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On Thursday, 03 April 2025, Home Depot (NYSE: HD) participated in the Annual Retail Round Up Conference, where EVP and CFO Richard McPhail outlined the company’s strategic approach to navigating market challenges and opportunities. While Home Depot faces potential tariff impacts, it is leveraging cost management and supply chain diversification to maintain its competitive edge. The company is optimistic about homeowner financial health, despite a $50 billion deficit in home improvement spending since 2019.
Key Takeaways
- Home Depot has diversified its supply chain since 2017 to mitigate tariff impacts.
- The company anticipates increased demand in home improvement projects despite past spending deficits.
- Significant growth in revenue and positive comp sales have been reported.
- Expansion strategies include acquisitions like SRS Distribution, enhancing market reach.
- Home Depot is investing in technology and staffing to improve customer experience.
Financial Results
- Revenue has grown by $50 billion since 2019, outpacing competitors.
- Home Depot reported its first positive comp sales in two years.
- Local assets for the pro business contribute approximately $1 billion to profits.
- Fixed costs were reduced by $500 million by the end of 2023.
- Expected EPS growth is in the mid to high single digits with 3-4% sales growth.
Operational Updates
- Supply chain diversification has reduced reliance on China since 2017.
- 17 flatbed distribution centers are operational, with plans for three more.
- Exclusive deals, such as with TILs, enhance product offerings.
- Investments in order and account management systems aim to boost pro customer service.
- Staffing adjustments are made to align with transaction volumes for optimal customer experience.
Future Outlook
- Home Depot targets a trillion-dollar addressable market, focusing on pro customer expansion.
- The company plans new store growth and further acquisitions through SRS.
- A significant backlog of deferred projects is expected to be activated as market conditions improve.
Q&A Highlights
- Homeowners are financially healthy, supported by increased employment and home equity.
- Home equity has doubled, with withdrawals at 25% of pre-COVID levels.
- The paint category has shown strength, bolstered by the exclusive TILs deal.
- Home Depot is in its best cost position since 2010, optimizing cost and retail.
For a detailed understanding, please refer to the full transcript below.
Full transcript - Annual Retail Round Up Conference:
Chris, Host of Retail Roundup Conference: Hey, everybody, and welcome to day two of the eleventh Annual Retail Roundup Conference. Lots of news out last night. My my pleasure to have EVP and CFO at Home Depot for for sale with with us again this year. We really appreciate you coming to our conference. Absolutely.
Great to be here, Chris. Thank you for having me, and thanks everyone for being here this morning. So address the elephant in the room. We’ll kick it off with tariffs first. Sure.
I don’t know if anyone’s asked you about that recently. No. We had a few questions, those of you in the 08:00 session. But so yeah. This doesn’t happen last night.
People seem to be I was gonna bring the board. We’re gonna board. Right. Right. Look.
We’ve we’ve been preparing for any eventual announcement for some time now. And in fact, you could even say we’ve been preparing and becoming, I think, one of the best well managed companies from a cost perspective since maybe the year 02/2010. And so when you talk about tariffs, we can’t talk about them without mentioning how we manage costs every single day. And so back in 02/2010, ’2 thousand ’11, we formed a group called the Cost Finance Group. This group is a a a group within finance, so they maintain independence, but they advise our merchants on product cost and negotiating strategies and negotiating positions.
And you can think of it as, you know, a a bunch of, you know, young hungry hungry cost economists who break down bills and materials so they understand the should cost from a product perspective for all of the products that we source. We understand manufacturing cost curves. So where do you manufacture? How much volume are we providing to you in your manufacturing facilities? What does that do for your economics?
What benefits are we providing from scale? We understand supply chain cost, ocean, domestic, and we understand currency fluctuation. Right? So in normal course, we are having always on conversations about cost with our vendors. These are partnership conversations.
