HD
#We like every other Company are looking at what's happening with the wage market.
And in parts of the country where there's high employment and there's wage pressure we adjust.
But we are able to work through that through the great productivity model that we have in our stores.
We will continue to adjust market by market as we see the dynamics of each market unfold.
Well we're in the very early stages of integration and we're working through that.
We're excited about the opportunity.
We know that there is an overlap with our vendor community and we will get synergies from that and are beginning to get synergies already.
We also know that we've taken our first actions on a little bit of the reorganization of folks where we have duplicate efforts that we don't need going forward.
So we're in the early stages but we're excited about the opportunities that we see.
And if I could just add a comment from the macro perspective we saw household formation up 1 billion households formed in the third quarter.
Many of those households will be moving into multifamily units.
The Interline acquisition gives us a great selling vehicle to serve that new household if you will.
What we said is that we will look at acquisitions where it gives us the ability to gain capabilities that we might not want to go build ourselves.
So if you think about some of the acquisitions that we've done, the BlackLocus acquisition gave us a data science capability that's being leveraged by our merchants for assortment and price.
If you think about the Crown Bolt acquisition that was basically accompany that was built for us that we sold when we sold HD Supply.
We got it back.
That gives us different distribution capabilities for small package goods in our stores.
The Interline acquisition gives us the capability to better serve our Pro customer through things like open account, through 93 points of distribution where we can deliver same day, next day.
So this is all about how to we actually get capabilities.
Beyond that really not looking for acquisitions.
Right so you might think, well, do you need to buy marketplace.
We can build that.
Do you need to buy a services Company.
No, we have one.
So those are capabilities that we don't need to acquire.
I would say on that we already have a model that leverages a nice interconnected complement of displaying the product in the store but then delivering direct from our manufacturers' warehouses.
So we're leveraging an interconnected model from the day we developed our appliance model.
We had a disciplined and balanced approach when it comes to capital allocation.
The first use of cash is to invest it back in the business.
This year we'll spend about $1.6 billion of capital back into the business supporting our growth.
We then take our excess cash and first pay 50% of our earnings in the dividend.
And the way that works is at the end of the year we will look at how much we've earned and we will cut it in half and that will be the new dividend.
If there were ever to be an earnings disruption we wouldn't cut the dividend, we would just earn back into that 50% payout.
And then excess cash is used to repurchase shares.
We think that's the best use of excess cash rather than leaving it on the balance sheet which would be value diluting to our shareholders.
We do have an adjusted debt to EBITDA target of two times.
We're at that ratio right now.
So we have used the financial leverage judiciously both the support acquisitions as well is to buy back our shares.
As it relates to evaluation of our share price we do have a point of view.
We're not at that intrinsic value, so we continue to outperform and that intrinsic value continues to increase.
There are ongoing legal fees as well as litigation activities.
We estimate it another $5 million of expense in the fourth quarter but there could be more.
None of it would be bigger than a bread box.
It's all manageable.
The biggest numbers that we had were the numbers that we settled on the payment card networks in the second quarter.
And bigger than a bread box is not a financial term.
I wouldn't say it's any more dramatic than we've talked about before.
But we do look at sales by price point.
And again this quarter we had a progression of higher comps as you went up price points in an assortment.
Our large spend Pro as <UNK> mentioned earlier is actually comping above the Company average and that's been a driver certainly in our Pro recovery.
That hasn't changed dramatically in the last few quarters.
It's been pretty consistent.
We would certainly expect it to continue.
If I could just jump in on the market share, the census data, the NAICS score for one would suggest that we have grown market share.
And again we compete in with a lot of folks across each of our product categories.
It varies widely by product category, whether that's other big-box, whether it's wholesale distributors, whether it's digital competitors.
So we are very focused category by category as to where are the largest opportunities to grow our business and take share.
And that share on a rolling 12 through September was 56 basis points up.
Sure.
And I think that's the key is that based on the weather and we did have impacts from weather last year it then impacts categories differently from a timing standpoint.
So as you mentioned tough winter last year in the Northeast, certainly as you get into the spring you see people making repairs on things like roofing and then in some cases a lot of live goods needed to be repaired as well.
But then that obviously is offset by categories.
If it's a warm winter nobody's doing ---+ you're doing outside projects and nobody was doing that last year.
So those are the dynamics category by category that affect our business, particularly as it relates to the start of spring and then through the tail end of the winter season.
But just as I said over time weather normalizes.
And if you look at our US comp on a two-year stack basis we see an acceleration from Q1 to Q2, Q2 to Q3 and now with the guidance I have just given you that acceleration into Q4 as well.
It was a tough winter.
I think as <UNK> mentioned while we had pressure from deflation and lumber we were very pleased with our unit productivity and pleased with what we saw in our Pro business and as we said the larger spend Pros leading the pace there above the Company average.
