Home Depot's (HD) Management Presents at Oppenheimer 17th Annual Consumer Conference (Transcript)

| About: Home Depot, (HD)

Home Depot, Inc. (NYSE:HD)

Oppenheimer 17th Annual Consumer Conference

June 21, 2017 09:05 AM ET

Executives

Ted Decker – EVP, Merchandising

Paul Deveno - Regional Vice President of New England

Analysts

Brian Nagel - Oppenheimer & Co. Inc.

Brian Nagel

Thank you for attending second day of the 17th Annual Oppenheimer Consumer Conference here in Boston. My name is Brian Nagel. I’m the Hardlines and e-Commerce analyst at Oppenheimer. So very pleased to introduce our next presenting company, Home Depot. And two of the company's senior Executives, first to my left I’ve Ted Decker, who is Executive Vice President of Merchandising. And to Ted's left we’ve Paul Deveno – sorry, Paul Deveno, Regional Vice President of the New England Region. So thank you very much for joining me gentlemen.

Ted Decker

Thanks for having us.

Paul Deveno

Thank you.

Brian Nagel

We are going to structure this as a fireside chat. I’ve some questions, I will be asking the Home Depot executives. At any time, if there is questions in the audience, please raise your hand, we will work you into the conversation. Thank you.

So let's just start talking about the overall macro environment. I mean, clearly we’ve the pleasure to having dinner last night, so we spent a lot of time talking about this. So I think it will be helpful to discuss it for the group too. As I look at the world, retail has been tough. Home Depot has been a bright spot, home improvements has been a bright spot. So maybe start talking about your overall assessment of the macro environment, the key drivers, maybe the sustainability in those drivers and such.

Ted Decker

Sure. So we’ve always said when we set our sales plan, we start with GDP as a premise and or as a base, and while that hasn’t been overly robust, we had steady growth for several years now. So we see the overall macro as a positive. Love the job creation in unemployment rate like wages starting to see wages increase, people are getting more spending power, particularly pleased with household formation. So we’ve had 7 or 8 years after the peak of housing six where we were way below historical averages of housing formation which is about 1.2 million units a year. We were in the low hundreds of thousands. So you saw last year housing formation got back up to about that average 1.2 million rate. So that’s obviously good for our business.

People moving out and forming households. So that the overall macro is good. And then you get a little more specific in our business beyond housing formation, we see housing turnover starting to get back to that historical average of 4% plus of housing units. So that’s about 5 million transactions and we get bumps in our sales when someone prepares a house for sale as well as when the new owner moves into the house to fix it up the way they want to live in the house. So housing turnover is strong. And then home price appreciation has -- we’ve had multiple years now of year-over-year we’re averaging about 5% odd on a reported monthly basis year-over-year house appreciation growth.

So that helps in so many ways. It helps psychologically. People feel hey, I have an asset again and I want to invest in my asset versus, I just have this albatross that I’m underwater perhaps with a mortgage, and I’m just going to do the bare minimum of maintenance, if I have to, but we've had with the home price appreciation the number of homes that are underwater with their mortgages, we were well into the teens of homes that had negative equity in their house. Now we’re in the high mid-single digits of negative equity in home. So that confidence level in the home is back. And despite all that appreciation in home prices we still see this as a medium-term tailwind, because while the national average is more or less back to have recovered in home prices, we still have nearly two-thirds of markets dispersed around the country they have not recovered to that 2006 home price.

Brian Nagel

So like the Las Vegases or …

Ted Decker

That's right. Yes, some of these big celebrated cities that the Phoenixes and the Vegases that are still struggling. But we see home prices continuing to appreciate, and again more people have confidence in that value and a willingness to invest. And then, lastly, there has been some talk about interest rates rising, what that has to do with mortgage rates. Mortgage rates were still historically low. They’re up a bit, but the rate itself, the nominal rates themselves, and then the affordability indexes are still sort of at record levels. And while we had modest increases in interest rates, we don’t really see that as a correlation to our business right now. And we're still interested in a great spot for housing. So overall macro positive, more specific to our space in housing. We feel even better.

