The Home Depot, Inc. (NYSE:HD) Goldman Sachs 29th Annual Global Retailing Conference September 8, 2022 9:35 AM ET
Company Participants
Ted Decker – Chief Executive Officer and President
Jeff Kinnaird – Executive Vice President of Merchandising
Isabel Janci – Investor Relations
Conference Call Participants
Kate McShane – Goldman Sachs
Kate McShane
Okay, good morning, everyone. We are going to get started. Thank you for joining us. We are very happy to be hosting Home Depot. This morning today we have with us Ted Decker, Chief Executive Officer and Jeff Kinnaird, EVP of Merchandising. Thank you so much, oh and Isabel Janci from Investor Relations. Thank you so much for joining us today.
You just reported earnings a few weeks ago and despite what seems like a tougher macro backdrop, you are still able to post this strong comp results. We just wanted you to talk to maybe the resiliency of demand and how you are viewing the sustainability of that?
Ted Decker
Well, thanks for having us. Good morning, everyone. Yeah, Kate, we couldn’t be happy with the business, incredible growth in the past two years from the business. $40 billion in the prior two years, another five odd billion dollars in the first half of this year and consumer in particular has been incredibly resilient. Our Pro and DIY customers are very engaged in the home.
The Pro backlog remains very healthy and that’s what we saw in Q2. We saw positive comps with both our Pro customers and our DIY customers and I think that speaks to a little bit more of the unique customer base that the Home Depot has. Our customer is very healthy. They obviously tend to be homeowners, income levels is strong, incredible increase in value in the home for that principal assets that home improvement is focused on we believe has gone up $8 trillion or $9 trillion over the last two years.
While that growth in value has slowed somewhat in recent periods with the last twenty years still up 8% year-over-year home price appreciation. That incredible gain in the value of the assets, great employment, wage growth. It’s a very, very healthy consumers that unlike a lot of other retail businesses and people are spending more time in their homes and the homes are aging.
So, all these dynamics, the value, income levels, engagement, aging home and the fact that you are spending more time in the home that is what has been supporting the demand that we saw into Q2 of this year.
Kate McShane
And if you can maybe drill down on a little bit more, I think the push back that we get a lot and I think you probably got to took – you guys hear it too is with regards to what pockets do the homeowner have left? Haven’t they done a lot of their projects already. They bought their appliances. So, again, what are you seeing with regards to that?
Ted Decker
Right. So, I know my list isn’t done. That’s another great thing about the business is you are truly never done without lists. You have – you are starting with break sets and that again speaks to the aging of the house and the wear and tear on the house. You are always going to have break sets. And then, the repair, remodel, the remodel part of the equation, as you are spending more time at home, people were not going to be working mostly five days a week but one day a week is 20% more time of a work week that you are in your house for wear and tear. The demand for space. Those are the type of things that are driving the ongoing project demand. We have seen – to your question, we have seen some projects and Jeff can add some more color to this, when the pandemic first hit, people were outside. So we saw a huge fight in the outdoor space. Improving the outdoor space, decks, gardening, patio furniture, grills, heaters you can find space heater, I don’t think anywhere in America. So the early stage they are lot more outside and we talked about seasonal business being a little underperforming in the first half of this year. But that’s truly people did do to your point a lot of projects outside. But those projects have moved inside and we are seeing the same levels of demand but we track it in more inside projects.
Jeff Kinnaird
Yeah, I think to Ted’s comments, in the early stages of the pandemic, I think everyone seem to be probably outing something at some point in the early stages. That shifted to this investment cycle in the backyard and the entertaining in the backyard and we saw that and categories like grills and patio and landscaping and patio heaters and other categories that were about that backyard and about that backyard experience. That investment we still see a significant investment there, plus that we are seeing this project-related investment as Ted spoke to earlier this investment and renovation, this investment in finishing a basement and finishing a bathroom and repairing issue in a home, replacing sinks and faucets and things that are seeing more wear and tear that the consumer spends more time at home. So we do see a transition in the business. It’s a healthy transition. We’ve seen that through our history. We see in different timeframes, different types of investments, but that will continue. We feel good that that investment will continue and as to Ted’s comment a lot of work to be done in the home. Homes are aging. And that’s – where – that’s good for our business.
