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The Home Depot (NYSE:HD)

Q4 2010 Earnings Call

February 22, 2011 9:00 am ET

Executives

Diane Dayhoff - Senior Vice President of Investor Relations

Carol Tomé - Chief Financial Officer, Principal Accounting Officer and Executive Vice President of Corporate Services

Craig Menear - Executive Vice President of Merchandising

Marvin Ellison - Executive Vice President of U S Stores

Francis Blake - Executive Chairman and Chief Executive Officer

Analysts

Alan Rifkin - BofA Merrill Lynch

Gregory Melich - ISI Group Inc.

Colin McGranahan - Bernstein Research

Michael Lasser - Barclays Capital

Peter Benedict - Robert W. Baird & Co. Incorporated

Matthew Fassler - Goldman Sachs Group Inc.

Deborah Weinswig - Citigroup Inc

Stephen Chick - FBR Capital Markets & Co.

Wayne Hood - BMO Capital Markets U.S.

Christopher Horvers - JP Morgan Chase & Co

David Schick

Brian Nagel - Oppenheimer & Co. Inc.

Laura Champine - Cowen and Company, LLC

Operator

Good day, everyone, and welcome to today's Home Depot Fourth Quarter 2010 Earnings Conference Call. [Operator Instructions] Beginning today's discussion is Ms. Diane Dayhoff, Vice President of Investor Relations. Please go ahead.

Diane Dayhoff

Thank you, Cindy, and good morning to everyone. Joining us on our call today are Frank Blake, Chairman and CEO of The Home Depot; Craig Menear, Executive Vice President, Merchandising; and Carol Tome, Chief Financial Officer and Executive Vice President, Corporate Services.

Following our prepared remarks, the call will be open for analyst questions. Questions will be limited to analysts and investors. And as a reminder, we would appreciate it if the participants would limit themselves to one question with one follow-up, please. This conference call is being broadcast real time on the Internet at earnings.homedepot.com. The replay will also be available on our site. If we are unable to get to your question during the call, please call our Investor Relations Department at (770) 384-2387.

Now before I turn the call over to Frank, let me remind you that today's press release and the presentations made by our executives include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties. These risks and uncertainties include, but are not limited to, those factors identified in the release and in our filings with the Securities and Exchange Commission. Today's presentations also include certain non-GAAP measurements. Reconciliation of these measurements is provided in the financial statements included with our earnings release.

Now let me turn the call over to Frank Blake.

Francis Blake

Thank you, Diane, and good morning, everyone. Sales for the fourth quarter were $15.1 billion, up 3.8% from last year. Diluted earnings per share were $0.36. As Carol will detail, fourth quarter comp sales were positive, 3.9% for the company and 4.8% for the U.S. We saw strength across the U.S. as 49 of 50 states positively comped. The states that have been the most impacted by the housing crisis, specifically Florida and California, performed in line with the company's overall performance in the U.S. So while they're not leading us out of the downturn, they are at least no longer an anchor. The markets with under performance to the company average in the fourth quarter tended to be those with significant weather impacts during the quarter and particularly January, such as in the Northeast.

Last quarter, we mentioned that we were seeing a tighter range of performance across our top markets. That continued to be the case in the fourth quarter. So the overall picture is one of a stabilizing business. This is a source of some confidence for 2011 because it's occurring despite the continued weakness of the housing markets. Private fixed residential investment as a percent of GDP remained near its 60-year low at 2.25%. We still look at this measure to help understand the pressures in the housing market and the fact that our performance has disconnected from it suggests that our business is stabilizing and can improve even as the housing market remains under stress.

Operationally, we continue to make progress with our customer service initiatives. We've completed the rollout of our First Phone. And Marvin Ellison and his team ended the year with 51% of store payroll allocated to customer-facing activities. Since we've started measuring our labor allocation, this is the first time we've crossed the threshold of having more hours dedicated to customer-facing activity than tasking activity. We have a target of a 60:40 ratio and we believe we'll achieve that by 2013. As we drive this re-allocation, we are seeing ongoing improvement in our Net Promoter Score, which is up 450 basis points year-over-year and is now over 73%.

We achieved another significant milestone in the fourth quarter. We opened our 19th Rapid Deployment Center. This completes our RDC buildout, at least for the next several years. Restructuring the supply chain of a business as large as Home Depot in just three years is an enormous undertaking that touched almost every part of the company and required the work and dedication of the entire team, but Mark Holifield and his supply chain team merit particular recognition. We now have ahead of us continued opportunities to improve the RDCs themselves, as well as the rest of the supply chain, particularly our stocking facilities.

For the quarter, as Craig will detail, we had a very successful holiday selling season. We saw a continued growth in transactions, and we also saw an uptick in our average ticket, with strong performance in kitchens and appliances.