Brian Nagel

What do you -- the millennial customer, there's been a lot to talk about this, is on the millennial homebuyer. I mean, I think we're starting to see indications now that the customer is coming to the market, maybe on a delayed basis. From your perspective, I don’t know, Paul you want maybe chime in on that if there is anything you see in particular.

Paul Deveno

Sure. So we’ve seen that. That’s cycle really was just delayed.

Brian Nagel

Okay.

Paul Deveno

I think for the longest time it was in great debate. What will this generation do in terms of homeownership. You could certainly see a trend at the time where rental, the household formation, as Ted was talking about earlier, it wasn't happening. Where was this generation, this millennial going to set their roots. And what we've seen is that the cycle essentially was delayed about 6 to 7 years. And right now it's really starting to come to fruition. And that fruition is as they are now moving into the jobs that they have secured as they are now forming families, as they are now getting their feet underneath them, we're seeing that formation happen. And we are seeing them move into the homebuying market just as every other generation has.

Brian Nagel

Just on a delayed basis?

Paul Deveno

Just on a delayed basis.

Ted Decker

Yes, as you can imagine as we looked at what is the largest single generation in the history of the country, we obviously had a keen interest where these folks are going to engage in the traditional way of housing, and as Paul said, our findings are and our belief is it was delayed with the economic downturn. The -- so many of the folks who were out of college and even if they had jobs they weren't in the career that that they had an interest in, so there is this notion, I’m going to have to move, I’m going to have to -- I still haven't been settled with what I want to be doing, but as this job creation has gone on and employments improved and people are feeling more settled aging, forming families if we see it just as a delay, I think that has a lot to do with the household formation now starting as I said last year getting back up to what we’ve seen in years past.

Brian Nagel

So what would be the -- you mentioned -- I mean, Ted you mentioned, interest rates, but when you look at a risk out for the macro backdrop for Home Depot now, is there one you could -- we could point to or …?

Ted Decker

You know I would say it would have to be a more wholesale economic hit somewhere, I want to throw out a black swan at them, but I mean it would have to be something large in macro that would impact everyone and we would be impacted with that. We just -- we don’t see anything -- I mean, we’re obviously very cautious and we watch all these leading indicators. But we don’t see anything. We’ve done a lot of work on interest rates and what if those would go up, 100 stages of 100 basis points, and looking at Affordability Indexes and historical averages, nothing is giving us pause other than a bigger unknown macro. If you look at one other key data on housing, we follow the private fixed residential investment. And again to think at where we’re in the recovery, while it’s eight years, the historical average of a percent of GDP invested in American housing is about 4.5%. We hit a low of 2.2%, we’re up to 3.8%. So you’re still after eight years of recovery, you’re still not at a 40, 50 year average of what America generally is investing in as a percentage of GDP into the household. Now the peak in '06 that the housing peak was over 6%. I think it was something like 6.2%. So we're in no way -- we're just happy to get back to the average in steady-state of formation and in investment in housing.

Brian Nagel

Let's talk a bit about merchandising. As I walk your stores now, I think I find it incredible, just the innovation is coming at some of the -- at some products that could almost -- it is to me there is a -- feel somewhat like a consumer finance retail, and now there is this wave of innovation coming. I know that this is your expertise.

Ted Decker

Yes.

Brian Nagel

So what are some of the bigger products you’re seeing? How is that helping to drive sales? And maybe some others that are down the road that are coming?