Ted Decker
And if I could build on paints and interesting categories, this dynamic or – have you done enough, is it time to move on to another project. As Jeff said, when the pandemic hit, everyone painted. The paint business and specifically the DIY which we have pretty good business already into it’s a Pro or DIY making the purchase. In the DIY engagement in paint spiked in the early part of the pandemic and that reversed what has been a very long trend of painting. Now the consumer is already writing the checks, but painting being done by the homeowner or being done for you by a Pro painter. And it used to do a lot more, at least in our channel, used to do a lot more DIY and less Pro, but over decades now, the DIY share of actually painting has been coming down and the Pro has been going up, because house owners now hire someone to do the painting. That reversed in the first phase of the pandemic as DIYers were home all paying. Now the Pro is reemerging. So painting is still being done but less by the DIYs and with all the capabilities we build on Pro paint and the share we are taking in the Pro paint section of the market, we continue to be extremely happy with our overall paint share or paint sales even as we’ve shifted back more to Pro from DIY as the consumer still ultimately writes the check, we can service both markets.
Kate McShane
And that’s kind of the great place to – sorry asking some questions about the Pro, because I know there has been a big focus on the Pro customer and whether it be your services or your supply chain, so you’ve discussed more recently that you are hoping to build market share specifically. That’s a larger Pro customer. How do you think about the size of that larger Pro market and how do you quantify your share within and what do you’d like to capture there?
Ted Decker
Okay. So, Pro has always been very important Home Depot. The balance of our business today is more or less 50:50 share with the Pro and consumer. Pro has always been important to the Home Depot. We’ve always felt if you can satisfy the Pro with the brands, in the pricing, in the inventory availability, the consumer will piggy back on that. We’ve always focused on the Pro piece of the business.
As we look at our updated total addressable market of $900 billion, that also is about 50-50 in Pro and consumer and our sales right now are balanced more or less 50:50 Pro and consumer.
As we looked at the Pro business, though and we’ve always known this, we tend to do much better with smaller Pros where we have more share of wallet where the Pro is buying virtually everything needed for a project at a Home Depot store and then with larger Pros, we were more of an infill emergency purchase. And to get the larger share of wallet what we’re calling the Pro plan purchase for those larger Pros, there is a whole series of capabilities that we need to build to satisfy that Pro.
It starts again with the brands, the inventory availability, everyday low pricing, so Pros can price their job. But then increasingly, they want a point of contact. So they do want sales representation. They need support on logistics and what an inside sales force would provide in terms of expediting their orders and then the single most important thing they need is on-time and complete delivery to the job site.
So we have been working on all those capabilities, including a loyalty program, including the digital B2B website, but most importantly the build-out of our One Supply Chain is providing the distribution assets and capabilities, so we can deliver that larger quantity planned purchase to the job site. And as we build these capabilities, the engagement we’re seeing with the Pros is very encouraging.
We still have a lot of work to do, but we love what we’re seeing in the progress we’re making and these capabilities that we’re bringing to market are absolutely what are behind our outsized growth in our Pro business.
Jeff Kinnaird
Yes. I’ll just tag on to Ted’s comments and say thrilled with the supply chain investments. We think of our One Supply Chain capability is really the foundation for Pro opportunity. Building on that, the products that we put in these facilities, the different categories that we look at in terms of these facilities, the go-to-market pricing strategy, I mentioned the Pro loyalty program.
We are thrilled with our Pro Extra strategy. It’s been over in the market for over two years. We’ve seen very significant growth in both years and continue to see that growth. On top of that, the sales team and educating that file on how to work with that new Pro opportunity and how to work within the model that we’re building is a real opportunity for us.