Our vendors have won with us. We’ve won with our vendors. I tell you, if you think about it, since 2019, we’ve grown 50,000,000,000. Our closest competition is growing something like 12,000,000,000 top line over that period. So our vendors are winning with the Home Depot.
When it comes to tariffs, that’s just another cost in the equation that we have to understand mutually. And I would say that we’re as well positioned as anyone in the in the North American economy today to understand costs in real time, to have real time conversations about how to mitigate that cost. We’ve had a stance really for decades, certainly, maybe more intently since 2017 during the first round of of tariffs to further diversify our supply base. And and so our vendors have been willing participants who have successfully helped us achieve a much different footprint today than we had in 2017. Today, the majority of the goods that we sell are produced in The United States.
And so that is unique to the most of versus other sectors of the economy. The remainder of products that we source, you know, certainly, Asia is an important region of of sourcing for us. We’ve diversified away from China in a in a significant manner since 2017. And and so that diversification will be an ongoing strategy for for us. As far as what was announced last night, we’re digesting it along with everyone.
So I would say that we’re as well placed for better price than anyone I could think of to manage through this. K. Okay. Maybe some I think in the past, you’ve provided some more direct specificity around source and exposure. So anything that you could share there?
And can you talk about your pricing strategy and how you would approach tariffs? Right. The sourcing It sounds like China versus Mexico versus Right. Right. Well, like, you know, as as I’ve said, we’ve we’ve diversified, and China has become a less important source of goods for us.
We do source from Canada and Mexico. From a look. We we’re our job is to optimize cost and optimize retails. And by optimize, I mean, on on the on the cost side, that’s pretty obvious. You know, sharpest cost possible.
On the retail side, we are a market participant. Right? And and and so we we do, you know, reflect market dynamics. However, part of our our our competitive advantage has always been to maintain the sharpest value for the entire project. We’re not always the lowest on every single item.
Usually, we’re we’re always the best value, we think. So maybe not the lowest cost, always the highest value. And, certainly, as you look across an entire project, we feel we’ve always had the sharpest position. So in thinking about retail management, retail price management, it’s just it’s an optimization, and and we’re gonna go through that every single day. The important thing in retail is, as you all know, is momentum.
And and so we saw in q three a little more momentum than we had seen in past seven quarters. And then that momentum continued through q four with our with our customer, and and we reported the first positive comps that we’ve had in two years. Yeah. But we know why we saw it broadly. Although we had not seen yet the recovery in large projects, we saw great vitality in a number of categories.
And and so that momentum is something we’re looking to continue. Right? And that’s always on our mind when we think about retail price management. And maybe a little bit around how you think about a portfolio approach having 35,000 SKUs doing projects provides an opportunity on elastic versus inelastic items. Right.
You did when there was a lot of inflation in the sort of mid to post COVID period Yeah. You did pass a long price. So to what extent do you think that inflation’s coming intersecting the space? And to what extent would you anticipate any gross margin pressure around it? Those are those are questions that are too hard to predict, Chris.
And, you know, obviously, as cost pressures increase in our market, you would expect that the market to respond and and see retails pressured retails. Right? But I think we did a a fantastic job of managing our margin position throughout that inflationary period, and you shouldn’t expect anything different from us. Excellent. Maybe dovetailing back to your momentumcom comments since you introduced it.
You know, there’s been a lot of questions about what’s going on with the consumer I don’t know, funny weather period, flu season, percent of marked level of uncertainty that’s happened since the February. And even there’s some consumer packages companies that are like, oh, something sort of changed in the February. How do you think about the health of The US consumer and the potential and the momentum and the engagement in the category that emerged in the forecast for last year and continue? Right? Well, our our customer is is is unique in that.
If you think about our our business, we break down roughly one half pro. So selling to those professional contractors who do work on behalf of homeowners and then consumer. And in that 50% of the business is consumer, but 80% of those customers are homeowners. And so I think, you know, home improvement provides a customer cohort that is uniquely strong, broad and deep. You know, our addressable market is about 130,000,000 households in The US, Forty Million more in Canada and Mexico than the homes they occupy.