Ted Decker

Well on a macro piece, the Home Depot has always stood for product service and value. And we firmly believe the product is king. We spend just an inordinate amount of time on product and innovation and value for the customer. And I'll get to some of the detailed new products that are coming out, but the entire organization is wired for product. I don’t know, Paul if you, from an operator point of view…

Paul Deveno

Yes. So, I’ve been with the Company for 26 years, an operator the entire time. And to Ted's point, merchandise and the product has always been the hero. And we look at it from the operations side, as the merchants provide us with incredible product, with great innovation at a great value for the consumer that draws them in, and then it's our responsibility to convert that. It's the products that they continue to provide for us [indiscernible] incredible. I know Ted's going to through a few of them for you, but it's a big differentiator for us.

Ted Decker

So we always talk about we want to be number one in product authority for home improvement, and it is the innovation and the value that we bring that I think differentiates and has differentiated Home Depot. And our whole store is performing when we talk about ticket and transactions and departments and comping, this -- the whole store really is performing and you can look at specific products in virtually every department that the pace of innovation and new product introduction is staggering. We have a quarterly new product book. Its hundreds of pages, I go through it, every page, every quarter to make sure I'm aware of every new product introduced into the store. And it's from the lumber department on one side of the building to outside garden on the other side of the building. And some of the more celebrated ones in a product category that is really redefining an industry is with lithium ion battery technology and power tools. So with a combination of what -- the supplier community has done an innovation of the run time of the battery, the brushless motor, so you're getting the power and run time and efficiency of the motor. And in the electronics to make it all work together in harmony, you now can truly cut the cord. So a Pro, certainly a DIY-er, but even a Pro now regardless of trade can have a cordless tool and do their days work in one certainly two batteries charge for the day, but in most cases just one battery charge and that technology has now moved to outdoor power. So think of lawnmowers and string trimmers and hedge trimmers and blowers, which a lot of noise, a lot of smoke, environmental …

Paul Deveno

Maintenance.

Ted Decker

Ethanol, in gas which breaks down motors, you now can have cordless outdoor power with the run time and efficacy in terms of getting the job done, and having the power to actually cut with what you're working on. This technology is really transforming the industry and it’s going into -- it's unbelievable what is going into, vacuum cleaners, paint sprayers, pneumatic nailers, are becoming battery-powered, so you don’t need the compressor and the hose and just imagine the job site set up. Where else we’ve seen it Paul?

Paul Deveno

Well, I think you mentioned outdoor garden and to me that’s been one the biggest transformations as you watch the consumer shift from gas powered mowers, gas powered trimmers. And what I find particularly here in New England is we all know that we put away those gas powered equipment for several months every year and every spring the consumers is having to come back and have those repaired, or have them worked on because they didn’t necessarily store them properly. The battery technology takes all that away. The battery technology often is helping lighten the load of the equipment. So you're seeing older generation that’s able to handle that string trimmer that maybe they couldn’t handle the gas trimmer. So there has been a lot of advantages switching over to the lithium ion.

Ted Decker

In LED lighting, in integrated LED, not just your solid A-line lightbulb, but now within your fixtures, so you’re getting the form factor of LED incorporated into the light fixture, so the possibilities of design are incredible of how the light is part of the actual fixture, but those are kind of more high-tech. Again, I -- when I mentioned, we look across the store and we see this innovation, flooring right now is one of our absolute strongest categories we reported in the first quarter double-digit comps in our flooring business and it’s both in hard surface and soft surface, and it's both driven by technology. So on carpet you now have advanced polymers where you’re extruding the color into the yarn itself, so you’re not dying a yarn, you're actually -- we would like to talk about the carrot versus the radish. So have a -- the thread of yarn is a carrot, its solid in its color, and then the chemical properties that they’ve developed were offering lifetime stain proof and pet proof carpet. On the hard surface side, vinyl flooring is -- it was maybe, I’d say the stepchild of flooring. It was deemed a lower cost, not particularly attractive property, but it was waterproof. It was the only waterproof category. So laminate floor is great, but you can't put laminate where you’re going to have saturating water or subterranean installation. We now have solid core vinyl flooring, which is nearly as rigid as a piece of laminate or wood. It's 100% waterproof and the technology now, the printing technology they can get the rustics sort of grayish barn look, restored wood is so popular in design, you can get luxury solid core vinyl plank flooring with the look from 5, 10 yards away you would swear it was a reconstituted Pennsylvanian barn that someone took down, to put a flooring. So, incredible product that the customers are finding and the comps in each of those businesses is incredibly dynamic.

