Home Depot Q1'16 Earnings Conference Call: Full Transcript

Operator:

Please standby we are about to begin. Good day and welcome to the <b>Home Depot Inc</b> HD Q1 '16 Earnings Call. Today's conference is being recorded. If you would like to ask a question during today's call please press the star key followed by the digit one on your touch tone phone. 

At this time I would like to turn the conference over to Ms. Diane Dayhoff, Vice President Investor Relations. Please go ahead.

Diane Dayhoff:Vice President Investor Relations:

Thank you and good morning to everyone. Joining us on our call today are Craig Menear, Chairman, CEO and President; Ted Decker, EVP of Merchandising; and Carol Tome, Chief Financial Officer and Executive Vice President Corporate Services. 

Following our prepared remarks the call will be opened for analysts' questions. Questions will be limited to analysts and investors and as a remainder we would appreciate it if the participants would limit themselves to one question with follow up please. If we are unable to get to your question during the call please call our Investor Relations department at 770-384-2387.

Now before I turn the call over to Craig, 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 may also include certain non-GAAP measurements. Reconciliation of these measurements is provided on our website.

Now, let me turn the call to Craig.

Craig Menear:Chairman, CEO and President:

Thank you Diane and good morning everyone. Sales for the first quarter were $22.8 billion, up 9% from last year. Comp sales were up 6.5% from last year and our US stores had a positive comp of 7.4%. Diluted earnings per share were $1.44 in the first quarter. 

We are pleased with the start of the year. 

In the US all three of our divisions posted positive comps in the first quarter led by our Southern division. In all 19 US regions and top 40 markets saw a single to lower double digit comps in the quarter.
Internationally our Mexican and Canadian businesses had another quarter of solid performance. Mexico reported positive double digit comps in local currency making it the 50th consecutive quarter of positive comp growth. Our Canadian business also posted mid-single digit comps in local currency for a total of 18 consecutive quarters of positive comp growth. But one there had somewhat of a positive impact on our business and certainly drove variability in demand. 

The first quarter was not an early spring story it was an execution and core of the store story. We continue to see broad based growth across our store as both ticket and transactions grew in the quarter.

All of our merchandising departments posted positive comps and we saw a healthy balance of growth among both our Pro and DIY categories with Pro outpacing our DIY business in the US. As table detail our customers continue to respond positively to our deep assortment of trusted brands as we are the product authority for both our Pro and DIY customers. The inner line integration is progressing nicely. We continue to move forward on a number of exciting sales driving initiatives and we have outlined the path to truly realize the value of the underlying acquisition and the total Pro opportunity over the next 18 to 24 months. 

We also continue to believe that blending the physical and digital channels into a seamless customer experience which we call interconnected retail provides the unique opportunity for us to expose the power of the Home Depot. This has been and will continue to be one of the central tenants of our company's strategy and we will remain committed to the investments in our interconnected capabilities.

For the quarter, online traffic growth was double digits and our online sales grew 21.5%. Investing in interconnected capabilities goes beyond our.com business as we are also continuing to further invest to more effectively meet customers' demands for increased fulfillment options. The roll out of comp our new customer order management system is on track to be fully deployed in our US stores before year end.

Following behind comp roll out is the implementation of BOPIS or buy online deliver from store. In certain markets where BOPIS has been introduced the demand has been much stronger than we anticipated. This is a good -- have the reduced challenging delivery capacity which we are working to address. We still expect BOPIS to be fully rolled out by the end of the fiscal year. For the spring season, we are focused on further connecting our in-store and online experiences. 

We offered a more expanded assortments spring seasonal products online. We also leverage our digital assets to more effectively target customers with the personalized message pertaining the relevant products and special buys. Additionally, we use digital media to highlight local in-store assortments to drive foot steps to our stores. 

To ensure stores will properly staff for the busy spring selling season we hired over 80,000 associates to meet the demand of these increased footsteps. We continue to see great productivity from our supply chain. The flexibility and nimbleness of our supply chain was especially evidenced in the quarter as we navigated spicy demand without sacrificing in-stock levels. We continue to see dividends from our investments made in our supply chain, in our in-stocks, inventory productivity, logistics costs, and service to our stores and customers. 

Our BOSS via RDC capability which enables us to fulfill buy online ship-to-store orders through our RDC network leverages both our inventory and our fulfillment channels. 

The cost savings of this initiative have been above our expectations and both our shift times and customer satisfaction scores continue to improve. We've made great strides with our supply chain over the past several years and we continue to optimize our network with initiatives like supply chain sync. While sync is in its early days of multi-year roll out we are pleased with our initial results. Early in the year our view of the macro environment remains consistent We believe that housing data indicates continued tailwinds for our business. 

As Carol will detail because of our out performance in the first quarter versus our plan we are increasing our sales and earnings per share guidance for the year. We now expect fiscal 2016 sales growth of approximately 6.3% and diluted earnings per share of $6.27. Today we have over 400,000 associates and I want to close by thanking them for their hard work and dedication to our customers. In addition to serving our customers in our stores through team depot our associate led volunteer force, our associates donated the personal time to complete more than a 1000 projects and service to our local communities over the past 12 months. 