So when you talk about customer health, for us, it’s homeowner health. And the homeowner has never been more financially healthy than they are today, Chris. So on in in the in the first respect, from a an employment and income position, the homeowner is fully employed, and they’ve seen strong income gains over the last five years. And those income gains continue. Second, and we think even more importantly, the wealth position of the American homeowner is in a different position than it was in 2019.
Since 2019, homes in The United States have increased their value by 50% in aggregate. The home equity in those homes because mortgage mortgages really haven’t changed much. The home equity position has increased, I think, latest number is 79% since 2019. And so you’re talking about the creation of $15,000,000,000,000 or so in housing wealth in the last five years sitting on the balance sheets of the American homeowner. Now what what I find interesting, Chris, and and so, of course, we’ve read the same press you read on, you know, how the consumer might be thinking heading into the spring.
But there are unique dynamics for the homeowner when we talk about what we’ve seen in in large projects, large project referrals, and the dry powder on the sidelines. So maybe I’ll just go into that for a second because that that’s the unique kind of investment thesis, you know, for for Hone hundred Depot, I think, in the short term. External sources calculate this slightly, you know, differently source to source, but most folks will say that we’re in a period. If you look at the last five years, we’re actually at a $50,000,000,000 deficit in cumulative home improvement since 2019. So we’re in a cumulative surplus since ’21 and ’22, obviously.
We grew by $47,000,000,000 in in three years. And then we saw that surplus grow as the COVID pull forward, you know, kinda worked its way through. And then the impact of higher interest rates had what we call the it created a deferral mindset among many of our homeowner customers. That deferral mindset began to kick in kinda mid twenty twenty three. And what do I mean by that?
Hey. You know, my mortgage is 3%. Mortgage rates are seven. I’m not gonna move. HELOC rates are 9%, and so I’m not gonna borrow against my house.
Why was the customer saying that? Because they, like all of us reading in the paper every day, rate cuts right around the corner. Right? This is, like, 2023. Come to present day, we have a $50,000,000,000 cumulative deficit in home improvement spending over the last five years.
So our customers tell us, yes. We’ve been putting off projects now for years that we intend to do, but we have the wealth. We have the power to execute these projects. And if you just click into the means of doing projects, if you look at cash out refinances, for instance, that value was about 6,000,000,000,000 in 2019. And so this is sorry.
Passable oh, apologies. Passable equity in The US equity base was about 6,000,000,000,000. That means that equity that you can actually borrow against. That 6,000,000,000,000 is now 11,000,000,000,000. Pre COVID, American homeowners were pulling equity out right around about 2% of that taxable equity mark every single year.
They’re pulling out something like half a percent now. So you have a doubling in the taxable equity, and you have withdrawals at about 25 where they had been pre COVID. And so these are all very big numbers. But just roundly speaking, huge deficit now in the condition of homes and incredible amount of deferral and project and then dry powder on the sidelines. We’ve like, we’ve never seen it before.
What’s interesting about that dry powder is we’re now shifting. Our customers tell us from the mindset of, hey. I’m waiting because rates are definitely going to drop to more of a conventional understanding that we’re likely in a new normal of interest rates. They’re not likely to move in a long at least this is what the consumer and the homeowner is saying. I’m going to begin thinking again about moving and about restarting projects.
Towards the latter half of last year, we began to see some of this. We began to see turnover pick up a little bit on sales, pick up a little bit, and we began to see HELOC withdrawals pick up a little bit, and they have steadily climbed as HELOC rates, which are based on short term rates, have decreased by about 60 basis points in the last year. So that’s a long answer, Chris, but there are unique forces that underpin the demand for and the ability to pay for some improvement projects. And so our job is to run the best business we can run and to continue to invest to take as much of that demand as we possibly can. That’s great.
