Home Depot Inc HD
Q1 2013 Earnings Call Transcript
Transcript Call Date 05/21/2013

Operator: Good day, everyone, and welcome to today’s Home Depot First Quarter 2013 Earnings Conference Call. Today’s conference is being recorded.

Beginning today’s discussion is Ms. Diane Dayhoff, Vice President, Investor Relations. Please go ahead, ma'am.

Diane Dayhoff - VP, IR: Thank you, Mary, and good morning to everyone. Joining us on our call today are Frank Blake, Chairman and CEO of The Home Depot; Craig Menear, Executive Vice President, 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 reminder, we would appreciate it if the participants would limit themselves to one question with one 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.

Before I turn the call over to Frank, 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, those 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 over to Frank Blake.

Frank Blake - Chairman and CEO: Thanks you, Diane. And I'd like to start by saying our thoughts and prayers are with those who have stricken by violent storms in Oklahoma and throughout the southwest. Our Company and our associates are part of these communities and we will be working hard to be at help in the days and weeks ahead.

Now, on our results, sales for the first quarter were $19.1 billion, up 7.4% from last year. Comp sales were positive 4.3% and our diluted earnings per share were $0.83. Our U.S. stores had a positive comp of 4.8%. All three of our U.S. divisions posted positive comps for the quarter. For our northern division, in particular, this was a significant accomplishment given the dramatic difference between the unusually warm spring of 2012 and the relatively cold spring of 2013.

Our western division was our best performing division, driven by double-digit positive comps in most of the major markets in California. Our Florida markets also performed well with comps above the Company average. Internationally, our Canadian business had positive comps for the sixth quarter in a row and our Mexican business had another quarter of positive comps, making it 38 quarters in a row of positive comp growth.

As Craig will detail, while weather negatively impacted our seasonal and exterior businesses, our core interior project business remained strong throughout the quarter. This was encouraging and consistent with the view that the housing market is starting on the path to recovery. For the first time in the last several years, the growth rate in our pro customer segment outpaced the growth rate in the consumer segment. We've been tracking the relative growth rates of our pro and consumer segments as one indicator of the housing recovery.

Since 2008, our pro segment has underperformed our consumer segment. Last year, the relative growth rates grew closer and in the fourth quarter of 2012, they grew at approximately the same pace. Our expectation was that the pro-business would accelerate during the housing recovery, and so this quarter’s outperformance from the pro segment is a positive sign.

Some of the outperformance was due to slower growth in our consumer-oriented garden business, but even adjusting for that, the pro segment had a higher growth rate. Also our smaller spend pro customers contributed more significantly to the overall pro growth than in the last few years. Our expectation was that we'd see improved performance in the smaller spend pros as the housing market recovers. So, this is another positive sign.

Our Services business had double-digit growth in the quarter and we're pleased with the integration of Measure Comp and U.S. Home Systems, our two recent Services-related acquisitions. Marvin and his team have been able to improve the customer experience both in the home and in the store by bringing these businesses directly into Home Depot.

As part of our interconnected retail strategy, we have completed the rollout of Buy Online, Ship to Store. This required an effort across our business from supply chain to merchandising, to online, to IT and store operations. Our customers now have access to over 300,000 items available for pickup at their convenience in our stores. So far the growth we've seen from this has been ahead of our expectations, and one out of five customers who pick up an order at the store also buys an additional item while there.

We also continued our efforts to improve the overall dotcom experience for our customers. We simplified our checkout process for fresh landing pages and integrated e-receipts into the site, among other key activities. We're pleased that the online traffic to our site was up almost 50%, and as part of that, not surprisingly, mobile traffic more than doubled.

The U.S. macro data on housing continues to improve. Private fixed residential investment as a percent of GDP ticked up for the sixth consecutive quarter to 2.7%. Increasing household formation, price appreciation and higher housing turnover are all positives for our market, but credit availability remains tight and constrains the velocity of the recovery.

Last year at our investors' and analyst' conference we set out a framework for thinking about the recovery of the housing market and the impact the recovery would have on us. In 2010 and 2011, we went through a period when our sales were growing, but the housing market was still down, or at best stabilizing. Our sales performance correlated most directly to overall GDP.

Last year, we had an additional modest assist from housing as the market started to improve. We saw that carry through in this past quarter, somewhat stronger than we anticipated after adjusting for weather impacts. As Carol will discuss in more detail, we are therefore revising upwards both our sales and earnings guidance for the year.

We remain focused on taking care of our customers, and investing in our business and in our associates. I'd like to thank our associates for their hard work and dedication. Based on this quarter's results, roughly 98% of our stores would be in Success Sharing, our profit sharing program for our hourly associates. Last year we had 100% of our U.S. stores make Success Sharing. Our objective is to accomplish that again this year.

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

Craig Menear - EVP, Merchandising: Thanks, Frank, and good morning, everyone. We are pleased with our performance in the first quarter with strength in our business across the breadth of the store. We had positive comps in all departments, except our indoor and outdoor garden departments. The departments that outperformed the Company's average comp were kitchens, plumber, tools, plumbing, decor, electrical, bath, flooring, lighting and hardware. Paint, millwork and building materials performed positively, while comp sales in indoor and outdoor garden were negative.

Spring arrived at various times cross the country and we were ready when it broke. In the Western division where weather was more normal, we had positive performance in all departments throughout the quarter. In contrast, in the Northern and Southern divisions where weather was significantly colder than a year ago spring gardening and outdoor entertaining categories posted negative comps in February and March.

