HD 2019 Home Depot Investor & Analyst Conference EVENT .../media/Files/H/HomeDepot... · market share gains. Customers come to The Home Depot for products that allow them to complete

HD – 2019 Home Depot Investor & Analyst Conference EVENT DATE/TIME: December 11, 2019 / 09:00AM ET PRESENTATION

Isabel Janci - The Home Depot, Inc. - VP, IR

Good morning and welcome to Home Depot's 2019 Investor and Analyst Conference. This morning you

will be hearing from Craig Menear, our Chairman, CEO and President; and Richard McPhail, our

Executive Vice President and CFO. Following their presentations, Craig and Richard will be joined other

executives for a question and answer period. Joining them will be: Ann-Marie Campbell, Executive Vice

President of US stores; Ted Decker, Executive Vice President, Merchandising; Bill Lennie, Executive

Vice President, Outside Sales and Service; and Mark Holifield, our Executive Vice President, Supply

Chain and Product Development.

Before I turn it over to Craig, I would like to remind everyone that today's presentations made by our

executives include forward looking statements as defined by 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 the factors identified on this slide and in our filings with the Securities and Exchange

Commission. It is now my pleasure to introduce our Chairman, CEO and President, Craig Menear

Craig Menear - The Home Depot, Inc. - Chairman, CEO & President

Thank you Isabel and good morning everyone. I’d like to start by thanking you all for taking the time to

be here today. Before we jump into the program, I’d like to provide an overview of what you can expect

from today’s discussion. As you know, we are now in a two year journey into a transformation to create

the One Home Depot experience. Today we’d like to provide an update on the progress of our investment

initiatives and share a preliminary outlook for 2020. It is our objective for you to walk away with a better

sense of why we have more conviction than ever that we are making the right long-term investments in

the business and to extend our leadership position in the market place. There are five key messages we

hope that you’ll leave with today: First, our distinct competitive advantages and execution have and will

continue to deliver strong financial results. Second, we continue to capitalize on a compelling market

opportunity. Third, our transformative investments to deliver the One Home Depot experience are largely

on track and will further enhance our leadership position. Fourth, the macroeconomic backdrop continues

to be supportive. And our disciplined approach to capital allocation, will continue to create substantial

value for our stakeholders. The Home Depot has built a number of competitive advantages that position

us as the number one home improvement retailer in the marketplace. Our stores are the hub of our

business and will continue to be important in the future of home improvement retail. We have a premier

real estate footprint that provides convenience for the customer that is nearly impossible to replicate.

Over the years we have consistently invested in a market-leading dot com experience, knowing that our

customers increasingly leverage the digital world for their projects. This has been done through an

integrated approach in merchandising and marketing. We have created a best-in-class supply chain. And

finally our unique culture and values, as well as our knowledgeable sales associates has always been a

competitive differentiator. These competitive advantages have translated into significant growth in our

business over time. Over the past five years, we have delivered over $25 billion in revenue growth and

over $5 billion of net earnings growth. And while we are the number one home improvement retailer

across all of our geographies, we represent a relatively small part of a large, fragmented addressable

market. Home Depot competes in hundreds of different categories, and in many of these, the

independents, the regionals or the specialty players command the majority of the market share. As a

result, the competitive set varies significantly by category. We have captured share over the past several

years and we are investing to position ourselves as the low cost provider and to grow faster than the

market going forward. In order to do this, we know that we can’t just maintain the status quo. This is why

we made the decision to invest in One Home Depot. What was true in December of 2017 remains true

today: retail is changing rapidly and customer expectations are higher than ever. Customers are

consolidating the number of retailers that they visit on a regular basis so delivering convenience and value

through a personalized, interconnected experience is critical. One Home Depot is the full realization of

the interconnected, frictionless shopping experience that we started talking about several years ago. It

enables our customers to seamlessly blend the digital and the physical worlds. Every initiative in our

investment strategy was formulated using a customer-back approach that will drive results not just over

the next several years…but for the long term. We are building interconnected capabilities that leverage

the convenience of our stores, integrates the digital experience, expand our product offering into new

categories, extends our leadership position with the pro and allows customers to receive their products

however they choose. We have learned a lot on this multi-year journey. Customer feedback has reinforced

our beliefs that the investments we are making the right investments and they will create value in the

marketplace that we believe is unique. Our strategic investments are largely on track and we are realizing

benefits, but there is more work to do to unlock the full value of the One Home Depot experience. We

were perhaps a bit ambitious with regards to the speed with which these benefits would be seen in 2019.

Transformations are complex and our technology teams have done a fantastic job supporting the

organization as we work to greater enable functionality and capabilities.

Let me give you a couple of examples of areas where more opportunity is ahead. First, let’s talk about our

B2B experience that we are creating. There are features and functionalities not yet available that will

better serve our large, more complex Pros. For example, integrating the functionality around special

order, price and delivery that’s available today at our Pro desk into our B2B experience, will enable a

more seamless, interconnected experience for our Pros. Second, many of you have seen the tools that we

have implemented at our Pro desks that have provided both simplicity and visibility for our associates and

translated to a lift in spend with this important customer. The same work is now underway for our DIY

customers as we invest to simplify order management in our stores. Historically, our associates have had

to navigate dozens of different systems. Now we have introduced Order Up, which begins to streamline

those multiple systems into one that is simpler and much more intuitive.

For the functionality that we have enabled to date, the average customer experience is 35% faster and has

led to increased customer service scores. In the near future, we will add a number of different capabilities,

including the ability to sell a store-based item and an online item on the same ticket. This is part of the

interconnected shopping experience that we are building. Finally, another example is increased

functionality around personalization both in marketing and in search results. This is an evolution. And we

offer personalization today, but there remains opportunity to unlock a more comprehensive view of the

customer that will allow us to offer a deeper level of personalization going forward. While there is more

functionality coming, we know that the capabilities we have built thus far are meaningful to our

customers and as such we will begin to market those. So, let me show you a new ad, that aired this past

week.

(Video)

We have also changed our tag line to strongly signal that The Home Depot is evolving as our customers’

needs change.

Now, let me now provide a bit more detail on some other major areas of investment. Our investment to

deliver the One Home Depot experience is nearly double what we would have spent in a business-as-

usual environment. As we transform the business, there is a customer experience standard that aligns to

the Home Depot brand that we hold ourselves accountable to deliver. This is the governor, if you will, to

the speed with which we will bring new capabilities into the market. Our culture centers around taking

care of our associates. We have invested in them in wage, benefits, training and career development

opportunities. Our commitment to our associates’ growth and development can clearly be seen in the store

leadership roles, as over 90 percent of our store leaders began their careers with The Home Depot as

hourly associates. We will invest more than 1 million hours per year over the next five years in training

and development opportunities. Our associates are a competitive advantage and they are the key to

providing an exceptional customer experience. Approximately 50 percent of our investment dollars were

targeted to leverage the advantage we have with our convenient locations, addressing customer pain

points and to deliver a great interconnected experience. Our investments here are on track. Approximately

60 percent of our U.S. stores have a new look and feel. We addressed our customer’s number one issue,

navigation, through our Wayfinding investment, as well as an enhanced in-store mobile navigation

experience. We are improving the checkout experience through investments in the front-end of our stores,

and we are enhancing the pickup experience for online orders by reconfiguring service desks and

implementing pick up lockers. Connecting the digital world ratings and reviews for appliances through

digital labels has been part of the overall improvements made in our appliance shopping journey, which

continues to deliver sales growth ahead of the market.

Our store investments are driving higher customer satisfaction scores, which we believe is translating into

market share gains. Customers come to The Home Depot for products that allow them to complete their

projects, and to save them time and money. So we continue to invest in merchandising resets in our stores

to refine assortments, introduce innovative products to improve visual merchandising to drive a better in-

store shopping experience. Two examples are our pipe and fittings aisle, as well as our Color Solution

Center in paint. In our pipe and fittings aisle we are re-setting all of our bays, reconfiguring them to better

showcase our merchandise assortment, and free up space to add new categories for our customers. On

average, we have been able to add 2-3 additional bays per store through this re-set, which has given us the

space for additional SKUs for our Pro customers. As a result, we have seen key pipe and fitting categories

lift approximately 150 basis points post reset. By the end of this year, we will execute the pipe aisle re-set

in over 1,300 stores and our new color solutions center in over 1,900 stores. Our enhanced store and

associate experience is complemented by the investments we are making in an interconnected and digital

customer experience. We know that customers expect speed, convenience and a variety of delivery

fulfillment options. This is why we continue to invest in our website and mobile applications, improving

our search capabilities, site functionality, category presentation, product content and enhanced fulfilment

options. We’ve grown our online sales by approximately $1 billion in each of the last 6 years, making us

the fifth largest e-commerce operation in the United States. And approximately 50% of the time

customers choose to pick up their online order in our U.S. stores. This is a testament to our interconnected

retail strategy. We know there is significant opportunity to better serve our Pro customers, who we

believe represent about 45 percent of our sales today. The value proposition that we are creating for our

Pros is a comprehensive ecosystem that encompasses product, exclusive brands, delivery, credit, service,

digital capabilities, tool rental, and more. We believe what we are building is unique to the marketplace.

