The Home Depot, Inc. (NYSE:HD) Q2 2023 Earnings Call Transcript

The Home Depot, Inc. (NYSE:HD) Q2 2023 Earnings Call Transcript August 15, 2023

The Home Depot, Inc. beats earnings expectations. Reported EPS is $4.65, expectations were $4.46.

Operator: Greetings and welcome to The Home Depot Second 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, Christie and good morning everyone. Welcome to Home Depot’s second 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. Following our prepared remarks, the call will be open for questions. Questions will be limited to analysts and investors. [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 the 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. Sales for the second quarter were $42.9 billion, down 2% from the same period last year. Comp sales for the total company as well as our U.S. stores also declined 2% from the same period last year. Diluted earnings per share were $4.65 in the second quarter compared to $5.05 in the second quarter last year. All three of our U.S. divisions posted low single-digit negative comps in the quarter. Our geographic variability narrowed significantly on a sequential basis as weather normalized, particularly in our Western division and spring-related categories rebounded relative to the first quarter. While there was strength in project-related categories like building materials, hardware and plumbing, we continue to see pressure in certain big ticket discretionary categories.

Pro sales performance was slightly negative in the second quarter and outperformed the DIY customer. While surveys suggest that Pro backlogs are lower than they were a year ago, they are still healthy and elevated relative to historical norms. Additionally, projects in these backlogs are generally smaller in scale and scope. In the second quarter, we are pleased with the consumers’ engagement with home improvement, particularly across small projects, which Billy will discuss in greater detail. Going forward, as we continue to navigate a unique and uncertain environment, our focus continues to be on operating with agility as we respond to evolving customer dynamics while also driving productivity and efficiency throughout the business. In addition and as we mentioned at our investor conference in June, we operate in a large and fragmented $950 billion plus addressable market.

We remain committed to growing the business and believe we are well positioned to continue capturing market share. To that end, I am pleased to announce HD Supply’s acquisition of Redi Carpet, a national MRO flooring provider with a proven track record. This acquisition, which closed at the beginning of the third quarter, extends our current product offering in the multifamily customer vertical with 34 locations strategically located throughout the U.S. Our team will continue to focus on what is most important: our associates and customers. Our merchants, store and met teams, supplier partners and supply chain teams did an outstanding job delivering value and service to our customers throughout the quarter. And I’d like to thank them for their dedication and hard work.

Before I close, I would like to send our thoughts and prayers to the people of Maui. While we are thankful that our people on the island are all accounted for, we are heartbroken by the loss of life and extreme devastation that the community must now navigate and we stand ready to help in the days, months and years ahead. And with that, I’d like to turn the call over to Billy.

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. In the second quarter, as we saw weather improve across the country, most notably in our Western division, we saw an increase in spring sales and strength in smaller-ticket projects. In addition, we saw a continuation of the trend we observed starting in the fourth quarter of fiscal 2022 with softness in certain big-ticket, discretionary-type purchases. Turning to our department comp performance for the second quarter, 6 of our 14 merchandising departments posted positive comps, including building materials, outdoor garden, hardware, plumbing, tools and millwork.

During the second quarter, our comp average ticket was slightly positive and comp transactions decreased 2%. Excluding core commodities, comp average ticket was primarily impacted by inflation across several product categories as well as demand for new and innovative products. Deflation from core commodity categories negatively impacted our average ticket growth by approximately 160 basis points during the second quarter driven by deflation in lumber. During the second 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 $715 in the second quarter of 2022, representing a decrease of over 40%. Turning to total company online sales.

Sales leveraging our digital platforms increased approximately 1% compared to the second quarter of last year. We’re excited about our customer engagement across our interconnected platforms as we continue to remove friction from the experience. We know the vast majority of our customers engage with us in an interconnected manner. Whether it be through project inspiration and research, transacting, fulfillment or support, our customers blend the physical and digital world. For those customers that chose to transact with us online during the second quarter, nearly half of our online orders were fulfilled through our stores. During the second quarter, Pro sales were slightly negative and outpaced the DIY customer. While surveys suggest that Pro backlogs are lower than they were a year ago, they are still healthy and elevated relative to historical norms.

