Home Depot, Inc. (HD) CEO Craig Menear on Q4 2018 Results - Earnings Call Transcript

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About: The Home Depot, Inc. (HD)
by: SA Transcripts
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Earning Call Audio

Home Depot, Inc. (NYSE:HD) Q4 2018 Earnings Conference Call February 26, 2019 9:00 AM ET

Company Participants

Isabel Janci - VP, IR

Craig Menear - Chairman, CEO, and President

Ted Decker - EVP of Merchandising

Carol Tome - CFO and EVP, Corporate Services

Conference Call Participants

Simeon Gutman - Morgan Stanley

Michael Lasser - UBS

Scot Ciccarelli - RBC Capital Markets

Chuck Grom - Gordon Haskett

Christopher Horvers - JPMorgan

Steve Forbes - Guggenheim

Zach Fadem - Wells Fargo

Seth Sigman - Credit Suisse

Operator

Good day and welcome to The Home Depot Fourth Quarter 2018 Earnings Call. Today's conference is being recorded. [Operator Instructions]

At this time, I'd like to turn the conference over to Isabel Janci. Please go ahead, ma'am.

Isabel Janci

Thank you, Christine, and good morning everyone. Thank you for joining us today on our fourth quarter earnings call. Joining us on our call today are Craig Menear, Chairman, CEO and President; Ted Decker, Executive Vice President of Merchandising, and Carol Tome, Chief Financial Officer and Executive Vice President, Corporate Services.

Following our prepared remarks, the call will be open for questions. Questions will be limited to analysts and investors. And as a reminder, please limit yourself to one question and one follow-up. If we are unable to get to your question during the call, please call our Investor Relations department at 770-384-2387.

Before I turn the call over to Craig, 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 that could cause actual results to differ materially from our expectations and projections.

These risks and uncertainties include but are not limited to the factors identified in the release and in our filings with the Securities and Exchange Commission. Today's presentation will also include certain non-GAAP measures. Reconciliation of these measures is provided on our Web site.

Now let me turn the call over to Craig.

Craig Menear

Thank you, Isabel, and good morning everyone. Fiscal 2018 was another record year for our business as we achieved the highest sales and net earnings in company history. Fiscal 2018 sales grew $7.3 billion to $108.2 billion. An increase of 7.2% from fiscal 2017 while diluted earnings per share grew 33.5% to $9.73. And although fiscal 2018 was a record year for our business, our fourth quarter comp sales were slightly below our expectations as the quarter experienced some unfavorable weather.

Sales for the fourth quarter were $26.5 billion, up 10.9% from last year. Comp sales were up 3.2% from last year. And our U.S. comps were positive 3.7%. Diluted earnings per share were $2.09 in the fourth quarter. Internationally, Mexico posted another quarter of positive comps in local currency while Canada was essentially flat.

As we mentioned on the last quarter's call, our fourth quarter faced tough comparisons given the prior year's approximately $400 million hurricane-related sales that would not repeat, and we have planned for this in our outlook. But as Carol will detail, what we did not plan for was the extent of the unfavorable weather we experienced in all regions throughout the quarter. It was cold. It was snowy. And perhaps worst of all, it was wet. Wet weather delays projects and this was evidenced in our sales performance in the quarter. In fact as Carol will detail, ex weather, our business performed in line with our expectations.

And as Ted will discuss while the ticket and transactions grew in the quarter and we saw a growth in both Pro and DIY categories, Pro sales once again outpaced DIY sales in the quarter. And the work that are doing to enhance the service capabilities for our Pros continues to resonate. I am very proud of our associates for continuing to do what they do best: serving our customers.

Our merchants, store teams, supplier partners, and supply chain teams did an outstanding job of delivering value and service to our customers throughout the quarter both in stores and online. In fact, several key accomplishments took place during the quarter. We set record performances on Black Friday and during Cyber Week. Our holiday décor offering and gift center events set new all-time highs. And during the quarter, we reached a new watermark of approximately $2 billion annual visits on homedepot.com with many of these visitors indicating that their next stop is a Home Depot store.

In fiscal 2018, we made progress with regard to the one Home Depot investment plan. But, we are still in the early days of our journey. Our strategic effort to drive and enhance interconnected customer experience through investments in both the physical and digital worlds are yielding solid returns. We also continue to focus on productivity as a virtuous cycle by leveraging technology and improving processes throughout the value chain of our business.

Fiscal 2018 provided a lot of great learning and momentum that we will continue to build on in 2019. I am particularly excited about the investments we are making for our Pros. In the quarter, we announced a consolidated go-to-market approach for our Pro customers under the banner Home Deport Pro. And we continue to invest in a more personalized offering for our Pro customers with a new B2B Web site experience.

We have now on-boarded over 100,000 Pro customers and the reception has been positive, our plans for continuous enhancements with new features and capabilities. For example, in response to customer feedback we are adding the ability for businesses to enhance account management and ordering capabilities with improved tools. Our intent is to roll out this new Pro online experience to over a million Pros in 2019.