We are building the capabilities to enable the Pro to be served no matter where and how they might want

to interact with us. The store experience is being enhanced, delivery is a key component that we are

building out through our supply chain investments and the B2B site experience is being designed to make

it easier for our Pros to engage with The Home Depot from the job site. We’d like to share a video to help

bring this experience to life for all of you

(Video)

As you can see, we have a lot of great momentum with the B2B website experience. And we are on track

to onboard 1 million Pros by the end of this year

Turning to our Supply Chain & Delivery efforts….Given the changing expectations of our customers, we

have committed to a $1.2 billion, five-year investment to create the fastest, most efficient delivery

network in home improvement for both Pro and DIY customers. Over the last decade we have invested

heavily in our Upstream network and have created a distinct competitive advantage, yet there is still

opportunity to improve going forward. We are investing to automate and mechanize our RDC network to

require fewer product touches and faster movement of goods. On the downstream side, we are investing

in approximately 150 new facilities to drive speed of delivery for our customers, efficient fulfillment, and

a network tailored to the specific needs of Home Improvement. We are now live with at least one of each

of these types of facilities that we are building and we’re pleased with the results. Perhaps the best way

for you all to better understand what we are building is to actually see it in action, so we have prepared a

video for you to provide some context:

(Video)

Today you have heard how our business is in the midst of transformative change as we invest to deliver

the One Home Depot experience for our customers. We will leverage our convenient store locations. We

will extend our digital leadership and expand our market opportunity. We will create a best-in-class

interconnected experience. We will deliver the fastest most efficient delivery network in home

improvement. All of this to extend our leadership position into the future. And with any transformation,

the work we are doing is complex, and I am proud of the way that our associates continue to focus on

what is most important in our business…our customers. As we celebrate the 40th anniversary of our store

openings, it is worth noting how the company continues to evolve, while at the same time, staying true to

the culture and values that were established in our business by our founders. Our culture centers around

values and a leadership construct that is the lens through which we make management decisions around

the important issues like environmental, social and governance issues that impact our business. We know

that this not only drives strong business practices, but has enabled us to deliver consistently industry-

leading results. The underpinning our strategy to create the One Home Depot experience is the desire to

create value for our stakeholders. This includes our shareholders, our associates, our customers, our

supplier partners and the communities that we serve. As we invest to unlock the truly interconnected One

Home Depot, we are enhancing our already strong foundation in order to deliver value for years to come.

I thank you and now I’d like to turn it over to Richard.

Richard McPhail - The Home Depot, Inc. - EVP & CFO

Good morning and thank you for being with us today. As you heard from Craig, we are confident that the

investments we’re making will extend our leadership position in our market. We believe that ultimately,

scale combined with a low cost position will win in retail and we intend to deploy and leverage our

unmatched scale in Home Improvement to win with the customer and deliver exceptional returns to

shareholders.

Today I’d like to take you through our preliminary outlook for 2020, but let’s first quickly cover our

expectations for the remainder of 2019. Today we are reaffirming our previous guidance of 3.5%

comparable sales growth, 1.8% fiscal sales growth reflecting comparisons against a 53 week year in 2018,

and diluted earnings per share of $10.03. While we define our sales growth in percentage terms, we capture

share in dollar terms, and through the second year of our One Home Depot investment program, we will

have grown sales by over $9 billion dollars – unmatched in our market. We are investing to win over the

long term. By the end of next year we will have invested $5 billion dollars in our stores, $2.5 billion dollars

in technology and will be on track to invest $1.2 billion on our One Supply Chain network. It’s important to

remember that these investments are designed to extend advantages that we already enjoy. Our 2,291 stores

across North America are the hubs of our customer experience and with 90% of the. U.S. population living

within 10 miles of a Home Depot store, they provide us with a structural advantage that will likely never be

replicated. As we unlock the power of an interconnected experience with our digital assets, we continue to

drive strong sales productivity, and we are now at the highest level of sales per square foot in our history.

For the last decade, the power of the Home Depot’s economic model has been defined by productivity and

efficiency, and while we are in an advantaged position today, our investments are designed to extend our

position as the low cost provider in our market. We are making transformational investments in technology

to simplify our infrastructure, harness the power of data analytics, and to drive complexity and cost out of

our processes and systems. Our investments in our supply chain will provide increased speed and reliability

of delivery for our customers, but they also create cost advantages. We are working to build the lowest cost

network in our industry that will also drive simplification in our stores as we migrate deliveries out of our

stores and onto an optimized network. Taken as a whole, productivity and efficiency are at the heart of our

investment program.

So let’s turn to 2020. We build our preliminary outlook for the year on the foundation of a supportive

environment for growth in 2020. The U.S. consumer is healthy and the housing environment is stable and

provides support for home improvement demand. With wage growth now at over 3% and the lowest

unemployment rate in 50 years, the consumer remains confident heading into next year. We’re in the 10th

year of economic expansion and the current blue chip forecast for GDP growth is 1.8% for 2020. The

housing environment is healthy, and we believe that we have entered a period of stability with respect to

home price appreciation, housing turnover and household formation that provides a solid foundation for

home improvement demand. While we don’t expect to see the same tailwinds as in prior years, we do

expect to see a positive influence from housing. And when we think about how home improvement should

grow over the long term, we think about two supporting data points. First, the age of the housing stock

continues to increase with over 50% of homes now over 40 years of age, and as we know, spend per home

increases as homes grow older. Second, homeowners have more capacity to spend on their homes than ever

before – the value of homeowner equity in the housing stock of the U.S. has more than doubled over the last

eight years and is at an all-time high. The combination of these factors supports our view that home

improvement spending will grow faster than GDP over the long term. With that backdrop, let’s turn to our

preliminary outlook.

For fiscal 2020, our preliminary outlook is for sales growth of between 3.5% and 4.0%, representing sales

of between $114.0 and $114.5 billion; operating margin of approximately 14%; and ROIC of approximately

45%. 2020 will be a year of transition for us. While we expect to continue to grow faster than the market,

2020 represents the peak year of investment in our $11 billion program creating pressure to operating

margin during the year as we complete many of our initiatives. After 2020, this level of investment will

decrease and benefits from our investments should increase. Our preliminary sales outlook of 3.5% to 4.0%

growth builds off a base of estimated GDP for 2020, which is slightly lower than in prior years; adds a

stable level of support we expect from housing; and reflects our outlook for continued growth faster than

the market built on the investments we are making and the improvements we continue to make in areas of

opportunity in our business. Our preliminary margin outlook for 2020 reflects our peak year of investment.

Let’s talk about the walk from 2019 to 2020.

We expect to continue to deliver leverage in our business as usual expenses. As expected, our operating

margin will reflect over $200 million of incremental investment in both cost of goods sold and operating

expense as well as incremental depreciation of approximately $70 million. Our investments, both in the

form of capital and expense, will decrease as we move past 2020. Additionally, we will see an impact from

product mix. As lumber price deflation abates, and we continue to see outsized growth in categories like

appliances, power tools, and outdoor power equipment, we expect to see some pressure from mix in 2020.

While these sales are dilutive to margin rate they are accretive to operating profit dollars and are evidence

of share capture in those categories. Finally, the most significant impact to our margin outlook is continued

pressure from shrink primarily driven by product theft. We have tested approaches to mitigate this loss

while minimizing the impact on our customers’ shopping experience, and are now rolling out these

solutions more broadly. While we implement these changes we think it's prudent to anticipate continued

pressure in 2020. We will maintain our disciplined approach to capital allocation. Our strong performance

allows us to invest more than anyone in our space while returning more than $35 billion in the form of

dividends and share repurchases over the three years ending in 2020. We expect our ROIC at the end of

2020 to be approximately 45%. 2020 will be a year of ongoing development for us, and while we’re not

providing guidance for the years beyond, we know where we’re heading. We’re creating an interconnected

experience for our customer that we believe will be unique to our market. We expect to continue to grow

faster than the market and to capture dollar share at an increasing rate. We will extend our position as the

lowest cost provider in our market, particularly through the transformation of our supply chain and our

technology infrastructure, and we will continue to drive capital efficiency throughout our business. At The

Home Depot, our scale creates a virtuous cycle. As you heard from Craig, our distinct competitive

advantages position us to deliver strong financial performance. While we are the leader in our space, our

market is large and fragmented and we have plenty of room to grow faster than the market. We believe the

One Home Depot experience we are creating will extend our leadership position. The macroeconomic

environment is supportive, and our capital allocation principles will continue to create value for our

stakeholders. Thank you for your time and now I’d like to invite my colleagues to the stage for Q&A.

Isabel Janci - The Home Depot, Inc. - VP, IR

As Richard mentioned, we will now be moving to the question-and-answer session. We have 2 of my

colleagues in the back, Elizabeth and Luke, they will have microphones. If you have a question, please raise

your hand and wait for the microphone to reach you. We want those that are joining us on the web to be

able to hear your questions. And please limit yourselves to 1 question with 1 follow-up. Also, please state

the name -- your name and the name of your firm before asking your question. So with that, let's get started.

Q U E S T I O N A N D A N S W E R

Michael Lasser - UBS, Analyst

It's Michael Lasser from UBS. Thanks for hosting the event today. I wanted to talk or ask you a little bit

more about the future state slide that you posted at the end of your presentation. One could argue that over

the last decade Home Depot has been on a fantastic run of steady-state margin expansion as there has been a

prolonged housing -- there has been a prolonged benefit from the housing recovery as the consumer has

been in a good spot, as you had a distracted competitor and there's been really sound execution. And over

the last 2 years, we've seen the company's operating margin come down. You're guiding for another year of

margin degradation in 2020. From there, should we start to expect to see The Home Depot's operating

margin stabilize in light of everything you know today, or have you just been past peak margin and based

on the overall environment, based on the cycle, we should really expect margins to come down further?