Over the course of 2010, we made significant improvements in our merchandising systems, predominantly focused on our in-stock product and processes. For 2011, that will continue, but we will also intensify our focus on our special order product and processes. This has been an area of historic underperformance for the company. We know we have to make it easier for our customers to buy non-stock items, and Matt Carey and his IT team along with our dot com merchandising [ph] and operational teams will be making this a priority. We will be digitizing our catalogs, upgrading our special order systems within our stores, restructuring our SKUs to accommodate shopping for coordinated items and continuing to improve the connectivity between our digital presence and our bricks-and-mortar presence.

On the international side of our business, Mexico continues to perform well, with positive comps for the 29th quarter in a row. Canada had negative comps for the quarter, as they lapped last year's dramatic increase in sales, driven by the expiration of the Home Renovation Tax Credit.

In 2011, our U.S. businesses will be lapping the expiration of a series of 2010 tax incentives: the new homeowner tax credit, the Cash for Clunkers appliance credit and the $1,500 energy tax credit. But we believe the growth in GDP and improving consumer sentiment will continue to lift our business in 2011.

For the year, we are anticipating approximately 2.5% sales growth and 9.5% growth in earnings per share. We have some difficult comparisons in the first quarter, but we expect each quarter to show positive growth, with sales momentum gaining in the back half.

We continue to focus on disciplined capital allocation and increasing shareholder return, as we have laid out for you in the past. And our intent is to increase our dividend every year. So today, the Board of Directors and I are pleased to announce that we are increasing the quarterly dividend, 6% to $0.25. We will continue to use excess cash to repurchase our shares.

The hard work and dedication of our associates will make the difference in 2011 as they did in 2010. We're very proud that 93% of our stores qualified for success sharing for the back half of 2010.

And now let me turn the call over to Craig.

Craig Menear

Thanks, Frank, and good morning, everyone.

Looking at our fourth quarter results, we are pleased that the focus areas we shared with you on our last earnings call met or exceeded our expectations during the quarter. We saw excellent results from our gift centers, seasonal and Black Friday offerings and new product launches.

The fourth quarter represented our fifth quarter in a row of positive comp growth. We saw positive comps in nine departments during the quarter, and we were pleased with the comp improvement we saw in the U.S. from the third to the fourth quarter. The departments that outperformed the company's average comp were kitchens, outdoor garden, indoor garden, electrical and tools.

As I mentioned going into the fourth quarter, we leaned into the holiday season and increased our buys. The outstanding values in our gift centers, as well as our incredible Black Friday line-up, led to a very strong November. In fact, the tremendous response by our customers to our Appliance values led to double-digit positive comps for Appliances in the month of November. The expiration of a tax credit in the U.S., for the purchase of energy-efficient windows, doors, skylights, drove increased sales in Millwork and home services during the first two months of the quarter as customers made purchases ahead of December's 31 deadline.

We also saw a continued strength in our gift centers and our decorative holiday categories throughout the month of December. While January was impacted by heavy snow and ice, we are well positioned to respond in weather-related categories. Our teams executed extremely well, leveraging our supply chain capabilities to position product for our customers. As a result, we saw a double-digit positive comps in Power Snow Removal Equipment, chemicals and Snow Tool categories.

As we shared with you previously, our focus over the past few years has been to restore the competitive position of Home Depot and to drive everyday great values for our customers. As a result of this effort, we have seen improved customer transactions for the past five quarters, and our overall company comp transactions were up 1.3% in the fourth quarter.

Total company average ticket was up 2.6% or $1.30 to $51.31 for the quarter. Transactions for tickets under $50, roughly 20% of our business in the U.S., were up 1.8% year-over-year. Transactions for tickets of $900 and above, also approximately 20% of the U.S. sales, were up 9.6% in the fourth quarter certainly contributing to our overall company ticket performance.

Drivers of this big-ticket increase included the sales of Appliances, Millwork, Windows and HVAC. While customers responded to the great values we offered in the quarter and took advantage of tax credits, we believe they still remain cautious on making big-ticket investments in their homes.

During the fourth quarter, we saw some commodity price inflation. In the last 45 days, we have seen a number of requests from vendors for price increases as a result of elevated raw material costs. We review each of these requests on an individual basis, and our portfolio strategy drives our go-to-market actions as it has done for the past several years.

The ongoing development of our assortment and value offerings for our customers through the implementation of our merchandising transformation continues to pay off through market share growth. As of December, according to the NAICS 4441 U.S. Census data, we gained 19 basis points of market share on a rolling 12-month basis. Additionally, based on an independent third party tracking of consumer activity, we gained unit share in seven out of 13 departments during the fourth quarter, including building materials, tools and hardware, plumbing, electrical, indoor garden, outdoor garden and appliances.

