The Home Depot Fourth Quarter 2023 Earnings Conference Call has begun and participants are in a listen-only mode. CEO Ted Decker and other executives will be providing prepared remarks, followed by a question-and-answer session. The call will focus on the company's fourth quarter and fiscal year 2023 earnings. The team will discuss how sales for fiscal 2023 were down 3% from the previous year.

In 2023, the company experienced a decline in sales and earnings compared to the previous year, but also focused on operational improvements and growth opportunities. They invested in their associates, managed disinflation, improved inventory productivity, and reduced fixed costs. This included a $1 billion investment in increased compensation for frontline hourly associates. They also navigated a unique disinflationary environment and improved their inventory position heading into 2024.

In order to increase productivity and efficiency, Home Depot has committed to reducing fixed costs by $500 million by 2024. They have made a strategic acquisition of Construction Resources to expand their product offering for Pro contractors. They are also working on new capabilities for the complex Pro market, including expanding assortments, fulfillment options, and sales force, and piloting trade credit and order management. Home Depot is confident in their business and their future prospects.

The speaker is pleased with the company's performance and is focused on three strategic opportunities: creating a better interconnected experience, growing Pro wallet share, and building new stores. They are working on improving the post-sale experience and have made progress with online order management and self-service returns. In the future, they plan to enhance the returns process to allow for self-service returns and gain efficiencies in transaction time and inventory management.

The Home Depot has improved customer service by allowing customers to start and complete returns in their preferred way. They plan to open 80 new stores in the next five years, strategically locating them in areas with high population growth or to relieve pressure on existing stores. In fiscal 2023, they opened 13 new stores and plan to open 12 more in fiscal 2024. They also have initiatives in place to better serve and increase their share of wallet with professional customers. These investments in new assets and capabilities also improve the Pro experience in their stores.

The company's strategic initiatives, including increased delivery orders fulfilled from distribution centers, have resulted in less congestion in stores, more time for in-store Pro sales associates to focus on customers, and improved product availability. The company also invested in increased compensation for associates, leading to improved customer service, productivity, and safety. Sales in the fourth quarter were largely in line with expectations, but were impacted by unfavorable weather and core commodity deflation. Customers are still deferring larger projects and focusing on smaller ones.

In the fourth quarter, our building materials and outdoor garden departments had positive comps, and 6 of our 12 other departments had above-average comps. However, our comp transactions and average ticket decreased due to deflation in core commodity categories. Lumber prices remained stable during the quarter. Big ticket comp transactions were down, especially in discretionary categories like flooring and cabinets. Pro and DIY customer performance was similar, with Pro backlogs remaining stable and elevated. Total company online sales increased by 2%.

The company is continuously improving their digital customer experience with new features such as enhanced browsing and product discovery zones. They saw strong engagement during their annual holiday events and have made significant progress in inventory management. The company is well-positioned for the upcoming spring selling season with a great lineup of new and innovative products. They are expanding their offering of Pro outdoor tools and have a wide variety of cordless technology products exclusive to the Home Depot. They also have a strong live goods program with new and improved varieties from national and regional growers.

The Home Depot has invested in partnerships with growers to bring new, improved products to their customers. Despite a decrease in sales in the fourth quarter, the company remains committed to providing a wide range of high-quality products and improving the shopping experience for customers. Expenses also increased during this time period.

The company's operating expenses increased due to compensation increases and decreased sales in the fourth quarter. The operating margin for the year was 14.2%. Interest and other expenses also increased. Diluted earnings per share decreased for both the fourth quarter and fiscal 2023. Inventory levels decreased and capital expenditures were invested back into the business. The company opened 13 new stores and made three acquisitions. Dividends were paid to shareholders and the quarterly dividend was increased by 7.7%.

In fiscal 2023, the company returned $8 billion to shareholders through share repurchases and saw a return on invested capital of 36.7%. The outlook for fiscal 2024 includes a 53rd week and while the economy is showing signs of normalization, the home improvement market still faces challenges. Factors influencing the outlook include positive factors such as no repeat of pressures from fiscal 2023, but also potential pressures such as decelerating personal consumption growth, elevated share of PCE, higher interest rates, and potential impact from pandemic-related demand and project deferrals.

The company is predicting a moderate demand for home improvement in fiscal year 2024, with total sales growth of 1% and a decrease in comp sales of 1%. The 53rd week and acquisitions will contribute to total sales growth. Gross margin is expected to increase due to lower product and transportation costs, as well as reduced fixed costs. Operating margin will be affected by sales and targeted incentive compensation. The company plans to continue investing in the business and return excess cash to shareholders through share repurchases.

The company believes it is well-positioned to meet customer needs and will continue to invest in their business to drive growth and shareholder value. They expect a negative 1% comp due to macro pressures, but believe they will outperform the market. This is a combination of industry trends, market share gains, and improved consumer behavior. While there are still some headwinds, they are not as significant as in the previous year.