And with that let me turn the call over to Ted. 

Edward P. Decker:Executive Vice President-Merchandising:

Thanks, Craig and good morning everyone. We had a strong first quarter driven by continued strength across the store particularly with our Pro customers and unseasonably warm February was followed by more normal the weather of March and April. While weather positively impacted our sales performance in the first quarter spring has not yet arrived in many of our markets.

In the first quarter, total comp transactions grew by 4% while comp average ticket increased 2.5%. Our average ticket increase was somewhat impacted by commodity price deflation mainly from lumber and copper. The total impact to ticket growth from commodity price deflation was approximately 15 basis points. Transactions for tickets under $50 representing approximately 20% of our US sales, were up 2.7% in the first quarter. 

Transactions for tickets over $900 also representing approximately 20% of our US sales, were up 9.5% in the first quarter. The drivers behind the increase big ticket purchases were appliances, roofing, sheds and windows all of which had double-digit comps. The departments have outperform the company's average comp were appliances, tools, building materials, lumber lighting hardware no work in the core. 

Electrical, paint, flooring, indoor garden, kitchen and bath, plumbing and outdoor garden had positive comps but were below the company average. 

Pro heavy categories continue to show great strength as we saw double-digit comps in sensing, pressure treated decking, boards fasteners, doors in --. In addition, the core of the store continue to performed well and we saw strength in maintenance and repair categories across the country. Tools storage, commercial industrial lighting, portable power, power tool accessories, end tools and wiring devices had double-digit comps in the quarter. The core categories including the large organization -- flooring, landscape lighting, final plank and wood flooring had comps above the company average. 

Our stores associates did a great job executing our 8th annual string Black Friday event and creating excitement in our stores. In particular special buys around appliances, outdoor power and hardscapes were well received by our customers resulting in double-digit comps in those categories. As Craig mentioned the Home Depot product authority for both our professional and DIY customers. We have the deepest assortment of the leading programs in market place. 

Many of these brands are $1 billion categories for us. Our Pros recognized our brand advantages in Pro sales outpace the company average in the first quarter. We continue to use detailed analytics to help us balance the art and science of retail. In marketing we maintain our best in class creative and we are also optimizing our add effectiveness with targeted digital marketing. 

We remain focused on leveraging customer data to build the right message at the right time to the right customer. As we have made strategic moves away from print and mass marketing to more targeted digital marketing we've seen great results. Since 2010, our return on advertising spend has nearly doubled. 

Now let me turn our attention of the second quarter. We continue to be the leader in the market place for innovation and value that save our customers both time and money. To maintain the momentum in our double digit comp in pneumatics category we are introducing the new -- pneumatics frame -- which is the latest addition to the M18 FUEL line up. This high powered nailer fast and as much faster than competing battery powered nailers saving our Pros time on the job side. 

And new from to -- is the 20-Volt Max Brushless Finish Nailer is compact in light weight finish nailer as innovative features including depth adjustments and multi-functional LED lights to illuminate work pieces. These are great examples of innovative and exclusive products from trusted best in class programs. 

For our DIY like customers we are excited about the new exclusive launch of -- outlast plus laminate flooring. This easy to install laminate is water resistant and this is still protect 24 technology proprietary coding that prevents water from seeking into the floor. Outlast plus flooring allows customers to install laminate flooring and high traffic in water prone areas such as kitchens, bathrooms, and bedrooms. In addition to all the great new products we are excited about our upcoming events. 

Our Thrill of the Grill, Memorial Day, Father's Day and further July events are right around the corner and we have an incredible line up of great values and special buys to help our customers enjoy this outdoor seasons. 

With that I would like to turn the call over to Carol.

Carol B. Tom :Executive Vice President and Chief Financial Officer:

Thank you Ted, and good morning everyone. In the first quarter, sales were $22.8 million, a 9% increase from last year, driven primarily by positive comp sales as well as the impact of interline brands versus last year, a stronger US dollar negatively impacted total sales growth by approximately $196 million, 4.9%. 

Our total company comps or same-store sales were positive, 6.5% for the quarter with positive comps of 10.2% in February, 6.7% in March and 4.3% in April. Comps for US stores were positive 7.4% for the quarter with positive comps, of 11.8% in February, 7.7% in March and 4.6% in April. We estimate weather driven demand positively impacted our US sales growth by approximately $250 million. The variability in our comp sales performance during the quarter was due in large part to whether and to the timing of Easter this year versus last year.

Our total company gross margin was 34.2% for the quarter, a decrease of 13 basis points from last year. The change in our gross margin is explained largely by the following factors First, as expected we had 25 basis points of gross margin contraction due to the impact of Interline. Second, we had 12 basis points of gross margin expansion and our supply chain, driven by lower fuel cost and increased productivity. For fiscal 2016, we continue to expect our gross margin rate to be about the same as what we reported in fiscal 2015. 