As we've look to 2011, we are well positioned to drive both sales and transactions. We kicked off the new year with great values on several interior projects, including bath remodels and paint. We are currently offering round two of our outstanding event called Vanity Insanity, and we are seeing terrific project selling from our associates, as well as great overall results from the event.

In our paint category, we're excited about the fact that a third-party leading consumer publication recently ranked our BEHR Premium Plus Ultra paint as its best buy across all dominant sheens for the second year in a row. Our BEHR Premium Plus and Glidden brands were also ranked highly across all sheens, reinforcing the fact that we have an incredibly strong offering for our customers in the DIY paint space.

We also continue to focus on innovation and services for our professional customers. At the most recent builder's show in January, BEHR announced the introduction of KILZ PRO-X, a product line designed with a professional paint contractor in mind to be available exclusively at all Home Depot stores by the end of the first quarter of 2011.

The entire KILZ PRO-X line has been formulated to optimize spray, roll and brush application, along with performance features, including superior hide and coverage and touch-up capabilities, allowing our professional painters to save time and money. As we roll out KILZ PRO-X, we are also implementing new POS enhancements that allow us to better serve this customer segment.

In addition, we are rolling out a new line of Milwaukee Red Lithium tools powered by the leading lithium technology available. These tools deliver 40% longer run time and 20% more torque than products powered by current lithium technology, in addition to providing superior performance in cold weather conditions.

And finally, we have a lineup of some incredible special buys and innovative new products for our outdoor categories during the 2011 spring selling season. We will kick off the spring season with an outstanding Spring Black Friday event. Spring Black Friday will include some of our most popular outdoor categories, such as live goods, lawn care, outdoor power, eco-friendly gardening products, patio and grills. And in addition to our Spring Black Friday event, we'll also be introducing several great products for our customers' outdoor projects, such as Armor Guard decking, an expansion of our green garden chemical products by both BEHR and Ortho, a new lineup of tractors from John Deere, and continuing innovation in cordless garden tools building on the benefits of lithium technology.

We're excited about these new product rollouts for 2011, and we feel confident that our customers will recognize and respond to the great values being offered at The Home Depot this spring.

And with that, I'd like to turn the call over to Carol.

Carol Tomé

Thank you, Craig, and hello, everyone.

We exceeded the guidance we gave you at the beginning of December due to stronger-than-anticipated sales growth and a couple of expense goodbyes. In the fourth quarter, sales were $15.1 billion, a 3.8% increase from last year. Comps or same-store sales were positive 3.9% for the quarter, with positive comps of 7.5% in November, positive 5.1% in December and negative 0.7% in January. Comps for U.S. stores were positive 4.8% for the quarter, with positive comps of 8% in November, positive 5.8% in December and positive 0.7% in January. For the year, our sales increased 2.8% to $68 billion. Total company comp sales were positive 2.9% for fiscal 2010, and comps for U.S. stores were positive 2.5%.

Our gross margin was 34.7% for the quarter, an increase of 25 basis points from last year. Our U.S. business contributed 24 basis points of margin expansion in the quarter, principally because we had lower levels of clearance inventory in our stores. Clearance inventory is down 32% from one year ago, and our inventory has never been in better shape.

For the year, we experienced 40 basis points of gross margin expansion.

Turning to operating expenses. In the fourth quarter, operating expenses as a percent of sales decreased by 161 basis points to 27.8%, and total operating expense dollars were $80 million less than last year. Our expense leverage was primarily the result of positive same-store sales, but also reflects the following significant items. First, depreciation expense was $18 million under last year due to a lower asset base arising from fully depreciated assets. Second, we saw a $24 million year-over-year expense benefit due to a lower-than-anticipated cost of private label credit. And third, management bonuses were $34 million less than last year. Relative to our financial plan, we had a good year but not as good as what we experienced in 2009.

Finally, we did incur some expense associated with the announcement of six-store closings in the quarter. But that expense was about the same as the expense we incurred last year for similar actions.

For fiscal 2010, operating expenses as a percent of sales was 25.7%, a decrease of 93 basis points from last year. As detailed in our press release, we had some charges associated with HD Supply and our business rationalization in 2009 and 2010. Adjusting for those charges, we leveraged operating expenses by 75 basis points for the year.

As we discussed, we've experienced great expense control due to the introduction of new tool. During the year, we also recognized some one-time expense benefits, totaling about $70 million that we do not believe will repeat in 2011.

In the fourth quarter, interest and other expense was $87 million. On an adjusted basis, interest was down $71 million from last year due primarily to the following factors: First, we had an unexpected $44 million benefit related to favorable IRS guidance and the corresponding reversal of an interest accrual; second, the cost of outstanding indebtedness was lower than last year; and third, we had some interest benefit arising from certain state tax settlement. For the year, interest and other expense totaled $566 million.

Our income tax provision rate was 38.2% in the fourth quarter and 36.7% for the year. Earnings per share from continuing operations for the fourth quarter were $0.36, an increase of 100% from last year. On an adjusted basis, earnings per share from continuing operations increased 50%.