But as the weather improved in April, our nimble supply chain and partnership with our store operations and field merchandising teams reacted quickly and maximize demand spikes. By taking advantage of these moments of opportunity, we are able to post positive performance in our garden business across all divisions in April.

Inside the home, we continue to gain momentum in simple decor. In flooring, customer response to our soft spring carpet, new floor tiles and fusion growth help drive department comp above the Company average. In bath, our line up of Moen and delta foundation faucets, as well as new vanities from Glacier Bay were the drivers of our performance. We continue to see strong results in lighting as customers transition to LED bulbs and light fixtures.

In maintenance and repair categories, we continue to see strength with comps above the company average in wiring devices, safety and security, plumbing repair, pipe and fitting, tools, hand tools, power tool accessories, cleaning and door locks. Total comp transactions grew by 0.1% for the quarter overcoming significant downward pressure from our seasonal business.

Transactions for tickets under $50, representing approximately 20% of our U.S. sales, were down 1.6% for the first quarter, principally due to our garden business. In contrast, in the month of April, we were able to drive positive transactions, including tickets under $50. Transactions for tickets over $900 also representing approximately 20% of our U.S. sales were up 9.7% in the first quarter.

Average ticket increased 5% in the first quarter. The drivers behind our average ticket growth were the strength in appliances, as well as continued improvement from our pro-business. Our average ticket increase was also impacted somewhat by commodity price inflation, mainly from lumber and copper, which contributed approximately 120 basis points to comp.

Now, let me turn our attention to the second quarter. We're introducing new technology and paint from BEHR with our new line of MARQUEE exterior paint and primer. This new paint creates a tough non-stick surface that resists dirt and offers advanced paint performance for longer-lasting color, all backed by lifetime guarantee. Our exclusive MARQUEE paint resists rain showers as early as 60 minutes after application and can be applied in lower temperatures which are great features for our pro customer. Also in paint for our professional customer we're introducing new paint sprayers from Graco.

We have an incredible lineup of great values and special buys, as well as innovative products for Memorial Day. We are introducing the first battery-powered trimmer that converts to a corded trimmer so that you never run out of power from Ryobi. In-store now, we have the Pennington smart feed sprayer system. Without measuring, pouring or mixing this system delivers even feeding every time and puts out more nutrients than competing products, while using less water.

For Father's Day and 4th of July events we also have an extensive lineup of great values and special buys. These events along with our superior execution in the stores will generate a lot of excitement in the second quarter.

With that, I'd like to turn the call over to Carol.

Carol B. Tome - EVP, Corporate Services and CFO: Thank you, Craig, and hello everyone. In the first quarter, sales were $19.1 billion, a 7.4% increase from last year. As you will recall, fiscal 2012 had a 53rd week which shifted our fiscal 2013 calendar. By starting fiscal 2013 one week later than last year we had an additional week of spring sales. The calendar shift contributed approximately 320 basis points of year-over-year sales growth.

On a like-for-like basis, comps or same-store sales were positive 4.3% for the quarter with positive comps of 4.6% in February, negative 3.5% in March and positive 9.9% in April. Comps for U.S. stores were positive 4.8% for the quarter, with positive comps up 4.8% in February, negative 3% in March and positive 10.8% in April. The monthly variation in our comps was due primarily to whether which impacted our garden department as well as the timing of Easter. As Craig mentioned, every department with the exception of our garden department reported a positive comp in the quarter.

Sales related Hurricane Sandy were approximately $145 million in the second quarter, $30 million higher than the storm sales we realized from Hurricane Irene and the same period last year. As the building continues, we believe we will see some additional storm related sales in the second quarter.

Our total Company gross margin was 34.9% for the quarter, an increase of 20 basis points from last year. This gross margin expansion came from our U.S. business and can be attributed to the following. First, our shrink efforts are gaining traction. As we realized 11 basis points of gross margin expansion due to better shrink performance than one year ago.

Second, we experienced approximately 20 basis points of gross margin expansion due to the impact of recently acquired businesses, which are gross margin accretive, and third, we experienced approximately 10 basis points of gross margin contraction due to a change in mix of product sold. For the year, we continue to expect moderate gross margin expansion.

In the first quarter, operating expense as a percent of sales decreased by 112 basis points to 24%. Total operating expenses grew at a factor of 35% of our sales growth better than our original guidance due principally to the sales environment.

Interest and other expense was $161 million for the first quarter, an increase of $77 million over the same period last year due to the following factors. First, in the first quarter of 2012, we had a $67 million benefit arising from the termination of a third party loan guarantee that did not repeat in 2013, and second, our net interest expense was $10 million higher than last year due for the most part to interest associated with $2 billion of incremental debt issued in April of 2013.

Our income tax provision rate was 36.6% in the first quarter and we expect our income tax provision rate to be approximately 37% for the year. Diluted earnings per share for the first quarter were $0.83, an increase of 22.1% from last year.

Moving to our operational metrics; during the first quarter we opened one new store in Mexico for an ending store count of 2,257. At the end of the first quarter selling square footage was 235 million and total sale per square foot for the first quarter was $328, up 7.8% from last year.

Now turning to the balance sheet; at the end of the quarter inventory was $11.8 billion, up approximately 2% from a year ago. Inventory turns were 4.4 times, up from 4.3 times last year. We ended the quarter with $44.2 billion in assets, including $4.3 billion in cash.

In the first quarter, we repurchased $2.1 billion or approximately 27.2 million shares of outstanding stock, including 9.1 million shares through open market repurchase and 18.1 million shares through an accelerated share repurchase program. The shares acquired under the accelerated share repurchase program are an initial calculation. The final member of shares repurchased will be determined upon completion of the program in the second quarter.