Kate McShane
If we could maybe talk about the supply chain, you mentioned that as the way that you are strengthening your relationship with the Pro. I mean, that’s been a multiyear investment now. I guess, as announced in 2017. Can you set the stage for us in terms of where supply chain capabilities are today? Where they’ll be when this is completed, which I think is very soon? And how you expect that to drive more sales and better margins?
Ted Decker
So, you’re right. We announced this in 2017 and we announced a number of different formats that are purposely designed to deliver different type products in different use cases. And we are five years on our journey, will probably be substantially complete next year in 2023 and broadly, there are three types of assets we’re building.
One is for big and bulky goods, which we call our flatbed distribution centers and the great thing about those centers is, we always have had building material distribution centers for replenishment to the stores. And what we do is we move those into newer, larger, more optimized facilities and you can also deliver to job sites from those facilities.
So you leverage huge inventory quantities that can replenish a store or go to the job site. Those are, I don’t know, halfway built outs at this point. That’s where we are getting a lot of Pro share growth as we are now able to deliver the quantities and materials on time and complete to the job site.
The second type facility that we are building, calling a direct fulfillment center, these are both traditional pick, pack and ship e-commerce facilities, which, again, as we’ve started to build these out, we are about halfway built on these has been supportive of our e-com business. We’ve doubled our e-com business in the last two years, grew again 12% in the second quarter on top of that doubling.
We wouldn’t be able to do that if we hadn’t built out these facilities. So the DFCs are satisfying the traditional e-com pick, pack and ship. But they also start big and bulky product. So I think patio, grills, vanities, tubs, tubs surrounds, millwork and those products then can be shipped parcel to customers, but also box truck to customers’ homes or Pros on job site, think vanities and tub surrounds.
The third set of assets are what we call our market delivery operations and these are flow facilities for big and bulky product. So the big and bulky product will leave the FDC, flow to the MDO. Think of this as the last mile then when it goes on a box truck and has a dense route to either job sites or homeowners and the foundation of that flow is our appliance business.
So as we announced that we’re in-sourcing at least control, we don’t – the drivers and the install agents are still third parties, but the management of the facilities, the management of the customer interaction, which we had previously outsourced, we are now insourcing through these MDOs. We’ll have about 100 of them in the country and we will be largely complete by the end of November this year.
So, a number of different type buildings, Kate, different levels of progress. The most complete will be the MDOs by the end of this year. But all of that in concert with all the other Pro capabilities that Jeff mentioned together as an infrastructure is what is enabling us to satisfy the engaged DIY, as well as Pro customer.
Jeff Kinnaird
And just going back to the flatbed deliver center as an example, our Pros are, in many cases, demanding deliveries from those facilities. It is a – it is not as easy as just putting a product on a truck and shipping it to a Pro. If there is a process of building an order, it’s how it’s packaged how it’s positioned for that Pro. You can make a Pro’s life much more productive just how you stack goods together. So, we have Pros demanding that delivery and that’s creating a lot of energy around that opportunity.
And second, on top of that, the opportunity to expand our assortments. If you think about a traditional Home Depot store, you’ve got limited space for some of the big and bulky commodities and these facilities allow us to carry longer length goods. They allow us to extend our assortment and they allow us to really cater to that Pro opportunity.
Ted Decker
And another benefit of these, Kate, so, similar to how in the FDCs, you’ve leveraged the bulk resupply of the stores with the same inventory as Jeff mentioned, you can ship to the customer. You are also taking a lot of activity out of the store. We’ve always delivered to customers, but that delivery node originated out of the store.
So when you think of the number of touches on the product and the inefficiency to ship into a store, stage it on shelf for retail only to take it back down again, package it, put it back on an 18-wheeler truck to go out to a job site, terribly inefficient.