In the first quarter operating expense as a percent of sales decreased by 122 basis points to 20.7%. Our expense leverage reflects the impact of positive comp sales growth along with great expense control. For the year, we now expect our expenses to grow at approximately 35% of our sales growth rate. Our operating margin for the quarter was 13.5% an increase of 109 basis points from last year. 

Interest in other expense for the first quarter was $237 million up $44 million from last year, due primarily to higher long-term debt balances. 

In the first quarter, our effective tax rate was 36.5% compared to 34.3% in the first quarter of fiscal 2015. We call out that the effective tax rate in the first quarter of last year was favorably impacted by the settlement of our tax audit. For fiscal 2016, we expect our income tax provision rate to be approximately 37%. Our diluted earnings per share for the first quarter were $1.44 an increase of 19% from last year. 

Now moving to some additional highlights, during the first quarter we opened one new store in Mexico and we ended the quarter with the store count of 2,275 and selling square footage of $237 million. Total sales per square for the first quarter were $377 up 6.5% from last year. 

Turning to the balance sheet. At the end of the quarter inventory was $13.2 billion up $913 million from last year, reflecting both the impact of Interline and the seasonality of our business. Inventory returns were $4.8 times up one-tenth from the first quarter of last year. In the first quarter we repurchased $1.25 billion or approximately 9.45 million shares of outstanding stock. 

For the reminder of the fiscal year, we intent repurchase approximately $3.75 billion of outstanding stock using excess for cash, bringing total anticipated 2016 share repurchases to $5 billion. 

Computed on the average of beginning and ending long-term debt and equity for the trailing four quarters, return on invested capital was 29.2%, 300 basis points higher than the first quarter of fiscal 2015. 

Now turning our attention to the full year. While U.S. GDP forecast had pullback slightly since we built our 2016 sales plan. We continue to see strength in the housing market, with home price appreciation housing turnover and household formation trending were we thought they would. 

Sales in the first quarter exceeded our expectations not just because of favorable weather, but because of higher demand for many of our core product categories. While we ordinarily don't raise our sales growth guidance so early in the year we're going to rolled forward some of our first quarter our performance giving the underlying strength of the business. Further the US dollar has weakened such that the current stock rate of exchange is now in line with the FX rates we used to build our plan. Because of this we are going to a single point estimate instead of our range for our 2016 guidance. 

From the high end of the guidance range we provided in February, today we are raising our sales and earnings per share growth guidance. We now expect our 2016 sales to grow by approximately 6.3% with comps up approximately 4.9%. For earnings per share remember that we guide as of GAAP. We now expect fiscal 2016 diluted earnings per share to grow approximately 14.8% to $6.27. 

We thank you for your participation in today's call and Derrick, we are now ready for questions.

Question & Answer

Operator:

Absolutely and if you would like to ask a question please signal by pressing star one on your telephone keypad, if you are using a speaker phone please make sure your mute function is tuned off to allow your signal to reach our equipment. Again press star one to ask a question. 

Our first question comes from Seth Sigman with Credit Suisse. Please go ahead.

Seth Sigman:Credit Suisse:

Hi thanks good morning nice quarter guys 

Edward P. Decker:

Thank you 

Seth Sigman:

So in aggregate it seems like weather did help the quarter you talked about $250 million or so. Can you elaborate on where you saw that benefit and if that means you actually pulled some sales forward what do you think that just incremental?

Craig Menear:

So obviously with a warm February, we had a great start to the year and we saw outdoor project business in the North very, very strong. The $250 million that we have estimated that is kind of hard to understand exactly how much of that is pulled forward but that's what we're estimating is the demand that we saw from the weather benefit we think there was $40 ish million or seasonal product pulled forward.

Carol Tome:

And the rest of the outperformance within building material categories by concrete and pressure treated lumber so on and so forth that really is weather driven demand.

Seth Sigman:

And just to follow up there, does that $250 million consider that spring weather hasn't arrived in some markets as you eluded to and would that be factored into that number.

Carol Tome:

That's right, we think we pulled forward true spring related category $40 to $50 million and as you know I don't know I don't know what ---- but as you know in certain parts of the country as spring has not yet arrived. So we are still anticipating a bang up spring quarter.

Seth Sigman:

All right and then just one follow on the pro initiatives here the extension of credit earlier in the quarter. Can you talk about how that's going and how incremental to the numbers this quarter that may have been.

Carol Tome:

Yes, we are very pleased with the new value preposition that we are offering on our private label card for our pros. You will recall that we are now offering 60 days to pay 365 day return and discounts at the fuel pump. What we are seeing with our pros is great receptivity new accounts are head of our sales plan which is great news. But just to remember that we just rolled this out all stores in January so there was no measurable impact to the top-line because of this but we anticipate that to come.

Seth Sigman:

Great thanks very much.