In April, we issued $2 million of long-term debt at a record-low blended coupon of 3.45%. At the end of the quarter, our adjusted debt to EBITDA ratio was 1.8 times against a target of 2 times, giving us approximately $2 billion in additional borrowing capacity. We have no plans to issue incremental debt in the second quarter, but if conditions warrant, we may look to do so in the back half of the year.

Computed on the average of beginning and ending long-term debt and equity for the trailing four quarters. Return on invested capital was 17.7%, 230 basis points higher than the first quarter of fiscal 2012.

Continued strong performance in the core of the store drove first quarter sales ahead of our plan. Further, we know that some garden sales that were deferred in the first quarter will be realized in the second quarter.

Finally, while the forecast for GDP growth in the U.S. hasn't changed materially, housing continues to recover. Today, we are lifting our 2013 sales and earnings per share growth guidance, reflecting our first quarter outperformance and our forecast for the second quarter where we are projecting sales and earnings to be higher than what we originally planned.

Because it is early in the year, we are not changing our forecast for the back half of the year. As a result, we now expect fiscal 2013 sales to increase by approximately 2.8% with positive comps on a 52-week like-for-like basis of approximately 4%. Given our updated sales growth guidance, we now expect expenses to grow at 30% of our sales growth rate on a 52-week basis.

For earnings per share, remember that we guide off of GAAP. We now project fiscal 2013 diluted earnings per share to increase approximately 17% to $3.52. These earnings per share guidance includes the $2.1 billion of share repurchases completed in the first quarter and our intent to repurchase an additional $4.4 billion in shares over the course of the year.

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

Transcript Call Date 05/21/2013

Operator: Dennis McGill, Zelman & Associates.

Dennis McGill - Zelman & Associates: I guess first question, Carol, I think it was a couple years ago. You had mentioned an REO turnkey program for banks on the foreclosure side, and I think that business is probably still growing and you've got an emergence of single-family rental companies out there as well that are going to be a little bit more institutionalize than maybe national. Can you just talk big picture kind of what that program looks like today and how you guys are thinking about maybe agreements that could get you into the maintenance side on the single-family part of the business on the rental side?

Carol B. Tome - EVP, Corporate Services and CFO: I'll start and Marvin maybe you want to kick in, we are pleased with this business. On a relative basis, Dennis, it's pretty small for us, but we are seeing nice growth and we will continue to use our services organization to expand this across the country. What we are more excited about actually is what Frank's commented on is the strength in our pro-business and REO would not be inside of that pro-business necessarily, but we are really excited in that regard. Marvin any color you want to add?

Marvin Ellison - EVP, U.S. Stores: Dennis, the only thing I'll add is as you know the business is shifting from traditional foreclosures with banks to private equity funds going in purchasing of groups of properties. So, we're shifting and adjusting, but I think Carol's point is most important. This is the small business. It's something that we are very interested in. We think that we have unique competencies with our pro-business, with the products we sell and our key is really two things, leveraging our GC network that we have because we are in the services business and the pro-business, but also leveraging product pull-through. We want those customers to come to our stores to buy products and those products to be the fixtures, the faucets, the plumbing supplies, et cetera that we put in those homes from a remodel and from a maintenance standpoint. So, so far so good, but it is a relatively small business.

Dennis McGill - Zelman & Associates: Roughly how big would that be too?

Carol B. Tome - EVP, Corporate Services and CFO: We haven't disclosed that, Dennis.

Dennis McGill - Zelman & Associates: Second question, as you talked about double-digit comps in California for the quarter, can you maybe go into a little bit of detail as far as categories that you see driving that performance? And then maybe Frank, just big picture how you think about that maybe being a lean indicator to other parts of the country as home price inflation gains momentum as well?

Frank Blake - Chairman and CEO: Well, let me take the latter first, Dennis. What we've seen over the last several quarters is some of our most hard hit markets, the markets that were really ground zero of the housing collapse recover and that's California, Florida, moving into Arizona, now even in Las Vegas and Nevada. So, it's really part of how badly those markets suffered previously and now starting to return to more normal performance. I'd like Craig and Marvin comment, but I'm not aware of any particular differences in terms of what's being sold in those markets. We're really selling across the store there.

Craig Menear - EVP, Merchandising: Yeah, it really is broad-based when you look at virtually every department we have, all posted positive growth in the California area. So, we're very, very pleased that it's a broad-based sales pattern.

Carol B. Tome - EVP, Corporate Services and CFO: It is that saying, the rising tide lifts all boats the entire business is lifting.

Craig Menear - EVP, Merchandising: Correct.

Dennis McGill - Zelman & Associates: Pretty bullish. Thanks guys.

Operator: Gary Balter, Credit Suisse.

Gary Balter - Credit Suisse: Just two questions. One is, could you talk about, you've been doing these different tests with PayPal and other ways of servicing the customer from a payment point of view. Could you just discuss where you're going with that and what's been the results of some of the tests and what are you rolling out et cetera?

Carol B. Tome - EVP, Corporate Services and CFO: On the PayPal front, we are very pleased with the year-over-year performance. It actually doubled in penetration. But Gary, it's very, very small. We brought PayPal into our business because our customers wanted to use that as a form of tender and so we're delighted to have the relationship with them. As we look ahead, we've got our eyes wide open as to what may be available to retailers from a mobile wallet perspective and there are a number of things that are being talked about. As you know, there's a consortium of retailers. We are not part of that consortium, but we are watching what they are doing – that's (MCS) – we're watching what they're doing. Obviously, we're watching what Google is doing. There's announcement today about Google. So, we're eyes wide open. We want to be with where the customer is going. We don't necessarily want to lead the way.