And in the second quarter, we saw strength across many Pro-heavy categories like gypsum, fasteners and insulation. In addition, we continue to see strength across smaller projects with positive comp performance in a number of categories, including live goods, hardscapes and landscapes. Big-ticket comp transactions or those over $1,000 were down 5.5% compared to the second quarter of last year. After 3 years of unprecedented demand in the home improvement market, we continue to see softer engagement in big-ticket discretionary categories like patio and appliances that likely reflects both pull-forward of these single item purchases and deferrals. Our merchandising organization remains focused 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 continue to bring to the market. This quarter, we are excited to announce the addition of the Milwaukee brand to our assortment of electrical hand tools. Within this assortment, we will be introducing a brand-new line of innovative Milwaukee hand tools that provide a high degree of precision with lasting results for our Pro customers. We’ve already seen positive results with our Pro customers and feel confident that the addition of these Milwaukee tools will strengthen our position as the number one destination for the electrical trade in the big-box retail channel. Additionally, in kitchen and bath, we continue to bring innovation to the market with Glacier Bay.

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Glacier Bay is one of The Home Depot’s top proprietary brands known for performance and style. This fall, we are excited to grow our faucet lineup to include innovative functionalities, such as touchless and spring neck designs, add to our assortment of sinks and shower heads, while also expanding into new categories like disposals. We are also extremely excited about our lineup for Halloween. Our merchants have worked with our supplier partners to put together an expanded assortment of product offerings for this Halloween season, including the return of many fan favorites as well as new collections for the Halloween enthusiasts. These products bring excitement to our stores and help drive traffic. And our sneak preview of our Halloween lineup was a tremendous success.

We are thrilled for the full rollout in the coming weeks. With that, I’d like to turn the call over to Ann.

Ann-Marie Campbell: Thanks, Billy, and good morning, everyone. Our store teams have a relentless focus on cultivating the best customer experience in home improvement. We know that our associates are a key differentiator and they are essential in helping us sustain the customer experience we strive for. In order to provide the best customer experience in home improvement, we must focus on cultivating the best associate experience in retail. This means not only investing in competitive wages and benefits but also providing tools, training and development opportunities that make working at The Home Depot an endurable and rewarding experience. I am happy to share that our approximately $1 billion of annualized compensation investment that we announced earlier this year is having the intended effects.

This quarter, we continued to see meaningful improvement in our attrition rates, particularly among our most tenured associates. More consistent staffing levels are resulting in improved customer service, productivity and safety. These improvements are exactly what we set out to achieve with this wage investment. In addition to investing in our associates, we must also leverage technology to further simplify both the associate and customer experience. As you heard at our investor and analyst conference in June, our customers journeys differ. Depending on the project they are working on, they shop with us in different ways. There is the unassisted cash-and-carry purchase, which represents a significant majority of our in-store sales. And the remaining sales are assisted purchases, where customers need help in purchasing a product, a service or installation.

It is critical that we have the right products in-stock in the right quantity and on the shelf available for purchase, particularly for unassisted sales. That’s why you hear us talk about our focus on improving our on-shelf availability, or OSA, positions. We are working to narrow the gap between what is considered in-stock, meaning our systems indicate it is in-store versus on the shelf and available for sale for the customer. We are doing this by starting to leverage new technology such as computer vision. Computer vision enables technology to do what we previously relied on associate eyes to do and provide specific locations of depalletized product that is stored in our overhead. To start, associates will take a picture of bays using their HD phones.

These images then feeds into our systems and provide a single real-time view of inventory that can then seamlessly integrate into applications like Sidekick. Powered by machine learning, Sidekick directs associates to key bays where OSA is low or out exists. This helps our teams prioritize the highest-value task inside their respective stores. The beauty of the machine learning model is that the algorithm is continuously learning as computer vision images are captured and Sidekick tasks are completed. So it will get better and better at directing our associates to the right bay at the right time. While it’s early days, as we have begun implementing this technology, we have seen meaningful improvements in OSA, increased associate engagement and productivity and higher customer service scores.

Order Up 14:54: Not only does Order Up make it easier to fulfill a customer’s needs, but it also frees up more time for associates to spend serving customers that needs assistance while in our stores. These enhancements have made the average Order Up experience over 40% faster for the customer, which has led to improved customer service scores. These initiatives are just a few examples of the many different types of projects that can drive significant impact for customers, our associates and shareholders. I am so excited about all that our store teams are doing to focus on both the customer and associate experience. None of this would be possible without our amazing associates, and I want to thank them for all they do 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 second quarter, total sales were $42.9 billion, a decrease of approximately $900 million or 2% from last year. During the second quarter, our total company comps were negative 2% with comps of negative 2.6% in May, negative 3.3% in June and negative 0.2% in July. Comps in the U.S. were negative 2% for the quarter with comps of negative 2.6% in May, negative 3.3% in June and negative 0.4% in July. As you heard from Billy, during the second quarter, we continued to experience lumber deflation compared to the prior year. While lumber prices were down, we saw an improvement in unit productivity, resulting in a net negative comp impact of approximately 85 basis points versus the second quarter of 2022.