And also the shopping experience was challenged because we tended to stage those orders early in the morning, tended to be in the building material side of the business, which is where we have a lot of Pro activity. In the aisles, we’re getting clogged with all this product staged for delivery.
So now you can take that activity out of the store, free up store labor for customer service and the inefficiency of all the touches of that material. So it’s really a wonderful flywheel of productivity, capability and customer service.
Kate McShane
That’s great and I guess we’ve seen over the years, retailers lean into their store base a little bit more for fulfillment from this respect you’re taking some of the fulfillment off of the store. The idea the store being closer to that customer. So with regards to this rebuilt supply chain for the Pro, are you still close to the Pro? Does it take longer to get to them if you’re taking them away – taking the product away from store?
Ted Decker
For this type product, it’s much quicker, because you have the quantities in one location. Oftentimes, in the past, we would have to source from multiple stores to get the quantity that the Pro needed. So another part of the inefficiency that truck might have to stop in some cases two, three stores to get the quantity which adds time.
Now you can load the night before and ship out the shipment, start five, six in the morning out of these facilities. But the interconnected model of Home Depot is alive and well and still a focus that we know how important the stores are in the interconnected sales, the digital initiated sales are still fulfilled at the rate of about 50% in our stores.
So whether that’s buy online, pick up in store, buy online fulfill from the store, curbside, et cetera, all those things are still 50% of the business. So the store is still very engaged in our interconnected model.
Jeff Kinnaird
One more comment there around the cash and carry Pro. There is nothing worse for a cash and carry Pro to come to a Home Depot and find all of that product pulled for delivery and not have that product available for that specific day. So we find that we are seeing taking the delivery or the majority of deliveries away from the store, it’s allowed us to invest back into the store, back into shelf space for key commodities.
We’ve even got – we’ve spoken seriously around the products we’ve got to get to stores right, which is really getting the micro space allocation in our stores right for that Pro and for that project customer. So taking the delivery away, creating more space for that cash and carry Pro has been a real success for us.
Kate McShane
Thank you. I wanted to ask about inventory levels. I think in the second quarter, it appeared that inventory levels were high. But once you parsed out some costs, then earlier receipts is not quite as high as maybe it looks. So could you maybe walk us through your current inventory position? Can you speak a little bit more towards maybe categories where, you maybe see a little more heavier inventory versus where you might still be chasing?
Ted Decker
Sure. Just from the highest macro point and Jeff can go through some categories. Early on, when we got past the stage that whether home improvement would be deemed an essential retailer and we knew we would be open in the early days of the pandemic, we made a very conscious decision to leverage our cash flow and our balance sheet to invest in the inventory to be there for our consumers and Pros, particularly as we saw the ramp up in activity in home improvement and investment in the home, what a great opportunity to have the products be there for the Pro and take share.
So it’s a very principal decision, too, on the margin invest and we’ve done that and have continued to do that. So that’s from a macro perspective.
Jeff Kinnaird
Yeah, if you think of inventory – first of all, almost half of the inventory growth has been inflation and we’ve managed deflation, inflation accordingly into our business. On top of that, there is an investment opportunity that we’ve taken advantage of in terms of the investments in the Pro, job lot quantity, the investment in the consumer project to Ted’s comments, the investment in our One Supply Chain facilities.
There is a need for inventory in those facilities. And it’s an investment opportunity for us. So if you think about being there for that Pro, being there for that consumer, if it’s a project-related category for a Pro or for a consumer. On top of that, we did have and we spoke about this in the second quarter earnings, I don’t think we had a spring in many markets and you had a late spring, and then you had a lot of rain in some cases in some markets, and you have a lot of drought. We still see drought in many markets today and that creates some challenges in terms of some of the seasonal categories.
I will say we’ve gotten through the majority of that challenge. We have some – we do have some carryover inventory that we are managing. That inventory won’t go back and we feel good that that inventory will be there. We also see sales of that inventory in the south, for the most part, still selling and we still see that consumer engagement in many markets.