And then I have a follow-up.


Okay. Thank you, Michael. So if you take a look at our outlook for 2020 and our margin of 14.0%. If you

were to take the current mix of business, as it stands today, and you set aside the investments we're going

to make in '21 and '22, you would see the type of leverage in our business that you've seen from us over

the past many years. But we're focused on creating the lowest cost platform in home improvement in

order to drive incremental share gains and incremental sales. And so we don't quite know what the

product mix might look like of that incremental opportunity. So it's preliminary to talk about what margin

looks like. But again, if you took the current business and thought about, okay, absent investments, you

would see the type of leverage.


So think of it this way, maybe an example to think about is with the network that Mark is building, there

are multiple types of facilities. And when you think about the market delivery centers, the MDCs, those

are supportive of core business as well as the opportunity to accelerate growth in MRO, which would be

accretive overall. At the same time, Mark is building the flatbed distribution facilities, and those are all

about really driving share opportunity in lumber and building material type categories, big and bulky

things, which are lower rate, but significantly higher ticket and operating profit dollars. And so the

question for us and the learning that we'll go through in 2020 is how does that mix play out as we bring

these facilities up on board. So it makes it a little bit harder to tell you out years right now until we get a

few more of these facilities opened and begin to understand how that plays out in the market. But as

Richard said, we're building the low-cost position to be able to take care of all aspects of our business and

take outsized share and drive gains in op profit dollars.

Michael Lasser - UBS, Analyst

That's helpful. And my follow-up question is on shrink. It seems like the expectation that it's going to get

worse before it gets better is new information today. So can you give us more detail on the drivers of that

shrink? How much is it? We're just in a really tight labor market, and that's part of it. How much is it

idiosyncratic to The Home Depot, maybe you had above average shrink experience over the last few

years and now it's just come back to normal?


Let me make a comment, and then I'll turn it over to Ann to talk about a little bit of what we're doing. So

look, this is a situation that, quite honestly, continued to become more problematic as 2019 played out

despite the work that we're doing. And we've got some great work that we've done to begin to turn the

corner in 2020. This is largely as a result of theft, as Richard said in his opening comments. It is driven

by, in large part by organized retail crime that has expanded rapidly in this country. We have a hypothesis

that this ties to the opioid crisis, but we're not positive about that, but what we can tell you is that working

hand-in-hand with law enforcement we are seeing significant busts that are happening. Where we work

with law enforcement, we'll go into a warehouse facility that gets hit, and it is literally millions and

millions of dollars of multiple retailers' goods in these facilities. In the digital world, in -- has become a

pretty easy way to move this product and we're working with all parties, including partners in the digital

world. But Ann, maybe you want to talk just a little bit about what's going on in this world.

Ann-Marie Campbell - The Home Depot, Inc. – EVP, U.S. Stores

Yes. So we have initiated several pilots to see how we can really mitigate and reduce shrink across the

board. And some of the short-term things we're doing, of course, is really making sure that we can secure

our high-value product. When you think about what they tend to take, right, it's very marketable product

that they can put online. So if we can secure that product, we can certainly bend the curve on shrink. But

not only are we doing that from a short-term perspective, we are also accelerating our plans around some

of the technology things we can do to bring shrink down. So think about [here utilization] or POS

activation, that you buy a power tool, and the only time that power tool can work is if it goes through a

POS. So when you think about the short-term things we're doing and the acceleration around the long-

term things we're doing, we expect to see shrink abate not only in 2020 but beyond. Now you may ask

why you will see a little bit of pressure in 2020? We take inventories in our store once a year. So even

though we are seeing short-term benefits from the things that we are enacting, we're not going to

recognize that benefit until we actually take our physical inventories. But our predictors on the things that

we have implemented have shown really good success, and we expect to continue to roll out those

initiatives that continue to see value.

Brian Nagel - Oppenheimer, Analyst

Brian Nagel from Oppenheimer. So the question I have first off, I guess bigger picture. We talk a lot

about the investments at Home Depot, and you outlined those a couple of years ago, we talked about it

more today. The question I have is, as we look at or consider some of the recent commentary that you

have not gotten as quickly as you initially thought the benefits of these investments, has the investment

plan for 2020 changed either in allocation of dollars towards certain initiatives or magnitude of dollars to

account for that?


So in large part, the investment dollars are the same. There are always tweaks that we make based on

learning. And one of the things -- I'll give you an example of one of the things that we're going to do in

2020, is put more dollars than we originally anticipated into the work that we're doing in our high-volume

stores. We've had great learning through some initiatives that were in '19 that we have seen terrific results

in making the operations of our high-volume stores, and as a result in sales lift in those stores,

significantly better. And so we're going to shift some more dollars from -- in 2020 to go after that. So it's

always a little fluid as we learn. I'd say the other comment around that is when you think about another

thing that's happening in our business right now is we are completely changing, Matt and the team, in

terms of how we develop software, and we are totally doing it from a customer back approach versus the

historical old way of doing it, which would build all your requirements and then go build, and then by the

time you implemented it, the world might have changed on you. So we are doing it from a customer back

iterative, agile approach. And so that by its very nature says we'll shift things as we learn.

Brian Nagel - Oppenheimer, Analyst

And as far as my follow-up question, with regard to the Pro customer, there was an analysis you referred

to for a while, just basically articulating how low your penetration with key Pros went, their spend being

done at Home Depot. Now with all these initiatives as we start to improve the on-boarding to the digital

platform or even to delivery, could you point to some key wins with Pro customers and how that spend

with Home Depot has really started to improve?


Yes. So I mean, I'd say, first of all, we're very pleased in the last quarter, for example, with the

acceleration of our Pro business. We also like the growth that we're seeing in our DIY business, and we

want to maintain the balance in that, by the way. We don't want to wake up one day and go, hey, we left

the DIY customer behind, but Bill, you might want to share what we're seeing.

Bill Lennie - The Home Depot, Inc. - EVP of Outside Sales & Service

Yes. So Brian, I would say that the slide that Craig put up on the Pro ecosystem is really key to the future

for the Pro. We all talk about, there isn't the 1 thing that resonates with the Pro and allows you to gain

share of wallet. We know that the key buying factors for Pros vary by size, the type of Pro, and what

purchase occasion they're in. And so that's exactly what we're doing, is we're listening to the Pros, taking

that feedback and then building out that ecosystem that provides them with the services that they need.

That will allow them to spend more with us, but we know that we have to earn that, have to create an

experience for them that's a lot less friction to it, more seamless, give them the tools that help them

become more productive. And as we do that, we see share of wallet gain. This is all about engagement.

It's all about finding ways to transact, to get frequency up with them. So the more that we provide that, the

more we see that share of wallet accelerate and the more we expect the business to grow.

Simeon Gutman - Morgan Stanley, Analyst

Simeon Gutman, Morgan Stanley. My question is, what percentage of the One Home Depot is in place. It

could be 0, it could be 10, it doesn't seem like the whole thing is in place. You're early on the B2B

initiative for the Pro, can you share some data points around sales uplift. The question is, if we're looking

at a stable housing environment for the next few years, it would seem like [3 to 5 to 4] should not be the

ongoing run rate, it should be better than that from these investments. So anything you can point to, to

look at the future of that.


Yes, the first comment I have is what we are building and the investments that we're making is to position

us to be able to take outsized share growth in any environment whatsoever, period. Whether it's a great

environment or an environment that changes down the road, that's what we're trying to accomplish

overall. As it relates to kind of where are we, what -- well, I'd say, we're probably still in the -- I don't

know, third inning? Mark's just getting going in supply chain, which is a key component. We're making

really, really nice progress in the underlying technology that the team is building to be able to transform

how we actually do technology in the future with much greater speed and agility. So feel really good

about that. Our physical investments in store are largely on track. And I'd say, there we're in a -- 2020 will

be a big chunk of that complete, but not totally complete at that point. So probably still pretty early

innings. And at the end of the day, obviously, we'd like to see that we -- when this all comes together and

we begin to have leverage from all the investment that we're making, that we would grow substantially

ahead of the market. So based on where the market is, with obviously, if it were the same, yes, we'd like

to see accelerating growth, absolutely.

Simeon Gutman - Morgan Stanley, Analyst

Okay. Follow-up is, in 2019, we talked a lot about these sales headwinds and that the underlying rate of

the business, it looked like it could have been a little stronger than what you were reporting. We're going

to lap some of this deflation next year. Housing today is nowhere is nowhere as -- you have initiatives

coming to the [fourth]. So what are the moving pieces to the 3.5% to 4%? Why isn't it a little bit stronger

than that?


Thanks, Simeon. So as has long been our practice, we build our outlook on GDP, which this year, the

outlook is around 1.8%. So that's a little lower than the outlook for 2019. We add a positive level of

support from housing. I would say, not at the level that we've seen in prior years, but a very positive, very

stable environment from an improvement of demand. And then the remainder really reflects our view that

we will continue to gain outsized share in our market. So that's -- those are the building blocks.