In the second quarter, our gross margin was 33%, a decrease of 8 basis points from the second quarter last year, primarily driven by pressure from shrink. During the second quarter, operating expense as a percent of sales increased approximately 100 basis points to 17.6% compared to the second quarter of 2022. Our operating expense performance during the second quarter reflects our previously executed compensation increases for hourly associates as well as deleverage from our top line results. Our operating margin for the second quarter was 15.4% compared to 16.5% in the second quarter of 2022. Interest and other expense for the second quarter increased by $49 million to $428 million due primarily to interest on our floating rate debt as well as higher debt balances than a year ago.

In the second quarter, our effective tax rate was 24.4%, up from 24.3% in the second quarter of fiscal 2022. Our diluted earnings per share for the second quarter were $4.65, a decrease of 7.9% compared to the second quarter of 2022. During the second quarter, we opened two new stores, bringing our total store count to 2,326. Retail selling square footage was approximately 241 million square feet. At the end of the quarter, merchandise inventories were $23.3 billion, down $2.8 billion compared to the second quarter of 2022. And inventory turns were 4.4x, down from 4.5x 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 second quarter, we invested approximately $800 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 $2 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 41.5%, down from 45.6% in the second quarter of fiscal 2022. Now I’ll comment on our guidance for fiscal 2023. Today, we are reaffirming our guidance for 2023. We expect fiscal 2023 sales and comp sales to decline between 2% and 5%. We are targeting an operating margin between 14.3% and 14% 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. In addition, we continue to focus on driving productivity in the business and feel confident that we will realize the previously announced $500 million in annualized cost savings in 2024. We also remain focused on meeting the needs of our customers with our leading product authority in home improvement, strong in-stock levels and knowledgeable associates. We will continue to prudently invest to strengthen our competitive position and 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.

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Q&A Session

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

Christopher Horvers: Thanks. Good morning, everybody. So I think the big question is for the industry, have we seen the bottom? You did a down 4.5% in the first quarter. You needed the down 2% in the second quarter. July was flat. So how are you thinking about the trends going forward? Was there anything in the second quarter that we shouldn’t extrapolate on a go-forward basis, whether that was weather shift? Or was there something about July that benefited that month in particular?

Ted Decker: Good morning, Chris, it’s Ted. The quick answer is, yes, July really was a weather shift. We had a particularly wet in cold June. And with that weather shift, the months of the second quarter were all sequentially about that same minus 2%. But to answer your question from a more macro perspective on where we see the industry and the demand, just start by saying, as you all know, we looked at 2023 as a year of moderation after the explosive growth we had the prior few years. And as we called out, consumers would be shifting their spending from goods to services. And while that shift is happening, the overall economy and the consumer in particular have remained incredibly resilient. As we all know, the economy continues to grow with a number – another great GDP print for the second quarter.

And fears of a recession or at least a severe recession have largely subsided, and the consumer is generally healthy. There’s PCE spending, continues to grow, albeit at a slower rate. And if you look at the home improvement customer, our core customer, the homeowner, they’ve seen continued growth in home equity over the last several years, strong job growth and increases in wages. So the core customer remains strong. And if you look at Home Depot, you look at our operations, what we can specifically control, we feel great about where we are halfway through this year, as you saw, the meaningful reduction in inventory. We think our inventory positions are better placed than they’ve been in the past few years. Our in-stock rates have continued to improve.

Our value proposition remains strong. And as Ann called out, the wage investments are really paying off. But given all those positives and – that we were pleased in the second quarter, uncertainties remain, Chris. We don’t know how quickly or further the share shift in PCE will occur and where spending in home improvement in particular will ultimately settle. And we don’t know how the monetary policy actions which are specifically intended to dampen consumer demand, what that impact will ultimately have on consumer sentiment in the overall economy. And as I said, while we did see the sequential improvement in our comp sales, a lot of that was a seasonal recovery in the second quarter. And as I said, specifically in July, as well as the impact of lumber is beginning to abate.

And as Billy called out, we do continue to see pressure in certain big-ticket, discretionary categories. So while there’s a lot of positives in the macro and with the consumer, we still see enough uncertainty really largely driven by this PCE shift and where that ultimately lands, that we – well, again, we feel good. We just thought there was too much uncertainty to take, for example, revise our guidance from earlier in the year. But having said all of that, long answer, when we do get through this period of moderation, we remain incredibly bullish on the sector. We couldn’t feel better about the macro for housing and home improvement and our prospects and ability to keep taking share in this huge and still largely fragmented market.