Gary Balter - Credit Suisse: And Lowe's being part of that consortium doesn't really impact your decisions or anything.

Carol B. Tome - EVP, Corporate Services and CFO: Eyes wide open. We want to do the right thing for our customers.

Gary Balter - Credit Suisse: And the second question, your productivity now by (indiscernible) calculation (we saw) was about $326 per square foot. You've peaked out about $100 higher back in the good old days and just comping in the high-singles you're going to get near there. As you look at your staffing in the stores and the way the stores are set, do you feel like you could – the capacity is fine for getting up to those levels or do you feel that may be you'll start stretching your stores again and you have to start changing the way you come to market a little bit?

Carol B. Tome - EVP, Corporate Services and CFO: Well, it really depends on the nature of the sales growth. As you know, we forecast sales growth 50% coming from transactions, 50% coming from ticket growth. As you saw in the first quarter, our growth came from ticket growth. That hasn't impacted on our staffing model, because it's an activity based staffing model. But Marvin, you've got tons of flexibility to do what you need to do to serve the customer.

Marvin Ellison - EVP, U.S. Stores: Yeah, Gary, we do in fact. If you go back to the old 60-40 initiative, over the last four years, we've reinvested roughly 500 hours per store per week back to the stores for service and that's the reallocation, not an incremental add. So, that's really allowed us to continue to sustain a service level while making sure that we respond to the needs of the business, but I think Carol's point is very key and that is we have an activity-based system, driven by transactions and ticket. So, where sales are picking up, our staffing has increased. We think we'll be in a perfect position to keep up with the trends. We work hand-in-hand with Craig's team. So, as we forecast events, new product introductions, we will adjust our staffing to make sure we have customers served in a most appropriate way. So, we feel really good about the future and how we can keep up with the business.

Frank Blake - Chairman and CEO: Gary, the one other point I'd add to that on the store, we're pleased with the size of our store. We don't see a need to substantially remodel our stores or expand them, but one thing that we're dealing with between Marvin and our supply chain team is buy online, pickup in store and buy online ship to store and buy online ship to store particularly that we've had some pretty good customer interest in that, and so we are thinking about how do we segment parts of the store to more efficiently serve that customer who is coming in and has bought online and just wants to pick it up in the store. So, Marvin and his team are working on, gee, what would we do with the store layout, but that's a slight alteration. It's not a remodel.

Carol B. Tome - EVP, Corporate Services and CFO: It's a really interesting statistic. If you look at the first quarter, 22% of the sales placed online were actually picked up in the store and 10% of those were BOSS related, buy online ship to store related, isn't that interesting?

Operator: Aram Rubinson, Nomura.

Aram Rubinson - Nomura Securities: A question about traffic and ticket. I see the quarter's entire comp, as you said, came from ticket. There were a number of factors though that might have influenced, such as the extra week shift and the weather and other things. Can you help us disaggregate some of those factors? I'm trying to get a sense of how the underlying traffic is on a reported basis; underlying traffic on a comp was slightly negative. So I was just trying to get a little context around that.

Carol B. Tome - EVP, Corporate Services and CFO: Well, I can start, and then, Craig, you can add some color. Our comp transactions, as Craig pointed out, were up 0.1%, and that's a good number given how we're still heavily penetrated in Garden in the first quarter. Our Garden business makes up 18% of our total sales. If you look at our comp average ticket, it was up 4.2% year-on-year, and if you look at the drivers, it was across all categories. As Craig pointed out, we had about 120 points coming from commodity inflation. We had about 70 basis points of growth coming from appliances. So, our appliance business is growing quite nicely, and then the rest was across all categories. Craig, do you want to give any more color?

Craig Menear - EVP, Merchandising: Yeah, just to reiterate, when we got into April and actually began to see a more normalized weather pattern, we were able to actually drive the transaction growth in the company, and with the Garden businesses kicking in and getting to positive growth in the month of April, it significantly helped that, including the lower ticket categories, which grew as well.

Aram Rubinson - Nomura Securities: So usually in a cyclical rebound, we see ticket lead the comp. Is that just part of what we're seeing naturally, or would you expect the traffic to kind of be balanced with the ticket in the year ahead?

Carol B. Tome - EVP, Corporate Services and CFO: So we would expect the traffic to come back in the second quarter, of course, because the sales that we didn't get in the first quarter have not been lost. As we look at our Garden sales, you'll recall last year we had a really warm first quarter. So we pulled forward about $160 million of Garden sales into the first quarter last year. This year, we estimate we lost about $188 million of Garden sales, but it's not lost forever. Maybe some of it's lost. But we're going to get the majority of that back in the second quarter, and with that comes people.

Craig Menear - EVP, Merchandising: I think the other factor, when you think about the growth in ticket, as we called out, over $900 being up 9.7%, the improvement in the pro business is also a factor there that's helping to drive that higher ticket. While we are not back to historical norms, we're seeing improvement in terms of unit productivity in the number of items in a basket with our pro customer, and so that's encouraging for us as well.

Operator: Dan Binder, Jefferies.

Dan Binder - Jefferies & Co.: I was wondering if you could just give us your best thoughts on when the seasonal shifts will occurs with the – or, I should say, the week shift that occurred in Q1, how that plays out across the rest of the year? Then my second question was just regarding competition both online and on land, how that's looking these days.

