The operator introduces the Home Depot Second Quarter 2024 Earnings Conference Call and reminds participants of the format and recording. Isabel Janci, the host, introduces the executives and reminds listeners that the call will include forward-looking statements and non-GAAP measures. She then hands the call over to Ted Decker, the Chair, President, and CEO.

In the second quarter, sales for the company increased by 0.6%, including the impact of the recently closed SRS acquisition. However, comp sales declined by 3.3% due to higher interest rates and macroeconomic uncertainty affecting consumer demand. The company is adjusting its sales outlook for the year to reflect this caution. Despite these challenges, the company remains focused on serving customers and has potential for growth in the large home improvement market.

The Home Depot has been investing in creating a better experience for Pro customers and recently acquired SRS Distribution. SRS has shown strong growth and the company plans to leverage their assets and capabilities for further growth. The home improvement market remains strong and Home Depot is gaining share of wallet with customers through various channels. The company's teams and supplier partners have been performing well and are dedicated to serving customers.

The company is focused on providing a top-notch shopping experience for all customers, especially for Pro customers. They have invested in tools like Sidekick and Computer Vision to improve in-stock and on-shelf availability, which has led to a convenient and fast shopping experience. They have also enhanced tools for associates, such as MyView and Pipeline Management, to better understand and serve customers. Additionally, the company has expanded its capabilities in 17 markets to grow share of wallet for complex project purchases.

The company's trade credit pilot program and order management system are showing promising results. The company is also focused on providing excellent customer service and has strong store readiness and execution. The second quarter was impacted by higher interest rates and a softer spring selling season, leading to a decrease in comp transactions and average ticket. However, there were positive comps in the plumbing department and above average performance in power, building materials, appliances, and paint. Customers are trading up for new and innovative products, but big ticket transactions over $1,000 were down compared to last year.

In the second quarter, there was a decrease in engagement in larger discretionary projects, but positive growth was seen with Pro customers who engage in the Pro Extra program and use the B2B website. Online sales increased and nearly half of online orders were fulfilled through stores. The company also expanded their partnership with Instacart. They focused on products and projects that resonated with customers, such as upgrading the durability of Lifeproof Vinyl Plank and simplifying their value proposition for water heaters. Investments in paint products and fulfillment options led to continued share gains in the quarter.

The company has seen success in their outdoor power equipment categories, thanks to their battery-powered platforms. They will continue to focus on providing value and a broad assortment of products for their customers. They are launching a new smart glass door with Feather River, which can switch from privacy to clear with the push of a button. They are also expanding their partnership with Milwaukee and offering a broader assortment of Made in the USA tools. In the second quarter, total sales increased by 0.6% to $43.2 billion.

In the second quarter, the company's total sales were $1.3 billion, including sales from the recent acquisition of SRS. Total company comps were negative 3.3%, with the U.S. comps at negative 3.6%. Gross margin increased by 40 basis points due to lower transportation costs and shrink, but was partially offset by the SRS acquisition. Operating expenses as a percent of sales increased by 65 basis points. The company also provided non-GAAP measures to help investors better understand their performance. The operating margin for the quarter was 15.1%, but excluding intangible asset amortization, it was 15.3%. Interest and other expense increased due to higher debt balances. The effective tax rate for the quarter was 24.5%.

In the second quarter, the company's diluted earnings per share decreased by 1% compared to the same quarter in 2023. However, excluding intangible asset amortization, adjusted diluted earnings per share remained flat. The company opened three new stores during the quarter, bringing the total store count to 2,340. Merchandise inventories decreased by $200 million and inventory turns improved. The company invested $720 million in capital expenditures and paid $2.2 billion in dividends. Their approach to capital allocation remains disciplined, with a focus on investing in the business and returning excess cash to shareholders. Return on invested capital was 31.9%, down from the previous year. Due to weaker performance and uncertainty in consumer demand, the company has a more cautious outlook for the fiscal year, which now includes the results of the recently acquired SRS.

The company expects SRS, their recent acquisition, to contribute to sales and earnings growth in the next few years. They have updated their fiscal 2024 guidance to reflect the impact of the acquisition and a 53rd week. They expect a decline in comparable sales, but believe they are well-positioned to meet customer needs in any environment.

The speaker discusses how the company's investments have allowed them to be more flexible in their operations. They plan to continue investing to strengthen their position with customers and drive growth. They thank the participants and are ready for questions. The first question is about the shift towards consumer weakness and the speaker explains that there has been a decrease in larger projects due to pressure in building materials and lumber categories. This has led to increased hesitancy in project-oriented purchases.

The speaker discusses the changes that have occurred over the quarter, including a shift in spending from goods to services, the impact of higher interest rates on the housing market, and a broader concern with the macro economy. They also mention the performance of different channels, such as core Home Depot retail and HD Supply, and the trends seen in SRS.

Richard McPhail and Ted Decker discuss the diversity of The Home Depot's business and their strong track record in various segments, including HD Supply and SRS. They are proud of their performance and expect continued growth, even with the challenges of the current market. They will not be breaking out operating segments, but feel confident in their MRO, roofing, pool, and landscape businesses compared to other publicly traded companies.