Christopher Horvers: Thank you for that. My follow-up question is on the ticket side. I mean you are – if you run stacks or CAGRs on your average ticket, it did deteriorate in the second quarter relative to the first. So can you talk about the drivers of that? And how much of that is this shift to smaller-ticket projects accelerating, because you are going to start to lap through that ticket pressure in the fourth quarter. So is what you’re seeing now indicative of that shift from large to small is accelerating, so we can’t just assume that we sort of annualize that out in the fourth quarter?

Richard McPhail: Well, Chris, this is Richard. First, just with respect to stacks and progression, what we’re encouraged by is we’re seeing – as cost pressures in our industry sort of abate, we’re seeing ticket and transactions actually begin to converge. And we think that that’s actually a healthy signal in the business. So I think that’s the most macro comment that we could make about ticket progression. With respect to large versus small projects, certainly, our customers and our contractors tell us that there is some stance of deferral when it comes to large projects. Customers are opting for – they are more likely to opt for smaller versus larger, and that may have some impact on ticket. But we’re also seeing the impacts of what we call softness in certain large-ticket discretionary item purchases like patio and appliances.

So there’s a lot going on there, but I think that the – maybe the most important dynamic is just kind of that nice recovery in transactions as both ticket and transactions begin to converge and normalize.

Christopher Horvers: Understood. Thanks very much.

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

Michael Lasser: Good morning, thank you so much for taking my question. Given this trend of small transactions coming in and maybe even replacing large transactions, is it more likely that you can take the low end of your guidance off the table of a down 5% comp for the year outside of some macroeconomic shock at this point?

Ted Decker: Well, Michael, I don’t want to go through the answer I just went through with Chris but – that’s pretty – that’s pretty much laid out the view. I mean, again, we feel really good about the second quarter. Clearly, we like the sequential improvement. And as Richard said, the normalization in settling, if you will, of a much healthier balance of ticket and transactions. But there’s still just a lot of uncertainty. Is the Fed going to raise? Are we going to get a budget deal passed? I mean there’s so many things out there swirling that – we just updated or reaffirmed in June that we’re just more comfortable standing pat right now.

Richard McPhail: And the other thing just to at least know that we’re watching is our share of PCE. We’ve watched this since our sales spiked in 2020 as not a perfect measurement, but certainly a way to think contextually about what we saw during the 3 years of unprecedented growth. As predicted, we’ve seen our share of PCE. As Ted mentioned, as we’ve seen share shift from goods into services, we have also seen our share of PCE steadily revert back towards 2019 levels. When you think about the bottom end of our sales guidance, that actually corresponds with the math that would say if our share of PCE reverted all the way back to 2019 levels, that would imply the low end of the guidance. We don’t see anything in our business today that tells us that that’s the trajectory, but that is the math of our PCE share shift.

And I’d also just repeat, Ted, we’re not sure where that share ultimately settles. The home is so much more important from a financial perspective for – you’d say all homeowners than it was 3 years ago that perhaps there’s an elevated level of home improvement spend in PCE versus prior years. We just don’t know. But that low end of the range does correspond to the PCE share shift math.

Michael Lasser: Understood. My follow-up question is Home Depot’s operating expenses this year are being impacted by the $1 billion wage investment. But SG&A growth over the last few years has been anything but normal. So the key debate here is, has the company entered a period where the cost of doing business has just gone up such that even if the cycle recovers in 2024, the company won’t see a significant improvement in its profitability because so much will need to be reinvested back in operating expenses based on what’s happening right now?

Ted Decker: Well, I wouldn’t paint that picture, Michael. Clearly, too early to talk about 2024. But we made a significant investment in wage, as Ann said, and we’re in a much more comfortable position on a national minimum level and where we are in competitive markets. So again, as Ann mentioned, we couldn’t feel better about the returns on that investment. We don’t expect that we’re going to need to make that outsize of an investment in the near-term planning horizon. Wage rates are still up, but we’re seeing those come down. Annual increases that we track month-to-month, as I’m sure you do, are moderating. So we don’t see another big wage investment. And then this business, as it always does, will leverage with volume in those dynamics of this P&L leveraging with modest comps. That investment thesis remains intact.

Richard McPhail: It might just do to remind, as we laid out in the investor conference, in a market-normalized case with 3% to 4% top line growth, in a normalized case, we expect margin expansion based on operating expense leverage that would lead to mid to high single-digit EPS growth. So nothing’s really structurally changed that much, but it is worth just pointing back to our comments in June.

Michael Lasser: Understood. Thank you so much. And good luck.

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

Zach Fadem: Hey, good morning. Can you help us unpack the cadence of DIY versus Pro from Q1 to Q2 as last quarter saw DIY outperform Pro for, I think, the first time in 2 years? And with that reversing out in Q2, curious how you think about the moving parts between the 2, and if we should expect the spread to widen or contract going forward.