For the year, earnings per share from continuing operations were $2.01, up 29.7% from fiscal 2009. On an adjusted basis, earnings per share from continuing operations increased 22.3% to $2.03 compared to last year's adjusted earnings per share from continuing operations of $1.66.

Now moving to our operational metrics. During the fourth quarter, we opened five new stores and closed one store in China for an ending store count of 2,248. At the end of the year, selling square footage was 235 million, flat to last year.

Reflecting the sales environment, total sales per square foot for the fourth quarter were $255, up 4.3% from last year. For fiscal 2010, sales per square foot were $289, up 3.5% from fiscal 2009.

Now turning to the balance sheet. At the end of the year, inventory was $10.6 billion, up $437 million from a year ago. This reflects higher sales level, as well as a pull forward of certain spring inventory buys. Inventory turns were 4.13x, up from 4.06x last year.

In the fourth quarter, we repurchased $600 million or 17.6 million shares of outstanding stock. We ended the year with $40.1 billion in assets, including $545 million in cash. For the year, this reflects cash generated by the business of approximately $4.4 billion, offset by $2.6 billion used for share repurchases, $1.6 billion used for dividends and $1.1 billion of capital expenditures.

Computed on the average of beginning and ending long-term debt and equity for the trailing four quarters, return on invested capital was 12.8%, 213 basis points higher than the fourth quarter of fiscal 2009.

Now as we look to 2011, we expect another year of sales growth, in line with the U.S. GDP growth expectations. We detailed our guidance in our press release, so let me just hit the high points.

First, let me remind you that we guide off of GAAP. For the year, we project that our sales will increase by approximately 2.5%, with low single-digit same-store sales growth. We plan to open 10 stores in 2011, two in the U.S., one in Canada and seven in Mexico. We expect sales growth to be stronger in the second half than in the first half of the year, with growth rates fairly similar to what we reported in the U.S. for fiscal 2010.

We are planning positive same-store sales growth in every quarter, but we expect the first quarter to be our lowest comping quarter, given the timing of spring's arrival last year and tough year-over-year commodity price comparisons. For fiscal 2011, we expect earnings per share from continuing operations to increase by approximately 9.5% to $2.20. Included in our earnings per share guidance is operating margin expansion of approximately 40 basis points, arising from gross margin expansion and modest expense leverage.

As I mentioned at our December investor conference, we expect some discrete cost pressures in 2011, and we have some operating expense benefit in 2010 that won't repeat. So we anticipate operating expenses will grow at approximately 70% of our sales growth rate for the year. Given year-over-year expense comparison, we project that our earnings growth will be stronger in the first half of the year than in the back half of the year.

For fiscal 2011, we project cash flow from the business of roughly $5.7 billion. This forecast assumes we refinance $1 billion of senior notes that come due in March. We will use our cash to invest in our business and return capital to shareholders.

Our 2011 capital spending plan is $1.35 billion, reflecting $585 million for our existing U.S. stores and supply chain, $370 million for IT, $300 million for new stores and $95 million for our non-U.S. businesses.

We just announced a 6% increase in our annual cash dividend to $1 per share, and we'll use cash to fund our dividend, which for the year approximate $1.6 billion. This leaves approximately $2.5 billion of excess cash, which we intend to use for share repurchases. Depending on the timing of our repurchases, we should see some earnings per share benefit arising from this activity in 2011. Assuming we repurchase the shares ratably over the course of 2011, we expect our earnings per share growth from continuing operations to be approximately 12% for the year.

So we thank you for your participation in today's call. And Cindy, we are now ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Brian Nagel with Oppenheimer.

Brian Nagel - Oppenheimer & Co. Inc.

I wanted to ask the first question about weather. In your prepared comments, you addressed the weather in January and we've heard from a lot of other retailers talking about weather, and you gave us the progression of comps through the quarter. So I guess the question I have is as you look at the weather in the markets, was it overall positive or negative? And then to what extent other way?

Francis Blake

Well, so if you went through the monthly comps that Carol set out, for the months with strong positive comps, November and December, I wouldn't say that, that was because of weather. Or unless you want to put it -- well, there wasn't weather that stopped people from being able to get to the stores. I mean that was really the weather issue in January was I mean, for example, here in Atlanta, I mean the city was shut down for almost a week. So I'd say if you look at it from that perspective, weather was more of a negative for us.

Brian Nagel - Oppenheimer & Co. Inc.

And the second question I had with respect to the ticket information you gave in the press release. We saw a nice uptick there, and again if my math is correct, it looks like one of the strongest growth in ticket in a few years. As you look at that, you think that was more reflective of something particular fourth quarter? Or was that something that's more reflective of an underlying trend in the business as something we could carry forward as we look into 2011?