Beyond B2B personalization, we continue to make great strides in driving our digital experience. This year we invested in our Web site and mobile applications improving search capabilities, site functionality, and product content. This ongoing investment in our digital properties has increased traffic and conversion. Versus prior year on a like-for-like basis, online sales grew 22.7% in the fourth quarter and 24.1% in fiscal 2018, now representing 7.9% of our total sales.

While we are seeing significant in our online sales, these online shoppers to the relevant to our stores has approximately 50% of our online U.S. orders are picked up in our stores, a testament to the power of our interconnected retail strategy. We continue to rollout automated lockers in our stores to make - picking up an online order easier and more convenient. Today, approximately 1,000 stores have lockers with more to come in 2019.

Customer sponsored lockers has been very positive. As almost 94% of customers raided their locker pickup experience a five out of five stars. We fundamentally believe that when a customer comes to one of our stores, it has to be a great experience. With our investment program approximately 40% of our U.S. stores now have a new look and feel and customer response has been very positive. The store investments are not just about the customer response as we're also seeing increase in social engagement and higher productivity.

Another key component of a best-in-class interconnected shopping experience centers on enhanced the delivery and fulfillment options. Fiscal 2018 was the year of the pilot as [technical difficulty] $1.2 billion investment journey to create the fastest, most efficient delivery network for home improvement goods. We are now live with a number of these pilot facilities. We'd look to fiscal 2019 as a year to take what we have learned in pilot and begin the role of that we expect to complete by 2022.

At a demonstration of the confidence in the business going forward. Today, our board announced a 32% increase in our quarterly dividend to $1.36 cents per share. The board also authorized new share repurchase program of $15 billion replacing our existing authorization. We remain committed into maintaining discipline capital allocation to create value for our shareholders.

Turning to 2019 and beyond, I'm excited about the opportunities that are ahead of us Carol will take you through the details. But we expect 2019 to be another year of growth. With sales growth of approximately 3.3%, top sales of 5% and diluted earnings per share of approximately $10.03.

Our strong performance in fiscal 2018 also positions us well with respect to our 2020 financial targets and today we are reaffirming those targets. It's an exciting time to be part of the Home Depot and we look forward to the work ahead as we continue our journey to create the one Home Depot experience.

There's a great deal of change being introduced throughout the business but as they always do, our associates are rising to the occasion, meeting new challenges head-on, without losing the passion to serve our customers that has made the Home Depot what it is today.

I want to close by thanking our associates for their hard work and dedication to our customers in the fourth quarter and throughout the year. For the second half of the year, 100% of our stores will receive success sharing, our bonus program for our hourly associates. We look forward to continuing our momentum in 2019, and with that, let me turn the call over to Ted.

Ted Decker

Thanks, Craig, and good morning everyone, when we look through the unfavorable whether we experienced in the fourth quarter we were pleased with how the business performed. Looking at our departments, comps and tools appliances to the core indoor garden building materials outdoor garden hardware and paint were above the company average.

Electrical, plumbing, flooring bill work and kitchen and bath were positive but low the company average due primarily to price deflation, lighting and lumber recorded low to mid-single digit negative comps. In the fourth quarter, average ticket increased 2.3% and comp transactions increased 0.9%. The fourth quarter finished, what was a volatile year in many commodity markets, particularly lumber.

For example, during the second quarter [technical difficulty] prices were more than 40% higher than they were in the year prior. These prices fell significantly during the third and fourth quarter and now sit approximately 25% below last year's prices. While this deflation pressure sales we've seen strong unit growth as prices have come down and this unit productivity drives activity across the store.

During the fourth quarter deflation and lumber negatively impacted average ticket growth by approximately 41 basis points. However, this deflation was largely offset by inflation and other core commodity categories and that impact the average ticket from core commodities of negative 8 basis points.

During the fourth quarter, big ticket comp transactions for those over $1,000 which represent approximately 20% of U.S. sales were up 4.8%. A number of factors served these headwinds to big ticket sales in the fourth quarter. Notably unexpected like weather across the U.S. and laughing last year's hurricane related sales. Excluding hurricane affected markets, we see the January's big-ticket comp was up almost double-digits in line with what we saw throughout 2018.

Big ticket categories like vinyl plank flooring, roofing, and appliances all had comps above the company average in the fourth quarter. We saw growth with both our pro and do-it-yourself customers in the fourth quarter. With pro sales growing faster than the company's average comp. We continue to see strong performance in pro heavy categories like power tools, water heaters and commercial and industrial lighting.

Sales to our DIY customers grew year-over-year as our customers completed a variety of interior projects. Categories like card window coverings, safety and security and cleaning all posted strong growth in the quarter. We also saw record performance for their annual gift center and holiday sets.

Additionally, the combination about standing values from our suppliers', right assortments from our merchants and phenomenal execution in our stores led to the single highest sales day in our company's history on Black Friday.

As part of our journey to enhance the one Home Depot experience, we are significantly investing our digital assets to provide a frictionless interconnected shopping experience. Earlier this year, we formed approximately 50 cross functional swats focused on agile development to improve our online customer experience. These teams have accomplished a great deal in a short period in our driving results. In 2018 we had a milestone of approximately 2 billion online visits and our ongoing efforts to improve the interconnected customer experience have led to a consistent improvement in our conversion rates throughout the year.