Ted Decker: Zach, I wouldn’t read too much into that. There was so much noise in Q1 that I’d just say that was an outlier. And the theme of the Pro responding to the investments we’re making in outperforming the consumer that we just saw in Q2 is consistent with what we’ve seen. But for an outlier, very noisy Q1.

Zach Fadem: Got it. And Richard, you had talked about the $500 million in cost savings next year coming out of the base. But I believe there’s also about 10 to 20 bps of productivity benefit this year. And I’m hoping you could speak to, first of all, the differences between the two and the buckets of savings and then whether that 10 to 20 bps for this year is in the base today or if it builds through the year.

Richard McPhail: Sure. Zack, thanks. Yes, that 10 to 20 is something we called out at the very beginning of the year when we – or – and actually Q – when we talked about the progression of margin. And so – or rather the range of operating margin outcomes. That – you can think of that as really productivity that we anticipate in ordinary course. It certainly offset expenses such as the wage investment, but it was part of our original guidance and consistent with revised guidance in Q1 and consistent with guidance today. The $500 million cost-out that we anticipate for 2024 is separate. And it really reflects our – the rationalization in most part of a cost structure that we had to build up as we saw product volume skyrocket in 2020 and 2021.

So we built a cost structure that isn’t necessary today in today’s volumes. And so we will rationalize some of that cost structure. A good example would be a warehouse that we took a lease on to hold product during 2020 and 2021. We are looking at our real estate footprint, and some of that may well be rationalized. Those are the – and with that comes cost savings. That’s the nature of the $500 million. Think about it as a permanent reduction in our fixed cost base.

Zach Fadem: And all these are SG&A, right? Just to confirm.

Richard McPhail: There’s probably some – there could be some geography in COGS and in operating expense, but we haven’t settled in that yet. To your question, let me just make sure that we’re clear, that initial 10 to 20 basis points of productivity is included in our operating margin guidance for 2023. No part of the $500 million is included in 2023. That is assumed full year benefit annualized in 2024.

Zach Fadem: Got it. Appreciate the time. Thanks, Richard.

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

Scot Ciccarelli: Good morning, guys. You talked about relative strength in the smaller project spending, but in an environment with negative Pro sales and smaller Pro backlogs, how are you guys benchmarking your efforts to gain traction in the large and complex Pro business you’ve spent a lot of time talking about?

Hector Padilla: Scot, this is Hector. Good morning. As we mentioned in the investors’ conference, what we are building as far as the ecosystem for the Pro, it is hard and it will take some time. Now the good news is that it will also be very hard to replicate, as you know. And today, we’re very encouraged by the signals that we are getting from our Pro customers as they engage with different pieces of the ecosystem. We are in many markets today with the expanded ecosystem. There are pieces of the ecosystem that we don’t have fully deployed. Think of our order management system or a trade credit. But we continue to gauge our performance with our Pros. Those Pros continue to engage not only in the supply chain assets that we have built and with our outside sales resources as we expanded that team, but they are visiting our stores in a more frequent basis.

So we continue to be very encouraged by what that cohort is always performing, and we’ll continue to invest in the efforts.

Scot Ciccarelli: Okay. Got it. Thank you, Hector. And then just a second question. Inventory was down quite a bit even with the negative comp. Would you guys expect that to mark the bottom of your destocking process? Or should we expect inventory levels to continue to drop? Thanks.

Billy Bastek: Well, we’re pleased with the progress we’ve made relative to our inventory position. And you think about everything that’s happened in the supply chain and lead times associated with that has helped. Listen, we still have work to do to improve productivity. But we feel good about our inventory, and we have low obsolescence risk and super experienced merchant teams. So a lot of the dynamics in the supply chain helped us really. And at the same time, I might add, our in-stocks are better than they’ve been since before the pandemic. So we’re really pleased about the inventory productivity, but at the same time, our in-stocks, our ability to be in-stock below a feed as an called out or OSA. And so really pleased with both of those pieces.

Scot Ciccarelli: Got it. Thanks, Bill.

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

Jackie Sussman: Hi, there. This is Jackie Sussman on for Simeon. Thanks so much for taking our question. You were speaking earlier on small projects replacing large projects. Can you drill into the backlog a bit more? How much have they come off of peak? How far above normal levels are they? And is there any evidence you’re seeing that consumers are fully pushing off or canceling projects rather than just trading down? Thanks.