Francis Blake

The key drivers of ticket in the quarter were obviously growth in categories like Millwork, HVAC, some of the categories that actually benefited from the tax credit, as well as a terrific response from our customers on our appliance offerings that we had as part of our Black Friday event, and a follow-up performance in our kitchen business overall.

Carol Tomé

As we built our plan for 2011, we assumed more growth would come from transactions in the first half of the year and more from ticket in the back half of the year.

Operator

We'll take our next question from Peter Benedict with Robert Baird.

Peter Benedict - Robert W. Baird & Co. Incorporated

Craig, you mentioned kind of some of your plans for the spring, specifically interested in the outdoor power equipment category. How do you plan that category going forward, the riding mowers? And what are your forecasts telling you in terms of the timing of spring, because I think spring was real early last year. When do you guys expect that to kind of set in?

Craig Menear

Peter, we did have an early spring last year, which was a very nice benefit in Q1. I think this year, if you buy into the forecasts it's more of a normalized spring this year. And so we actually anticipate that it provides a little bit of headwind in the first quarter. And then we're excited about our overall outdoor power equipment lineup for this year, excited about the value propositions that we have in Riding Mowers and Walk Behind Mowers. We have an outstanding program in walks. And then as I mentioned, we're expanding with some new product in outdoor power as it relates to continued expansion of lithium, which did very well for us last year. So looking forward to the spring selling season.

Peter Benedict - Robert W. Baird & Co. Incorporated

And one quick follow-up. On the international comp trend, when should we expect kind of a turnaround and particularly in Canada? Are you guys expecting that to be positive next year? And if so, when do you expect that swing?

Francis Blake

Yes, Canada, so we continue to have a little bit of headwind in the first quarter just as you get through all of the tax credit compares and then it should start to turn positive.

Operator

We'll take our next question from David Schick at Stifel, Nicolaus.

David Schick

Frank, you said at the beginning of the call excess cash to buy back shares. Carol you said priorities are to return cash and invest in the business. But just I guess more details on your thoughts if you beat guidance, how do you think about movements on the balance sheet, buyback, the dividend? What are the priorities that you would use excess operating income for?

Francis Blake

Well, hopefully, we've set out our guiding principles pretty clearly over time which is, first, we invest in the business to support and sustain our company; and then second, we do look to excess cash for buying back shares. And we have an objective of increasing our dividends annually as we approach a payout ratio of 40%-ish. And we're kind of slowly, as you saw from the announcement this morning, we're kind of trending down in that direction.

David Schick

So it's not one big next thing, if you would continue the balance of things?

Francis Blake

Right.

David Schick

And then just any comment on what you're seeing in the rollout of the First Phone?

Francis Blake

Well, Marvin's here and I'd ask Marvin to comment on this. I'd just say at the start that it's really been a program just extraordinarily well received by our associates and a great job both by our operations team and our IT team. But Marvin?

Marvin Ellison

Yes David, very successful. We had really a couple of key things we're focused on. Number one, simplifying how we look at data. This device gives the associate real-time data on sales, gross margin and inventory. Also in-stock; simplifies the in-stock process, which is big for us. But one thing that's been a pleasant surprise is checkout. We had almost 1 million transactions in the fourth quarter on the First Phone in checking customers out at point-of-sale. So a mobile point-of-sale checkout is a big for us because we have a huge focus this year on speed of checkout. And the results and the feedback have been terrific. A great partnership between Matt Carey and his team, Marc Powers, my lead of operations. And we feel like that we have a lot to build on for the rest of the year.

Operator

We'll take our next question from Chris Horvers at JPMorgan.

Christopher Horvers - JP Morgan Chase & Co

Can you talk about your thought process on bringing the inventory in a bit earlier this year for spring? I think you made that same decision a year ago, and it was very successful. Just curious what the drivers were this year.

Craig Menear

Yes, we did have success with that last year. You are correct. And so we're following on that success. Given all the data that we looked at, we said we wanted to be prepared to capture anything early that we could, given the fact that the projections right now for the later part of the quarter are not all that strong from a weather standpoint. Who knows how that will exactly play out, but that's the decision that we made.

Christopher Horvers - JP Morgan Chase & Co

And Carol, on the gross margin, did you see any pressure in 4Q related to commodity cost pressures? And are you baking in any for 2011?

Carol Tomé

Well, as you can appreciate in the gross margin, there were lots of goes in and goes out related to product mix, and there was some inflation in there as well but nothing material or else we would have called it out. As we build our plan for 2011, it is a commodity neutral plan. Craig mentioned in his comments that over the past 45 days, we've been getting some requests for price increases and we deal with those, one request at a time.

Operator

We'll take our next question from Michael Lasser at Barclays Capital.