Operator:

Our next question comes from Simeon Gutman with Morgan Stanley. 

Simeon Gutman:Morgan Stanley:

Thanks. Good morning. Just want clarify something when we use the word pulled forward and if we take the $40 million out that seasonal just thinking about the other part that core on core was pulled forward maybe other projects getting done a little earlier. Do we now that's typically 1 to 3 month pull forward I mean this is projects that presumably could get cone another parts of the year. Where I'm going is trying to think about, how that could impact the second quarter versus others later in the year.

Carol Tome:

Well, here's how we've looked at this, we think there was about $250 million of weather driven demand, if not all seasonal than this is just activity because of great weather earlier in the quarter. We're not rolling that forward because we anticipated that these were projects that would be completed later in the year and just got done earlier in the year. So we're not rolling that forward, it will bleed into Q2, Q3, maybe even Q4.

Simeon Gutman:

Yes, to your point. I mean, if somebody was doing a concrete project that maybe that planned for the summer, and they said they look the grounds not frozen in the North. I can do it now and they do it, that's it's hard to tell which quarters its come from, but it certainly probably the next couple quarters.

Carol Tome:

So as we think about the shape of the year and this might help the modeling, we now think that the first quarter will be the highest growing quarter. As a result, the first half will be slightly higher than the back half of the year. And if you look at the comps that we are projecting for Q2, Q3 and Q4, we expect them to be in the similar range, not a lot of difference in those comps numbers.

Simeon Gutman:

Okay, that's helpful. My follow-up on the online business, I think that you mentioned growth of about 21.5%, anything different about the pickup in store percentage that's changed and then your comment on the deliver strain maybe from delivering from store, is that because Home Depot is offering the customer the option of where they want the product from or that's your system that is choosing to deliver from store?

Craig Menear:

So first of all, I comment on the percentage of pickup is around 40% to where the customer is choosing the option to pick up their items from Home Depot.com in our stores and as it relates to the delivery, we have piloted the delivery program for a while we saw, mid single-digit growth in deliveries with the pilot when we went into additional markets, markets like Atlanta, for example, we saw a pretty substantial increase in the customer option to choose that delivery and we're seeing double digit growth in deliveries.

Simeon Gutman:

Thanks.

Operator:

Next, we'll hear from Michael Lasser with UBS.

Michael Lasser:UBS:

Good morning and thanks for taking my question. Carol, as you mentioned, it is not typical for the company to raise its guidance after the first quarter, and you have strong first quarters in the past. So what is different about what you're witnessing in the business right now that it inspires so much confidence for you to move that rate higher?

Carol Tome:

It's really the strength across the store. As you know, when we build our sales plan, we use our directionally correct but imperfect sales forecasting model, which is an economic driven model. We do not build market share gains into our forecast. As we look at the performance in the first quarter, clearly there were some share shift. 

Look at appliances, Ted called it out, appliances contributed 50 basis point of our comp growth in the first quarter. So we are confident with what we saw in the first quarter and what we're seeing early in May to roll forward the out performance of the first quarter.

Michael Lasser:

So you mentioned that GDP forecast was a little lower, housing was about where you thought it was, so what's changed is you're getting a little bit more market share than you originally thought?

Carol Tome:

We don't plan market shares as so that, we believe there were some share shifts and confirmed by -- data that came out to show that from a census perspective anyway we did grow share. The other thing that we must look at is housing and just from the other things that are happening within their housing market that we haven't built into our plan but we find to be at interest. Shares of statistic we've seen home equity values increased 94% since 2011. How was that possible because home prices are up 25% and people have been continuing to pay down our mortgages. 

So there is a wealth effect that's occurring with home owners and this wealth effect as we've talked at Link, if you feel like your home as an investment and not an expense you spend differently in your home and you could set in our big ticket categories. 

Michael Lasser:

And they my follow up question is on the expense outlook you now expecting such as to grow 35% or sale is up due to what's happening in the first quarter or do you spend it to see some expense could guide in their remainder of the year. Thank you so much. 

Carol Tome:

Well despite giving our sales plan considerably in the first quarter. Our total expenses were actually $13 million under our plan that was driven by lower utilities as you would expect because of formal weather in February but also we're not seeing the kind of pressure on medical as we had anticipated. For now for the full year, we anticipate that our expenses will be lower than our original plan which is healthy and take our expense growth factor down from what we had set at 40% to now 35% 

Michael Lasser:

Okay.

Carol Tome:

Thank you. 

Craig Menear:

Thank you. 

Operator:

And next we have Kate McShane with Citi.

Kate McShane:Citi:

Hi, thanks for taking my question. I wanted to follow up on the other question that was just asked just given some of the earnings that we've seen so far for Q1 that they health of the U.S. consumer I think is being called into questions somewhat. So I wanted if you could beyond what you've already mentioned. 

Let's talk about the DIY business and if there is any rethought there to the overall take of the consumer and does how much of the out performance of pro versus DIY is driven versus maybe the housing statistics versus your initiatives.