Richard McPhail: Well, I’ll start on that one. And if we rely on publicly published surveys, the one that we watch is the National Association of Homebuilders Index. We have seen backlogs declined sequentially. But yes, they are well above the historical average. And so you would really say the professional customer has been oversubscribed for so many years that they still have a full book of business, just not maybe oversubscribed. They may be taking phone calls again, but they are very healthy. Again, if you think about the historical average, and you can look this up, but historical average being a score for 50, the index is still at 61, so down from peak but higher than average.

Ted Decker: In addition to the publicly available indexes, obviously, we have millions of Pros and the field sales force that Hector mentioned. So anecdotally, we are getting loads of feedback from our customer base. They are still busy and engaged with those backlogs, but it’s their commentary to our sales force that they are smaller. So, that’s where we get the color on that dynamic.

Jackie Sussman: Got it. That’s helpful color. And just one quick follow-up. Shrink was the only real call-out on the gross margin line, can you talk about how that trended in the quarter? Did it get worse or any better? And are there any actions that you are taking to kind of mitigate that impact going forward?

Richard McPhail: From a financial perspective, shrink has been a consistent pressure over the last several quarters and even the last few years, and it’s something we are tackling every day. And Ann, maybe talk a little bit…

Ann-Marie Campbell: No, we are certainly in the battle in retail as we kind of think about shrink. But we have always continued to lean into initiatives that we have seen that can have impact to mitigate overall. And I know it’s early as we think about the Inform Act, but the Inform Act is one of the key components as we think about organized retail crime that I think will help give us a little bit more visibility in some of the things that are happening out there. But certainly, it’s been largely in line with what we have seen in the last several quarters. We certainly have key initiatives to help mitigate that. And we need our kind of government partners to help on their end as well to help us in retail to really mitigate what we have seen out there.

Jackie Sussman: Got it. Thanks so much.

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

Steven Zaccone: Great. Good morning. Thanks very much for taking my question. I was hoping you could comment a bit more about the homeowner engagement that you talked about. It sounds like it was a bit of a sequential improvement. Was that largely weather-driven, or are you actually seeing some elasticity of demand as inflation eases in some categories?

Billy Bastek: Yes. Thanks Steven. No, I think we articulated earlier about the weather patterns. We actually talked in Q1 about the impact that the West had. The West was our best-performing region, best-performing division for Q2. So, we saw a lot of that engagement back into those spring categories. We pushed a little bit around from June to July with some of the weather and the heat, as you saw more in ACs and fans. So, a much more normalized balance to the quarter outside of just some shifting of some of those smaller seasonal pieces.

Steven Zaccone: Okay. Great. And then just a clarification on second half expectations, is there any difference in how you are thinking about the business in the third quarter versus the fourth quarter comps? And then maybe a more near-term question, if July benefited a bit from weather, how has August to-date trended? Is it fair to say you are kind of back within that full year guidance range?

Richard McPhail: Right. So, the first two weeks of the third quarter have been a little better than our first half comp. But we have 24 weeks left in the year. So, we think the guidance range is appropriate.

Steven Zaccone: Okay. And then just third quarter versus fourth quarter, should we just kind of look at the 1-year comparisons?

Richard McPhail: We are not going to provide quarterly guidance. And again, we have got 24 weeks left in the year. So, we think the range is appropriate.

Steven Zaccone: Okay. Thanks. Best of luck in the back half.

Richard McPhail: Thank you.

Operator: Our next question comes from the line of Chuck Grom with Gordon Haskett. Please proceed with your questions.

Chuck Grom: Thanks very much. Great quarter. You committed to investing $1 billion in wages this year. But as comps and transactions have remained negative and the flexibility that you have with the transaction-based labor model, is there the potential for that full amount not to be realized or will you reinvest it in other parts of the business?

Richard McPhail: Well, from a financial perspective, of course, there is an assumption around how many hours would be utilized during the year. There is something that has to be multiplied against the wage. But I wouldn’t say this is a material. You are not going to see a material change in our financial profile. And again, our guidance is the best guideline for you to look out with respect to our annual – likely annual performance.

Chuck Grom: Okay. Great. Thank you. And then for Ann, just can you elaborate a little bit more on the computer vision technology? How quickly is that going to be rolled out across the chain? And maybe elaborate on some of the benefits you think you could see in the near-term.

Ann-Marie Campbell: Sure. So, first of all, we started with Sidekick application, which direct associates to pass down product from the overhead. And so Sidekick is a task to computer vision to help that associate see where the product in the overhead, so which is a complementary component to drive overall productivity. So, we are certainly bullish. We have that in our – a region that’s fully rolled out already. We have that in what we consider pilot stores across every single region. And we expect that to be rolled out later this year. We are seeing some really, really good output finding product that takes a ton of time in our stores. So, I have been around for a long time, my neck looking up in the overhead trying to find product for customers, and we have thousands of associates that’s doing that every day.