However, our work is not done. In 2019, we will continue to rollout enhancements across our digital assets. As you heard from Craig, we're excited to be rolling out a new B2B online experience for our pro customers to provide a more tailored, personalized offering and for consumers we will continue to focus on improving the way we bring our service to life in the digital world.

As we looked at 2019, we are excited to build on our momentum. We are the number one retailer for product authority and home improvement and together with our supplier partners. We will work to offer the best products at the best value for our customers every day. A great example of our strong partnerships is in our paint business.

Our exclusive partners bear in PPG brings the two highest rated consumer paint and stain brands to the Home Depot. These strong brands along with a great execution in our stores, help drive paint comps above the company average and fourth quarter. We are particularly pleased with our sales to our pro painters as our investments and initiatives are gaining traction.

In addition to having the best products, we are investing to improve the in-store paint experience for our customers. In 2019, we plan to rollout a new color solution center to all stores and we'll do a full reset in exterior states. We are thrilled with the results we are driving in our paint business and look forward to building on our momentum in 2019.

Product innovation is resonating with our customers as we see them trade up to new features and innovation across the store. One example we are seeing this is with Traeger in our grill category. Traeger is one of the fastest growing brands in the grilling category. Their innovative pellet grills. Traeger offers the versatility and convenience of being able to grill, smoke, bake, roast, sprays for barbeque all in the same grill.

Giving the strong sales, we are introducing Traeger's new lineup of live fire grills. This technology connects the grill directly to your smartphone, so you can monitor your grill or adjust the temperature remotely. We are excited to be Traeger's exclusive partner in the big-box Home Improvement Channel.

Another example of innovation is in our pro heavy roofing category. Over the last several years, we have seen both residential and commercial roofers trade up for innovative products that save them time and money. In the residential space, we've seen a significant shift from strip shingles to laminate architectural shingles. These laminate shingles last longer have a lifetime warranty are easier to install and offer dramatic color contrast in dimension which is important from a decorative perspective.

In the commercial segment the trend is shifted from asphalt and aluminum roof coatings to - roof coating that are more water and dirt resistant. A great example of this is Henry Tropi-Cool Silicone, an exclusive to the Home Depot and Home Improvement channel. No primer coat is needed so the one code application saves time and money. We're excited about the year ahead particularly with the spring selling season right around the corner. Our investments in localized assortment and innovative products in everyday low prices will continue to position us as the product of authority in home improvement.

With that I'd like to turn the call over to Carol.

Carol Tome

Thank you, Ted, and good morning everyone. In the fourth quarter total sells for $26.5 billion, 10.9% increase from last year. And for the year, our sales totaled a record $108.2 billion, 7.2% increase from last year.

Fiscal 2018 included a 53 week which added approximately $1.7 billion in sales to the fourth quarter and the year. The extra week is not included in our comp sales calculation. Our fourth quarter results also included the impact of a new revenue recognition standard that we adopted at the beginning of the year.

In the fourth quarter, the change in revenue recognition positively affected sales growth by $86 million. Our total company comps were positive 3.2% for the quarter with positive comps of 3.1% in November, 3.1% in December and 3.3% in January. Comps in US were positive 3.7% for the quarter, with positive comps of 3.4% in November, 3.5% December and 4.1% in January.

There were a few notable factors that affect our comp performance in the quarter. First a stronger US dollar negatively impacted total company comp sales growth in the quarter by approximately $96 million or 0.4%. Second the commodity price inflation, we experienced in the first three quarters of the year disappeared in the fourth quarter.

Finally, as you know we were up against nearly $400 million of hurricane related sales. We expected that but we did not expect such a wet winter. Sometimes weather driven demand can help sales growth sometimes hurt. Relative to our expectation we estimate weather driven the demand negatively impacted fourth quarter comp sales by roughly 85 basis points.

In the fourth quarter, our gross margin was 34.1% an increase of 19 basis points from last year. The year-over-year change in our gross margin reflects the following factors. First the new accounting standard drove $168 million of gross profit or 53 basis points of gross margin expansion. Second higher supply chain and the filament expense because the proximate 19 basis points of gross margin contraction.

Third higher shrink in one year ago resulted in 10 basis points of contraction. And finally changes in the mix of products sold drove 5 basis points a contraction. For the year we experienced 29 basis points of gross margin expansion.

In the fourth quarter, operating expenses as a percent of sales increased by 79 basis points to 21.3% due to the following factors: First, we experienced 152 basis points at expense leverage in BAU or Business As Usual Expenses. The strong leverage in the core of our business was driven by solid expense control but also reflects certain expense items that did not repeat this year most notably a onetime bonus of $117 million that was granted to our - associates last year.

Our BAU expense leverage was offset by the following. First as we called out in our press release. As we move forward with our B2B experience, we recognized an impairment loss of $247 million or 93 basis points of expense deleverage related to the write-off of several trade names associated with Interline brands.

