Home Depot's second quarter 2023 earnings call was hosted by Isabel Janci, with Ted Decker, Billy Bastek, Ann-Marie Campbell, and Richard McPhail joining her. The call included a reminder that it was being recorded and that questions would be limited to analysts and investors. The company reported sales of $42.9 billion, down 2% from the same period the year prior, and comp sales for the total company and U.S. stores also declined 2%.

HD Supply reported a decrease in diluted earnings per share in the second quarter compared to the same period last year. All three US divisions reported low single-digit negative comps. The weather normalized and spring-related categories rebounded. There was strength in project-related categories, but pressure in big ticket discretionary categories. Pro sales performance was slightly negative and consumer engagement with home improvement was high. HD Supply is committed to growing the business and recently acquired Redi Carpet, a national MRO flooring provider, to extend their current product offering in the multifamily customer vertical.

In the second quarter, 6 of the 14 merchandising departments posted positive comps and the comp average ticket was slightly positive. Excluding core commodities, comp average ticket was impacted by inflation and demand for new and innovative products, while deflation from core commodity categories negatively impacted average ticket growth. Ted expressed gratitude to the associates, store and met teams, supplier partners, and supply chain teams for their hard work and dedication, and sent his thoughts and prayers to the people of Maui. Billy then took over the call.

In the second quarter of 2021, lumber prices decreased significantly compared to the second quarter of 2022, with framing lumber dropping 40%. Online sales increased slightly compared to the same period last year, with nearly half of online orders fulfilled through stores. Pro sales were slightly negative, but still higher than historical norms, and there was strength in smaller projects. Big-ticket discretionary purchases were down 5.5% compared to the same period last year, likely due to pull-forward and deferrals of single item purchases. The company is focused on providing value to its customers.

The Home Depot is continuing to provide a broad assortment of best-in-class products that are in-stock and available for customers, as well as introducing new lines of innovative Milwaukee hand tools and Glacier Bay products for kitchen and bath. Additionally, they are providing an expanded assortment of products for Halloween, including fan favorites and new collections.

The Home Depot is investing in their associates by providing competitive wages and benefits, as well as tools, training and development opportunities. This investment has resulted in improved customer service, productivity and safety. In addition, they are leveraging technology to simplify the customer and associate experience, focusing on having the right products in-stock and on the shelf for unassisted sales.

This paragraph discusses the use of new technology, such as computer vision, to narrow the gap between what is considered in-stock and what is actually available for sale. It explains how computer vision images are used to provide a single real-time view of inventory and how machine learning algorithms are used to direct associates to the right bay at the right time. The use of this technology has led to improvements in OSA, increased associate engagement and productivity, and higher customer service scores. Additionally, Order Up has made the average experience over 40% faster for the customer, leading to improved customer service scores.

In the second quarter of the fiscal year, total sales were $42.9 billion, with a net negative comp impact of approximately 85 basis points, and a gross margin of 33%. Operating expenses increased 100 basis points to 17.6%, and operating margin was 15.4%. Interest and other expenses increased by $49 million, and the effective tax rate was 24.4%. Diluted earnings per share were $4.65, a decrease of 7.9% from the same period last year. Ann thanked the associates for their hard work before turning the call over to Richard.

The company opened two new stores in the second quarter, bringing the total store count to 2,326, with merchandise inventories at $23.3 billion and inventory turns at 4.4x. They invested approximately $800 million in capital expenditures and paid $2.1 billion in dividends, returning $2 billion to shareholders in the form of share repurchases. Return on invested capital was 41.5% for the trailing 12 months. For fiscal 2023, they are expecting sales and comp sales to decline between 2-5%, an operating margin between 14.3-14%, an effective tax rate of 24.5%, interest expense of $1.8 billion, and a 7-13% decline in diluted earnings per share compared to fiscal 2022. They are also aiming to achieve $500 million in annualized cost savings in 2024.

The speaker is discussing the current state of the industry and the economy, noting that the consumer is generally healthy and GDP is growing. They also point out that the economy is shifting from goods to services, and that 2023 will be a year of moderation after the explosive growth of the prior few years. July was a weather shift, with the months of the second quarter all being about a minus 2%.

Home Depot is feeling good about their operations halfway through the year, with reductions in inventory, improved in-stock rates, and wage investments paying off. However, there is uncertainty about the PCE shift and how it will affect consumer sentiment and spending in home improvement. While there is a lot of positives in the macro and with the consumer, Home Depot is not revising their guidance due to the uncertainty. Despite this, they remain optimistic about the sector when they get through this period of moderation.

Richard McPhail of Home Depot discussed how the average ticket size has decreased in the second quarter compared to the first quarter. He attributes this to customers opting for smaller projects and the softness in large-ticket discretionary item purchases such as patio and appliances. He is encouraged by the recovery in transactions and the convergence of ticket and transactions.