Brian Nagel

Well, talk about some of the -- you’re in the stores a lot, some of the efficiency -- the ongoing improvements or improved efficiencies within Home Depot stores. Maybe -- we talk a lot about the front of the store, but also the product coming into the unit?

Paul Deveno

Yes, I would tell you that the vast majority of process change were also around simplification. If you think about being in a retail environment, the associate base that we bring into our stores, the natural turnover that occurs, if we can create an environment where simplicity and I always equate it back to an iPhone, you get an iPhone, there is no instruction booklet, you pick it up, you start using it. I would tell you that through the years our systems have not been that way. They required a lot of training, a lot of practice, and a lot of expertise in every single area. And so it was also very difficult from -- for one associate to move from one area to the next and help out when you had a rush in a particular area. So we continue to work on efficiency and we continue to work on simplification. I will give you an example. Probably one of the greatest ones that we’ve taken on so far this year is what we call our end-to-end process on the back end, back in our receiving area. So to set it up for you, if you think about for years we have received our tractor-trailers product without palletized goods. There was a lot of airspace in those tractor-trailers. We fast-forward to today, everything is flow loaded in that tractor is packed for the ceiling. So, essentially we’ve taken where we used to deliver with three trucks, we’ve dropped that down to two trucks. So obviously there is an efficiency gain there on a cost savings there. Now you translate that to the efficiency in the store. At store level, we used to take that product off the -- off of the truck, drag it out to the sales form and randomly kind of put it away. Today, the receiving department has clear visibility to everything that’s on that truck. We actually print them a map of how to layout their receiving department before that truck gets there, it will say Brian I need you on the right side of the conveyor belt, Paul I need you on the left. As the product comes off, it's all labeled, tells us exactly what cart to put it on. So a great example is if you go back to just a year-ago, when we would unload one of our tractor-trailers with less product on it, it would take us in the neighborhood of 6 hours to unload it. Today with more product on it, about third more product on it, we unload that same truck in about 2 to 2.5 hours. So massive efficiency gains reducing the number of footsteps that our associates are taking. From there then it translates back onto the floor as they put it away. As they go to move and put it away, again same process we are mapping it out for them. We are telling them exactly where to set up that cart, what day, what shelf to start on, and they work through that process. This has a ripple effect. And the ripple effect really comes into play as you know we have a lot of products that we carry in terms of job lot quantity. We have a lot of spike sales. And so we carry inventory in our overheads. To me, it's the most crucial inventory we carry, because while it's in the overhead I am in stock, but if it's not on the shelf, I don't have the availability for the customer to turn that into a sale. When we fall behind in our freight process, the first thing that breaks down for us as an organization is the ability to get it out of the overhead and on the shelf. This improvement in moving freight from the back to the shelf has drastically improved our ability to move product from the overhead to the shelf. And so obviously the more I can continue to get on the shelf, the more that we’re able to care of customers and it's easier to drive sales.

Brian Nagel

It's great.

Ted Decker

And you’ve heard us talk about our supply-chain synchronization and we use terms end-to-end and that’s really what Paul's describing in some multi-year journey for us to ultimately do joint business planning with our supplier base, joint forecasting, order expectations, and timing synchronized transportation, synchronized flow of product into the store to the shelf and having that just one seamless end-to-end supply chain, we’ve made great progress still -- happily have a lot to do …

Paul Deveno

Lots to still do.

Ted Decker

To still do, but it's first of all improves the customer experience, because you’ve better on shelf availability of product, and then it reduces cost and efficiency, and also for our suppliers it helps them quite a bit as well and they participate in the savings.

