This summary is based on the third quarter fiscal 2008 earnings call conducted by Home Depot Inc. (HD) on November 18, 2008.
Management:
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Chairman and Chief Executive Officer: Frank Blake
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Executive Vice President, Merchandising: Craig Menear
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Chief Financial Officer and Executive Vice President, Corporate Services: Carol B. Tome
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Executive Vice President, Chief Information Officer: Matt Carey
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Senior Vice President, Supply Chain: Mark Holifield
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Executive Vice President, U.S. Stores: Marvin Ellison
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Senior Vice President, Investor Relations: Diane Dayhoff
Key Investors Issues
- Sales totaled $17.8 billion, a 6.2% drop from $19 billion in 2007.
- Net earnings were $756 million or 45 cents a share, down 46%.
- The firm repurchased 2.4 million shares for $70 million.
Year to Date Highlights:
- Sales were down 5% to $57 billion from $59.7 billion in 2007.
- Net income amounted to $2.3 billion or $1.38 a share, down 38%.
Third Quarter Highlights
Sales were $17.8 billion, down 6.2% from $18.97 billion in the prior year due to negative 8.3% in comparable sales and a negative impact of $225 million because of the seasonal shift associated with 53 weeks in fiscal 2007.
- Negative comp sales growth was in all departments except building materials, which was driven by strong sales in roofing and insulation.
- Both categories increased in the number of units sold, though it should be noted that some of the comp dollar gain in roofing was driven by higher prices due to increased petroleum costs.
- Additional departments that outperformed the company''s average comp were plumbing, hardware and garden.
- The departments that underperformed the company average comp were kitchen and bath, millwork, electrical, lumber and flooring.
Average ticket was down $1.62 or 2.8% from last year to $55.86 as big ticket sales continued to suffer and 40% of the decline in average ticket was due to lower average spending per basket.
- The positive results along the Gulf are attributed primarily to hurricane-related sales. Hurricanes Gustav and Ike added approximately $125 million in incremental sales in the quarter.
- However, the firm did not realize any benefit to the bottom line as those sales were low margin sales and margin dollars were offset by additional expenses such as freight, store damage and associate cost.
- Net earnings were $756 million or 45 cents a share, down 46% from $1.1 billion or 60 cents a share in the prior year due to lower sales.
Gross margin was 33.7%, an increase of 27 basis points from last year, and reflects the benefits arising from the focused-based portfolio approach as well as a shift in the mix of products sold.
- Operating expenses increased by 214 basis points to 26.3% of sales, reflecting for the most part the impact of negative sales.
- Looking forward, the new private label credit card contract with Citi begins in January of 2009 and at that time the cost of credit will be capped at 1.5% of private label credit sales.
Net interest expense was $151 million, an increase of $26 million from last year, reflecting a decline in interest income due to the lower interest rate environment and lower investable cash balances.
- The firm repurchased 2.4 million shares for $70 million and had $874 million in cash and no outstanding commercial paper as well as $11 billion of long-term debt of which $1.7 billion comes due in 2009.
- Retail inventory was $11.9 billion, down 5.7% from last year or 7.5% down on a perstore basis, inventory was down 7.5%.
Operational Highlights:
- The firm launched a strong new lower-priced campaign, achieved significantly better markdown control, and lowered per-store inventory by 7.5%.
- At the end of October, it opened the fourth Rapid Deployment Center or RDC in Winchester, Virginia.
- The International businesses, particularly Canada, have started to feel some of the economic pressures with mid single-digit negative comps and a similar pattern of accelerated declining sales in the quarter.
In addition, the Canadian team tackled a major business system implementation with SAP Core Retail, which is now live in all Canadian stores.
- China also reported negative comps, driven in large part by the impact of the Olympics in China in August.
- Early this year, Home Depot introduced new tools to merchants to better plan, assort and react to changes in the market by forecasting at a more granular level.
- The clarity that these tools provided drove gross margin and inventory productivity, particularly in our seasonal categories.
In the third quarter alone, the firm saw a 200 basis point gross margin improvement in the U.S. garden category due to lower markdowns.
- Going forward the firm expects to see relative strength in energy efficient and basic repair products.
- The firm opened 11 net new stores for an ending store count of 2,268, with 257 stores representing approximately 11% of store base operating in Canada, Mexico and China.
- Selling square footage was 238 million, a 2.1% increase from last year and reflecting the sales environment, total sales per square foot were approximately $296, down 8.5% from last year.
Key questions and answers from the third quarter earnings call conducted by Home Depot Inc. (HD) on November 18, 2008.
Colin McGranahan (Sanford C. Bernstein & Co.):
You said that 40% of the decline in ticket was due to lower spending per basket. Can you comment how that compares over the course of the last?
