But as we watch every hurricane market, after you go through that cycle, it’s as strong as ever. So with that backdrop of fundamental macros in the overall pandemic playing out over a five-year period like a giant national storm, we have every reason to be extremely optimistic about the future. And that’s why we’ve made the comments today about how happy we are of what we accomplished, the management team here in the store associates and store leadership and supply chain just did such a great job level setting this business following that sort of pandemic storm and we couldn’t feel better about how we’re positioned from an operational point of view. And then we’re sticking with all the strategic investments, our eyes are still on the prize of the best interconnected shopping experience, building out the Pro ecosystem for complex Pros and then having such confidence in our model to start a reasonably meaningful store build program.
So we feel really, really good, Michael. Thanks for the question.
Michael Lasser: That’s very helpful, Ted. If I could just add one more question. It’s on Richard’s comment about the rule of thumb of 10 basis points of margin expansion for every 1 point of comp. And understanding that this is theoretical, does that move in a linear fashion, meaning if you get back to the trajectory of mid-single-digit comp eventually that you would see a better than trend rate of margin expansion at the higher the growth rate. And there was also a comment that rule of thumb would be outside of actions that would be taken. So can you discuss what actions might be taken to bend that curve on the upside over time?
Richard McPhail: Thanks, Michael. Well, first, I certainly want to center you back to the comments we made at the Investor Conference in June where we call out a base case once we return to market normalization, a base case of 3% to 4% sales growth, flat gross margin, an assumption of operating expense and operating margin leverage and growth and EPS growth of mid- to high single-digit percentages. Within that, obviously, is sort of an implied leverage per comp point on our OpEx. I’m giving you a, what I would call, loose rule of thumb. It would apply for the most part to our sort of business model today, it certainly applies in the past and I would expect it to apply it loosely in the future. Embedded in that is a normal rate of productivity and efficiency that our teams delivered every single year.
I mean underneath all this guidance and our results for 2023, which we were so pleased with, is an enormous amount of work on behalf of our team, think about the efficiency in our supply chain, you think about the efficiencies that our merchants bring every year in product cost. Of particular note, the productivity in our stores with some of the tools that are unleashing the power of AI and putting that in the hands of our associates, those are standard fair for us. They feed into what I would call normal operating leverage for the Home Depot, and it’s something that we’ve come to expect of ourselves. So that’s a long way of saying, we always intend to lever OpEx at a certain point of sales growth. And I would stick with the basic rule of thumb, maybe higher, maybe slightly lower in some periods from time to time.
On the question about what actions there may be, but we always operate with a degree of financial flexibility in the P&L. Although, I would tell you that we did our very best, and I think we accomplished our objective of reducing fixed costs towards the end of ‘23 that had built up during the pandemic, hence the $500 million in cost savings implied in our guide. There are always levers. We have to determine what environment we are operating in before we decide what levers to pull. And so for now, we’ve provided what we would call our central case for 2024, but we’re going to manage the business with the best interest of our long-term shareholders in mind.
Operator: Our next question comes from the line of Seth Sigman with Barclays.
Seth Sigman: I wanted to follow up on macro and the margins. Just on the macro side, you gave us a number of the factors that have built in here. I guess the real question is, what are the conditions needed for comps to actually get back to positive? Is it as simple as fully digesting the two years of lower housing turnover and that will happen at some point through this year? I guess, ultimately, can you return to growth without existing home sales improving?
Edward Decker: Absolutely. I mean as we’ve said for the longest time, home turnover is a base of home improvement demand, but it’s been pretty steady. If you look at 4.5-odd percent of housing stock is a multiyear percentage of turnover, and that equates to 5-ish million units. The reason we’re calling out that is a factor in these last two years is the dramatic decrease. And there’s definitely an understanding that there’s an improvement in place cycle if you don’t move and you stay in your house, but there’s a lag effect. And arguably, that lag effect is a bit longer this time because of the interest rate environment and people are just being conservative of when they kick off a larger home improvement project in a home that they’re going to ultimately stay in for a longer period of time.
So that’s the dynamic of housing turnover. We think that plays out. We’re literally at a 40-year low in turnover, don’t see that going lower. So you’re going to cycle through that kind of a two-year pressure. And then do we get back to growth? Absolutely. I’d say, we have a neutral look on housing for 2024. We don’t think there’s incremental pressure nor do we think that we’re quite ready for a hockey stick recovery. Richard has been talking for some time, and the Fed’s stance of hire for longer. I think we now we have an appreciation that longer is going to go through the first half of this year. So even a lowering cycle in the back half, there’s some timing effect to get mortgages, move homes, take a HELOC loan out, et cetera, to get a bigger project going.
So that’s why we’re kind of calling for a slighter moderation to continue into ’24. But as we said, the back half is marginally stronger. And we think all the macros line up for return to normalcy following that and with the capabilities that we’re building, and we’re taking share today with x percent of these capabilities complete. Super optimistic about how we’re hitting the ground running as we continue to build going into a stronger market and the share gain opportunity.
Seth Sigman: Okay. Just one follow-up. Richard, you gave us a bunch of sensitivity numbers around the EBIT margins. I guess, more specifically on SG&A for this year. I realize there’s a number of moving pieces that come back. But can you give us a feel for what base underlying SG&A growth should look like this year? I think the headline guidance is around 4% growth. But maybe what is it excluding incentive comp and some of the costs that you’re lapping with the benefits that you’re lapping, just so we could think about that?
Richard McPhail : Yes, I’d tell you, the best way to look at this is that we are now – our P&L provides you with an appropriate jumping off point for your models, there’s a lot of noise in operating expense. If you think about the geography of the settlement in Q1, you think about the geography of costs that we incurred, then you think about the geography of the $500 million in cost out, two-thirds of which will be realized in OpEx, one-third of which will be realized in cost of goods sold, and you just have a lot of noise. Again, the main driver of operating expense growth is going to be just at inflation on our base of operating expenses. And we think that if you look at our gross margin and our operating margin guide, these offer you the appropriate jumping off points for your modeling.
Isabel Janci: Christine, we have time for one more question.
Operator: Our final question comes from the line of Steven Forbes with Guggenheim.
Steven Forbes: I’ll keep it to one, just to end the call here. I wanted to follow-up on the complex Pro, Ted. I appreciate the comments in your prepared remarks around trade credit being piloted. I’m curious if you can maybe expand on some early learnings around those newer features being launched as we think through what the sort of managed account customer can contribute to growth over the coming years here?
Ann-Marie Campbell: Yes, I’ll kick that off. Thanks, Ed. First of all, we’re in our early stages. And just as a reminder as well, HD Supply does trade credit today. So we’re — as we architect our program, there’s a lot of learnings there. But what — to me, typically in the room and Chip, you have a lot of it here with trade credit and his experience is helping us also form some of the intricacies of how we think about it. So I’ll turn it over to Chip.
Chip Devine: Yes. Thanks, Steven. Trade credit is definitely a necessary capability that we’re building really focused on that complex project. So as we invest in our pros and our capabilities to be able to service their larger jobs, trade credit is definitely necessary. So we’re in early days, as Anne mentioned, piloting a number of different customers, but plan to grow and expand that through the next couple of quarters as we automate that into our selling system as well. .
Operator: Ms. Janci, I would now like to turn the floor back over to you for closing comments. .
Isabel Janci: Thanks, Christine, and thank you, everybody, for joining us today. We look forward to speaking with you on our first quarter call in May.
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.