So complementing, directing the task and then finding exactly where the product is in the overhead drives a ton of productivity for us, and we expect to roll that out later this year.

Chuck Grom: Okay. Thanks Ann.

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

Brian Nagel: Hi. Good morning. Thanks for taking my question. So, at the risk of being maybe a bit repetitive, I just – with regard to inflation, I guess maybe now disinflation, so we are starting to see – and I know you mentioned in your prepared comments the lumber price dynamic there where you have seen improved unit demand. But the question I have is as we are seeing or we are moving past maybe peak-ish inflation and getting more disinflation, how are you seeing the overall business flex here, both from a – I guess from what you are doing as well as how your consumers are reacting generally?

Ted Decker: I mean broadly on the inflation piece, well, we still expect that the overall year will have a net inflationary impact on our costs in retails. But as we go into the second half, it is moderating. And when you look at just the activity of cost increase requests, I mean they are negligible. I mean there are a couple. And we were in the billions of dollars at one point of cost in. And so net new requests for cost and certainly cost increases in the supply chain, that’s all completely abated. As we go into the second half, when you think of product cost, transportation, overall transportation costs and then what would ultimately do in retails, inflation has certainly abated. Commodity is certainly down meaningfully from the peak as well as year-over-year as well as even shorter term.

But beyond commodity and the fact that we don’t have increased inflation, we are not expecting a deflationary environment. I think Richard used the term settling. We are kind of settling into these non-commodity price levels. And as the Pro and consumer customer has gotten used to those over the last few years, you are seeing the normalization in transactions, as Richard called out. So, we are encouraged that the cycle of inflation is essentially behind us. And Richard, I don’t know if you – or Billy, if you have anything else to add to that.

Billy Bastek: No. I would say we are encouraged by the improvement in transactions and as we see the normalized pieces that Richard spoke about earlier, but we don’t see a deflationary environment as we go forward.

Brian Nagel: That’s very helpful. And then the second question I have and I know it’s going to be a bit nuanced, but just to understand how your consumers really reacted here. So, as you look at the West Coast, you called out, I think is a point of strength in the quarter as weather maybe normalized a bit. But the question I have is as you are watching that consumer reengage with Home Depot amid more normal weather conditions, is there anything there surprising, or is the consumer coming back like you would normally expect with the weather shift like we have seen?

Billy Bastek: Yes. I would say, Brian, that we commented out in Q1 because of the impact that we saw, and it played out precisely kind of how we thought in the West. As I mentioned, that was our best-performing division. Customers engaged heavily in our seasonal businesses that were so pressured into Q1. And so it really did play out precisely how we had thought.

Brian Nagel: Okay. I appreciate it. Thank you.

Billy Bastek: Thanks.

Operator: Our next question comes from the line of Michael Baker with D.A. Davidson. Please proceed with your question.

Michael Baker: Okay. Thanks. Two, please, if I could. One, bigger picture. I think last quarter, maybe it was in the June Analyst Day, you said that you thought the housing market would be down mid to high-single digits in 2023. That was sort of the industry baseline. There has been some indicators of housing being a little bit better. Is that still the way you are thinking about the industry right now, it’s down in that mid to high-single digit range?

Richard McPhail: Well, we have said there are some economists who might call for that. We were uncertain, and that’s really because when you look at supply and demand imbalances in the market, we have worked our way into a structural deficit of housing in North America. And what’s interesting to us is you have actually seen sequential improvement month-over-month in home prices for the last four months. So, I think if you just look at observed data, home prices have for the most part, remained steady versus last year, and so better than many economists’ predictions at the beginning of the year.

Michael Baker: Okay. So – but has your view changed at all or too much uncertainty?

Richard McPhail: We didn’t ascribe any housing benefit to our guidance for 2023. And we think long-term, those supports for home improvement demand are there. And we do think that supply-demand imbalance is an important part of that, along with the aging of the housing stock. So again, we are bullish on the future of this market.

Ted Decker: Yes. I think the big story with housing now as it’s playing out is values have held up. And Case-Shiller just came out with some data and Redfern just – Redfin just came out with some data that, that drop-off in values has been erased and that we are now back to record highs of home values in the United States and sequential improvement, as Richard just said. The near-term story in housing is that with so many people locked in to the incredibly low mortgage rates that there just isn’t a lot of inventory available for sale. So, transactions are at certainly near-term lows in terms of nominal number of houses that are turning over in a percentage of the housing stock. So, many people are below 5%, even at 3% mortgage rates.