The company's customers are currently more cautious about spending on large projects, possibly due to a trend of deferred spending and a recent period of increased spending. The housing market is also uncertain, with home values holding steady but turnover decreasing. The company expects to maintain its market share through various growth initiatives, leading to a projected negative 1% comp outlook. Lumber prices are not expected to have a significant impact on the company's performance in 2024. The company anticipates a normal seasonal curve and a slightly better second half compared to the first half. In 2023, the halves were relatively similar in terms of performance.

During a recent earnings call, Zachary Fadem asked Edward Decker about the trends in the industry for professional versus DIY customers and their potential for share gain. Decker stated that in Q4, these segments were performing similarly and that the managed account customer who is engaging in their ecosystem was the highest performing segment. They expect this to continue in 2024. When asked about the disinflationary price environment, William Bastek stated that it is factored into their forward-looking guidance and that they have not seen any significant changes in promotional activity compared to pre-pandemic levels. He also mentioned that they are in a solid marketplace and are looking forward to 2024. The next question from Chris Horvers asked about the share of wallet and what they learned over the holiday season.

The speaker, Edward Decker, mentions that there are signs of life in the retail sector, despite some macro factors affecting the market. He notes that the consumer is healthy and engaged, but mainly in smaller projects. However, there was strong engagement in categories such as holiday decor, gift center, and live goods. The company also saw record sales in totes during their storage event. While there was a decline in bigger ticket items, the appliance business was a strong performer due to their integration with the TEMCO acquisition and their online shopping experience.

Christopher Horvers asked about the gross margin decline in the fourth quarter and whether the legal gain in the first quarter of last year would have an effect on 2024. Richard McPhail responded that the gross margin was in line with expectations and attributed the decline to pricing actions and cost decreases. He also mentioned that the legal settlement in the first quarter of last year had a geography shift impact on year-over-year comparisons, but it was offset by short-term costs that set the company up for lower costs in the future. Scott Ciccarelli from Truist asked the next question.

During an earnings call, Scott Ciccarelli asks about the potential benefit or accretion from the company's complex Pro build-out and the expected margin drag from incentive comp in 2024. Edward Decker explains that the improvements in the complex Pro segment are factored into the guidance for comp sales and overall sales. Richard McPhail adds that the largest driver of deleverage is sales growth, with operating cost inflation outpacing sales growth. Ciccarelli asks for further clarification on the potential impact of managed accounts and expanding capabilities, but Decker states that they cannot provide specific details. Chuck Grom asks about the company's monitoring of regions and product categories to determine if demand for home improvement will bottom out in the next few years.

Richard McPhail and Charles Grom discuss the stability and recovery of transactions and units in the home improvement market over the last three quarters. They define a healthy market as one where both ticket and transaction are positive, which has been the case recently. However, the macro pressure continues to negatively impact both metrics. They also mention that there are no significant differences in recovery across different geographic regions. In terms of comp, Richard states that the natural rule of leverage or deleverage is about 10 basis points per point of comp up or down. Michael Lasser asks about the potential for a different recovery in the home improvement market compared to previous downturns, but Edward Decker believes the market segment remains strong.

The speaker discusses the current state of the housing market, highlighting factors such as home price appreciation, increasing home equity, and a shortage of homes. They also mention the potential for growth due to untapped equity and the upcoming prime homeownership age for millennials. They compare the pandemic to a hurricane and express optimism for the future of the market.

The speaker expresses satisfaction with the accomplishments of the management team and store associates in navigating the challenges of the pandemic. They are confident in their operational position and plan to continue investing in their strategic goals. In response to a question about margin expansion, the speaker mentions a rule of thumb of 10 basis points for every 1 point of comp, but notes that this is theoretical and may not move in a linear fashion. They also mention taking actions to improve margin expansion over time.

In the future, the principles of productivity and efficiency will continue to be important for our business model. Our team's hard work and use of AI tools contribute to our normal operating leverage. We aim to leverage OpEx at a certain point of sales growth and have financial flexibility in our P&L. We have reduced fixed costs and have levers to pull if needed. Our central case for 2024 has been provided, but we will manage the business with the best interest of our long-term shareholders in mind. On the topic of macro and margins, the company has taken into account various factors in their forecasts.

The speaker discusses the factors that will contribute to comps (comparable sales) returning to positive in the housing market. They mention the impact of lower housing turnover in the last two years and the lag effect it may have on home improvement projects. They also mention the Fed's stance on interest rates and predict a slight moderation in the housing market continuing into 2024.

The speaker discusses the strength of the company's back half and their optimistic outlook for the future. They also mention the sensitivity of EBIT margins and provide guidance for SG&A growth, noting that there may be noise in operating expenses due to various factors. They encourage analysts to use the provided gross margin and operating margin as a basis for modeling. The final question is about the complex Pro and the call ends.

The speaker appreciates the comments on trade credit being piloted and asks for more information on the early learnings and how it will contribute to growth. The speaker mentions that HD Supply already does trade credit and that they are in the early stages of implementing it. The speaker then hands it over to Chip, who explains that trade credit is necessary for complex projects and they are currently piloting it with plans to expand in the future. The operator then concludes the call.

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