But, so one, there is been inflation in that inventory number now for a couple of years. Two, we’re investing for the Pro and for the consumer opportunity and three, we’re managing some carryover inventory that we see as low risk.
Kate McShane
And from a supply chain standpoint, have you seen any kind of alleviation or improvement in terms of when you are receiving receipts? And has there been more of an emphasis on trying to bring things in a little bit earlier to ensure?
Jeff Kinnaird
Yeah, we are seeing some relief – some needed relief in the broader supply chain, in the global supply chain, which is good and will benefit our business. I will also say there are some categories that we still see constraints on. If you think about our in-stock levels today versus pre-pandemic, we’re still climbing back to those in-stock levels in terms of the total in-stock for our business.
That’s on top of growing the business by over $40 billion over the last couple of years. So we are climbing back in terms of the stock. We are very happy with the progress we’ve made and how we are seeing our supply chain and our partner’s supply chains recover from some of the challenges over the past couple of years.
If I look forward, we do see an opportunity in terms of that supply chain improving. We see better container availability today than we did a year ago, two years ago. We see shipping lanes open up, but we’re not going to not be agile in terms of our approach and not be ready for anything to take place in the broader supply chain.
Kate McShane
Okay. Thank you. And then, if I could just switch gears for the last time just on the MRO space. I feel like we’ve talked about it quite a bit, especially since you’ve reacquired HD Supply. But could you talk maybe a little bit more about how HD Supply has performed recently, how you are thinking about the MRO space more broadly? And what your long-term goals are there?
Ted Decker
Yes, we’re very happy with HD Supply, reacquiring the business and merging that with our business that we had brought four years prior has been just a terrific integration. We are happy with the business, and the integration is going very well. Within the $450 billion Pro space, about a $100 billion of that is MRO. So, in and of itself, it’s a very large space and we define that MRO as living spaces outside of a traditional home.
So the largest sector in that business is multifamily housing, but then you have hospitality. You have health care with things like hospitals and extended living. You have government, which can be things like university, dorms or jails even or housing. So there are multiple segments within the MRO. Our business pre-acquisition largely focused on multifamily housing.
When we reacquired HD Supply, they had the largest multifamily housing business but also significant share in those other verticals. So they had a very strong hospitality business, a very strong government-built business. They are government contractors the Home Depot is not and then an emerging healthcare business.
So those additional verticals and the fact that we could now meaningfully play in those is why we updated what we previously said with the $50 plus billion TAM in MRO to $100 billion TAM. So we’ve put together the number one and two player in MRO. The market is huge. We are less than 10 share, see tremendous growth opportunity and as we continue to build capabilities and assess other verticals, there is opportunity even beyond with to find now is that $100 billion TAM. So, we love that business and love the team running and they’ve done a great job in the integration and very, very happy.
Kate McShane
Does the repair maintenance mix of the MRO business skew a little higher than it does the traditional Home Depot business?
Ted Decker
It’s actually very different product in a way, it’s a similar type product. It’s not that it skews higher. It’s just the use cases are different. So it’s an appliance but it’s a slightly different type of appliance. It’s HVAC, but it’s things like many splits in different application of what you’d get for DIY home. So, similar product categories, but different use cases. So the actual product is a little bit different.
Kate McShane
Okay. Great. We have four questions we’re asking every company that we’re sitting on stage with both yesterday and today. We’ve touched on some of them already. But wanted to put a slightly finer point on it. The first question is just the health of the consumer. So, based on your view of what you know today, what you’ve seen from the consumer so far, do you think the consumer will be weak or stronger about the same in 2023?
Ted Decker
We think our core home improvement customer remains healthy and engaged into 2023.
Kate McShane
Okay. The second question is on units versus price. So you’re always very helpful in breaking down for us ticket and – or transactions and value. There has been more inflation and you’ve seen more pricing, but your mix has also changed, as well, which has pushed ticket up. As we look towards 2023, how do you think ticket versus traffic trend?