So scaling up that, can you talk a little bit about replacement cycles and what you’re seeing from some of those early COVID winning categories, whether it’s paint, whether it’s some specific outdoor type type categories, do you think some of that emergent momentum is, in fact, just structural because things are breaking and walls need to be painted? Well so the COVID pull forward, to the extent there was COVID pull forward, we saw it most clearly in outdoor categories. You know, 2021 was the year of the backyard. Right? We’re all in our backyard.
And so grills and patio sets, everybody got a patio set, everybody got a grill. And so we certainly saw a a divot in classes like those ’23, ’20 ’4 even. We believe we are through all of the COVID pull forward. So looking across the business, there is no more COVID pull forward to work through. We think we’re back in natural replacement cycles.
Our appliance business has been actually quite strong through 2024 here and there. Absolutely. And we saw fantastic engagement with appliances through the holiday season. You know, the beauty of home improvement is you’re never done. I mean, just think about your own home.
You are never done. And and so, you know, replacement cycles can offset each other. Right? And so there’s there’s never I I can’t think of really a super cycle ever in home improvement. I think we just we see consistent demand even now for smaller projects.
Our professional customers tell us they still have healthy backlogs, healthier than on historical average. I think the remodeling index where 50 is conditions are kind of average. We’re still at a 59 score. That score had been in the seventies during COVID, but a lot of optimism with the pros. And so replacement cycle, project cycle, you know, I think we’re I think we’re back to to normal.
You mentioned paint, though. Paint has been a a real strength for us. And there are a few things about paint. Number one, it’s it’s typically the gateway project. Anybody can do it.
The ticket is a little lower. The complexity is low. And and so we saw a strong 2024 capped off by a an exclusive deal that we just announced with TILs. And I don’t know how many of you know what TILs is, but if you ask your painter, what do you put on a wall before you put paint on it? More people are gonna take pills when they say primer.
This is the Kleenex of primer. It is now exclusive to the Home Depot. And so, number one, that’s just another sign that our paint category and our team in paint is leading the industry, and our vendors see that. But second, you should take that as a proof point where our vendor understands the power of the Home Depot and understands that regardless of the fact that they could sell in in in multiple outlets, the Home Depot is the place where brands excel. And so we couldn’t be happier about that deal.
Our painters couldn’t be happier, and I think that’s gonna have an impact this year. Excellent. Maybe think about the Home Depot long term growth strategy. That has changed a lot, I think, in the past ten years. Could you maybe marry that?
My my impression was if we went back to the, you know, prime post GFC, it’s the the three legged stool with ecommerce that’s driving productivity of the existing box. It seems like in the past five years, you’ve created an effort to expand the TAM. Can you tell me about that transition and and how you’re thinking about market share? I will. And I’m gonna revise your your remarks there a little bit, Chris, if if I may.
Of course. So so I think it’s the the the great thing about our strategy is, actually, I don’t think it’s any different than it was twenty years ago. There are new dynamics that emerged that we respond to, most principally ecommerce. But the professional contractor strategy is as old as the Home Depot. When I joined the Home Depot twenty years ago, literally not Thursday, I opened a drawer and there’s a floppy disk.
And on it, it says own oh, no. Oh, w. I have to know? Own the no. Exactly.
Own the out of the box. Like, how do we attack a professional contractor who needs stop site delivery and while they’re interacting with our stores, they need a lot more than that. So, you know, this strategy is perennial at the Home Depot. But I will give you a little bit of history. So to come out of the GFC, Frank Blake does, you know, does just a magical job of bringing our culture back and then focusing on rebuilding a great business and driving efficiency in our processes to make, frankly, to make our associates lives easier so that they can help our customers.
Right? And so it was it was the right thing at the right time. But I’ll also tell you, ecommerce began in earnest in 02/2008 with Frank. We read a an article in the New York Times, I think, that said Amazon is gaining share in power tools, and we did a ton of work in the summer of o eight to decide what the Home Depot was going to be online, and we still are, you know, leveraging that work today. But I’ll fast forward a little bit.