And then I'd say one other comment as it relates to, as you mentioned, the deflationary pressure that we

saw. Ted, we'll be pretty stable right now based on year-over-year in the lumber business, we think, at this

point.

Ted Decker - The Home Depot, Inc. - EVP of Merchandising

Yes, the lumber prices were actually pretty flat, lumber and panel traded in a pretty tight range throughout

'19. But it was all lapping the spike in prices we saw in '18. So as we look at 2020, we'll stay flat. We

won't have pressure in 2020, but we won't have tailwind either in terms of our call.


And we don't plan for any adjustment, we [set it days ago.]

Dennis McGill - Zelman, Analyst

Dennis McGill, Zelman & Associates. Richard, the first question, can you bridge the margin outlook

today for 2020 versus the outlook from a couple of years ago? I think the midpoint of the range was

14.7% versus 14%.


Sure. I think, Dennis, the easiest way to think about it is, if you sort of look at our 2019 guidance, [4.3%,]

slightly different than our guidance at the beginning of the year, principally because of the fact that we

expect to report 3.5% sales growth in 2019. So that perhaps a little different than what we had outlined

many years ago. And then if you look and you bridge 2020, which I went through. Again, based on the

3.5% to 4% sales growth, we are certainly leveraging at the degree to which you would expect with that

sales growth. And then you have the investments that are right on track with respect to the long-range

plan. Shrink has really been the largest unplanned item, particularly in 2019, and we just think it is

prudent while we are going to be taking steps to implement actions that we've tested with success, that's

going to take a little time to work through our P&L. Improvement in shrink actually only works its way

through the P&L as we take inventories and we take inventory throughout the year. And so that's why

2020, the shrink impact still looks relatively significant.

Dennis McGill - Zelman, Analyst

Okay. And then secondly, on the margin mix or the product mix, as you think about the flatbed services,

in particular, is your point, Craig, when you roll that business over the next couple of years that that's

going to be disproportionately in categories that are more building material, commodity oriented and

those just carry lower margins, and so you have better return perhaps, but the margin mix from that

operation, in particular, is something that you're unsure how it will unfold?


The -- yes, the flatbed distribution centers are all about driving big and bulky capabilities in home

improvement, right? And it will allow us to actually extend assortments in that space beyond where we

have room today in store. So if you talk to our store associates, for example, there's lots of stores we have,

that have -- don't have the space to carry 20-foot lumber and product like that. These facilities will allow

us to do that and get it delivered to the customer in a very expeditious, efficient way. So we see

opportunity for growth in that space. It is, let's say, how -- the average ticket, Mark, kind of a truck going

out is significant.

Mark Holifield - The Home Depot, Inc. - Executive VP of Supply Chain & Product Development

Well over $1,000, $1,300 is...


So driving big sales in op profit dollars on a very low, efficient cost base. It just is lower rate than our

average. So it could put some pressure on rate. But obviously, we're trying to bring out the MDCs at the

same time which are more accretive to the type of stuff we sell. So the balance between how those ramp

will really determine what kind of rate. But at the end of the day, honestly, we don't take rate to the bank,

it's all about how we drive gross profit dollars, and that's what we're really focused on. How do we

accelerate the growth in top line and gross profit dollars.


In the most capital-efficient way possible, which is the point of One Supply Chain.

Laura Champine – Loop Capital, Analyst

It's Laura Champine with Loop Capital. Another question about the margin pressure you expect from the

mix shift. I think, Richard, you mentioned an expectation to take outsized share in appliances and OPE.

And my sense from some of the Craig's answers is that that's driven by distribution improvements. If that

is so, how do you communicate that and turn those improvements into better conversion relative to more

typical sales drivers like promotions and assortment?


So let me know if -- I hope I don't miss your point, or tell me if I don't. So when you think about what

we've done in the appliance business, right, we've invested heavily in appliance business over a number of

years as one of our chief competitors was donating lots of share. And we saw an opportunity to go after

that. And we grabbed our unfair share of that market opportunity. And as a result, we sit here today with

about a $10 billion appliance business, which is rate pressure, to your question, it's rate pressure. But it is

a phenomenal return on invested capital and drives great overall sales productivity. The ability, and as we

shared in the video in supply chain for Mark and his team to take that customer experience more in house.

And Mark, I think we're at 20% today?


20%, yes.


Of appliances delivered in total by Home Depot controlled environment. We are taking control of that

customer experience, and we're seeing great feedback from the customers on that. The interesting part is,

is that not only is it that, but it is the entire process end-to-end that we're working on. Research for that

product begins online, even when it's purchased in-store, for the large part. So the work that the team has

done to enhance the overall beginning of the shopping experience, bringing, as I mentioned, bringing the

digital label so that you actually have ratings and reviews in the store from the digital world has given the

customer confidence and our associates confidence in selling. So it's really this interconnected blend that

we're bringing together that we see acceleration in businesses when it all comes together. And that's

candidly why we're making the investments that we're making.


I think appliances are a great example of taking control of the end-to-end supply chain and the customer

experience to improve our customer satisfaction and improve our penetration there. Our legacy appliance

delivery processes, we've gone through those stem to stern. They're better and we continue to improve

that whole end-to-end process. And then on top of that, the One Supply Chain investments of opening up

the market delivery operations, which are these appliance hubs, as Craig mentioned, we're at 20% control

directly of our appliance delivery now, where before none of it was directly controlled by us. Our goal is

to fully control that over time. And we've seen a 7 point improvement in our customer satisfaction scores

on appliance delivery, which is very meaningful. What's -- it's great we've got that improvement, but

there's still a tons of upside on that. We're not where we want to be yet on that. So there's a lot of

opportunity ahead of us, and that's what we expect to capture with the One Supply Chain investments and

market delivery operations.

Laura Champine – Loop Capital, Analyst

And my follow-up is on that same bucket of margin degradation on the shrink side. I think that you're

being more vocal than other retailers, at least as far I'm aware, on the crime issues that are impacting you

there. Is there something special about Home Depot's warehouses or access to inventory, is there

something that makes you more vulnerable that you might be able to crack down on to stop it before it

happens?


Let me share an example of a report that I read yesterday. Just as 1 example of many. And the report

came from our head of asset protection on a bust that we participated in. That was a warehouse, I don't

remember what city it was in, but it was a major metropolitan market, if I remember correctly.

Ann-Marie Campbell - The Home Depot, Inc. - EVP of U.S. Stores

It was.


$16.5 million of goods from multiple retailers in this 1 warehouse of which Home Depot's was estimated

at $1.4 million. This is happening everywhere in retail.


Yes. And I think for us when you have strong brands like we do and they are very marketable, of course,

we are going to be challenged, just like any other retailer that have these strong brands. But I think it's

important to point out that, we're doing things immediately. When you think about -- I talked about some

of the things we're doing just to protect the product in bay. But when you think about the stuff we're doing

with machine learning behind the scenes, where we are anticipating where these organized retail crime's

operations are moving, which is why we get into the busts that we are getting. When you look at some of

the things we're doing with non receipted returns, where we are identifying things behind the scenes that

help us identify where we have gaps in our system. So we're not only to reinforcing the asset protection

component of our stores, because we do have multiple entrances and exits and we have to protect the

safety of our customers and our associates. But there's a lot of things we can do with technology that can

really help us across the board. And when we are a harder target to take things from, they go somewhere

else. And so we have to continue to be vigilant about it and that's where we have upped our game across

the board to make sure that we're not as vulnerable as we were in the past just given that the environments

is changing.

Matthew McClintock - Raymond James & Associates, Inc, Analyst

Matthew McClintock, Raymond James. So just a lot of the focus today is on One Home Depot and

rightfully, so -- but on product innovation, you talked about for '19. I was wondering if you could give us

like an insight into how you think about that category in 2020. And I have a follow-up to that.


Which category?


In product innovation, just the product that you expect to launch, if you could assess...


Generally, yes. We see it happening across the store. And we see our customers trading up in selecting

that innovative product. So if you think of the things that are more discretionary in nature like appliances,

just unbelievable technology and innovation in the appliance space. Just came out of a big event for the

holiday season and we continue to see customers trade up to that innovative product. Whether it's

different ice cube making devices, LED lights, stainless steel, smart technology is now entering the

appliance space, whether it's pre-heating an oven or refrigerators, you might not think you need this, but

cameras inside the refrigeration. So if you're at the grocery store, hey, do I need milk? You can actually

look through your phone to see what's in your refrigerator. We've talked a lot about power tools. That has

been transformational and continues to increase the power and the run time of these tools, the electronics

and the tools, the battery power, the brushless motors has revolutionized the tool industry. We've invested

behind that in how we bring that to life in-store and digitally. That transformation is now moving into

outdoor power equipment. So those battery platforms are moving into outdoor power, where now you can

actually cut a half acre, 3/4 acre lawn on 1 battery charge, a pro can have a string trimmer or leaf blower

and do hours of work on a battery pack. And if you have a couple of battery packs, you can get through

most of the day's work. We're investing behind that as well. So as we reset our tool corrals by brand, by

battery platform, we are now resetting our outdoor power equipment by brand, by battery platform

because these batteries work across the tools, whether it's in outdoor power or in traditional powered

portable power tools. But it's just not the fun cool stuff like technology, we see innovation literally every

day and every bay. Some things that might not seem so sexy but fast set times with high PSI ratings in

concrete, lightweight drywall, mold resistant, flame retardant drywall, sound-proofing and flame retardant

insulation. The flooring industry, what's happening with polymers in carpet, what's happening with solid

core vinyl plank. I mean, I can go on and on. We have 900-odd bays in the store, and there's literally

technology improvements and enhancements in each case. The Pros find it for ease of use and the

consumers find it for convenience and satisfaction and well-being for a more fulfilling life. So it's super

exciting and it continues. And it has for 40 years, right, Craig? This isn't new in Home Depot, the supplier

community appreciates that no one launches this type product better than Home Depot, which is why we

get the disproportionate share of exclusive product. And even if it isn't exclusive product or an exclusive

brand, we'll often have exclusive lines, like in the case of DEWALT, the Atomic, which is their new

compact platform. It is exclusive to Home Depot. And even if it isn't an exclusive brand or an inclusive

line, we'll often get launch exclusives. So for 6 months, for 9 months, for a year, we'll have the product

before anyone else in the market. Again, because the supplier community knows, no one -- our digital

platforms, our marketing platforms and in the stores brings product to life and launches it like The Home

Depot.