Second, the new accounting standard resulted in a $168 million increase to our operating expenses and caused 63 basis points of operating expense deleverage and third expenses related to our strategic investment plan of roughly $198 million resulted in approximately 75 basis points of operating expense deleverage.

Fiscal 2018 operating expense as a percent of sales was 20% an increase of 49 basis points from last year. Our fiscal 2018 expense performance was better than our initial expectations driven by productivity in BAU.

For the year, we incurred almost $700 million of expenses related to our strategic initiatives in line with our plan. Our operating margin for the fourth quarter was 12.8% and for the year was 14.4%. Interest and other expense for the fourth quarter grew by $19 million to $265 million reflecting for the most part a loss on the sale of a non-strategic asset.

In the fourth quarter, our effective tax rate was 24.7% and for fiscal 2018 was 23.6%. Our effective tax rate for the quarter and the year reflects the close out of the provisional charge we took last year related to Tax Reform and certain positive audit settlements.

Our diluted earnings per share for the fourth quarter were $2.09, an increase of 37.5% from last year. For the year, diluted earnings per share were $9.73 an increase of 33.5% compared to fiscal 2017. Our fourth quarter and fiscal 2018 diluted earnings per share were negatively impacted by approximately $0.16 due to the impairment charge recorded in the fourth quarter. So moving on to some additional highlights, during the year we opened three new stores including one in the U.S. and two in Mexico for an ending store count of 2,287, selling square footage at the end of the year was 238 million square feet.

For the fiscal year, total sales per square foot increased 7.2% to $447, the highest in our company history. At the end of the quarter, merchandise inventories grew $1.2 billion to $13.9 billion and inventory turns were 5.1 times flat with last year. The growth in our inventory versus last year reflects the investments we are making to accelerate merchandising resets and higher in stock levels than we had one year ago.

Moving onto capital allocation, in fiscal 2018 we generated approximately $13.3 billion of cash from the business and used that cash as well as the proceeds from $2.2 billion of net debt issuances and cash on hand to invest in the business paid dividends to our shareholders and we purchase our shares.

During the year, we invested approximately $2.4 billion back into the business through capital expenditures. So further, we paid $4.7 billion in dividends to our shareholders. And finally during the year, we repurchased approximately $10 billion or about 54.3 million of our outstanding shares including roughly $4.5 billion or 25.7 million shares in the fourth quarter.

Computed on the average of beginning and ending long-term debt and equity for the trailing 12 months, return on invested capital was approximately 44.8%, 1060 basis points higher than the end of fiscal 2017.

Today's press release includes our guidance for fiscal 2019. And I want to take a few moments to comment on the main points. Remember that, we guide off GAAP for fiscal 2019 guidance to a loss from our reported results for fiscal 2018 which includes sales and earnings associated with the 53rd week, when we report our quarterly cost sales results, we will compare weeks one through 52 in fiscal 2019 against weeks two to 53 in fiscal 2018.

So with that, turning to our sales growth projections, as you know we use a directionally correct but imperfect model to project our sales growth. It starts with GDP. While we are in the 10th year of economic recovery, U.S. GDP is expected to grow in 2019. And for our model, we are using 2.6% GDP growth. To GDP, we add the expected spending impact from key housing metrics, including home price appreciation, housing turnover, household formation, and the age of the housing stock.

As we look to 2019, most housing metrics are trending positive, albeit heading towards stability. Two of these metrics we're highlighting are home equity, which is a function of home price appreciation, and the age of the housing stock. Home equity has more than doubled since 2011. And 52% of the homes in the U.S. are greater than 40 years old. As you will recall, that the three-year sales target we established in 2017 started with a base comp of 4%. The sales forecasting model that we built for 2019 doesn't move us materially off that base. For 2019, we are planning a 5% comp, which includes our base model plus growth emanating from our strategic investments. For fiscal 2019, we expect total sales growth of approximately 3.3%, reflecting the compare to 52 weeks last year.

Two more comments for your models, first, when you are thinking about the shape of the year, we would expect the comp for the first-half of 2019 to be about 250 basis points lower than the second-half of the year because of the hurricane-related sales overlap. On a two-year stack basis, we expect that our first-half and second-half comp will be relatively similar. Second, because of the shift in the year and the seasonality of our business, our 2019 comp sales will not match our sales growth rates in three or four quarter. During the year, we plan to open five net new stores, four in the U.S., and one in Mexico. For fiscal 2019, we are projecting our gross margin rate to be approximately 34%, in line with the 2020 target we set forth during our December 2017 investor conference.

At this time, we are not expecting further gross margin contraction in fiscal 2020. We expect our fiscal 2019 operating expenses to grow at approximately 53% the rate of our sales growth. On a 52-to-52 week basis, and ignoring the impairment charge we reported in the fourth quarter of fiscal 2018, we expect our fiscal 2019 operating expenses to grow at approximately 90% of the rate of our sales growth. For the year, we expect that our operating margin will be essentially flat with what we reported in fiscal 2018. For fiscal 2019, we estimate our effective tax rate to be approximately 25.5%. We expect fiscal 2019 diluted earnings per share to grow approximately 3.1% to $10.03. Our earnings per share guidance include our plan to repurchase approximately $5 billion of outstanding shares during the year.