Michael Lasser - Barclays Capital

So there's been a lot of noise in the housing market over the last year. And as you look into the category detail of your recent performance, is there anything to suggest that the strong fourth quarter results weren't just due to the upturn in the housing turnover that occurred early in 2010, especially in light of the historical six- to nine-month lag between that metric and home improvement demand?

Francis Blake

Michael, we can't see it. I mean it's an interesting question because you might think you saw just as you said, you saw this spike kind of in the spring and was that coming through more in the fourth quarter. But if you look at where the strength was, I think you'd say it was a combination of areas where we had great offerings and took some share and other areas where you had improvement through the tax credit items that we called out. And then a very, very strong seasonal, holiday season selling that we really don't think was related to a uptick in the housing market as a whole.

Carol Tomé

To put it in perspective, the benefit we enjoyed from the sale of energy-related products was about 50 basis points impact to our comp in the quarter.

Michael Lasser - Barclays Capital

Follow question. Consumers have shown a clear desire to want to re-engage in home improvement over the last few quarters. So the next big headwind the business might face is pressure on discretionary budgets from rising food and gas prices. Does that influence how you think about the portfolio pricing strategy as we move through the spring and through the rest of this year?

Craig Menear

Yes, I mean, and certainly, we know that if you look over the past couple of years, there's been cycles where the customer has been under serious pressure with discretionary spend. That's why we are incredibly focused on trying to drive great values for our customers every day and focusing on making sure that we're putting the offerings out there that continues to drive our positive comp transactions and really helps drive customers to our stores. So it's a key focus for us as we move forward.

Operator

We'll take our next question from Colin McGranahan with Bernstein.

Colin McGranahan - Bernstein Research

First question, just back on gross margin. I'm going to go out on a limb here and say that you'll probably get a few more requests from vendors for price increases over the next 45 and probably 400 days. How do you think about passing that through? In what categories do you think you have some pricing power? And which categories might you need to be a little bit more careful? And historically, what have you seen and how do you think this might be similar or different?

Craig Menear

Colin look I would agree there is certainly been pressure in the last 45 days. I don't think that's going to subside. But we deal with those on an individual, one-off basis. Our first and foremost approach is try to figure out how to work with our suppliers to either leverage our supply chain, leverage how we do business together to try to mitigate the pressure that they're seeing so that we can continue to hold the line the best we can. And really, in terms of our go-to-market approach, that's driven by our portfolio strategy. And we are guided by our portfolio strategy in terms of how we think about applying pressure in the marketplace and what we really want to stand for.

Colin McGranahan - Bernstein Research

And then just separate follow-up question, I know it's hard to do, but is there any way you can quantify what you think the impact of the energy tax credit in the appliance -- your strong performance in appliances in November did to the comp in November?

Carol Tomé

Well, we can tail you for the quarter what we think it is.

Colin McGranahan - Bernstein Research

That’d be fine.

Carol Tomé

So we think the impact of energy was about 50 basis points to the U.S. and appliances was about 120-ish basis points.

Colin McGranahan - Bernstein Research

And Carol, just a follow up on that. Given your expectation that comps improve through the year, should we -- your toughest compare now is the fourth quarter, would we assume that you'll do something similar in the appliance category next year? Will this become kind of an annual event?

Carol Tomé

We're not going to share our secrets with you today.

Operator

We'll take our next question from Laura Champine at Cowen and Company.

Laura Champine - Cowen and Company, LLC

We're very pleased to see the increase in big-ticket purchases, and it looks like you gained some share there. But Craig, you made a statement that you thought the consumer was still cautious on big ticket. What's your evidence there? And what's the outlook for the bigger ticket spending in 2011?

Craig Menear

Well, I think two things. Number one, when you look at the categories that had positive growth that were tied to the tax credits, so we look at that and go, that's not necessarily repeating. So that makes us a little bit cautious as a result. And then the second piece of it is we still need to see improvement in the big projects with the customers; it’s not seeing a lot of evidence of major remodels going on in homes at this point. So that's really the two things that we're looking at from a caution standpoint.

Laura Champine - Cowen and Company, LLC

And then just a clarification on the last answer. The 120 basis point impact on Q4 from appliances, was that from your own promotions or from stimulus programs for ENERGY STAR appliances?

Carol Tomé

That was the impact of appliance sales…

Craig Menear

Sales, right.

Carol Tomé

In the quarter.

Operator

We'll take our next question from Wayne Hood with BMO Capital.

Wayne Hood - BMO Capital Markets U.S.

So, my question was to Craig and I guess you are sitting at record gross margin levels from where we are today and over the next 12 months. Are we at an inflection point where you begin to give some consideration to reinvesting more into price in areas like Appliances to drive growth in market share and let your gross margins kind of flatten out in '12 and '13? And instead of having modest increases, maybe it's slight.