And then my follow-up is, you talked about in terms of lessons learned over the last 2 years. One of them

was transformations are complex and take time. Can you talk about how you've incorporated that lesson

into the planning process for 2020 and beyond?


Yes. So I think, if you think about as we build these capabilities and more capabilities come into play,

what we've really learned is how we're trying to approach this. The interconnected interdependency that

exists going forward is really important and really powerful, and it makes it harder for us to understand

exactly what each little component is delivering. But we know that when it comes together, it's really

powerful. And I go back to maybe the category Ted was just talking about, when you think about power

tools, for example. This is a category that we've had a leadership position in with a pretty large share for a

very long time. Yet, we are growing at an accelerated rate right now because all of the capabilities that

we're bringing together in this and Ted, I don't know if you want to talk on -- because we actually had this

conversation, by the way, as we were preparing for this meeting. Going, all right, how do we explain this

to you guys? Because it's pretty interesting.


Yes, I think from a customer back, the operative words and experience we're trying to develop is a

seamless interconnected, convenient shopping experience. And then all of these pieces start to come

together. So when you think about power tools, we know most all shopping journeys start online. So is it

the fact that we reach people appropriately with marketing or with SEM or SEO efficacy to get them to

come to our site. Did they resonate with the experience and the category experience we built on power

tools. Did they resonate because we have these great brands, at generally, everyday low prices, and in all

cases, great values. Did they resonate because when they come into the store -- and part of that $5 billion

that we spent in the stores, we spent about $100 million on our tool corrals to do that setting by brand. It's

very expensive, as you can appreciate, to move product around and [seal] around in our stores. Is it the

great customer service that Ann and her team give when the customer's in our stores. Is it our great

relationships with our supplier partners, in many cases, they have some augmented expertise in our store.

Is it -- if someone chooses to have it shipped to the job site or the home, the supply chain that Mark is

building, that they can reach 90% of the country in 2 day or less parcel. Is it our seamless and easy,

convenient -- one day -- return policy, where we'll take back with limited friction. So all of that comes

together. And what we've learned is to try and parse that, we're going to get x basis points from returns,

we're going to get y basis points from an online experience, we're going to get z basis points from 2-day

shipping or 1-day shipping, that's very hard because all of it comes together in a seamless interconnected

convenient shopping experience.


So it gives us real confidence that what we're investing in, quite candidly, when we can continue to take

outside share in a category that we have significant share already, we feel pretty good about the

investments we are making.

Eric Bosshard - Cleveland Research, Analyst

Eric Bosshard, Cleveland Research. Two years ago, when you talked about this program, the sales

guidance was, I think, increased and spoken at 4.5% to 6%. I understand the moving pieces in '19. And I

guess, some of the moving pieces in '20, but if you could talk about the thoughts on the 4.5% to 6%. And

the thoughts on the incremental revenue growth as a payback from these investments. If you could bridge

that, that would be helpful.


Well, we are focused on delivering the remainder of 2019. We have built an outlook in 2020 that

expresses our confidence that we're going to continue to take outsized share. And as we said, we're

building this capital-efficient low-cost platform to go after incremental market share opportunities. We

don't quite know what that business looks like, but we're confident. And so as we learn more through

2020, we'll come back with our views at the appropriate time. Yes?

Eric Bosshard - Cleveland Research, Analyst

A quick follow-up. What's different? Your confidence in the payback, I think your execution of the

investment, of new capabilities, all those things seem to be delivering. And I appreciate the economy

going to be perhaps different. But what is different that makes it add up to less? It's also going to be that

the original guidance was not optimal, perhaps just put that in context.


Look, I think that we've shared with you that some of our investment has been pushed. And so some of

the things that we're doing are harder than what we anticipated. If you think about the underlying changes

that we're making to be able to drive this experience, we have shared that one of the complications that

underlies a lot of the work that we're doing is, if today, you have an item that exists in-store and online,

and by the way, in our MRO business, that carries 3 SKUs in our world today. And so we can't present a

consolidated view to the customer until we solve that underlying problem, and the team's working really

hard. And when we solve that underlying problem, then we can drive significantly greater leverage

through the supply chain, and we can drive more value for the customer. And I'd say, Eric, we probably --

maybe we were just a little bit too ambitious in our thinking as to how fast we could get some of this

done, how fast the benefits would come. We love the early reads that we're getting on the work that we've

done, for example, on the B2B website. We have onboarded early this year, 135,000 Pros. Later, towards

the end, we added another, what, 650,000, Bill?


Right.


It takes time to get them to engage with the experience, understand the functionality we've built, and then

we have more work to do to be able to get to more complex pros where we have more functionality that

they need. So I'd say, we were probably a little bit ambitious.


Right. A just a follow-up comment on the B2B website as an example. If you think about a Pro going into

our store and they are trying to buy 3 types of products. You want to buy an in-stock product, you want to

order something that's online, have it delivered to store for pickup or shipped to your job site, you want to

place a special order, if you go up to our Pro desk, we can orchestrate that and make that happen real

quick and seamlessly. If you try to do that online, you're operating in 3 different POS systems. And so it's

very complex. Our goal is to take all of that and make that customer-facing through a digital experience.

And we're confident we're going to get there, but it's going to take us a little bit longer to deliver that.

Now I'll make 1 comment why I think that's so important. 70% of our pros that are in our stores never go

to a Pro desk, right. This is all about refining our growth strategy, identifying those pros that are in the

aisle, getting them signed up for Pro Xtra, starting to engage them. When we do that, we see their

purchases double. But when you start to take those experiences and make them customer facing, we think

that there is tremendous upside. So we're seeing momentum in the customers that have been migrated.

We're really, really excited and encouraged about what lies ahead, but it's just going to take us a while to

get those capabilities customer facing.


I think it is important to know. This isn't the company's first time entering and pursuing a new market

opportunity, that it was unclear to understand what the true upside was, but that eventually came to the

fore. Ted, maybe you might talk about appliances?


Yes. If you take appliances in questions about growth opportunity, share opportunity and impact on rate,

when we started the appliance business in a modest way 15-odd years ago, we didn't even have

showrooms, right, we just -- we put some big basic appliances inside our racking, it couldn't -- you

couldn't even call it a display really. And 15 years later, we're pushing a $10 billion appliance business.

Unfortunately, the gross margins are not 34% in appliances. But we have managed that in the portfolio,

disproportionate growth in lower earning business, but tremendous gross margin dollars in appliance, if

not a rate. And we have tremendous return on capital employed and tremendous return on capital

deployed given our direct model. And when you think what we've built out now in what I would argue is

the best-in-class digital experience with videos on how to receive your order, picking your delivery date,

everything that Mark's doing in the supply chain. The breadth of the brands that we have, the ability to get

all those brands delivered generally inside of 5 days is tremendous evolution of that business to what we

have today. So as Craig said, will MRO grow faster than more big and bulky coming out of the 2

platforms of an MDC and FDC? The aim is to grow them all equally. Because as we sit at 15% share of a

$650 billion market, there's share opportunities in all these categories, as the assets come online, as the

interconnected largely powered by systems and IT comes online, our merchants are working very closely

with Bill and the Pro team and our outside sales forces to start unlocking these market opportunities and

turning it into share gain through satisfying increased customer purchase occasions.

Steven Forbes - Guggenheim Securities, Analyst

Steve Forbes, Guggenheim. So Craig, you mentioned the 150 new supply chain facilities as part of the

$1.2 billion investment over the 5-year period. But can you or I guess Mark provide some color on how

many facilities are slated to open in 2020? And discuss whether the incremental sort of operating costs of

those facilities are part of -- whether or not they're part of the $200 million-plus of incremental investment

spend that you noted for next year?