Craig Menear:

Okay, I'd say that when you look at the strength of the business that really comes across the board, we are really pleased with a mix of both transactions and ticket growth that we had at something we look forward in terms of balance in the business we see the consumer continuing to engage in big ticket sales with transactions above $900 growing 9.5% in the quarter. So while our pro business was strong and we are pleased to see that we are also very pleased to see the growth in our DIY business. So the balances what really is what we are striving to achieve and we are seeing that balance across the store 

And can I go back to the housing data; the housing data suggest that home owners still like they have more value than they did before. Look at negative equity, homes with negative equity have dropped from 22% at the beginning of 2012 to now 8.5%.

Kate McShane:

Thank you. That's very helpful and then my second follow up question is slightly unrelated I know you spend some time in the prepared comments talking about --- ship from store which I think you are rolling out by the end of the year. Just wondering if we could have more detail in terms of how much of that program how much of your merchandise that program will address, is it going to be eligible for everything that's online and in the store how where we expect that to work by the end of the year.

Edward Decker:

It pretty much is almost everything we sell, whether it's online or in store, it will be eligible for delivery. And we will leverage the supply chain network that we build up to do that in the most cost-effective way using our RDC as flow-through points for product that will come from our distribution points that a customer chooses to have delivered. So it's definitely a broad approach to the assortment that we carry.

Kate McShane:

Thank you.

Operator:

And Scott Mushkin with Wolfe Research. Your line is opened.

Scott Mushkin:Wolfe Research:

Thanks guys. Thanks for taking my questions. So I just wanted to go back to the buy online and deliver from store economics just trying to understand a little bit more. Our research suggests that particularly millennial really want to do that, they don't necessarily really want to pick up in store. I was just wondering in looking at the uptake is exceeding expectations, what would the margins attached that business?

Craig Menear:

First of all, I would say that in our business, we have a lot of project businesses. We have a lot of things that are big and bulky and so, I think that's why in many ways we are seeing significant portion of our customers choose to pick up their product in-store and then potentially have it delivered from store. We also have Pros who are interested in having the product delivered from store to their job sites. It saves them time and saves their runners from having to come in to the stores overall and then candidly we have been doing delivery from store for quite some time for years and that's just part of the overall operating cost of doing the business and so we approach that the on a day-in and day-out basis as part of operating the business and our value proposition for the customer across product takes that into account.

Scott Mushkin:

Sure I mean refresh my memory, do you guys charge for that or is that not charged for us?

Craig Menear:

Yes, we do. We charge for it and there is options for tighter windows where it's a premium paid.

Scott Mushkin:

Okay, perfect and I want to go into the credit changes extending from 30 to 60 days, and just try to understand a little bit more about the credit limits attached. I know you guys are using a bank to help you with that. What are your upper credit limits and is there thought of expanding that out and maybe just a little tutorial on that that would be great and that's my last question.

Carol Tome:

Sure our private label credit card is underwritten by a third party and I do an averages then talk to you about outliers. So for our commercial customers, these would be our Pros. The average line of credit $6600 which seems to adequately meet their needs but we do have some higher spend Pros. So the third party underwriter will extend larger lines, and we have six figure lines, to many of our customers who ask for those lines. 

Furthermore, if there is a situation where the credit lines tighten up a bit, we have a second look program with another third person provider that will take a second look at the request and ups the line of credit. So we have a number of tools in our toolkit to adequately provide the financing requirements for our Pros. The biggest tool is moving to 60 days because if you think about it we are providing working capital support for them. They're going to get paid by their customers before they have to pay us back.

Scott Mushkin:

And so you said, I think you said there are some six figures out there I mean do you with the mix of the business are you anticipating that 's reference going up meaningfully and that sort of would you guys ever think you taking some of those on your own balance sheet or no? 

Carol Tome:

No we'll look at customers take us where they take us we want to grow the pro and if they need more credit we're happy to support them in that efforts. In terms of taking that on to our balance sheet we love the arrangement that we have with our third-party underwriter today. 

Scott Mushkin:

Perfect. Thanks guys. Thanks for taking my questions. 

Operator:

And moving on, we will next hear from Chris Horvers with JPMorgan.

Chris Horvers:JP Morgan:

Thanks. Good morning everybody. So why don't you just at the risk of being a dead horse so to speak follow up on California and oil markets we have seen someone like cost go seen some variability in California and they sell a lot of food so it's a bit surprising to us. Are you seeing anything different in those markets that alerts you or causes any concern? 

Craig Menear:

No, overall we're really not, the area that we watch most closely is Texas we have a 178 stores in Texas, Texas actually outperformed the company average in the quarter. I think all major markets in Texas performed well. Texas clearly has diversified their economy more so over the past few years which I think is a benefit clearly in Western and Canada we saw some pressure as you might imagine not quite as diversified environment there. So we have really seen any major shift. 