Carol B. Tome - EVP, Corporate Services and CFO: Sure. So, let's talk about the seasonal shift, and I'm going to do it on a comp basis. So, for the first quarter, we told you that the seasonal shift was 320 basis points on a comp basis. In terms of dollars, that was $554 million. Looking at the second quarter, we will actually have a lower comp basis and it will be lower by about $300 million. So, if you think about what that means, our comps will be higher in the second quarter than our total sales growth. Then looking to the third quarter, there shouldn't be any meaningful difference in the comp basis, and then finally, in the fourth quarter, our comp basis should decline by about $100 million. You can call that pretty flat. So hopefully, that's helpful.

Frank Blake - Chairman and CEO: As far as the competition, really it's still there. We have plenty out there, kind of I haven't seen anything dramatically different in the last quarter. But clearly, it's a – we monitor what's happening in the marketplace and then adjust according to what we see happening.

Operator: David Gober, Morgan Stanley.

David Gober - Morgan Stanley: Craig, I was just wondering if you could touch a little bit on some of the merchandising initiatives, particularly on the localization front as you ramp into the busy part of the year, and any kind of update on what you're seeing there and how you're expecting that to impact the business, whether that would be contributing kind of ticket or traffic?

Craig Menear - EVP, Merchandising: David, we have – as you know, we've put tools in place to assist our merchants in assorting. We are working on actually delivering enhancements to those capabilities right now. We have been developing clusters. So, working to do a better job of assorting locally, probably an example of that would be adjustments in floor tile mix. We had pretty nice performance. So, we believe that by working with our field merchandising team in conjunction with the merchants here in Atlanta that those kind of adjustments are paying off for us and seeing it in the performance.

David Gober - Morgan Stanley: Maybe just a follow-up on the appliance business and Carol mentioned that, that continues to be strong and seem like in the fourth quarter that was a big call out as you guys expanded a couple of relationships with vendors and are you still seeing momentum there and as you continue to roll that out, are you seeing the impact across the stores at more localized the appliance section?

Frank Blake - Chairman and CEO: First of all let me start, we are pleased with the performance that were seeing in the appliance business as Carol called out it contributed about 70 basis points of comp in the quarter. Our customers are responding to the expanded offering. We completed the initial rollout of our expanded store-base, which was 120 stores at the end of last year and we are moving forward as we called out last quarter with an additional 120 stores. The appliance business is an interesting business. It's highly repair-oriented. A lot of appliances break every day in the country, so we do see that as a big repair business. It also does complete the kitchen. So there's an opportunity on both sides.

Operator: Christopher Horvers, JPMorgan.

Christopher Horvers - JPMorgan: Carol I believe you mentioned the 18% of sales is historically you said Garden in the first quarter, what was that this year, how does that compare to 2Q and perhaps can you expand that bucket how much would you say it's seasonal and outdoor broadly historically in the first and second quarter including things like grills and (patio) furniture and outdoor paint and all the outdoor activities?

Carol B. Tome - EVP, Corporate Services and CFO: 18% number that I shared with you was the penetration this year and as we pointed out that our comp was negative, so obviously the penetration was higher last year, slightly higher. Craig you might want to talk about how we've categorized?

Craig Menear - EVP, Merchandising: In terms of outdoor kind of categories in total as we look at it, generally in Q1 that represents about 30% of our business and it grows to about 35% of our business in Q2.

Christopher Horvers - JPMorgan: So, I assume last year that was a lot higher in the first quarter. Is it 200, 300 basis points higher the flip year-to-year or is something smaller?

Carol B. Tome - EVP, Corporate Services and CFO: Well, if you just want to give us a second, we can tell you. So, the penetration has changed about 200 basis points year-on-year.

Christopher Horvers - JPMorgan: 200 bps year-to-year, okay. So, you're raising the guidance for the – you're just raising – assuming that the seasonal business shifts into the second quarter from the first, I think the $180 million that you mentioned that you missed this year, that's about 90 basis points. I mean, should we look at the 2Q outlook on a stack basis or we're just going to sort of assume that (indiscernible) domestically and I get the 90 basis points back of that garden business shifting or another 200 basis points from the seasonal shift, total outdoor seasonal shift?

Carol B. Tome - EVP, Corporate Services and CFO: Well, let me share with you how we're thinking about it. The guidance that we've given today, the lift from 2% to 2.8% or on a comp basis, 3% to 4% equates to about $800 million more in sales than we originally planned. Of that $800 million about $340 million was recognized in the first quarter. So, the balance we believe will come in the second quarter. And we get there the following way. First is recovery of garden and we won't recovery everything we lost, but we'll recover the majority. We also believe that we'll have additional sales from Sandy and these will all be incremental sales. We are projecting $80 million from Sandy, and I will tell you that is a projection, don't really know. And then the rest will come from strength across the core of the business. It's May 21st. Our sales thus far in the month are great. So, we feel very comfortable with the guidance that we've given.

Operator: Michael Lasser, UBS.

Michael Lasser - UBS: I actually have two. First, it's on the (forward credit) to consumers. How are you viewing that dynamic within the broader macro environment as influencing your sales? Is that starting to happen which is the driver or do you expect that that's still on the horizon that will happen down the road? And I have a follow-up?

Carol B. Tome - EVP, Corporate Services and CFO: So, Michael, the question is consumer credit?

Michael Lasser - UBS: Yeah. Is it starting to flow? We saw in the fourth quarter home equity lines were still down year-over-year. What do you think is fostering all this good growth that you're seeing?