Yes. So I'll just kind of go through the platforms. A couple of years ago, when we unveiled the One

Supply Chain strategy, we really identified what we were going to do across 5 different platforms. The

first platform part of -- one of the key tenets of the story is really to leverage our upstream supply chain

where we build a tremendous competitive advantage with a low-cost, fast-flow supply chain and to

further mechanize the RDCs. And you saw on the slide there, where we went from 3 touches to 1. We're

halfway through that. We actually accelerated that program because we're having such good results from

that. It's been great results in terms of financials. It's also been -- a bonus from that has been it has

improved the safety in our facilities as well doing that further mechanization. So well on track in terms of

the RDC platform in the upstream. Another platform that we talked about was the flatbed delivery

centers, we have talked about that a bit. We've got our first one up and running in Dallas. We'll be

opening more in 2020. Really excited about what we're seeing in Dallas. One of the things that changed a

bit in the last couple of years is we really found that we had an opportunity to go further upstream in our

flatbed and bulk distribution. In other words, where we're doing these flatbed DCs, most of them will be

combined with our bulk distribution centers that serve our stores with goods for that side of the store, the

lumber and building materials. What we're doing now, more than ever, is taking control of that upstream

supply chain. We found out -- we figured -- over the years, we left this to the vendors, much like we did

the rest of our supply chain -- we transformed with the RDCs and we left the bulk DCs kind of alone. We

have discovered that, hey, as the largest purchaser of lumber in the U.S., we have tremendous leverage in

managing the rail inbound and the truck inbound to these distribution centers, have a flatbed delivery

center co-located there and take control of that entire supply chain from the lumber mill all the way to the

customer. So a huge advantage there. We have the 1 up and running, like I said, we'll be opening more in

2020. Our market delivery centers. These are the centers that will consolidate the legacy Interline Brands

and Home Depot Pro centers, 25 of those in local markets. We have 1 open in Chicago. We'll be opening

more in 2020, and we're on track there. I think maybe a little bit behind on that one, as Craig mentioned,

getting the integration of our order management systems, our inventory systems, and our transportation

systems to really be able to take an order, understanding where the inventory is, understanding the

transportation options to get the product there. That's proven to be a little more challenging than we

thought. So maybe a bit behind on that one. And then finally, our -- well, not finally, our direct fulfillment

centers. We have -- we have -- we had 3 of those that got us to 2-day parcel freight on the ground for 90%

of the U.S. population. We're now adding facilities in Dallas and in Seattle, as noted in the video. They're

underway now in terms of construction. That will get us further on to our goal of 90% 1-day parcel freight

to the U.S. population. So pleased with the progress there. And then finally, MDOs, we mentioned the

appliance deliveries that are enabled by the MDOs. They're not just for appliance, but that's really where

the biggest bulk of their business is. 20% of our appliance delivery is now under Home Depot control

through those market delivery operations. We'll more than double that in 2020, as we build more market

delivery operations. We have -- we've opened 13 of the 150 facilities. We've got 26 that are in some state

between real estate committee approval and getting ready to open. So 26 are in the development phase.

And we have more in the pipeline that we'll be taking to the real estate committee for approval going

forward. So feel well on the way and largely on track with what we outlined a couple of years ago.


And as we have shared in the past, obviously, as we invest in opening these up, that's pressure and that is

in the...


It is in the $200 million of investment.

Steven Forbes - Guggenheim Securities, Analyst

As a follow-up on that, Richard, again, $200 million, given sort of the weight on the supply chain side,

can you just provide some color or sort of split between COGS pressure and SG&A pressure with that

incremental spend?


Supply chain is largely expressed in COGS, but the vast majority of that $200 million is in operating

expense.

Scot Ciccarelli - RBC Capital Markets, Sector Analyst

Scot Ciccarelli, RBC. I guess, I was looking for some clarification. Craig, you've mentioned a couple of

times maybe you guys were a bit ambitious in terms of how quickly some of the change in investment

could manifest in terms of accelerated sales growth, market share gains. I guess the question is, is there a

couple that you could kind of point out that would take longer? Or it's just the combination/integration of

all of them together has just hit a -- been a longer than expected process?


I think it's a combination of everything coming together has been a little bit longer. And on some of the

investments, particularly, for example, on the pro side, as I mentioned, it takes a while, pros are creatures

of habit, it takes a while to get them to begin to utilize and understand the new capabilities. When they do,

we see great results. And so that's part of now what we're doing as planned to go market and actually

communicate and begin to more aggressively onboard as well.

Scot Ciccarelli - RBC Capital Markets, Analyst

So once you have all those physical capabilities on the digital side, supply chain, et cetera, and given your

comments right there, like, how long do you think it will take the stores and the DC workers, et cetera, to

actually get used to it where you could actually start to see, again, more of a -- let's call it, a net financial

benefit kind of flowing through the P&L?


I mean, I think, to tell you that I could give you a month, a timetable exactly, would probably be

unrealistic. But what we're seeing is we're seeing a ramp, and this will continue to ramp over time as we

pull these capabilities together and begin to create the holistic experience that we're building. Obviously,

the key component of that is the supply chain and that takes time. And as Mark just shared, we have a

number buildings coming up. That will continue. And we've kind of taken the same approach that we did

with the RDC network. If you remember, we went pretty slow in the beginning with the RDCs. And then

as we proved that model up, we began to ramp that and started seeing more and more benefit as time goes

by. So I think you will see this same type of pattern as we go forward.


Some of you might have heard me say this before, but when we built the RDC network, in 2007, we had

1. In 2008, we had 4. And in 2009 and '10, each, we opened 7 each. So 1, 4, 7, 7 was how the cadence

there. Our supply chain build-out will look something like that as we move forward.


I think even for the store, to talk a little bit about adoption of flatbed delivery centers, just think about

picking orders in 2,000 stores, delivery orders, right, and being able to become much more efficient

through a flatbed delivery center. Mark mentioned, the one that's in Dallas or it's one of our biggest kind

of big and bulky market. Literally, adoption will be as soon as it opens. If you tick that part right, okay.


That one will be pretty fast.


Because that's important. Because when you think about how we go to market and uses of our labor and

we think about activity-based labor modeling. And if you look at where we use labor, that can be most

efficient somewhere else, this is where the flatbed delivery center is just a tremendous win. And it's not

going to be an adoption issue with the stores because clearly, it's going to be more efficient, more

effective and we can think about where can we reallocate that labor if necessary or whether or not we

need to use that labor within the store. So there's a lot of things that has to come online simultaneously,

but once they come online, there -- certainly, the stores will leverage those capabilities very quickly.

Isabel Janci - The Home Depot, Inc. - VP of IR & Treasurer

And shifting that to the fulfillment to the FDC will also improve the customer service experience in the

stores.


In the stores, which is, you walk into some of our stores today that we're pulling orders for customers,

right, and this is like to Craig's point, 14-foot lumber and it's blocking an aisle in the store because that's

where we can store the product. So there are just so much value beyond the efficiency we can gain by

doing it out of a central facility. It just gives us a lot of capabilities and a lot of efficiencies within the

stores that we want to unlock as well because there is a tremendous amount of value beyond just the

picking component.


Yes, it's a huge component of our high-volume store strategy really. I mean, if you go to New Jersey, I

think some of those high-volume stores we have there, you can go there 6 in the morning someday, you

might see lumber blocking -- delivery orders blocking the lumber aisle. If you think about Dallas, that

flatbed delivery center is going to serve 61 stores' needs in terms of lumber and building materials, flatbed

delivery. And think of the efficiency of that. That facility is co-located with our bulk distribution center

that serves those stores. So in the old days, the product would come through that bulk delivery -- bulk

distribution center and go to the store and then we pull it back out of the store, load it on a truck and

deliver to the customer. That flow doesn't happen anymore for delivery, right? We'll bring that product to

the bulk delivery -- bulk distribution center, we'll move it across the floor to the flatbed delivery center,

load it on a truck and deliver to the customer. Much more efficient than all of the store laborers who

receive that product, put it away, let it down and then go pick it for a customer and take it back out the

back door. Much more efficient to launch that from a central flatbed delivery center. We're really excited

about the possibilities of that one. Our store team is super excited about that in Dallas, can't convey

enough our excitement about that one I think.

Nadim Rizk - Fiera Capital, Analyst

I have 2 questions on the e-commerce business. The first one, you mentioned that in the last 5 or 6 years,

you've been growing over $1 billion of e-comm business. Could you give me the split in terms of how

much of that business came from Amazon, from Lowe's, from other retailers, from Home Depot, people

not going to the store, but going e-comm. Just -- I'm not looking for exact numbers, but just rough

indication. And my second question on e-commerce, is why do you see CapEx declining post 2020 when

e-comm is supposed to continue growing and then maybe eventually go from next-day shipping to same-

day shipping kind of thing or sort of more services to customers?


So on...


Yeah, go ahead, Ted.


No. So e-comm, as Craig said, the e-comm business itself, the pick, pack and ship business continues to

grow. We believe we're #5 in e-commerce in terms of product flow. That all continues to grow at rates

over 20% on a bigger and bigger base. So we're thrilled that we're keeping that growth rate. It's harder to

get market share. So when we look at overall market share, the base numbers are the federal census

numbers, so we know we're taking share in the overall space. As we go through categories, it gets more

challenging. When you get into online, it gets more challenging. But we look at what our growth numbers

are, publicly reported numbers from digitally native competitors, talking to our supplier base on where

they're seeing growth. We're quite confident that we're taking share in e-comm in virtually all categories.