In the paragraph, Home Depot's performance is discussed, with a focus on the widening gap in certain categories. The company is facing pressure in finance projects due to uncertainty in interest rates, but has seen strong performance in categories such as vinyl plank, water heaters, paint, and power equipment. The question is then asked about the level at which the 30-year fixed rate mortgage needs to fall in order to drive Home Depot's business higher.

Ted Decker discusses the decrease in mortgage rates and its impact on housing activity. He mentions that rates have recently spiked back up, but as they trend down towards 6%, they would expect to see more activity. He also mentions the "golden handcuff" effect of low mortgage rates and how it may delay some people from entering the housing market. Michael Lasser asks if Home Depot would consider investing in price or value to gain market share during the downturn.

Billy Bastek and Richard McPhail of Home Depot discuss the company's updated gross margin guidance and the influence of SRS on this line item. They state that while the home improvement sector is facing some pressure, they are not planning on increasing promotional activity and instead will focus on driving innovation and value for customers. They also mention the success of their proprietary brands. McPhail then broadens the discussion to include SRS and how it is one of the accelerants that could push the company towards accelerated growth in sales and earnings.

The objective of acquiring SRS is to increase sales, operating profit, and EPS growth. The acquisition has already had a positive impact on the company's sales and operating profit, and is expected to be cash EPS accretive in the first 12 months of ownership. SRS has a different product mix than Home Depot, with 2/3 of their products being roofing and the remaining 1/3 in pool and landscape. This has resulted in a 35 basis point impact on gross margin and a reset of the company's margin profile by 45 basis points. The impact on operating margin is also significant and should be considered in the context of gross margin.

The speaker discusses the impact of adding SRS to their mix, which lowers their base operating margin by 30 basis points in Q2 and 40 basis points for the full year of 2024. They also mention exceptional performances in gross margin, thanks to transportation benefits and a decrease in shrink. The speaker then addresses reversion, noting that while transactions were flat to down, ticket sales were up due to inflation and the number of items in consumer baskets.

Ted Decker, responding to a question about inflation, says that there are no signs of product prices changing in the channel. He explains that the company has predicted a slight decrease in AUR (average unit retail) in the first half of the year, but this is due to lapping the cost and retail moves from last year. There is not much activity in terms of cost or retail changes, and the company remains committed to its EDLP (everyday low price) strategy. Decker also mentions that labor and transportation costs have increased in recent years, but there is no indication that they will decrease in the near future.

The cost structure of the company has increased due to labor costs, but the marketplace is not seeing a significant decrease in prices. The company has outperformed expectations in cost of goods sold and has managed expenses well, resulting in a favorable year-to-date performance. Despite a negative 3% comp, the company is still guiding for an operating margin of 14%, compared to the original guidance of 14.1%. SRS is not included in this discussion.

The speaker explains that the company has achieved a core 14% operating margin despite a negative 3% comp. This is due to investments made and a mix shift of 40 basis points when including SRS. The company expects to report an adjusted operating margin of 13.9% for the year. SRS has seen high single-digit revenue growth, split evenly between organic growth and acquisitions. The company plans to continue supporting SRS's balanced growth strategy in the future. SRS is not included in the company's comp base.

The paragraph discusses the impact of consumer deferral of home improvement projects on the company's comp sales guidance. The company expects these deferred projects to become comp sales once they have been owned for 12 months. The question is raised about the possibility of an increase in deferrals as interest rates decrease, and the company's response is that there is a direct relationship between lower mortgage rates and an increase in home improvement activity. The company remains bullish on the future and has invested in its business to prepare for it. The questioner asks about a slowdown in July compared to June, and the company attributes it to the growing trend of deferring projects.

The company experienced a decline in sales due to extreme heat in July, which affected sales in categories such as air conditioners and fans. However, the month of August has started off better than July, and the company is still aiming for a negative 3% comp. The company has recently made a large acquisition and will continue to look for opportunities to fill in geographies and segments.

The company plans to continue using M&A for growth opportunities, but will not make any large acquisitions after the recent significant transaction with SRS. The Pro segment outperformed the DIY segment in the quarter, and the company is investing in markets and expanding its outside sales team to better serve the Pro market. The company expects positive growth in all markets and plans to continue investing in them. The return timeline for buybacks and the impact of SRS on long-term structural margins were also discussed.

The speaker discusses the company's high watermark in recovery over time and mentions their intent to delever before restarting share repurchases, likely sometime in 2026. They also mention their expectation of generating operating leverage and delivering profitability. The final question from an analyst is about the growth of the SRS business and the breakdown of their 50-50 growth between comp and acquisitions. The speaker also provides an update on the branch count and the capital spending needs for both greenfield and acquisition expansion.

This paragraph discusses the capital light nature of SRS Distribution's operations, particularly in their greenfield operations and infill acquisitions. These operations are quickly profitable and have a track record of doubling EBITDA in the first three years of ownership. The company has recently closed on a small pool deal and has a few more under LOIs. The amortization expense for Home Depot last year was $186 million. SRS Distribution has about 775 branches and their growth profile has been steadily increasing.

The company has recently opened over 20 branches and is focused on growth. The conference call is now over and the participants are thanked for joining. The next call will be in November for the third quarter earnings. The operator ends the call.

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