Carol B. Tome - EVP, Corporate Services and CFO: Well, interestingly, we did see improved penetration on our private label cards in the quarter. The penetration increased 119 basis points to 22.9%. And if we look by category, where we saw that growth, it was driven by our kitchen department, our millwork department and our plumbing department, some of our strongest year-over-year growth departments. So, that's good news. I will tell you, our approval rates continued to decline principally because people are coming off the sidelines with lower FICO scores and they are not qualified. So, our approval rates are about 65%, down from last year's slightly. The average FICO score being approved is (710), with an average credit line of $5,800. The other interest in statistic is that for our existing customers, they are only about 27% utilized on their credit. So, consumers continue to be pretty cautious with credit. Same thing holds true for pro. Our pro approval rates were about 70% bit of a higher line there, $6,800 but only 20% utilized. Now on the consumer side as you know the ability to pay or the Card Act really negatively impacted approvals. The Consumer Financial Protection Bureau came out with some changes recently which we think will help approval rates, we think it will help grow our approval rates by 100 basis points more or less, so that's good news. This is my long answer to your question that much like the housing market beginning to recover the consumer and credit availability beginning to recover, but it's not recovered.

Michael Lasser - UBS: It sounds like you're doing your part to contribute to the free of flow of credit to the consumer?

Carol B. Tome - EVP, Corporate Services and CFO: Yes, we are.

Michael Lasser - UBS: And my second question is as the housing recovery continues the profitability of the supply chain should improve or the entire home improvement supply chain should improve as capacity utilization rates rise. Are you starting to see evidence that you're benefitting from that and would ever capacity you think you might?

Carol B. Tome - EVP, Corporate Services and CFO: Well, as you know, we've given guidance through 2015 which suggests we will get about 20 basis points of benefit from our supply chain by 2015, didn't see that in the first quarter, but that's just because of the nature of the seasonal business and the spiky sales and our supply chain did a get great job in the first quarter, but longer-term we should enjoy lot more benefit.

Michael Lasser - UBS: So I wasn't necessarily talking about your supply chain, sorry for the confusion, I was talking about your vendors becoming profitable such that you would start to participate in their improved profitability?

Frank Blake - Chairman and CEO: Certainly, when you can put throughput through the factories that improves overall profitability. And we do have agreements in place with our suppliers where as we drive productivity for them, we share in that productivity and obviously can deliver greater value for our customers as well.

Operator: Matthew Fassler, Goldman Sachs.

Matthew Fassler - Goldman Sachs: You spoke about the strengths in your commercial business and you attributed that in part to macro dynamics which clearly are working in your favor. When we've been talking to pros over the past month about the power center channel supplying to them, Home Depot often stands out as taking more aggressive action and having incremental impact. So, is it possible to try to disaggregate you think the contributions of your own changes and you might talk about any ones that are new or different are making a big difference versus that of the market and driving that pro business above the consumer business here in the first quarter.

Frank Blake - Chairman and CEO: So, Matt, first off, I'll ask Marvin to address some of the actions we've taken in the store to better serve our pros. But I'd just say generally it's tough for us to measure share. It is really hard for us to measure share with the pro because the pro shops across so many different channels; there are so many different kinds of pros in our stores. So, we really don't have a good read through into to what extent do our pro numbers reflect some possible share gain versus the market. Since we started for several years now we've had a notional theory of what we'd see in the housing recovery and since we are seeing that play out with our pro numbers, we're more inclined to think of that as a more general market recovery. But we have done – and thank you for noting – we had done some things that are very focused on this customer segment in the storm, maybe Marvin you want to comment on some of those?

Marvin Ellison - EVP, U.S. Stores: Sure. Matt, we really took advantage of the downturn. We had processes and our focus was really not that good to be quite candid and so when the market was depressed we decided to invest in a couple of things. Number one, we had a very distinct focus on what we do in the store and what we do outside of the store. In the store was primarily for our smaller pros, outside of the store was pros, was typically would not venture into Home Depot because of the nature of their business and in the store, we focused on speed and convenience. We put in dedicated cashiers for the pros. We put in dedicated loading. We created pro (power house) where we eliminated tasking and we wanted service focus, most specific times of the day and we really made a really consistent focus on speed. We leveraged the mobile point-of-sale to help pros accelerate the transactions then we shifted outside of the store. We put in a sales force designed specifically to go to the pros, a larger pros and to make sales calls talking about the future and benefits of working and buying from the Home Depot. We work with Craig's team to improve the bid room process. It would take in the past days to get a bid back we turned it into minutes. We continue to listen to pros and just made the necessary changes and what we hoped is that when the market started to improve that the investments in training and service that we put in place would benefit us. It's still very early. We still have a lot of work to do and to Frank's point it's difficult to measure market share, but we have to believe that all of the dedicated focus over the last two years maybe giving us a disproportionate benefit as the market improves?

Operator: Brian Nagel, Oppenheimer.

Brian Nagel - Oppenheimer: First question, I just want to follow on the Matt's question on the pro a bit, but you called out the strength you've seen in the pro business and clearly it knows you said, it's a pretty big focus for Home Depot you're connecting better with those customers now, you're following with the data better. As you look at the buying patterns now, with all that's going on in the macro environment it's not surprising probably it's picking up a bit. Are you seeing something in your data to suggest that there is we do have a sustainable trend here now for Depot in this pro-business more than we've seen the past?