Brian Nagel

So it wasn’t that long ago Home Depot purchased Interline? Let's discuss just a bit how the de-integration of the acquisitions is going? The ongoing strategy for Interline or maybe what you’re seeing is in terms of -- with Interline allowing Home Depot to reach to a new or broader customer base.

Ted Decker

So, we’re very pleased with Interline as we reported in the first quarter, as strong as our sales were Interline sales were above the Company average. And we like the space. It's just not that it's a big space, it's a $50 billion space with no one player having double-digit share. So the biggest players are single-digit share. But the product adjacency is very much Home Depot. So there's tremendous overlap in the product, and the customer that Interline is servicing are homes in a sense, they're just not single-family home. So the focus is on multifamily housing, on hospitals, hotels, think of college dorms, institutional housing of any nature. So these are homes places in -- with beds is the way I think about it, that were servicing as opposed to a single-family home and the customer alignment is very strong as well. So we look at the Interline customers -- vast majority of Interline customers are Home Depot shoppers. So the product categories are very similar, the purchase occasion is somewhat different. And what Interline lets us do, Interline lets us do much larger orders, scale deliveries, and that the product packaging. So you don't need a retail packaging for lot of these customers. Paul used an example last night of toilet flappers. I mean, we sell a toilet flapper, it's clamshell wrapped with instructions and packaging. If you’re a typical Interline customer and you have a contract to go and replace the floors with the toilets in a particular hotel, you’re going to be doing 40 flappers. You don't want to be opening 40 clamshell packages and you don't need to read the directions. So, Interline's going to deliver a more utilitarian box. Same product, but just different packaging and different use case. So we like the space. We think it's aligned with our core product and perhaps most importantly its aligned with our customer.

Paul Deveno

Its added a whole new dimension for our store associates to take care of some of our existing Pros. That the toiler flapper examples are great one. Another one that I use all the time is appliances. I had an order last week, it's a great example where we had a Pro come in, had a dire emergency, needed five appliances on site. They were at the job site five hours later. And so that wasn't something that we could necessarily always pull off with our in-store delivery capability of appliances, but it was something that we are able to execute having the Interline at our disposal.

Brian Nagel

Maybe just to segue into this, the overall Pro initiatives, so -- within your stores now, Home Depot has been talking about better serving the professional customer for a while. It seems like just the narrative out of your company has become stronger on that. So, some successes or what do you -- what are the latest efforts basically to serve this professional customer in your stores?

Ted Decker

Sure. To level set being a working warehouse in the business, always open for the Pro, we've always been Pro oriented. And one of the initial business premises was, if we’ve the best product with the best value, that the professional customer is buying, that is going to be the stamp of approval for the DIY customer, because they’re going to say, well, I want that best product too and I’m getting that same great price that the Pro is getting. So Pro has always been super important to Home Depot. We talk about the Pro business penetrating about 40% of our sales. Pro has been incredibly strong. So for several quarters now we've reported our Pro sales being stronger than the Company average and that was the case again in the first quarter, and we just continue to lean in on this customer. And as we said, it all starts with product. You have to have the right value and we're focused on everyday low price. We make a very big deal about everyday low price. The last thing a Pro wants to do is have a promotional cadence for their daily product requirement. And service is a big element and Paul you can mention some of the things we do in the store for the [multiple speakers].