For the year, we project cash flow from the business of roughly $14 billion. We will invest $2.7 billion of this cash back into the business in support of our strategic initiative. We also plan to use this cash to pay $6 billion of dividends. As Craig mentioned, we just announced a 32% increase in our quarterly dividend, which equates to an annual dividend of $5.44, in line with our targeted dividend payout ratio of 55% of earning. Finally, we plan to repurchase $5 billion of outstanding shares using excess cash. At our last investor conference, in December, 2017, we shared with you our long-term financial target and our strategy to create the One Home Depot. By the end of fiscal 2020, we are aiming to grow our sales to a range of $115 billion to $120 billion, with an operating margin range of 14.4% to 15%, and return on invested capital of more than 40%. As evidenced by our fiscal 2018 results and our guidance for 2019, today, we are reaffirming out long-term targets.

Thank you for your participation in today's call. And Christine, we are now ready for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question.

Simeon Gutman

Thanks. Good morning. My first question is two parts, on gross margin. So, getting to the 34% level in 2019, was that always part of your plan and The Street maybe just looked like it was mismodeling or is something changing on your investment cadence? And then the second part of that gross margin question is, can you split the, it looks like about 30 basis points of contraction, into like fixed versus variable costs, and how much would gross margin [indiscernible] comps or better or worse than the 100 basis points of your forecast?

Craig Menear

Simeon, I think the first comment I'd have is as it relates to the margin rate, was a difference in what we anticipated. A little bit more sustained pressure in supply chain maybe than what we initially anticipated in 2017.

Carol Tome

But as we look at our model, both for '19 and '20, let me break apart the gross margin performance for you and our expectations. First, as you know, productivity is a virtuous cycle at The Home Depot. And we have productivity in our cost of goods. And we project productivity into '19 and '20. Offsetting the productivity in '19 is some pressure that Craig mentioned, in supply chain as well as our supply chain rollout. There's a little bit of shrink pressure in 2019, but we're going to cover that off with productivity. And then there's a mix pressure, mix that was always in our plan as we see relatively outperformance of growth in lower-margin category. So, as we look through '19 to '20, nothing comes to our attention that is at this point that the margin will contract further, because productivity will continue into '20.

On your second part of your question, in terms of fixed variable nature of our gross margin or of our cost of goods, we actually don't look it through that lens. But I will tell you, within the performance in the fourth quarter, there were a few surprises relative to the guidance that we gave at the end of the third quarter. First, the supply chain contraction of 19 basis points was a bit higher than we had anticipated. We had three basis points of fuel pressure come through, and about five basis points of higher fees related to third-party delivery agents. And then we had a bit higher shrink than we anticipated. Hopefully that's helpful.

Simeon Gutman

Yes, it's helpful. My follow-up is on the demand side. Can you tell us if there were any markets that were "normal", not meaning ex-weather, did they perform in line or did they perform better than you thought? And then you've told us in the past where housing turnover markets have been soft you've called out that the business has been solid, just checking if that's still the case.

Carol Tome

Yes. We've got great performance in areas that had good weather. I must say the weather was across the country, but you can find pockets of relative outperformance. And if you look at the housing related markets, let's take Seattle as an example. Seattle is talked about a lot as the place where there's been huge home price appreciation. The comp is Seattle for the fourth quarter was at 6.3%. Let's take Dallas. Dallas is another area of the country where home prices have seen significant home price appreciation. The comp in Dallas was in line with the company average. So, we're not seeing any impact to our performance in a negative way because of the housing environment.

Craig Menear

If you looked at a market like L.A., when the weather has shifted, we've seen 1,400 basis point swing week-to-week based on weather. So, when the weather was positive it would lift 1,400 basis points.

Simeon Gutman

Okay, thank you.

Operator

And our next question comes from the line of Michael Lasser with UBS. Please proceed with your question.

Michael Lasser

Good morning. Thanks a lot of taking my question. You noted that your comp guidance is based on 4% growth from underlying economic conditions in housing. Is there a way that you could size the potential downside if GDP doesn't meet 2.6% and we see a continued deceleration in some of the key housing metrics?

Carol Tome

Well, clearly, our base model starts with GDP and the forecast for GDP next year are - there's a wide range. We landed on 2.6%. We think that's the right number to you, we added to that about a point coming from the various housing metrics that we look at, so that takes our base comp to 3.6, and candidly, we rounded up to four because we are just not that good at it. There - we really wanted to call out two things that are important in our model and one is from equity. There's 15.4 billion through - what am I saying, $15.4 trillion of home equity out there.

Home equity has more than doubled since 2011. And if you look at the home equity per owner occupied household, that equity is $193,000 and has not been extracted, so we think that bodes well, it's a wealth effect that bodes well into 2019. The other aspect of the housing market is just the age of the housing market, 52% of the home is older than 40 years. We know that spend for homes that are 40 years and older is 30% greater than spend on homes less than 10 year.

Michael Lasser

An my follow-up question is on the contribution from your initiatives, shouldn't we expect that the contribution, which we said that a 100 basis points, should we expect that, that's going to build over the course of the year as you've had more time to benefit from what you've put in place over the last 12 month to 18 months and what's the upside risk from that those initiatives driving more than a 100 basis points contribution.

