Home Depot (HD)
Q1 2009 Earnings Call Transcript
May 19, 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
Mark Holifield - Senior Vice President, Supply Chain
Marvin Ellison – Executive Vice President, U.S. Stores
Matt Carey - Executive Vice President, Chief Information Officer

Analysts

Scott Cicarelli – RBC Capital Markets
Michael Lasser - Barclays Capital
Daniel Binder – Jefferies & Co
Christopher Horvers - J.P. Morgan
Budd Bugatch - Raymond James
David Strasser – Janney Montgomery Scott
Stephen Chick – FBR Capital Markets
Deborah Weinswig - Citigroup
Wayne Hood - BMO Capital Markets
Colin McGranahan - Sanford C. Bernstein
Matthew Fassler - Goldman Sachs
Laura Champine – Cowen and Co

Operator

Welcome to today’s Home Depot first quarter earnings conference call. Today’s conference is being recorded. (Operator Instructions) For opening remarks and introductions I will turn the conference over to Ms. Diane Dayhoff, Vice President of Investor Relations. Please go ahead.

Diane Dayhoff

Thank you Rocky, and good morning to everyone. Welcome to the Home Depot first 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 analyst’s questions. Questions will be limited to analysts and investors and as a reminder we would appreciate if the participants would really 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.

Now 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.

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 first quarter were $16.2 billion, down 9.7% from last year. Comp sales were negative 10.2% and excluding the charges related to the Expo business closings diluted earnings per share from continuing operations were $0.35. The external environment remains difficult. Private, fixed residential investment as a percent of GDP is now at 2.7%. This is down 40 basis points from the fourth quarter and is well below the 60-year average of 4.8% and also below the previous 60-year low of 3.2%. We have referenced this number previously as an indicator of the health of our market and we have seen a substantial contraction from a few years ago when the percentage reached as high as 6.25%.

We believe that most of the correction on this index is now behind us but there remain mixed signals elsewhere within the market. On the positive side, year-over-year 21 markets out of our top 40 markets are showing a lower rate of decline. We positively comped in our Gulf region, principally because of storm recovery, and major markets in the Ohio valley region returned to positive comps. We have also seen significant improvement in comp transactions. As Carol will detail, we had a very soft February in the U.S. with particular weakness in our western division but saw improvement through the remainder of the quarter. We are concerned about accelerating rates of foreclosures, particularly in the western part of the country where there is already a high density of houses in foreclosure.

In the fourth quarter of ‘08 we saw foreclosures decelerate in areas of California and along with that an improvement in our comps. Those trends reversed this past quarter which provides a cautionary note on signaling a recovery prematurely. One out of every 54 households in California is in foreclosure. That is the highest it has ever been and before we see real improvement we believe we need to see sustainable deceleration in foreclosures. Overall it is important to emphasize that most of our markets that are improving versus last year are only showing a slower rate of decline, not positive comps. Getting to less bad is not the same as getting to recovery.

Whatever the longer term significance of these different signals, we continue to focus on improving our business. We have a lot of opportunity there and I think we have made some significant progress. In the first quarter we gained share in 7 of 13 departments, reduced inventory by over $1 billion and maintained a strong in-stock position in our stores. We also drove footsteps into our stores through our portfolio strategy and our new lower price program. Our comp transactions were down only 2.6% year-over-year which is the best performance on transactions we have had in seven quarters.

Our customer service continues to improve. Our store operations team has rolled out new, customer first training to all our store associates and support staff and has brought simplification of focus across the business. We are seeing the benefit of this in improved customer service ratings. Our net promoter score, which is calculated by taking the percentage of our customers who rate their experience as a 9 or a 10 and subtracting from that the percent who rate their experience as a 6 or worse, has improved 790 basis points year-over-year and is now at 61.5%. That is a meaningful improvement. About a month ago we opened our sixth RDC in Valdosta, Georgia. This is an important milestone because it is the first of our RDC’s that is mechanized and the planned future state of our RDC’s is as mechanized facilities. We are very pleased with the performance of our RDC network and RDC’s now service approximately 600 of our stores and the roll out will continue.

We are also making significant progress on our merchandising tools in the U.S. and that is reflected in the performance in the first quarter. These tools are helping us better control inventory in general as well as clearance and markdown management. Our core retail efforts in Canada, however, have experienced some difficulties. A software implementation of this scale often entails some set backs. What we are seeing is that the effort itself diverts attention from the core business. It also takes time for merchants and operators to effectively utilize unfamiliar tools and some of the tools themselves require tuning. Some of Canada’s under-performance over the last few months is attributable to these factors. These issues will get resolved and we are fortunate to have a very dedicated Canadian team to take on the twin challenges of a major system implementation and market correction at the same time.

Also on the international front, our Mexican business again posted positive comps while our business in China posted low single digit negative comps reflecting the decelerating environment. Next month the Home Depot will celebrate its 30th anniversary. It is as true today as it was 30 years ago that our associates and culture set us apart. Based on this quarter’s results, 85% of our stores would qualify for success sharing, our program for rewarding our hourly associates. We are proud of this level of participation and proud of the work our associates do day in and day out.