Carol Tome:

No and actually in California the ---- just released some model restructuring 

Chris Horvers:

Yes, which is great

Carol Tome:

So our --- California business is doing quite well. We did have a pop up sore in North Dakota, we popped it up during head us affecting days --- that store down 's really impact.

Chris Horvers:

Right understood can you talk about any research that you have done around --- and household from Asian are they coming into form households now will they do you think they act like Genex did before them and how do you think that an impacts to long-term outlook of the box and the online business. 

Craig Menear:

We actually have done a fair amount of research here and it was part of our strategic planning last summer we had several groups and more - actually work on where Home Depot looks like 8 to 10 years out as well. What our research tells us is that basically this is a delayed cycle that the millennial generation has many of the same desires that generations prior to them have or seeing as household formation goes up roughly a third or so of those formations are happening with millennial at the tail end of that age group. It appears there is about 6 year delayed cycle here. But our research indicates that in many ways they will act the same as previous generations. 

Carol Tome:

No the average age of new home buyers last year was 33 years old, --- millennial so that I know the proof point that at some point they want our home.

Chris Horvers:

Yes and then one last just clarification question was there any impact in the monthly to the Easter shift. 

Carol Tome:

Yes so if we look at how we reported comps, I am talking to the U.S. Now March was reported at 7.7 if you shifted for a like-for-like for April that comp would have been 9.2 April was reported at 4.6 it would have been like-for-like 3.6.

Chris Horvers:

Understood thanks very much.

Operator:

Our next question comes from Matthew McClintock with Barclays.

Matthew McClintock:Barclays:

Hi yes. Good morning everyone. I was wondering if we could ask a question on appliances. Thinking about the longer-term opportunity within that category, particularly now that you're seeing on other channels of retail that are maybe more challenged right now the department stores, etcetera looking at that is also a new growth opportunity. 

Can you maybe just update us on your thoughts and maybe how that's starting to change now that you're seeing more competition in that category?

Craig Menear:

We haven't seen the impact of any increased competition. Our appliances business is extremely strong again in the first quarter. In fact, it accelerated as we exited the quarter. We've been leading into that space as you know and we're going to expand the appliance square footage in another hundred stores again this year. 

So were very happy with the results. In fact, certain markets that some others entered the space, we saw significantly higher performance than the rest of the country.

Matthew McClintock:

Perfect. Thank you very much.

Operator:

And next question in the queue we have Brian Nagel with Oppenheimer.

Brian Nagel:Oppenheimer:

Hi, good morning.

Craig Menear:

Good morning 

Brian Nagel:

Congratulations on nice quarter. 

Craig Menear:

Thank you.

Brian Nagel:

So my first question which was market share, anything as you look at the data to suggest to maybe comment on market share one way or the other and particularly with what seemed to be somewhat volatile weather through the period did that impact market share trends that you're seeing within the channel through the quarter?

Craig Menear:

I don't think we have any way of knowing if weather really impacted share. I mean we are really focused on making sure that we are driving everyday great value for our customers and trying to bring innovative products that solve problems for them. Ted if you have any additional comments?

Edward Decker:

No again, with the weather, whether it has been normal or in fact good, our seasonal businesses of all stores been outperforming and then the things that are tied more heavily to the consumer in outdoor garden, that is been extremely strong where we have good weather. So don't know yet if we would take any share there and then right now, April in the north and even now with a day like today with a lot of rain again we don't see great consumer outside sales, but again you don't know the relative performance at this point.

Brian Nagel:

Got it. That's helpful. And then the second question I have and I guess a bigger picture in nature, but a lot of questions I get a lot from our client is here is Home Depot great numbers now for a while I mean how much longer does this persist and I know an analysis you have talked about it as your analysts suggest just to look at the productivity of the store particularly by category so I guess maybe its quick update there as you look around the store relative to historic peak levels if you will where saw the biggest opportunities in the categories to drive to drive increased productivity from here?

Craig Menear:

So I would say that as we look at that business first of all, my starting comment would be we're planning $550 billion market all in now with the addition of interline and playing in the MRO space for multi-family hospitality and institutional and we owned less than 20% of that in total. So we think there is lots of opportunity to grow. We have several initiatives underway and I have both Ann-Marie and Mark Holifield here and I'll let them comment, but several initiatives underway to drive productivity as we move forward and coordinated effort between our supply chain and our --- operations team.

Mark Holifield:

Yes, we are very pleased with, this is Mark Holifield. We are very pleased with the supply chains sink initiative we have got that role pretty much in the southern tier of RDCs with a deal of our dollar flow on that. One of the things that's along with sink is the --- process where we loading product on to the floor where have previously it was loaded on pallets and that's driving tremendous productivity just filling trucks much more full as they depart for stores. So still rolling that out so still lot's of opportunity there.