Craig Menear

Michael, it will build as we go forward, you're thinking about that's the right way. And so, we definitely, we see it building throughout 2019 and then beyond.

Michael Lasser

When…

Carol Tome

Michael, I mentioned that the back half comp would be greater than the first half comp, part of that is due to Hoover Hurricane overlap but part of it is due to build.

Michael Lasser

And what leading indicators are you looking at within the business that gives you confidence that it's going to contribute 100 basis points as you are expected?

Craig Menear

Well when we look at the initiatives that we've begun to put in place whether that is the amount of store refreshes that we have done, whether it is the interconnected experience with the automated lockers that we put in place, which is driving obviously a great response from the from the customers. These are things that we tested, we piloted and as we rolled, we begun to see benefit a test result and feel comfortable that those are going to be the driver behind that point of initiative growth.

Carol Tome

We're also seeing outside growth in our pro-business and as we continue to add pro's to our Web site, our new pro experience, if you will, we're adding over a million customers this year. We see spend with those customers increasing.

Michael Lasser

Okay. Thank you very much.

Operator

Our next question comes from line of Scot Ciccarelli with RBC. Please proceed with your question.

Scot Ciccarelli

Good morning, guys. Got you…

Craig Menear

Good morning.

Scot Ciccarelli

So can you help us understand maybe the investment pace a little bit better? It sounds like there may be some shifts between the original expectations between 2019 and 2020, just from a timing perspective, number one. Number two, could we end up facing a scenario where the absolute investment amount knows what you're doing in the supply chain and in the stores et cetera. Maybe exceed your prior views and, almost every company out there, their investment plan seems to be moving target?

Carol Tome

Well, I'm happy to take you back to December '17, when we laid out our investment plan. So you'll recall, we are announcing $1.1 billion investment plan, which was $5.4 billion over what we would have spent in a BAU basis. And this is the cash to look at the investment. So I suppose expense and capital. Then we shared with you a chart back in 2017 that broke that spending down by year, we said we would spend $1.4 billion in '18, $1.9 billion in '19 and $2.1 billion in '20. If we look at what we spent in '18, we spent $1.4 billion about $550 million in expense and $800 million in capital.

Now on the expenses, we also had some depreciation but that wasn't on the chart that we shared with you. If you add the depreciation related to our investments in 2018, it was more like $700 million. As we look to '19, we are projecting in our guidance that we will spend $1.7 billion, $550 million and expense and about $1.1 billion in capital. That's roughly $200 million under what we shared with you in 2017, that spending is being pushed to '20, and it might push out a little past to '20. The reason for this is because we're just getting smarter about how we spend our dollars and I've had to change the prioritization of some of our activity to deal with some of our legacy IT system.

As we look at it today, our estimate is we won't exceed our spend and that we may be able to deliver this under the target. So we've got to face this the appropriate way so that we don't actually deliver an initiative that the foundation can't serve. So hopefully that's helpful.

Craig Menear

Yes, Scot.

Scot Ciccarelli

Okay. Thanks.

Craig Menear

This year was a learning year as related to the investments and we found that some things we could actually accelerate and other things we are going to take us a little bit longer as Kelly mentioned because of legacy systems that we have to fix.

Scot Ciccarelli

Understood. Okay, thanks guys.

Operator

Our next question comes from a line of Chuck Grom with Gordon Haskett. Please proceed with your question.

Chuck Grom

Hi, thanks. Good morning. Carol just on the macro again just trying to connect the dots between your 5% guide and leaders view for 2019 particularly its expectation on games and our renovation spending slows as the year progresses, which is sort of counter what - to what you're speaking to. And just also on a follow-up to the comp with the shift going from week one to 52 weeks to 253. I know for some of the department stores that tend to throw things off a lot. Is there anything that we should think about in terms of the quarterly cadence because of that?

Carol Tome

Yes, so let me address the latter part of your question first, and then we'll get back to the macro. So the shift in the calendar wouldn't be such a big deal that we weren't such a seasonal business, but we were very seasonal business. So this year, let's take the first quarter, we will be comparing weeks one through 13 and 19 against weeks 2 through 14 and 18 and that shift will have an impact. So you would expect the comp in the first quarter to actually be lower than the actual sales growth that we report that reverses in the second quarter and the second quarter we would expect the comps to be higher than the sales growth we report and the third quarter it'll be about the same and then in the fourth quarter, the comp will be higher than the sales growth that we report aggressively, because we're up against 14 weeks versus 13 weeks that we will share. I will tell you that the first week difference is about $1.5 billion sales. So we're dropping off the compare on a $1.5 billion and we're gaining that compare of over $2 billion. So hopefully that helps you kind of model with that first quarter impactful Bay.

Now going back to the macro questions, we can use this directionally correct. But in perfect model, and it's worked for us pretty well, since we implemented it. And if you've been following us for a while, you'll recall that we set forth stages of housing recovery and the impact it would have on our comps. And we have three stages of housing recovery. There was sharp, there was moderate, and then there was stability.