Craig Menear

So as it relates to our strategy first and foremost, what we're trying to do is continue to lower prices for our customers on a day-in-day-out basis and drive greater value for them. And we're trying to manage obviously the bottom line by driving improved efficiencies in how we run the business. So things like the 32% reduction in clearance inventory, which saves the margin line obviously or how we've been able to deliver the improvement to date and still be able to lower prices for our customers. And that's our continued focus. We shared at our analyst meeting that as we moved into 2011 we'll begin to see benefit from our supply chain and much less of it comes from our merchandising.

Wayne Hood - BMO Capital Markets U.S.

Just a follow-up for you too, Craig, is where do you think your inventory will be by the end of the second quarter and the end of the year? And then Carol, where are you thinking the payables to inventory would be for the year just so we can take a look at your cash flow?

Carol Tomé

Well, why don't we put it in terms, if I could jump in, Craig, put it in terms of net working capital, so that would be receivables, inventory and payables. As of the end of 2010, net working capital as a percent of sales was 10.3%, and we project based on the guidance that we've shared with you this morning that it will drop to 9.8% by the end of 2011.

Operator

We'll take our next question from Greg Melich at International Strategy Investment.

Gregory Melich - ISI Group Inc.

I wanted to get into the SG&A a little bit more in the earnings progression. I think you've mentioned that first half earnings growth should be better than second half, given some of the comparisons on SG&A. Yet the comps will be weaker in the first half than the second half. Could you take us through the logic behind that? What's driving it? And also, do you have the Durbin Amendment and the benefits in your guidance for this year?

Carol Tomé

Yes, absolutely. Well, as I mentioned, we have about $70 million of expense benefit that we don't believe will repeat in 2011. That expense benefit took place in the back half of 2010. You'll recall in the third quarter, we told you that we had $20 million of gains from real estate sales. We don't believe we'll have those gains next year. In the fourth quarter, we just called out a $24 million year-over-year benefit related to our private label credit. The gross benefit was $44 million. That won't repeat next year. So that takes us to $64 million of expense benefit that won't repeat and then there was about $6 million of other items that won't repeat. And all of that took place in the back half of the year. So that's why the year-over-year earnings is different than the year-over-year sales growth estimate. On the Durbin side, as you know, the Durbin Amendment asked the Federal Reserve to determine what reasonable and proportionate fees should be for debit, and debit makes up about 17% of our tender penetration. Based on the Fed's draft regulation, we think the benefit to The Home Depot could be $35 million a year. Now because it hasn't been implemented, clearly the benefit to us would be less than $35 million in 2011. And because we don't know when it's going to be implemented, we haven't put any of that in our plan.

Gregory Melich - ISI Group Inc.

And then if I could follow up on commodity inflation. You said that that's a neutral environment in your gross margins. But what did commodity inflation actually impact comp in the fourth quarter? And what do you expect in the top line for commodities this year?

Craig Menear

So between lumber and copper in the quarter, it was approximately 50 basis points of impact.

Gregory Melich - ISI Group Inc.

And in the guidance for this year?

Craig Menear

We basically plan for flat.

Operator

We'll take our next question from Steve Chick at FBR Capital Markets.

Stephen Chick - FBR Capital Markets & Co.

I guess question on weather and kind of with the storms we've seen and the commentary you made about January, is there a way to, I guess, plan or assess what the restoration might be if you might get a benefit of that in terms of recovering in restoration? And have you seen any kind of pick up as you move beyond January and I guess you could say thawed out or gotten further into February here?

Craig Menear

Steve, this is Craig. I really don't have a way to quantify it. There's no way for us to do that. But what I can tell you is that we certainly believe that folks will have to repair things. When you look at the amount of ice and snow that existed, you'll have roof damage, you'll have live good damage in terms of shrubs, bushes. Their gutters will need to be replaced. So we're certainly prepared for that and anticipate that.

Carol Tomé

And as we look at our business in February, the first couple of weeks of February, the weather was horrible. But it's gotten better. And February comps are running better than our January comps.

Operator

We'll take our next question from Alan Rifkin at Bank of America.

Alan Rifkin - BofA Merrill Lynch

Frank, with big ticket up so strong and obviously a significant contributor to comps, could you maybe shed some color on how good of a leading indicator you believe big-ticket strength is in other parts of your business, even including repair and maintenance?

Craig Menear

Well, so let me start with the repair and maintenance. Again, and we've shared on past calls that, that has been a strength in our business, and certainly repair and maintenance categories continued to perform positively. So the customer is still focused there. As we look at the big ticket, particularly around the fourth quarter, certainly the drivers behind that, again where the great values that we had in our appliance offerings, it's a good appliance time in the industry in total and we kind of went after that with some great values and did very well. But then, you look at the categories that were impacted by tax credits, and those performed extremely well. And certainly, that environment obviously has now changed. So we think that, that adds some pressure going forward and don't really anticipate the same level of big-ticket performance as we move through the first half of the year.