Paul Deveno

Yes, there are several things we’ve done around service and last mile, in particular. And so I'd tell you that the first one that I think of is just some of the technology that we’ve employed, even simple things like our app. And the ability for a Pro to rather than send a runner in to run around the store and spend payroll dollars, pulling their own product, the ability to just program it through your app, the runner comes in, gets to our front desk, we’ve a text to confirm, so that professional owner on the jobsite just gets a text from Home Depot says, Brian is here to pick up the order, yes/no. Yes, out the order goes. So they are slow adopters on that kind of technology where they’ve been a very quick adopter as we’ve updated our entire delivery model. So I think about it wasn't that long ago, delivery at the Home Depot was managed on a whiteboard with a dry erase pen. And it's hard to believe, but that's exactly how we managed it. And so Pro would come in and say, hey, I really need a delivery tomorrow and we would look at the whiteboard and say, I don't think I can put you in and we just didn't have any data, any science behind it. Today everything is route driven. It's all electronically driven. The consumer, whether it's the homeowner or the Pro, can see the same thing that store sees online in terms of availability. We’ve created hub stores again for efficiency and how we pull these orders, how we deliver these orders. And then we’ve created windows. So now there are different tiers. You may be home all day, and so that is we can offer you an all-day delivery and that's a certain price. You may be a Pro and say I need a two hour window and I need it first thing in the morning. We can do that, that's a different price. So they have shown a willingness to pay for that premium window narrowing and that service. What's been really good from a store operator standpoint as we roll this out has been very thoughtful. So we come to the market and we start with all day. As we get better and hit certain thresholds, 95% hurdle rate, we will drop in a four-hour window. As we become efficient at that, we will drop in a two-hour window. So it's been a very thoughtful rollout as well to not disappoint, because that was the last thing we want to do is disappoint that customer.

Brian Nagel

So our time is beginning to wind down. Any questions in the audience?

Q - Unidentified Analyst

You touched on the average consumer. Can you be a little bit more specific either geographically or demographically? What are you seeing and what do you think the consumer is doing differently today than 3 to 5 years ago? And what do you think they will be doing which is much more important to you and us?

Ted Decker

Well, I would say geographically something -- so try and normalize for weather, but normalizing for weather we look at the performance of the business across departments, as well as across geography. We’ve already mentioned that the business is strong across the store, across the departments, but even across the geographies. So we've seen the variability of our comp rate continue to narrow in all the markets, particularly the top 40 that we're tracking weekly. So we see a broad-based strength in the consumer. I think that the consumer is back engaged in their home. We've talked about household formation and home prices etcetera, but just the investment of and level of maintenance and remodeling and redecorating that people have been doing over the years, we have a very large backlog of that type work in the American home, and the consumer is engaged in the categories. And as I talked about innovation, they’re engaged in the product, that the consumers see the value of the product innovation, something we track regularly as we break up our assortments to an opening price point up through a premium or even a super-premium price point, week after week as we track this the consumer continues to buy up the continuum for the premium product. And it's not just that -- they want to buy the most expensive thing, they’re responding to the innovation and they’re buying the value in the product. So we see them healthy and engaged and happy to spend where there is a strong value proposition.

Brian Nagel

Do you see the proportion of the market -- the commercial portion, and I don’t want to use the word flippers, but there is a fairly large portion of the market that is already being driven by financial forces where people purchase homes, rebuild them, lease them, sell them, so on. How much of that do you see versus 3 to 5 years ago?

Ted Decker

How large is this portion of it? Yes, I don't have the specific numbers in penetrations of sales. But the flippers are past peak for sure. And happily our comps have stayed strong through that. We certainly enjoyed the flipping, but the most intense flipping was in the most troubled markets. And so while it was great to get that business of a flipper, the overall market was still in such bad shape. Now you're seeing a much more robust broader base strength in those markets. Still plenty of flipping, but I'd say well past peak.

Paul Deveno

Ted, here is what I would add to that is, what I see in the stores every day is that that Pro that was doing the flips a year-ago, three years ago, that was the work that was available. So you fast-forward to today, there's less availability for that, but the homeowner feels better about their home as an investment, have some equity in the home, and is now hiring that same Pro to come in and do work within their home. So to Ted's point, that's where it actually becomes more robust. Our business model really works in both environments. Personally I prefer this one, because there is a lot more homeowners into our flip availability.

Brian Nagel

Time for one more quick one, if it's out there. Okay. Ted, Paul, thank you very much.

Ted Decker

Right.

Paul Deveno

Thank you, Brian.

Brian Nagel

We really appreciate you having here.

Question-and-Answer Session

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