The Home Depot, Inc. (HD)
Q2 2009 Earnings Call Transcript
August 18, 2009 9:00 a.m. ET

Executives

Diane Dayhoff - Senior Vice President, Investor Relations
Frank Blake - Chairman, Chief Executive Officer
Craig Menear - Senior Vice President, Merchandising
Carol B. Tome - Chief Financial Officer, Executive Vice President Corporate Services
Matt Carey - Executive Vice President, Chief Information Officer
Marvin R. Ellison - Executive Vice President - U.S. Stores

Analysts

Maggie Gilliam - Gilliam & Company
Stephen Chick – FBR Capital Markets
Matthew Fassler - Goldman Sachs
Scott Ciccarelli - RBC Capital Markets
Mike Baker - Deutsche Bank
Gary Balter - Credit Suisse
Dan Binder - Jefferies & Company
Budd Bugatch - Raymond James
Christopher Horvers - J.P. Morgan
Eric Bosshard - Cleveland Research Company
Gregory Melich - Morgan Stanley

Presentation

Operator

Good day, everyone and welcome to today’s Home Depot second quarter earnings conference call. Today’s call is being recorded. (Operator Instructions) If you’d like to ask a question during today’s call please press the * key followed by the digit 1 on your touchtone phone. Please note that any prompts entered before this time may not have registered in our system. Beginning today’s discussion is Ms. Diane Dayhoff, Vice President of Investor Relations. Please go ahead, Madam.

Diane Dayhoff – Senior Vice president Investor Relations

Thank you, Augusta and good morning to everyone. Welcome to the Home Depot second quarter earnings conference call. 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 open for analysts’ questions. Questions will be limited to analysts and investors and as a reminder we really would appreciate it if the participants would limit themselves to one question with one follow-up, please. This conference call is being broadcast real-time on the Internet at homedepot.com with links on both our homepage and the investor relations section. The replay will also be available on our site. 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. 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 also include certain non-GAAP measurements. Reconciliation of these measurements is provided in the financial statements included with our earnings release. Now let me turn the call over to Frank Blake.

Frank Blake – Chief Executive Officer

Thank you Diane and good morning everyone. Sales for the second quarter were $19.1 billion, down 9.1% from last year. Comp sales were negative 8.5% and excluding the charges related to the expo business closings, diluted earnings per share were $0.67. Despite the negative sales environment and difficult market conditions, there were some significant positives for us in the quarter. As Craig will detail, we had positive comp transactions in the U.S. for the first time in more than five years. We also had the largest gain in total market share that we have seen in five years and we saw improved comp rates in some of our most important and most hard hit markets like Florida and California.

Craig and his team drove terrific values in innovation in core DIY projects and we achieved positive comps in paint and had a strong selling season in outside garden. We continue to make improvements in the underlying business. Since our last earnings call, we’ve opened two new RDCs, one in Houston and one in Cincinnati. As of today, we have eight RDCs serving approximately 800 stores or more than 40% of our U.S. store base. Mark Holifield and his team, by the end of this quarter, will basically be opening an RDC every month. This is an impressive, maybe unprecedented pace for a large-scale supply chain effort.

Marvin Ellison and the store operations team have brought more focus and better execution on customer service and we see that through our net promoter scores, which take the percent of our customers who rate their experience with us as a 9 or a 10 and subtract from that the percent of customers who rate their experience as a 6 or worse.

Our net promoter score has improved approximately 1,000 basis points year-over-year and is now at 62.7%. It’s particularly significant for us that our scores went up in the second quarter versus the first quarter since frequently there can be a deterioration of performance as foot traffic increases. On the international front, our business in Mexico produced another solid quarter with positive single-digit comps in the face of a contracting economy. We had negative comps in both Canada and China but I should point out that the SAP implementation issues that impacted our Canadian business over the last several months have been largely resolved. The Canadian team is now focused on the business, not a system implementation. We had good expense control across the board and managed inventory levels effectively by achieving flat inventory turns year-over-year. All in all, relative to our plan, we had a solid second quarter. As Carol will detail, based on our first half performance, we are lifting our earnings per share guidance for the year.

But the larger question for us is when will we start to see a broader market turnaround? We are now in the fourth year of a major correction in the housing and housing related markets? Private fixed residential investment as a percent of GDP is at 2.4%, the lowest it has been in over 60 years and down 30 basis points from the first quarter, which previously set a record low. To understand the current trends across the country, we can look at the comp performance of our top 40 markets in the second quarter versus their comp performance in the first quarter. There is some encouraging news here, since nearly 75% of the markets perform better in the second quarter than the first and as indicated, we’ve seen some significant improvement in California and Florida. In California, double-digit negative comps turned to single-digit negative and in Florida, while we still have some double-digit negative comp markets, the percentage comp decline is about half what it was in the second quarter last year. But caution is still appropriate. We have some short-term sales headwinds in the back half of the year as we anniversary hurricane activity from last year and commodity inflation in fuel-related categories. More importantly, while the performance across most of our regions is better, we are still not seeing positive comps in any areas other than the areas impacted by hurricanes last year and while there was improvement in hard-hit markets like California and Florida, we remain concerned by the high level of foreclosure activity which we believe continues to put pressure on the housing markets in those areas as reflected in lower sales of basic building material products.

With the dunnhumby tools, we are also getting a clearer look at customer behavior across different segments of our shoppers. Again, there’s a mixed picture. Some clear strength on the consumer side as basic DIY activity picks up but these tools also allow us to see some areas of stress with greater clarity. For example, we have traditionally said that pro sales represent approximately 30% of our business. That turns out to be accurate as a statement in the past. What has happened in the downturn is that our pro business has declined more rapidly than our consumer business. As an indication of that, pro sales are now down to about 27% of our overall business versus approximately 32% at this time last year. A key element to returning to positive comps for us will be the recovery of this important segment.

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