And if you look through that document, I think it's on our Web site. If not, we can get it to you, you can see in the stability area, which is where we think we are trending our model suggest it's GDP plus one to two, we conservatively said GDP plus one. So if you use a 2.6% GDP and you add one basis, 100 basis points to that, you get to 3.6% and we rounded up a bit to 4% and then as you heard from Craig, we added a point relative to our strategic investments. There are lots of forces and economic prognosis that you can use. But one thing that we use to kind of support our point of view is what the Harvard Joint Center says for remodeling activity and their forecasts for remodeling activity in 2019 is a 5% growth.

Chuck Grom

Okay, great. Thanks very much. And then, one more if you Carol, on the third quarter call you gave some helpful color on tax refunds and the timing impact, just curious if your views on that front of change at all. And it looks like February refunds are down a lot, which is expected just wondering if that's impacted your business and thus far in February

Carol Tome

Yes, now we wouldn't say that there's an impact to our business from tax in February and as you pointed out, we wouldn't expect the real benefits coming from tax reform to come in later. As those filers who haven't earned income credit or in a child credit, they actually haven't filed those returns get filed and processed later.

Chuck Grom

Okay, great. Thanks.

Operator

Our next question comes from a line of Christopher Horvers with JPMorgan. Please proceed with your question.

Christopher Horvers

Thanks. Good morning, everybody.

Craig Menear

Good morning.

Christopher Horvers

So there's a lot of noise in '18; hurricane inflation in the first-half of the year, a touch in the fourth quarter of deflation, can you just - it'd be helpful to think about 2018. If we backed out whether on an annual basis and we backed out the net benefit from inflation in the first three quarters. What is that underlying rate and how does that compare to the 5% guide that you're putting out for 2019 and does that guide include any benefit from or headwind from inflation, deflation?

Craig Menear

So we looked at that, we backed those noise levels out, it gets you somewhere in the area of a 55 to a 57 as a normalized run rate, you think about taking out the storms, you take out the weather, you take out the inflation. That's where we run into.

Carol Tome

And as you know, when we build our plan, we are commodity inflation neutral. We don't really know how to plan for that. Based on where commodity prices are, let me give you a little bit of brush from - in the first-half of the year what we plan for that.

Christopher Horvers

Understood, so just to summarize, there's who basically saying I mean precise based points but 70, 80 basis points of moderation and the underlying driven comp from '18 to '19, okay understood.

Carol Tome

What you speculate in that - you would expect that where we are in the house and recovery, we'd expect that.

Christopher Horvers

Got it and then in terms of the shift from pricing, well turnover net, then pricing and now Home Equity and age does that express itself in any way in terms of traffic versus ticket growth, do you expect ticket continue to lead as ticket growth actually become more of a factor versus the traffic growth. How are you thinking about that?

Craig Menear

Yes, it would impact continue to support ticket growth for sure, and if you think about the formations, estimated to be increasing in 2019 while turnover is more flattish to where it was in 2018 that would definitely drive project business.

Christopher Horvers

Okay. And then one quick - go ahead. Sorry, Ted.

Ted Decker

Yes, sorry, Chris. I would just add on the ticket. The thing that's really encouraging about ticket reasons we called out in an innovative product and more premium roofing and a grill like a Traeger grill. We look at a number of signals very closely. One is the line structure where sales are coming from OPP to good, better, best. We continue to see stronger productivity as you move up price points and we break that out. Second data point we look at very closely is where is ticket growth coming from? And we include commodity, we include tariffs, we include new items, et cetera. And by far our largest ticket growth is coming from the introduction of new innovative items. It's actually much more significant than either inflation or tariff.

Christopher Horvers

Got it. And then, and just to sneak one, last one in and Carol anything - any particular cadence around gross margin in SG&A versus sales growth. Obviously the fourth quarter, you allow the extra week, but anything else to call out on a quarterly basis and margins?

Carol Tome

Yes, [indiscernible]. And we try to predict when spring will break. And we use five-year historical averages and forecasts from Planalytics, and we tried to predict when it will break, we are usually wrong, but we try. Now based on the way that we built our plan, we think that spring is going to break, it hasn't yet, but we think that spring is going to break in the first quarter. So because many of our seasonal categories are lower margin, you would expect the margin decline to be the greatest in the first quarter.

So that's an important thing to get out there as you're building your models, because as you know, we're not really good at this. But that's what our model - that's how we're planning. Then from an expense growth factor, the real noise will be I guess in the fourth quarter, but I think, we've given you enough color there that you can model to that. So there's really nothing too [goopy] on the expense side.

Christopher Horvers

Have a great spring. Thanks very much.

Carol Tome

Thanks so much.

Operator

And our next question comes from the line of Steve Forbes with Guggenheim. Please proceed with your question.

Steve Forbes

Good morning.

Carol Tome

Good morning.

Steve Forbes

I wanted to focus on the enhanced delivery and fulfillment option rollout that you mentioned for 2019. So maybe you just comment on the number and type of facility slated to open in '19 and I guess, how you're moving along relative to the original plan?