This past quarter, we had double-digit growth in virtually all categories. So while 22% overall, we had

double digit in virtually every category online. So we feel pretty good that we are indeed taking share in

virtually every category online. Others are also taking share, but we're pleased that we're taking share. On

the delivery, yes, expectation of time to delivery is increasingly important. And when we open up a new

capability of when Mark opens up a new direct shipping facility or we improve supply chain routes, that

we can lower our days delivery on the website. When you post the number of days till delivery, we see an

immediate increase in sales when we decrease the number of days. So that's why we've made the decision

that when we're 90% out of the country today, 2 days or less parcel; we'll be same-day or next day, 90%

of the country, when we're done building up the supply chain. We have same-day capability today in 70-

odd percent of our stores for store-sorted product, utilizing third parties like Roadie. So we think we're in

a great -- we actually don't talk enough about it, but we have greater same-day delivery capability of our

product categories than anyone else in the country.


Yes, I think 1 learning, too, that I'd chime in on. One -- so we're incredibly pleased we've been able to

take those days out of delivery, stand up new offerings like the same-day capabilities with crowd-sourced

cars and vans out of our stores. 50% of the country is now served by same-day with car delivery and 70%

via van delivery at reasonable prices. What we find most interesting, I think, 1 learning over the past

couple of years for me in this has been, the -- speed is important, but for our project-oriented pro

customers, reliability is the most important thing. And reliability, being there when we say we're going to

be there, is really we're discovering is what's most important to our pro customers. Speed is important, but

being there when you say you are is more important.


The only other comment that I'd make is that our digital growth in our digital business has, for all

practical purposes, been incremental growth in The Home Depot. We see categories growing in store at

the same time we're growing double-digit online.

Nadim Rizk - Fiera Capital, Analyst

Yes, fair enough. But to go back to my second. How do you see all that happening, yet, CapEx is going to

be start to decline post 2020? That's what I don't understand.


Right. I understand your question. So first of all, CapEx in total is going to decline post 2020. So if you

think about programs in our investment program, particularly the store investments, what we've done in

store environment, for instance, where those improvements are essentially coming to an end, that's going

to flex the capital number down. There are also investments we're making in technology infrastructure

that benefit the entire company, they also benefit and really sort of lead us to a more frictionless

experience online, but they don't last forever. We will continue to invest in our online experience. It's just

when you put it all together with our other programs, that's why you see the CapEx profile of the total

company decline after 2020.

Chris Horvers - JP Morgan Chase & Co, Analyst

Chris Horvers, JPMorgan. So a bit of a follow-up on a couple of questions. So first on the expense side,

you talked about incremental dollars of investment peak next year into 2020. Store investment sort of

slowing, technology slowing a little bit, then Mark's got a lot of work to do. As you get beyond 2020, if

we're still in a sort of 3 to 4 comp environment, do you get back down to the BAU 50% SG&A versus

sales growth rate? Or is that more lagging out as Mark completes?


So first of all, we really like to -- we're concentrating on 2020, right? There will be investments that are

specific to these programs that will continue beyond 2020. The investment -- the nominal dollar amount

will be lower post 2020.


So the nominal dollars will be...


It's $200 million in 2020 and it will be lower... It will -- it's increasing by $200 million this year -- or in

2020. After 2020, that will be a decrease, rather than an increase.


Understood. That's great. And then in terms of sort of a 2-part question. It sounds like you had some

technology discoveries where it's like, ooh, this is going to take longer than what we originally

appreciated. Is there something structural in terms of the systems, the legacy systems that make them

harder to change than that you previously thought? And how is that, following up on someone else's

question, like how have you thought about that as you take -- make more changes and then related to the

market share or the self-help factor on the guide, you are now expecting about 50 basis points this year.

Does that 50 basis points accelerate next year? Or is it more, hey, let's be as prudent here, things have

taken us -- taken longer than we thought, and thus, we'll just assume that 50 bps is a similar level in 2020?


Yes, let me take the first part of that. The -- there are complex opportunities as we redesign and build our

systems for the future and for efficiency and speed, which is exactly what we're doing in the overall

environment. And so yes, there were things that we have learned that were harder than we thought to

unwind. And if I go back to my SKU example, it took us in the neighborhood of 4 or 5 months to actually

get to an approach to unwind that problem, to truly understand how we were going to unwind that

problem and build it for the future going forward. I don't think we anticipated that it would take us 4 or 5

months to figure that out. We knew it was not going to be an easy problem, but it was a little bit harder

than what we thought to figure out. And so yes, I mean it's -- we're learning as we go. But we're super

pleased with the support that we're getting from the team. They're doing a great job. They've got an

approach on that particular problem now that we're working hard to implement. And that will allow Mark

to continue to move forward and open the buildings as he's expecting to open them, we'll getting build

out...


And it's not just systems, it's processes as well, right? I mean how do you onboard a SKU, how do you

enrich all the content to be able to flow that SKU properly. The process is often fraught with the same

kinds of issues as the system. So it's not just a system issue, it's really how do we want to do it the right

way going forward. Getting it right is way more important than doing it fast.


Really using that customer experience as the governor for we're going to do this when we actually have

everything right for the customer more so than anything else. We want that experience to be great when

we implement.


Chris, the second part of your question. I would go back to how we built our preliminary outlook for 2020

to answer that, which would be to say, again, guiding off of a preliminary outlook for GDP at 1.8%. A

positive level of support from housing, albeit at perhaps a lower degree than in prior years and an

expectation for continued share gains. I think as Craig and Ted pointed out today, we don't want to give

you a false sense of precision. We've always had a directional and imperfect model. But I think when you

add the factors up, you can see that our expectation is for healthy share gain in 2020.


And again we know that when it all comes together in categories, and we've been able to do that in a

category like power tools because it doesn't have the same complexity as some of our big and bulky, we're

seeing the share gains as a result of that. Absolutely, seeing the share gains. So we're super excited about

what we're building going forward. When you think about building that really across all product types in

the project business that we're in, you go, wow, that is super exciting. It really is. When you think about

the road is littered with retailers that couldn't or wouldn't change with their customers' needs as they

changed. If you just look back over history, that is not an option for The Home Depot. It is candidly not

an option here. We intend to be there. We intend to deliver a great customer experience, and we intend to

be the low-cost provider that takes outsized share in the marketplace. That's why we're making the

investments that we're making.

Kate McShane - Goldman Sachs, Analyst

Okay. I'm sorry. Kate McShane, Goldman Sachs. Just in terms of the 2020 guidance to the extent that you

can comment on the cadence of the year. I'm just curious with regards to comp, you seem maybe to have

slightly easier comparison in the first half of the year just considering the weather and the lumber

deflation, but also it sounds like investment maybe picks up into the -- well, all year, but how should we

think about the cadence of comp first half versus second half?


Thanks, Kate. Today, we're providing a preliminary outlook. We'll provide further detail when we

provide guidance for 2020 on our fourth quarter earnings call.

Kate McShane - Goldman Sachs Group Inc, Analyst

Okay. And then my follow-up question is just about automation. I wondered if in the supply chain, you

can talk to us with regards to all these different platforms, how much automation plays a role versus your

labor?


Yes. I think automation's a real key to our supply chain. You saw in the video, quite a mix though, I think

obviously, there's conveyors going straight into the truck. The RDC platform, we've got a person in a

trailer putting a carton onto a truck -- onto a conveyor, it goes through a sorter and it comes out on the

other side inside the trailer, where an associate stacks it into the trailer. So 2 touches to get products from

the inbound side of the building and out to the outbound side. So highly automated. It's great. It works

really well for products that are in gauge, right, that fit onto the conveyor and can be conveyed like that. I

was walking in an RDC the other day and I'm walking around the dock, I'm always intrigued by the types

of products that we handle here at The Home Depot. You look over there, and you've got a big honking

spool of wire, right, sitting on a pallet. Over here, you've got bags of mulch. Over here, I've got stack of

boxes with -- for goodness' sake, those are live goods, they're rosebushes. Then I've got over here tomato

cages that people use in their gardens. That stuff doesn't get to go on the conveyor, unfortunately. And

right now, the way to handle that is there is a human involved in handling a lot of that. So it probably will

be for some time because there's just isn't a piece of equipment yet.

You saw in the video, our appliance market delivery operations involves with 2-wheelers. I'm very, very

interested in the autonomous 2-wheeler. If anyone has a lead on that, please let me know. And we're

constantly looking at applying technology to our business. But in keeping with our hallmark of

disciplined capital allocation, we always make sure that there is a payback from those investments when

we make them. We've got a pretty exciting task coming up. We're actually testing autonomous robots in

the distribution centers to help us select orders and bring them to the outbound dock. So we're there with

that. I would say that home improvement, big and bulky, lots of different variety of products has to be

considered as we make those investments. But where we can get a return, we're going to make those

investments and we're staying in touch with where the technology is on this.


Let me also say that part of the investment as it relates to technology and automation just isn't in supply

chain. If you think about what Ted and team are doing in the digital experience and leveraging the ability

to personalize, that doesn't happen manually. That all has to happen through real-time automation and

machine learning that we build in. So it's spreading throughout The Home Depot.

Greg Melich - Evercore ISI, Analyst

Greg Melich with Evercore ISI. I guess, I had 2 questions. One to Richard and one to Craig and team,

however you want to do it. Richard, I just want to make sure we're on the same page or understand the

capital allocation philosophy a little bit. I think guess 55% prior year earnings is dividend, the 2x debt-to-

EBITDA are still the number, and how do you think about those as what you talked about 2021 evolving

where CapEx could be coming down, spending out of the P&L, also probably peaking. How do you think

about those sort of numbers going forward?