Ted Decker
We’d certainly like to see more balance. We always shoot for a 50-50 more or less blend of ticket and ticket driven by innovation, as you said in transaction engagement. We definitely have had more ticket. The resiliency of our segment has been supportive of the overall sales and that elasticity wasn’t as just dramatic as you would have expected with the higher prices.
So the resilience of our customer, we see them continuing to be able to manage through the higher prices. As we sit today, with some commodity prices coming off, maybe you’ve seen a bit at least today, a peak in some of the commodity prices and overall price levels, but that one is still a TBD with moves of the Fed and interest rates and overall inflation environment. But we’ll shoot for a better mix for sure in 2023.
Jeff Kinnaird
I’d also say that part of that ticket is innovation and we continue to see an enormous amount of innovation across our business and that’s virtually almost every category. I mean, it’s great to see that we’ve got many longstanding partnerships. It’s great to see throughout the pandemic the innovation pipeline didn’t slow down and our merchants have worked alongside of our partners to build an opportunity to think of the continued electrification of tools.
You think, there is dynamics changing there. I think we used the example earlier, the new Milwaukee M18 framing nailer is now the one tool you buy with the battery platform. Previously, you’d buy a nailer compressor, a cord, fittings and all the pieces that go with that process and today, it’s pneumatic nailer with this electrified nailer. That’s changed the market.
If it’s categories like larger vinyl tile where you see the less of a need for an underlayment in terms of that product and that innovation has become just a mainstay in our business today. So, innovation is playing a big part in that ticket and transaction and unit situation.
Kate McShane
Our third question is around margins and to your point, Jeff, not all the ticket has been inflation. But if we were to enter into an environment where maybe we don’t see deflation, but just moderating inflation, how do you imagine margins playing out in terms of that stickiness of price and maybe cost coming down?
Jeff Kinnaird
Yeah we manage accordingly. We have the tools, the capabilities and the partnerships to manage the inflationary environment or a deflationary environment and there was a dynamic across multiple categories to date that we are experiencing in terms of still seeing some inflation in some categories. We are seeing deflation in some categories and again, we have the tools and the capabilities to manage that environment.
I’ll also say, we have a deep understanding of virtually all cost components of virtually all products that we sell. We tear down products. We have labs around the globe that look at commodities and components and pieces that are parts and pieces of virtually everything we sell. We have a really good understanding of all cost components. The cost of those cost components, including labor and energy and we manage it accordingly with our suppliers.
Kate McShane
Okay. And then, our last question is about inventories and promotions, more specifically, promotions. I think in more general merchandize categories outside home improvement, you’ve seen a tick up in promotions as you’ve had certain categories get very elevated with inventory. But in home improvement, it seems like things have been fairly rational. What is your expectation as we go into next year when it comes to promotions?
Jeff Kinnaird
Yeah, we have had the benefit of being in a category that we are not meeting promotional activity to support the business. We pride ourselves in being an everyday value retailer for our customers for the majority of our business, which is great.
It allows us to be the value – have the right value proposition for our customers every single day and be that customers advocate for value, especially when it comes to launching innovation and launching new products and making sure we’re there for our customer on that launch. I will also say there are categories that there are promotional activities if you think about the appliance business.
It’s one category that’s always been a promotional category. We participate in those promotions, and that’s part of that specific business. So I don’t see a change in our cadence in terms of promotional activity. I look into the next couple of months here, really excited about our Halloween category that we just launched.
We are excited about our decorative holiday program that will launch in our stores in the next month or so. And then Black Friday, we’ll have great value for our customers over the Black Friday season and that will carry into 2023.
Kate McShane
Okay. Well, thank you so much for joining us today. It’s great to have you here.
Jeff Kinnaird
Yeah. Thank you.
Kate McShane
Thank you.
Jeff Kinnaird
Thank you very much.
Question-And-Answer Session
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