Given the negative impact of the first quarter sales from lumber and weather, further softening of demand relative to our expectations and continued uncertainty regarding consumer demand patterns, we are updating our guidance to reflect a range of potential outcomes. We now expect fiscal 2023 sales and comp sales to decline between 2% and 5%. As a result of the change in our sales outlook, we are now targeting an operating margin between 14.3% and 14.0% for the year.

Our effective tax rate is targeted at approximately 24.5%. We expect interest expense of approximately $1.8 billion, and we are anticipating between a 7% and 13% decline in diluted earnings per share compared to fiscal 2022. As Ted mentioned, we expected 2023 to be a year of moderation in the home improvement market, driven by monetary policy actions to dampen overall consumer demand. In our view, we are in a transitional period in the consumer economy. Setting the short-term impacts of monetary policy aside, we know that the home improvement customer is healthy and we believe the medium to long-term underlying fundamentals of home improvement make it one of the most attractive markets in retail and the economy as a whole. We believe that we are well positioned to meet the needs of our customers with a broad assortment of products, strong in-stock levels and knowledgeable associates.

The investments we’ve made in our business have enabled agility in our operating model. As we look forward, we will continue to prudently invest to strengthen our competitive position, leverage our scale and low-cost position to outperform our market and deliver shareholder value. Thank you for your participation in today’s call. And Christine, we are now ready for questions.

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Chris Horvers with JPMorgan. Please proceed with your question.

Operator: Our next question comes from the line of Steven Zaccone with Citi. Please proceed with your question.

Operator: Our next question comes from the line of Zach Fadem with Wells Fargo. Please proceed with your question.

Operator: Our next question comes from the line of Michael Lasser with UBS. Please proceed with your question.

Operator: Our next question comes from the line of Brian Nagel with Oppenheimer. Please proceed with your question.

Operator: Our next question comes from the line of Scot Ciccarelli with Truist. Please proceed with your question.

Operator: Our next question comes from the line of Brad Thomas with KeyBanc. Please proceed with your question.

Operator: Our next question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question.

Operator: Our next question comes from the line of Seth Sigman with Barclays. Please proceed with your question.

Operator: Thank you. Our final question will come from the line of Steven Forbes with Guggenheim. Please proceed with your question.

Operator: Thank you. Ms. Janci, I would now like to turn the floor back over to you for closing comments.

Isabel Janci: Thanks Christine and thanks everybody for joining us today. We look forward to speaking with you at our Investor Conference on June 13th.

Operator: Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.