The executives at the company are uncertain about how the year will play out due to macroeconomic factors, so they have decided to stand pat with their guidance of a 5% decrease in sales. They are also monitoring their share of PCE, which has been steadily reverting back to 2019 levels. If their share of PCE does revert back to 2019 levels, that would correspond with the bottom end of their sales guidance. However, they are not sure where the share will ultimately settle.

Home Depot's operating expenses have been impacted by their $1 billion wage investment, leading to a debate about whether the cost of doing business has gone up such that even if the cycle recovers in 2024, the company won't see a significant improvement in its profitability. However, Ted Decker reassures that wage rates are moderating and that the company does not expect to need to make another large investment in the near-term. Additionally, Richard McPhail notes that in a market-normalized case with 3-4% top line growth, they expect mid to high single-digit EPS growth.

Ted Decker commented that the outlier Q1 results of DIY outperforming Pro should not be read too much into, and that the theme of Pro responding to investments in outperforming the consumer seen in Q2 is consistent with what has been seen before. Richard McPhail then clarified that the 10 to 20 bps of productivity benefit this year is something that was originally anticipated and is part of their original guidance, and is separate from the $500 million cost-out they anticipate for 2024.

Hector Padilla explains that the company is building an ecosystem for the Pro market that will be difficult to replicate and will take some time, but that it will ultimately help them gain traction in the large and complex Pro business they have been focusing on. He also states that the initial 10-20 basis points of productivity is included in their operating margin guidance for 2023, but that the $500 million cost savings will not be included until 2024.

Billy Bastek and Hector Monsegur discussed their encouragement with the signals they are getting from Pro customers engaging with the expanded ecosystem. They have pieces of the ecosystem that are not yet fully deployed, but they are seeing Pro customers engaging with the supply chain assets and outside sales resources. Inventory has dropped, but they are pleased with the progress they have made and have low obsolescence risk and experienced merchant teams. In-stocks are better than they have been since before the pandemic.

Richard McPhail and Ted Decker discussed the National Association of Homebuilders Index, which has seen a decline in backlogs but is still above the historical average. They also discussed anecdotal feedback from their customer base, which indicates that projects may be smaller. Finally, McPhail noted that shrink has been a consistent pressure over the last few years, and they are taking actions to mitigate this impact.

In Q2, the West was Home Depot's best-performing division, likely due to an increase in homeowner engagement driven by weather patterns. This was evidenced by an increase in sales of spring categories and ACs and fans due to higher temperatures. However, the overall quarter was more normalized than previous quarters due to some shifting of smaller seasonal pieces.

Richard McPhail and Steven Zaccone discussed the potential for the $1 billion investment in wages to not be realized due to the negative comps and transactions, but McPhail reassured that there would not be a material change in the company's financial profile. Ann was asked to elaborate more on the computer vision technology.

Ann-Marie Campbell discussed the Sidekick application, which uses computer vision to help associates find products in the overhead quickly. This application is already rolled out in one region and is being piloted in stores across every region. Campbell expects it to be rolled out later this year, and believes it will drive a lot of productivity for the stores. Brian Nagel asked how the business is flexing with disinflation, and how consumers are reacting.

Ted Decker and Billy Bastek discussed the moderating inflationary impact on their retail costs and the lack of a deflationary environment. They are encouraged by the normalization of transactions on the West Coast due to the improved weather.

Michael Baker asked Richard McPhail about the housing market, referencing a prediction from the June Analyst Day that it would be down mid to high-single digits in 2023. McPhail noted that there are some economists who might call for that, but that there has been sequential improvement in home prices for the last four months, and that home prices have remained steady versus last year. He concluded that there is still too much uncertainty to change their view.

Richard McPhail and Ted Decker discussed the housing market and the impact of low mortgage rates. They mentioned that values have held up and are now back to record highs, but there is a lack of inventory for sale. McPhail noted that the first two weeks of the quarter were better than the first half comps, but they are sticking to their guidance.

Richard McPhail and Ted Decker discussed the impact of DIY and Pro services on the company's second half of 2020 and 2021, with Richard noting that it is all the same demand regardless of who is fulfilling it. Ted then noted that the consumer is responding well to seasonal activities such as gardening and painting, and that this consumer segment is healthy overall. This was exemplified by strong engagement in Halloween, a discretionary product category.

Richard McPhail and Billy Bastek answered a question from Steven Forbes about ticket and transaction trends in the second half of the year. Richard noted that they are encouraged by the recovery they have seen and Billy mentioned that the impact of lumber prices will abate as they get to the back half of the year. Hector Padilla then gave an update on how the Dallas market is trending year-to-date in 2023 compared to the company average.

Hector reports that the results in Dallas have been encouraging, with customers engaging with the delivery sales, stores, and online digital platform. The team has scaled the capabilities in Dallas to other markets, and they are seeing similar results. Dallas has been a success so far, and they will continue to test, learn, and deploy capabilities at scale. Steven Forbes thanked Hector and Isabel Janci closed the call by thanking everyone for joining and looking forward to the third quarter earnings call in November.

This summary was generated with AI and may contain some inaccuracies.