So we have, you know, great housing recovery coming out of the GFC. We know that tailwind isn’t gonna last forever. So in 2015, we embark on this kind of discovery of what are the next engines of growth going to be for the Home Depot. What we talked about in 2015 is largely what we’re investing in today. It’s the pro.
It’s interconnected retail, meaning the marriage of our digital assets and the store experience. And and those are our two principal growth avenues. Add the third one, which is the the the pre emergence of new stores, right, which is incredibly exciting for us. But just to talk about the growth strategy for a bit, we are in a trillion dollar addressable market. It’s one of the most attractive markets we think in the consumer economy.
We’ve got about a 17% share. But if you think about the pro side of that, pro is about a little over half of that 1,000,000,000,000. We sell it 525,000,000,000 for the pro. There’s probably about half of that that while you would we we have the right to win, but we don’t quite have the capabilities to win. So when we talk about the ability to win with larger pro, the more complex order, we’re talking about a $250,000,000,000 market opportunity where we’re in prime position.
We’re the largest player. And and so and yet we don’t have the capabilities. And so for the last five years, it is fair to say the buildup of the capabilities that have allowed us to begin to compete and win with that complex per order are are are really shaping up and beginning to to be put in place. I’m happy to talk more about that, Chris. I guess the the question there is two part question.
One is where do you exit this year from a capabilities perspective? Or do we have a base of pyramid in place to grow to grow from? And then, you know, on the other side, how does you can turn 17 markets now. How is it how are you thinking about the pace of that expansion? Right.
And the old system. Right. So we are in 17 markets with a number of elements of the experience. And, yeah, I I kinda take these down into local and then national elements. You can think of local as being a flat high distribution center.
We have 17 of those. We’re building three more that will open in 2026 or ’20. You have a flat high distribution center. You have an outside sales force who is calling on customers and showing up to job site and facilitating these orders. And and then you have and, obviously, you have the power of the store, which is already there.
Then you have kind of the common assets or or national, which are more technology oriented. These are an order management system, a an account management system, an approach to pricing, and and trade credit in the form of a house account where we extend short term credit and hold it on our balance sheet. All of these are beginning to come together. Local assets are there in 17 markets. We think that what we’ve built already contributed about a billion dollars, but it’s in our p and l base today.
So over the last few years, we’ve built up to that kind of billion dollar annual benefit. And and look, the the point here, Chris, is that this is hard. You know, truly winning the pro requires exceptional execution across all those things we’re building. So you need to be able to offer trade credit, but you have to be able to allow the pros to manage their orders the way they’re accustomed to. Think about how many order modifications and cancellations and you know, modification of the delivery date.
Order management is quite complex for these complex orders compared to cash and carry retail. It has to exist within our systems, and so that’s why it it takes a bit. So we’re already winning, despite the fact that we don’t really have that order management experience that that our pros are accustomed to. So pace. What we can’t afford to do is overpromise and under deliver to any per customer.
And that’s why we have been very measured about taking on business that we know that we can win. We’re experimenting with the right categories to hold in these flatbed distribution centers that allow us to carry much deeper quantities, almost infinite quantities. We can talk more about that, but also a broader set, longer length lumber, longer length drywall that can’t be held in a store. We’re learning what works. And it’s working.
It’s not Yet, you know, we’re we’re not at that tipping point, and I don’t quite know when we’ll get there. But at some point, you know, when we click on all cylinders here, we think we’re gonna have built something truly disruptive and novel. We just wanna do it the right way. We’re not gonna get ahead of ourselves because if you’re a pro and we call you and we close an order with you and we don’t deliver on your expectations of service, you’re not gonna take our call yet. And so that’s why we’re we’re being very careful and measured with it.
K? So I have about five more minutes to prepare questions, and then we’ll open up the audience for for q and a. So definitely welcome questions. On the as you so the follow-up question to that is that business, how how is that gonna affect the cyclicality of the Home Depot business relative to sort of the core retail box? So, you know, the the beauty of what our pro business is is comprised of is not not exposed to new construction.