That clearly those lean to bigger ticket projects in the building materials business, bigger ticket projects, so we're very encouraged by that spend with the customer.
Then likewise you look at categories like appliances that's a big ticket spend as well.
So we don't really see a slowdown if you will big-ticket.
And Matt if I can add from a macro perspective as we look at home equity lines of credit they are down 29% from the peak but 17 million home equity lines have been planted this year and 28% of the banks who are underwriting those lines of credit are stating that their underwriting is starting to ease a bit.
So if you think about people use their home equity lines that typically goes into a bigger project like a kitchen remodel or sort of thing.
So it's a bit encouraging as we think about Q4 and beyond.
So the way we look at it quite candidly is as one business and an interconnected approach.
A couple of things, one we shared with you that we did what we call COGS A, so we looked at normalizing how we account for things in both channels so that our merchants have a common view of all costs and expenses.
And then as I mentioned earlier 42% of our online orders are picked up in our stores.
So it's very much a blended mix and we look at it as a blended mix and so we see it more of the same going forward.
And we'll probably provide a little bit more outlook as we go into our December Investor Conference in terms of how the business is coming together by channel.
But certainly view it as one Home Depot for the customer.
I will just say that we do a lot of deliveries from store today.
But <UNK> <UNK> is here, I will let him comment on this.
Our stores have been a base for delivery for quite some time where we take orders in the store and deliver them.
This buy online, deliver from store initiative that we have rolling in 108 stores now and we will roll out in 2016 allows us to take orders online, drop them to the store and use those same delivery assets to get to our customers.
We continue to stay abreast of the various offerings in the marketplace.
We think the most important thing for us to focus on right now is our deliver from store initiative, utilizing the assets that we have in place now.
No, not really.
We've grown pretty comparably quarter to quarter.
Do you want to start <UNK>.
I would start on the investment piece first.
Absolutely we seat terrific productivity in the areas that we have invested.
And from what we can track we believe we're taking share in these areas and I'd highlight three.
One would be the lithium-ion battery technology in power tools and now migrating to outdoor power.
We have an extremely robust lineup of brands and product and values in power tools and believe we're taking meaningful share there.
LED in light bulbs and now increasingly integrated into light fixtures where we've been very aggressive following the development of that technology.
We were partnered with some of the best folks in the industry and our light bulb and now again integrated fixtures with LED are very strong.
And we believe we're taking share.
Then in appliances certainly, you know we've been expanding square footage for some time now, investing into floor space and adding some additional brands to our portfolio there.
We saw double-digit comps in appliances yet again this quarter and believe we're taking share in appliances.
And to your question about where are we on the cycle, we're doing a lot of work in this regard trying to come up with our own point of view.
But one thing we've learned looking at data coming out of the Harvard Joint Center for Housing Studies as well as John Burns Real Estate Advising Firm is that homes that are older than 45 years tend to be have a higher repairs.
And in fact the amount of money spent on repairs in those older homes is 5.6% higher than the amount of money paid to repair a home that is 20, 24 years old.
There are 40 million homes in the United States that are older than 40 years.
So as the housing stock ages it just bodes very well for big-box home improvement retailers to sell to those customers who need to make repairs in their homes.
We don't have that kind of insight.
But we will continue to study it.
And what I would say on that is the merchants will continue to focus on products that make it easier for our Pro as well as our consumers to be able to do those kind of projects.
Our Pro business in total is good whether it's as <UNK> mentioned managed accounts, whether it's our consumer credit card data that shows, our Pro credit card data that shows.
We've lost some visibility in the small Pro with our data breach that we're working to regain, so that's probably why we don't talk as much about our smaller Pro.
But all of the data points that we have indicate that our Pro business is very solid and we're pleased with the results, whether that's within categories or whether it's at customer data that we have specifically.
To put some numbers behind it, if you just look at Pro sales on our private label credit card as well as managed accounts we know those sales.
They make up 20% of our sales in the third quarter and they grew faster than the company.
It's really, really hard to tell.
Clearly if you think back a year ago on our call we talked about the fact that we were pleased that each month had positive transaction growth despite the breach.
We again some positive transaction growth.
As <UNK> mentioned just a minute ago when you look at a two-year stack comp basis we've seen progression in two-year comps quarter after quarter after quarter and we anticipate that we will be able to do that again this quarter.
So it's really difficult to get at that number.
The only other thing I can tell you is as we said last year we know that there are customers who were upset based on the emails that we got.
So there had to be some impact, it's just really hard to quantify.
Alan, we have time for one more question.
It's something that we were watching very, very carefully and certainly thought we might see some impact.
But candidly Texas would be the biggest market that would have those kind of impacts.
We really haven't seen it at all.
As I mentioned earlier all of our major markets in Texas actually outperformed the Company average comps and we've seen strength across the store.
You are going to hear all about it on December 8.
Thank you for joining us today.
And we look forward to speaking with you at our investors and analysts conference next month.