Alan Rifkin - BofA Merrill Lynch

And one follow-up, if I may. With the RDC program completed last month, can you maybe just give us an update on what you think the gross margin benefits will be, as well as the benefits to turns? And would it be unreasonable to expect that 2011 should be the year where you realize the maximum benefits from the RDC rollout now that the expenses are behind you?

Francis Blake

So Alan, I wouldn't say that it's the year of maximum benefit, but it is the year it starts to turn to a benefit as we've been describing this all along. There's an investment and then the benefit starts to come forward. And as we talked about it in December, we saw overall 40 basis points with 30 coming from the supply chain and the RDCs as it picks up. And you start to see that benefit as we go forward in 2011.

Operator

And we'll take our next question from Deborah Weinswig at Citigroup.

Deborah Weinswig - Citigroup Inc

Carol, you mentioned great expense control due to some new tools. I'm pretty well versed on your merchandising tools, but can you please expand on the tool that helped deliver the company's great expense results in the quarter. And what inning are we on, on these tools?

Carol Tomé

Well, I think we've talked in the past about our new checkbook that we introduced in the stores. That really helped the stores manage their operating expenses like their personal bank account. And they have great visibility now when they can actually pull up images of invoices. It's just really helping them get their arms around our expenses. We also have cost-out teams here at the store support center, and these teams go aggressively against cost. We do a lot of cohort analysis. Just superior analytics helping us really getting underneath the cost. There's a sense of enthusiasm. We're really enthusiastic about sales, but there's a real sense of enthusiasm about cost control, too. And we recognize people who drive out costs. You might say, “Are you done?” We're not done if you think about the expense plan that we put together for 2011, expenses would be going faster if we didn't have expense control in place. So we still got opportunities to drive productivity in our business for sure. And a lot of that is coming from the technology initiatives that Matt and his team are driving in our business. With technology boy, lots of cost can go out.

Marvin Ellison

So Deborah, let me give you a perspective on the P&L checkbook, before we rolled this out, our store would have to wait until the 15th of the month to see the expenses from the previous month. So it's impossible to really manage it effectively. Now you have basically a real-time view of what you're spending based on your budget by line item. So to Carol's point, it gives the store team, just a much better handle and tremendous visibility and transparency around what they're spending, how to spending to the rate of plan, and it just allows us to be much more efficient in managing that overall expense line.

Deborah Weinswig - Citigroup Inc

And staying on the technology theme, can you talk about how much of your sales were online in 2010? And how do you see that growing in 2011? And maybe some of the initiatives behind that as well?

Francis Blake

Deb, we've kind of said on online that we're not going to talk about it as a separate business for a while yet. We need it to get to be a more significant than material part of our sales before we break it out.

Carol Tomé

Which means...

Deborah Weinswig - Citigroup Inc

I was trying. I know you said, Frank. But I was trying. But can you just maybe talk about some of the initiatives in place?

Francis Blake

But we're very pleased with the improvement we've seen on online. And again, for us, it serves multiple functions. It's not only a vehicle for selling product, but it's also a vehicle for educating our customers around product and projects. So as I say we're making a lot of investments in it, and we're very pleased with the progress.

Operator

Our last question today will come from Matthew Fassler at Goldman Sachs.

Matthew Fassler - Goldman Sachs Group Inc.

My question relates to market dynamics. I believe you alluded to gaining share in roughly half of your categories as measured by units. If you could give us a sense as to where those share gains were at, how that trend compared with prior quarters? And then as part of that discussion, what you've seen in terms of promotional dynamics in this space, particularly in some of the hotter categories, if you will, like Appliances.

Craig Menear

This is Craig. We gained share in Building Materials, Tools, Hardware, Plumbing, Electrical, Lawn and Garden, both sides of that, as well as Appliances. And quarter-to-quarter, again, that's unit share based on consumer activity. So quarter-to-quarter, those can fluctuate a little bit. But when we look at it on a rolling 12-month basis, those are areas where we're continuing to show progress over time. And I think as it relates to the marketplace, again, we feel that we're applying a significant amount of pressure in the market in terms of really offering our customers' outstanding values. History of our company has all been about finding special buys, working with our suppliers to come up with something that helps them drive volume through their factories. We can pass along savings to our customers. It creates urgency to bring the customers into the store. And I think we did a really good job of that in the fourth quarter, which helped our numbers. And so we'll continue to follow that strategy.

Matthew Fassler - Goldman Sachs Group Inc.

And any comments on just the competitive dynamic? Did you see competitive responses or competitive aggressiveness, particularly or in November, December?

Craig Menear

We've seen somewhat similar to previous quarters.

Diane Dayhoff

Well, thank you to everyone for joining us today, and we look forward to talking to you at our earnings call, which will be in May.

Operator

And that does conclude today's conference. Again, thank you for your participation today.

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