So, values are holding if not now back increasing fundamental imbalance again of 2 million to 3 million to 4 million homes. And the issue is inventory. And people are getting used to it. We understand new buyers have sort of digested the increase in mortgage rates to the 7%-ish, but there is just not that much available to purchase.

Michael Baker: Yes. Okay. It makes sense. Sorry, that was one question. The follow-up is this, if I could. You had said – I hate to be so short-term-focused, but August was better than the first half comps. But any comment on August versus the second quarter comps?

Richard McPhail: Again, the first two weeks of the quarter were a little better than our first half comp. We have 24 weeks left. And so we just – we would point you back to our guidance.

Michael Baker: Okay. Fair enough. Thank you.

Operator: Our next question comes from the line of Karen Short with Credit Suisse. Please proceed with your question.

Karen Short: Hi. Thanks very much. So, two questions. The first is when you think about the dynamics on DIY versus the Pro in terms of the impact to your second half comp and then into ‘24, how are you thinking about DIY in terms of recovery? I think it’s pretty clear where you stand on the backlog with the Pro. But I think DIY is a big question in terms of how that customer will feel and is going to feel in the second half.

Richard McPhail: But it’s – I think at the end of the day, it’s all the same demand. And whether the Pro is fulfilling that demand or not, it’s sort of all the same. So, I wouldn’t – I actually would view it as saying we feel good about where our Pro business is. We feel good about the entirety of it, really. We don’t know where those trends will go. But again, we know our Pros say their backlogs are healthy.

Karen Short: And then the second question is – oh…

Ted Decker: No, I was just going to say that the consumer – the nearest term view of consumer is the engagement in seasonal is led by the consumer, certainly, the garden business, but also things like exterior painting and stain. And when the weather improved, consumer responded. And it was really steady constructive demand. So, what we expect going forward, I think you look at all those macro comments we mentioned earlier that our consumer is a homeowner, 80%-odd of them on their homes, up tremendous equity value in that home, great jobs, great income, and it’s a very healthy consumer segment in the overall economy. So, seeing their engagement in Q2 as weather improved, seeing their engagement in something like Halloween, I mean it’s not an enormous business for us. But to say unbelievable engagement, Billy, in that product category, which is 100% discretionary, is a pretty decent telltale of engagement in the sector.

Karen Short: Okay. That’s really helpful. Thank you. And then my second question is, Richard, you always discussed your ability to flex SG&A with respect to labor, but then also inventory rapidly based on the comp in order to maintain stability with operating margins. So, I guess my question is, with the recent wage investments, do you still have the same flexibility within the same timeline in general to – with that rule of thumb in mind?

Richard McPhail: Absolutely. I mean you would say that the jumping-off point would be post-wage investment. But post-wage investment, we have the same degree of flexibility we all – we have always had.

Karen Short: Okay. Thanks very much.

Isabel Janci: Christine, we have time for one more question.

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

Steven Forbes: Good morning everyone. So, just two quick follow-ups. The first on ticket, curious if you could expand on DIY ticket versus Pro ticket trends as we think about sort of second half complexion. And then maybe if you could just speak to what the full year comp implies in terms of ticket, if it’s still positive as you see it today?

Richard McPhail: We have – I will answer the second part first, and then I will turn it to Billy. Again, we have got 24 weeks to go. We are not going to break out ticket and transaction within our guidance, other than just to repeat, we are encouraged by what we have seen with respect to settling of ticket and recovery in transactions. Billy?

Billy Bastek: Yes. And as we called out just on the lumber piece alone, we will see that abate as we get to the back half of the year, and there will be much less of an impact than we saw in the first half overall.

Steven Forbes: And then just lastly, as we think about the Dallas market, the 350 basis points you guys noted as of 2022 at the Analyst Day presentation, any update on how that market is trending year-to-date 2023 versus the company average?

Hector Padilla: Yes. No, Steve, this is Hector, again. We continue to be very encouraged by the results in Dallas, and we have scaled a lot of the capabilities that we first implemented in Dallas to all the markets. And we are seeing very similar and encouraging results as we see the customers engage, not just with the delivery sales, but also again, back in our stores and through our online digital platform. So, continue to be very encouraged about the performance. For us, Dallas has been a success so far. And we will continue to deploy capabilities to round out the ecosystem in Dallas and again in other markets as we test and learn and deploy capabilities at scale.

Steven Forbes: Thank you.

Operator: There are no further questions at this time. I would like to turn the floor back over to Ms. Janci for closing comments.

Isabel Janci: Thank you, Christine, and thank you for joining us today everyone. We look forward to speaking with you on our third quarter earnings call in November.

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.