Carol Tome:

Yes and in conjunction with that there is tremendous opportunity in the backend with the store. So as Mark talked about project sink, we are also focused on getting this product to the shelf and as we managed the flow of product in the stores we then really engineered the backend to create a better streamline process to get the product on the shelf much quicker as well. So a ton of opportunity there and in addition we have talked about buying online deliver from store. We have also talked about buying online ship-to-store and all those are convenient experiences for the customer and we want to make sure that we lean in and ensure that we have organized or labor around where the customers going and create an efficient and effective process for them. 

HD:

And if I could jump in. There is sales productivity opportunities to. As Craig said huge market to plan lots of room for growth but if you think about peak to drop we still haven't fully recovered some of our category. So when I look at productivity still to be recovered special or kitchen work some of our building material categories still have room to recover from the peak. 

Craig Menear:

The building material categories in lumbar lower those were still as Carol said off or -- - as we exited last year and it was nice to see those were some of our strongest departments in the first quarter here in 2016. So it's nice to see larger project business underway. 

Brian Nagel:

Thank you very helpful. 

Operator:

Our next question comes from Peter Benedict with Robert Baird 

Peter Benedict:Robert W. Baird:

Hi, guys. Thanks for taking the question. 

In the past you have spoken to I think it's roughly 25% year sales of mix being in a bucket that you've considered at risk of -- competition obviously that's a big topic right now. Is that still the right way to think about it and can give us any color may be on how the products in that bucket have performed relative to the rest of the box or you have been merchandising against that bucket. 

Craig Menear:

I would say in general still a good way to think about it. If you think about those things that carry the highest level risk would be those that are small package regionally high value easy-to-ship product and so you think about categories like power tools, --- and so on. As Ted called out we had a tremendous quarter as related to tool sales, quite candidly we're seeing both channels grow in these categories that represent that 25% were staying very focused driving great value for our customer every day. 

Peter Benedict:

Okay good that's helpful. And then Carol maybe just on leverage is there a scenario where you would be comfortable revisiting that two times leverage -- what would be the happen for you to even consider something like that.

Carol Tome:

Peter as you know, our targeted adjusted debt-to-EBITDA ratio is two, we're slightly under that we're about 1.9 today we like 2 as a guardrail, it provides financial flexibility, but more importantly we can sleep at night because we don't have too much leverage as a company. So we like it and now it's not our goal to let that leverage ratio decline and it will as we earn more. 

So as you've seen us in the past, as the leverage point gets to a certain inflection point and if interest rates are subtracted so on and so forth, we will raise incremental debt to support our share repurchase program.

Peter Benedict:

Okay fair enough. Thanks so much.

Operator:

And next we'll hear from Dan Binder from Jefferies. Please go ahead.

Dan Binder:Jefferies:

Thank you. If we look at the comp store sales for the quarter, there was a little bit of deceleration which I suspect was weather related. I was just curious if you could comment on whether May has picked back up or has seen trends similar to April?

Carol Tome:

Yes, as I said earlier, one reason that we are confident with our ability to lift our sales for the year, is what we're seeing in May.

Dan Binder:

Okay, fair enough. And then on the Pro business I know you said if it was above the company average and there is somewhat of an estimate. But just curious is the gap between the DIY and the Pro business widening stable or narrowing?

Edward Decker:

It's not that dramatically different. It was slightly stronger in the first quarter. I think we saw more outdoor project business which you can have a tendency to be Pro related if you doing things like concrete.

Dan Binder:

And then lastly on the overtime proposal that's out there being reviewed can you just comment on how Home Depot would be able to adjust if it becomes law?

Craig Menear:

I mean we look at all factors when we put together our plans. Clearly we are aware that this was possible to come that's factored in our guidance.

Dan Binder:

Great, thank you.

Operator:

Jaime Katz with Morningstar. Your line is open. 

Jaime Katz:Morningstar:

Thanks. I am curious about lending standards you guys have mentioned them in the past and I am wondering if there been any changes particularly if you have them by any sort of demographic there has been a few articles out recently saying that millennial have had more difficult time accessing the credit markets. 

Carol Tome:

Well, you can look it through two lenses. First is just, call it consumer credit which may come through bankcard or in our case through private label card. We see consumer credit asks are being approved 71% of the time. So it's a pretty good approval rate. 

Now I will tell you the cycle is pretty high, it's over 700. But that's a pretty good approval rate. It also speaks to the type of customers who are shopping inside of our store and the approval rates for our pro-cards or pro applicants is about the same about 70% of the time. Then you need to look at lending standards and for mortgages and lending standards are changing ever so slowly, it's like glacier melting and you can appreciate why, because financial institutions have higher capital ratios it's very hard to make a buck in this global straight environment. 

So you can understand why it's slow to move, but we've factored that in as we think about where our business may go and if it were to be easy on underwriting standards for mortgages, that would be good news because the affordability index if you can the mortgage the affordability index is something like 170, that's awesome. So if you can get approved you can afford it.

Jaime Katz:

Okay and then can you guys offer any commentary on any commentary on any lessons you may have learned so far interlined brands or shared best practices you've adopted into the Home Depot model?