Right? It’s it is repair, maintenance, and and and improvements and larger modeling. Right? And so I think that we are in a cycle right now. I mean, you could say that, you know, the the hesitation by our customers to take on larger projects probably has not been this frozen since the great financial crisis.
Housing turnover, I’m not sure it could be any lower. And so in that respect, it’s fantastic. I’m not sure that that conditions could get much worse, and yet here we are winning every day. You know, you take you take a category like roofing, for instance. That’s where we’ve expanded our exposure to that great market through the acquisition of SRS, which is about two thirds roofing.
Roofing is is essentially a noncyclical business. Right? You have a a major proportion going into repair and remodeling. And and so a category like that, you know, it’s it’s just it’s a noncyclical category, and it winds up just what ours are. And I would say that that’s, you know, larger projects.
There is some relationship with significant swings in interest rates. But as I said, as as folks adjust to this new normal, you know, we expect it’s just a matter of time before this begins to to heat up again. Okay. It’s a great dovetail to the SRS side. So, you know, large pro versus trade pro is quite a great asset, very scalable asset.
Yes. Could could the trade pro opportunity bigger than the large power opportunity opportunity? And as you think about category expansion in SRS, you know, like, is the environment inhibiting going into a new category? Is it finding the right bolt on asset onto SRS? Still right here.
Well so your first question, trade versus large flow. Look, the beauty of the SRS acquisition is allows it allows us to sell to both that generalist who is buying across our store and across our assortment, and then also that specialist, the roofing specialist. Think about a project, remodeling project, where you have a small roofing requirement to the project. That part of the project might be executed by the GC, maybe subbed out. But that purchase is likely to be executed through our hemp seed sales representative and delivered to our platform distribution center.
If you’re talking about a larger remodeling project or a full roof replacement, that’s going to come through that’s gonna be subbed out to a roofer. That roofer is gonna go to SRS. That’s where the, you know, the specialty roofers go. So and with SRS, we pick up pool, we pick up landscape, we pick up the specialist. The acquisition of SRS did increase our TAM by, we think, about 50,000,000,000 as we become more legitimate in those trade categories.
And not all specialty trades are fully reflected in that trillion dollar market. So, you know, we’ll we’ll learn as we go, and we’ll expand our TAM as we move along as well. With respect to new verticals, SRS is an exceptional acquisition vehicle. They’ve proven over their fifteen year history, to have really an unblemished record of, call it, a 50 acquisitions. They’re methodical and best managed distribution company we’ve ever come across.
And to your point about quality assets, one thing we know is we’re we don’t need to be in the turnaround game. Right? We we are not interested in investing in turnarounds. We’re in so we’re interested in acquisitions that accelerate our ability to realize our vision and and make us better. Right?
And that’s what SRS did. It made us better. Actually, the trade credit that I talked about is being run by SRS today because they know how to do it. Right? So we we probably spent a year of learnings on on trade credit underwriting, trade credit processing simply by asking SRS to take on the entirety of the Home Depot trade credit portfolio.
And by the way, customers who are utilizing trade credit, we’re seeing truly significant growth rates with those pros. But back to the point, we will always consider acquisitions when they accelerate our ability to achieve our vision. And we’ll create value for SRS in a number of ways. Number one, we just want them to keep growing in their verticals. They they significantly outgrew their public company competition in the second half of last year.
Second, we want to evaluate new verticals and to allow them to expand into new verticals through either building it or acquiring quality assets. And then third, the cross selling with Home Depot you’re showing some really interesting benefits in in early days with SRS. Fantastic. So any audience questions that we can entertain for Richard? Everyone looking at how great the market’s been this morning.
09:45. Have a nice day. Questions?
Unidentified speaker: You you you talked a lot about home prices. Yeah. Maybe it feels like we’re in a slightly different world now than we were a few months ago even from a risk perspective with all these tariffs. Can you maybe just talk about, you know, home prices as it relates to demand? Any risks you see there?