Frank Blake - Chairman and CEO: So, I'd say Brian this is interestingly this is the first quarter that the pro-segment sales have outpaced our consumer segment sales. So we're I think appropriately cautious about drawing broader generalizations. As Carol said, we raised our guidance thinking through what we think is going to play out in the second quarter and we're just – I would say, it's a bit early from this quarter to say, boy, this is sustaining. We do like the trend over the last – I mean, definitely the trend has been a positive trend.

Carol B. Tome - EVP, Corporate Services and CFO: It might be helpful to share with you the top 10 pro classes to the question of what are they buying. It includes plywood, gypsum, dimensional lumber, pipe and fittings, floor and wall tile set moldings, interior paints, (studs and) light bulbs, that's pretty core to a pro customer.

Craig Menear - EVP, Merchandising: And broadly the only think I will add is when you talk about the large pro which we defined as over $10,000 in annual spend in the smaller. The smaller pro is improving and that's a good sign as Frank noted earlier and what we're hearing from the pro that's just a very simple definition as to why a lot of the smaller pros basically shut their businesses down and started to work for a larger pro. So, as the business and the market improves, there are more jobs available and a lot of smaller pros are venturing out again to open up their shops and they back in business, but it's very early. But the trend is positive. We just hope that it sustains

Brian Nagel - Oppenheimer: Then maybe just a shorter question on – a lot of your focus here on seasonal sales because it's (key at that time) and there has been a lot of shifts with the weather and such. But is there a way that you could look at your business and say, okay, despite all these weather shifts we've had 2013 versus 2012, seasonal sales are actually better this year or the same as last year? Is there some way to look at it like that?

Frank Blake - Chairman and CEO: So, the weather-adjusted seasonal sale metric, we really don't have that. That would be a difficult one to come up with.

Craig Menear - EVP, Merchandising: I think what we do, do is, we look at this really on a half basis and we try to take into account both quarters combined to eliminate the shifting noise, if you will, from year-to-year and we look at multi-year penetrations by category by week. And this is why as Carol said, we feel like we've got an opportunity to gain most of those sales in Q2. You may have some categories like pre-emergent that we may not get at all back. But we feel pretty confident that we'll get the majority of it.

Operator: Peter Benedict, Robert W. Baird.

Peter Benedict - Robert W. Baird: What do you guys make of the recent decline in lumber prices? What do you think is driving that? And just getting to your outlook for inflation over the balance of the year, what are you thinking from that front?

Craig Menear - EVP, Merchandising: The lumber pricing has been interesting for the year. I think output in Q1 from the industry was up double-digit in the U.S., as well as up high single-digit from Canada. So, I'm sure that has a factor on driving the overall pricing in the market. It's still up significantly year-over-year, but I think that's probably a factor to the recent declines.

Carol B. Tome - EVP, Corporate Services and CFO: We plan on a commodity neutral basis. So, as you know, we haven't lifted the back half of the year for anything that might happen with prices up or down.

Peter Benedict - Robert W. Baird: Then diving a little bit more into that pro – some of the pro questions here. Has any indication in some of the categories, things like jobsite tools, windows things like that, are they starting to show any kind of an uptick, or is that still going to come?

Craig Menear - EVP, Merchandising: I mean, we look at pro categories – Carol called out the top 10. We are seeing growth in those businesses, and we saw growth in the first quarter, obviously, versus the fourth quarter, which you would expect to see some based on just the seasonal. So, we are encouraged by the growth across those categories.

Peter Benedict - Robert W. Baird: Then just one last one. When spring arrives as it did this year, I mean, when does it typically peak? I mean, are we seeing the peak now? Does the peak occur kind of as you get into June? Just trying to understand how long the spring season goes when it arrives at a similar time that it did this year?

Craig Menear - EVP, Merchandising: That really varies by area of the country, and as you can imagine, the South peaks several weeks in advance of the North. But even in that, the peak in any given area can shift up to roughly two weeks, give or take. So, it really does vary by area of the country. In some areas, it can be as early as week 10. In other areas it can be as late as 17 or 18.

Carol B. Tome - EVP, Corporate Services and CFO: Yeah, based on our month-to-date sales, I would say it hasn't peaked.

Operator: Greg Melich, ISI Group.

Greg Melich - ISI Group: I have one follow-up question from before, and then a longer term one. Carol you mentioned that May is running great. Would you describe April as great as well?

Carol B. Tome - EVP, Corporate Services and CFO: April was an outstanding month. But I would also want to bring your attention to the timing of Easter, because of where Easter fell this year versus last year. March was – the negative comp was overstated by about 230 basis points, which means the positive comp in April was overstated by about 230 basis points.

Greg Melich - ISI Group: So April was great, not outstanding, if you adjust for Easter – I'll leave it at that. So I have more serious question. Your free cash flow guidance, you didn't update as part of the change in your EPS guidance. I think it was around $7 billion. Has that changed particularly given that it seemed that inventory was only up 2%? To get the sort of topline growth, should we expect more free cash flow leverage, or is it still the same number there?

Carol B. Tome - EVP, Corporate Services and CFO: No. We've updated our forecast. I didn't call it out, because I don't think it's really material on $7 billion number, but it's up maybe $200 million or $300 million.

Operator: Michael Baker, Deutsche Bank.

Michael Baker - Deutsche Bank: So one shorter term one longer term question. Shorter term, just this quarter can you tell us the EPS impact of that calendar shift at the $540 million odd?

Carol B. Tome - EVP, Corporate Services and CFO: Sure. The EPS impact was $0.03.