Craig Menear:

Lessons learned would be that our anticipation that we have a customer who has come in need across both businesses would be a clear learning, the desire for the customer weather it's new --- customer to fill in and shop at the Home Depot and or customers who are shopping in the Home Depot to have a desire to buy through Interline is there. We're pleased to start --- if you have any other comments that. 

Bill Lennie:

-- Bill Lennie. Just a exactly right we are encouraged by the customer feedback and the advantages they seeing when we combined Interline and Home Depot and then the second thing that are pleased with this a collaboration we're seeing within all tight sales organizations and our ability to join forces and sell across the end markets. 

Jaime Katz:

Thank you. 

Operator:

And next we have Mike Baker with Deutsche Bank.

Mike Baker:Deutsche Bank:

Thanks just wanted to may be the three follow ups. One, just to be clear on the guidance are you raising the full year guidance because of currency being less ---- and what you saw in the first quarter, are you also changing I guess raising the second, third or fourth quarter guidance was all the increased just because of the what we saw in the first quarter and currency. 

Carol Tome:

Mike the increase is solely related to the outperformance we saw in the United States. The reason that we are no longer providing a range is that the exchange rates that we use for our plan are now about the same as the current spot rate. So no need to provide a range but we're just rolling forward our performance except the weather driven demand. We're rolling over the rest of the out performance. 

Mike Baker:

Okay so no real change in how you would have thought about the second, third and fourth quarter?

Carol Tome:

That's right. 

Mike Baker:

Okay. Thank you. Two others, one Easter so far, if I understand it. So Easter hurt March, help April I guess that's because the store, people don't really shop on Easter but I would have thought that would have been out way by people shopping before Easter to do some outdoor projects. 

But again that's not the case, Easter hurts March and it helped April to shift? That --- correctly. 

Carol Tome:

Easter is not a big selling for the Home Depot.

Mike Baker:

But again the sales around Easter don't offset that I suppose.

Craig Menear:

No 

Carol Tome:

No they don't.

Craig Menear:

It -- weekend effectively. 

Carol Tome:

So that's it's a weekend in spring.

Mike Baker:

Okay.

Carol Tome:

But again it didn't the quarter. 

Mike Baker:

Right understood and then one last is maybe bigger picture question. But sounds like you think some of the housing trends are favorable and we agree with that. One thing I think you look at as an important metric and we agree again is that it's home price depreciation. But home prices are now pretty close to where they were in 2006 if we think about as the peak year. 

So do you think -- how do you think about that we concerned up to be a less home price depreciation and then therefore less of a driver to your business 

Craig Menear:

I think the way we look at it the important factor is when home values are positive it's a good thing for our business clearly the customers need recover the value of their homes we've seen that recovery obviously take place and improve for large portion of customers. But as long as home values stay positive it's a good thing I mean for years and years home values grew on average in the low single-digit 1%, 2% 3% 

Mike Baker:

In your view just so as we are now back towards peak year, your view is that home price depreciation can continue 

Carol Tome:

We factored that into our longer-term forecast. Now this year, we believe home prices will be up around 5%. It's important to note that it's not fully recovered even with that 5%, and it's certainly different in other parts of the country. So we think 5% this year and then we think next year maybe 3%, the year on after that 2%, so it continues to Craig's point because there is just ongoing home price appreciation.

Mike Baker:

Okay. Thank you, great color. I really appreciate the time. 

Craig Menear:

Thank you. 

Carol Tome:

Derek we have time for one more question.

Operator:

Absolutely our last question for today comes from Dennis McGill with Zelman & Associates. 

Dennis McGill:Zelman & Associates:

Hi good morning thank you. Just a couple quick ones, Carol, on the cash flow, can you just refresh how we should think about cash flow drop down for the year and working capital as you work through the year?

Carol Tome:

Yes, so we think we generate around $10 billion of cash from the business this year. That includes a slight improvement in working capital principally in inventory turnover. We're planning to take our inventory turnover up by a tenth in 2016.

Dennis McGill:

And then the share transaction is greater than 900, I think you've talked about that it's around 20% of late. Where did that peak out in the last cycle?

Carol Tome:

Where did it peak out in 2006?

Dennis McGill:

Yes, just a sign of a big ticket share.

Carol Tome:

I don't know. I would have to go look at it. I'm not even sure we did that barbell analysis back in 2006.

Craig Menear:

No, I don't know if we did in 2006. I can tell you that for the last seven or eight maybe seven years it's been pretty comparable to that. I think the other factor to consider is when we look at 2006 and look at kind of peak performance, in our own minds, we're not sure what the peak really was, because in 2006, we actually had negative transaction, we were firing customers and so, we don't know that we actually we assume we didn't actually peak in 2006 the way we should have.

Diane Dayhoff:

Well, thank you for joining us on our call today and we look forward to discussing our second quarter earnings results in August. 

Operator:

And that does conclude today's conference call. We appreciate your participation.