Craig Menear

Yes, Steve, we're excited about the pilots that we’ve put in place in 2018 and the learning that we have and Mark is here I'll let him address that, but I would also say that we're excited about the options that we provided for our customers during the year as well on same day delivery for a car and van service on products out of our stores.

Carol Tome

Yes, just a reminder, we have our five direct fulfillment centers already up providing one and two-day service to over 90% of the population. We've got our Interline Brands facilities. Now Home Depot pro that give us near national coverage with next day delivery via 700 private fleet trucks. We've opened three market delivery operations and we have openings planned and groundbreaking planned through the year on the various new platforms, market delivery operations, flatbed delivery centers, et cetera. So we're looking forward to that and of course we have our car delivery and van delivery fast options there with 40% coverage of the U.S. population for low cost car delivery and 70% with van coverage.

Steve Forbes

And then, just a quick follow-up, maybe more of a modeling question, right, as it relates to DNA specifically, can you - because I think, if you walk back to the Analyst Day in '17, there was a - I guess an average three-year DNA run rate, right? That was called out. Can you just update us on how that - which we should be building in as we lookout to 2020?

Carol Tome

So I think in our guidance, we gave you a DNA number of what did we say $2.3 billion, some of that flows through cost of goods sold. So on the expense line, you could plan about $2 billion of DNA on the expense line, and the remaining $300 million would be up in the cost of goods sold.

Steve Forbes

And then, any comments that we look at the 2020 relative to the three-year plan you laid out during the Analyst Day for DNA.

Carol Tome

I just keep it about that rate.

Steve Forbes

Thank you very much.

Carol Tome

Yes.

Operator

Our next question comes from line of Zach Fadem with Wells Fargo. Please proceed with your question.

Zach Fadem

Hey, good morning. You talked about some of the dynamics around the transition to the spring selling season with the later spring last year, is there anything that gives you confidence this year from either a whether to-date or product perspective, and can you just given the calendar ticket -- you gave some helpful color. But here is whether you anticipate the Q1 comp to be above or below the full-year comp growth just given the full start…

Ted Decker

I mean, I will start with what Carol said earlier, and that is, we do use a multi-year average model in terms of planning. And when you look at that model, it suggests that we will actually see spring break in Q1.

Carol Tome

We don't provide quarterly guidance as you know. So I'd like to go back to the half. That's the easiest way to think about our business, I would expect the first half comp to be lower than the full-year comp.

Zach Fadem

Okay, fair enough. And could you comment on how some of the external factors in '19 like lower gas prices in mortgage rates for the consumer are incorporated in the '19 outlook? And then second, what do you assume in around the tariff environment?

Ted Decker

We for years have tried to correlate gas prices to our business. We've never been able to draw a correlation on that. And so, we've - there's nothing built in for that whatsoever and then you've assumed nothing beyond what is in place today on tariffs. We just feel we don't try to plan for something that hasn't happened. As we've said with tariffs that's been manageable good news obviously Sunday and looks like negotiations are continuing but all the tariffs that have been put in place today, we have managed through that without any issue.

Isabel Janci

Christine, we have time for one more question.

Operator

Our final question today will come from Seth Sigman with Credit Suisse. Please proceed with your question.

Seth Sigman

Thanks. Hey, guys. Thanks for taking the question. So regarding the weather impact and the impact on exterior projects, you gave us the 85-basis point impact. I'm curious during these types of periods, do you actually see an offsetting benefit on indoor projects and then just narrowing in on the exterior projects. To what extent you already trying to see those comeback or expect to see those comeback in that first-half outlook. Thank you.

Craig Menear

Yes, I mean, generally, as Ted mentioned, we felt very positive about our paint business and so customers have a tendency to focus inside when they can't do work outside and that is something that happens in the business overall. So we felt good about the interior side of the business.

Ted Decker

Yes, I would say every cycle, we have had a bad weather. You know, Craig mentioned the huge swings in a market like Los Angeles. We've seen that consistently across all our markets. Last spring, for example, we were delayed and as soon as the weather broke and our business just…

Carol Tome

Not bad.

Ted Decker

Just exploded, and we see that across markets now, weekend-to-weekend, so full expectation that when spring comes, we're ready for it. We got great innovative products. We are in stock and ready to go for our customers.

Carol Tome

Okay.

Seth Sigman

Got you. Okay. And then, just one follow-up on the pricing environment, you talked a lot about commodity prices. Can you just talk a little bit about price changes that you're seeing in non-commodity categories, and if you're embedding anything in the guidance? Thanks.

Ted Decker

There's nothing in the guidance for sure. Right, across the board, not just with tariffs but we've seen through '18 and increased cost expectation from our suppliers, just whether it's wages or transportation, supply chain, fuel things that they've experienced. But we've digested all of that, and run that across the portfolio basis. So we don't see any increased pressure going into '19, if anything, as you mentioned, things like fuel and transportation capacity, and hopefully the tariff outlook, all those pressures should be abating a bit.

Isabel Janci

So thank you for joining us today. We look forward to speaking with you on our first quarter earnings call in May.

Operator

This will conclude today's call. We thank you for your participation.