Michael Baker - Deutsche Bank: Then the longer term so at least from my model, the last time you were at an equivalent sales per foot number, your operating margins were 250 points lower than they are now. So, as I sort of start to think out longer term and if you can get back to where sales per foot were pre-recession, is there any reason to believe that the operating margins shouldn't be that much higher, 200, 300, 400 basis points higher than they were last time they peaked?

Carol B. Tome - EVP, Corporate Services and CFO: Well, as you point out, we have a ton of operating leverage in our business, and by the great work of the team in terms of cost out and just driving productivity, it's more productive than it's ever been. We've guided to a 12% operating margin by 2015. Let us get there, and then we'll talk about how much we're…

Michael Baker - Deutsche Bank: Looks like you're going to get pretty close to it by the end of this year, maybe within 50 basis points. But we'll wait for that update.

Operator: Alan Rifkin, Barclays.

Alan Rifkin - Barclays Capital: With respect to the average ticket 900 plus, is the composition between large pro, small pro and the DIY similar within that category as the corporate average?

Carol B. Tome - EVP, Corporate Services and CFO: Well, it's interesting when you look at that average ticket performance. Some of the top drivers of the year-over-year growth were in the appliance category, and that's mostly consumer.

Frank Blake - Chairman and CEO: That is mostly consumer.

Alan Rifkin - Barclays Capital: So collectively, I mean, compared to three and six months ago, what is your take on the proclivity for both the pro customer, large and small, as well as the DIY customer to take on some of these larger projects? Are you seeing clear evidence of that?

Craig Menear - EVP, Merchandising: I mean, we've seen the expansion of the project business. As I called out, we have seen nice growth in the simple core, so whether that's customer taking on flooring projects were now taking on storage projects, where in the past they might have deferred that. We've begun to see those categories have nice growth in the business. So, we're encouraged by that. Other drivers to kind of expansion in ticket is also innovation. So, things like LED, which drives ticket expansion inside of a category, things like lithium technology, which drive expansion in tools now across almost five departments in the store. All of those have positive influences on the growth of average ticket as well.

Carol B. Tome - EVP, Corporate Services and CFO: It is just one thing we are looking at very carefully and this data comes from Corelogic and that is where homeowners are on the loan-to-value basis because once homeowners believe their home is more of an investment than an expense, we believe the nature of those spending will change and so this data it came out in the fourth quarter. It suggest those that are have negative equity spend maybe a $100,000 a year, but those that have 100% positive equity or maybe a loan-to-value as much as 49%, those spend closed to $3,000 a year. So, we're watching with home price appreciation, how households will move into different spending buckets and then trying to determine what the impact on our business will be. It's little early. Alan, obviously because this data is just coming out, but we are really trying to understand what it could mean for a business and the project nature of our business going forward.

Alan Rifkin - Barclays Capital: One follow-up if I may for you. Obviously, California, Florida, Nevada, Arizona, outsize gains. Where are we today in absolute terms with where your stores in those markets are relative to where we were six years ago when the crisis really began, are we above those levels in absolute terms at the store level?

Carol B. Tome - EVP, Corporate Services and CFO: Not yet.

Alan Rifkin - Barclays Capital: No.

Carol B. Tome - EVP, Corporate Services and CFO: Not yet, no.

Alan Rifkin - Barclays Capital: Any quantification of still how far below you are on average store revenue basis in those markets?

Carol B. Tome - EVP, Corporate Services and CFO: Just think about it as of the end of 2012 we still had close to $3 billion of sales to recover from what we lost during the recession.

Operator: Scot Ciccarelli, RBC Capital Markets.

Scot Ciccarelli - RBC Capital Markets: Obviously there were some weather challenges that you guys kind of called out already, but in general I think what we've continued to see over the last several quarters is relatively modest improvements in the smaller ticket sales, but pretty big improvements in bigger ticket sales. I guess my question is how much of that is due to changing mix on the assortment side and if this trend continues is that something you continue to adjust in terms of the mix and assortment in the stores in addition to the labor enhancements Marvin has already called out?

Frank Blake - Chairman and CEO: I mean it is – certainly, a portion of this is driven by the growth in categories like appliances which carry a big ticket, but certainly in the first quarter the smaller ticket was clearly negatively impacted by the lack of Garden sales, which is a massive driver to transaction on smaller ticket. As you can imagine lots of customers coming in buying some bags of dirt, buying live goods and so on, which carry a much smaller ticket. But as we look at the larger ticket, improvement in penetration in lumber with our pro customers, one of the top classes both plywood, dimensional lumber fall into that, gypsum, those are businesses where customers on the pro side are buying multiples helping to drive the larger ticket as well as, as we said, the appliance business. We've seen over multiple quarters the hard work that we've put into things like our kitchen business overall and as well as the improvement of our services businesses, which drive ticket pay off and help drive the growth in the larger ticket over the past several quarters. We still feel that it's balanced that we'll be driving both on an annualized basis, both transactions as well as ticket in our business.

Scot Ciccarelli - RBC Capital Markets: But is there anything that you've seen in the business to make you think that the trends that we've seen recently won't continue? I mean, it seems like you've been calling out appliances for a while. Lumber has obviously been gaining steam for the last couple of quarters. These tend to be kind of long cycle trends, don't they?

Craig Menear - EVP, Merchandising: Yeah, I think, they'll continue to help us grow the larger ticket categories for sure.

Diane Dayhoff - VP, IR: Thank you very much for joining us today. We look forward to speaking with you next quarter.

Operator: That does conclude today's conference. Thank you for your participation.