Thanks for the question. We will maintain our philosophy around capital allocation, which is simply to

return excess cash to shareholders in the form of dividends and repurchase after investing in our business.

So we would look to pay a dividend of at least 55% of prior year earnings per share and return excess

cash above and beyond that point to shareholders in the form of share repurchases. We do believe that the

2x adjusted debt-to-EBITDA ratio is the appropriate balance for us between cost of capital, access to

capital and flexibility. And so we like the target, but we certainly maintain flexibility to do what is right

for the business.

Greg Melich - Evercore ISI, Analyst

I guess you have the answers so then to Craig. As you've built this platform that basically is fifth largest

e-comm platform, you're doing it without any 3P business. Any -- I would say, you've extended your

market TAM to $650 billion. But how do you think about other ways you could extend that TAM or

deepen the share even more just given, I think, fifth largest digital player in the country in a category that

isn't really online. How well can you leverage that, M&A, are you...


Sure. That's a -- it's a great question. And if you think about one of the things that we shared with you that

we're building is an extension of our Decor business that we call HD Home, right? And that is all about

how do you leverage the capabilities that we're building, to be able to grab a larger share of our

customers' spend in related categories around the home. And so we went down the path. That was the

acquisition of The Company Store. Our customers told us that they would be willing to purchase more

categories around the home from us. That they trust The Home Depot to bring value to the marketplace.

The consumers are shopping fewer retailers on a regular basis, so it naturally applies. If you think about

those categories of kind of finishing the home space, if you will, around the kitchen, in the bath, and the

bedroom, don't hold me exactly to these numbers, I believe, in total, it's about a $200 billion market, of

which a little north of $25 billion today is done in the digital space. And so you open up a $25-plus billion

marketplace that ought to leverage all the capabilities that we're building through our digital platform,

through our supply chain network that will have incredibly efficient delivery, low-cost model, we ought

to be able to serve our customers, make it a more convenient, kind of one-stop shop for their home needs

and leverage all of the spend that we're putting into the business. And if you think about kind of 2 areas in

our business where we've done this before, okay, one is, we've talked about a lot here today is the

appliance business. We weren't in that business. Our customers told us we want to buy this from you. The

other one, quite candidly, is holiday decor. We weren't in that business either. Our idea of holiday decor

was, we always sold live trees, Christmas trees and then our decorative idea was a stake light with green

and red bulbs in our electrical department. And today, we're a destination for that business. And it's a

substantial business for us. And so we think there's opportunity like that. And that's part of the expansion.

Of course, the market's expanded, but also when you look at the opportunities, MRO, this home

opportunity, we think we can leverage the capabilities that we're building. Yes, no, no, it wouldn't -- it

would not [go around our inventory] by any means, not at all.

Mike Baker - Nomura, Analyst

Mike Baker from Instinet Nomura. I wanted to ask about the margins for next year, down 30 basis points.

Are you breaking out, is that gross margin or SG&A? I think there's some gross margin pressure and

shrink in mix. Should we expect SG&A to deleverage or lever? I mean, if you go through the math, with a

50% business as usual and then add on $270 million in incremental expenses, I think you get expense

growth that will be less than sales? Does that make -- is that right at all?


Well, when you add the depreciation, so when you take that full bar including depreciation, the

incremental expense is greater than the operating leverage sort of equivalent. I think you have it

reasonably right. Some of the factors that we called out including shrink and mix, more gross margin in

that orientation, we'll provide more detail when we provide 2020 guidance, but I think around what you

already have it at.


Okay. And if I could ask 1 more follow-up, which isn't really a follow-up because it's a completely

different question. But in your outlook for the next year, so maybe it's similar in that sense, but you talked

about having less of a benefit from housing, yet most housing metrics are getting better, and really just

started to get better midyear and that should flow into next year, is between home sales, home price

appreciation, both accelerating, so why wouldn't housing be more helpful or are you just being

conservative in the outlook?

Richard McPhail - The Home Depot, Inc. – EVP & CFO

The housing environment's absolutely stable and positive, and it will be a positive influence on home

improvement. We just don't want to count on the same level of tailwind that we have in the past.


So if you think about the beginning of the year, kind of everybody thought it was going to be an absolute

disaster. And we said, "Hey, look, things are stable." Now everybody is thinking that it's going to be a

little bit stronger. Our position hasn't changed. We think it's stable.


So nothing specific that you're seeing in terms of competitive situation from one of your competitors

investing a lot or anything like that. It just sounds like it's being a little conservative, [lack of position] as

you said before. Okay.


And we have time for one more question.

Peter Benedict - Robert W. Baird, Analyst

Peter Benedict at Baird. I guess, on the short term, everyone's asked basically all the long-term questions.

But -- so just related view on price elasticity among the consumers out of the pros or DIY consumer in

relation to maybe price increases you're taking around tariffs or anything else? And then secondly, just

how are consumers responding to this shorter holiday window. You're now past Black Friday, Cyber

Monday, again short-term stuff, but just curious what you would speak to on that.


So on tariffs, our position hasn't changed. We view this to be manageable and our merchants and our

finance teams and our supply chain team has done just a great job to identify the pressures literally down

to the SKU with every -- all the tariffs that are in place through 4A for Home Depot, it was about a $2

billion potential exposure. We've mitigated well over half of that. And on the residual, we have taken

some price increases. But we do that with a portfolio approach, it's not necessarily tariff SKU to retail

increase. We look at the entire line structure or even across categories. And we're watching the elasticities

very carefully. Again, the finance partners and the merchant teams have done a great job to measure

those. As you can imagine, we have different elasticities geographically and in product categories,

whether it's a Pro-oriented or a consumer-oriented SKU. We have covered all the top line. So we wouldn't

point to any top line impact from actions we've taken on tariffs. There -- you generally don't get unit

increases when you have retails go up, so we watch units very carefully. Our whole model is about

volume and driving units for our business as well as our supplier partners. So our suppliers are deeply

connected with us to keep that unit productivity at the center of all of our actions. So again, we've been

able to manage it. If we get a December surprise, Sunday, that's in our outlook. And again, we'll take the

same approach for the tariffs on other categories and think it's manageable. I was chatting before the

session started. We actually saw more net cost pressure in 2018 with the commodities spike than we have

with our post mitigation tariff impact. So again, we think this has been manageable. On the short term,

again, Richard, updated our guidance for 2019. I can say we had our best week and our highest sales day

this Black Friday. We do have a shortened week, weather is -- could be better, but we've seen this before.

For us, it happens sort of every 7 years. And all our plans are on track and seeing great results in

decorative holiday, our appliances and our gift center, everything is going at our planned rate. So we're

very happy.


The customer is certainly in a healthy place. We see that in the business. We are investing for the long-

term position in this company. And we are investing to make sure that we're in a position to be a low-cost

provider. We're investing to make sure that we are in a position to be able to take share in any

environment. We're investing to make sure that we're in a position to leverage the competitive advantages

that we have in the marketplace. And we're excited about the opportunities that we have ahead of us. We

are pleased with the progress that we're making. And we look forward to be able to continue to drive the

kind of growth that we've had in the business and deliver the kind of returns that we've had over time.

Peter Benedict - Robert W. Baird, Analyst

And then just 1 quick follow-up, I guess, for Richard, maybe was just thinking about the store-based

investment, I think you showed the chart to that, I think $1.7 billion of that CapEx plan in next year is

now on the stores? Is there a way you can tease out, maybe what's the maintenance CapEx of the store

base versus what's kind of these incremental investments that are kind of peaking next year? I'm just

trying to understand how maybe that breaks down as we think, beyond 2020, where store investment

could settle in?


Without giving a lot of specific breakouts, the investment we've made in the environment of our stores,

the investment we've made in pick-up lockers, the investments we've made in merchandising resets, they

all come together to form that number. And so it's -- I would say that all those programs are significant. I

wouldn't isolate any, but we have -- we're finishing a lot in 2020.


And Richard, if I could add 1 thing that I'm particularly super excited about, we have seen great results

with customer intercept on our whole environmental investments in the store and our wayfinding. So

think of the new sign package, our new wayfinding, our number of bays, shining the floors, updating all

restrooms and break rooms for our associates. We're accelerating that with the goal to complete all of our

stores in wayfinding and environmental in 2020. And I would say I have been with Home Depot, it will

be 20 years. So it's probably closer to the 30 years this will be the first time every store will have the same

brand standard and look and feel for probably close to 30 years. I'm super excited about that. We have

made a call to do all the top 40 markets first and then do the balance of the 400-odd stores going into '21,

'22, and we said, no, we want One Home Depot, and that means people in Maine, Atlanta, Dallas, L.A.

are all going to have the same Home Depot experience, that's all part of our confidence in launching the

new advertising campaign. It's One Home Depot, so super, super excited about that.


So that concludes our investor & analyst conference. Please reach out to the IR team with any additional

questions. And thank you for joining us today and for your interest in Home Depot. And thank you to all

of those that made today possible including our executives, the IR team, our corporate communications

and corporate events team. Thank you.

Documents

HD 2019 Home Depot Investor & Analyst Conference EVENT .../media/Files/H/HomeDepot... · market share gains. Customers come to The Home Depot for products that allow them to complete