Any correlation within your own business? I’m sure you guys look market to market. You see that there are some markets where you still see appreciation, some where there’s the appreciation. Can you just talk about that and and how we can contextualize how that might affect
Chris, Host of Retail Roundup Conference: the things with us that forward? I think contextualize is a good a good way to put it. I kinda wanna keep it at a higher level. Let me answer the lower level question first. So what do we observe?
Right now, I’d say the the the signals are going to be excuse me. They’re going to be harder to read because of this deferral of project. And so I’d say the the predominant force in our homeowner customer’s mind has been rates over the last couple of years, not necessarily priced. Now let’s talk about, you know, home prices. First of all, I remember at the end of twenty three, there were many people calling for a home price crash.
You knew that wasn’t gonna happen. In fact, home prices increased by 5%. I expect there will be some variability in home prices market to market, and we’ve seen that in recent months. But I think the question that you have to ask, again, contextually is, okay. You’re a homeowner that, you know, has been let’s just say you bought your home in 2019.
Right? You’ve seen 50% price appreciation. If you see a correction let’s say you see a 5% correction, you’re up 45%. Is that is is that really gonna sway your mindset? We actually you know, we work with I remember speaking to Robert Schiller of Kate Schiller fifteen years ago on the question of wealth effect in housing.
And I I think the the upshot of it is, obviously, there’s there’s not perfect price transparency. And so when you have moderate swings in price, they don’t have as much of an impact as when you have significant swings in price. And so, you know, I just I don’t know that dynamic is gonna be very important for home improvement. I think the bigger dynamic is when we survey our customers, the number of customers who have said they’re deferring projects because of higher rates. I mean, if you’re talking about, you know, double digit percentages of respondents saying, I’m holding off on the kitchen project.
I’m going to do it. I’m just waiting for rates. And now, again, they’re beginning to say, look. This is the new normal. I’m gonna get on with my life.
I think the the buildup of backlog is going to be possibly a more important dynamic in the short term than home prices. Said another way, deferral. Is that deferral. Right. Yeah.
Deferral. So the next question is, it’s like, normally, category grows in line with wage growth. It grows 4%. Consumption grows three to 4%. How how does the share of wallet and deferral impact how do you think about in an environment that’s weaker?
Like, is you know, normally, like, oh, I can afford these projects, now are you is it less so in a in a tough outcome because of the cycle that we just came through? You know, first of all, I’d say I don’t I there’s there’s more than just income. I do think it’s some gross appreciation. It’s when you and think about home improvement. But I think as investors, you know, you’re you’re in a great spot when you’re in home improvement because it’s the one way that a customer can make an investment that they believe is gonna pay off that always has paid off, but it also increases their standard of living at the same time.
I challenge you to think of any other one like that. Right? And so I think there’s just a persistence of home improvement demand. Look. The the how we stock The US for $50,000,000,000,000.
This thing is getting older. Ten years ago, 45% of homes were older than forty years. Now that number is 55% of all homes older than forty years. And if you look at the graphs, it’s it’s beautiful glacial increase in the average age of the American home. At the end of the day, it’s it’s one of the most fundamental needs in in in the consumer’s mind.
And so I I would say we know that this buildup of backlog is real. Our customers tell us every single day. And I I do expect you’re gonna see it see it active upon. So I’m so as you think about so I think everyone’s in this very dark mindset right now. Maybe can you talk about, you know, cost?
And I think what will put your question in terms of upside and downside. I know you’re in the best cost position since 02/2010, having called Home Depot since so ’3 is a very, very, very strong statement because that flow through from 2010 to 2017 was prepracticing against the companies. Yeah. So can you talk about let’s say you’ve cracked, you’re talking more of a normalized comp, how you think about flow through and, you know, your your willingness to pass that through and make sense that we do have an accentuation of the deferral. Is there enough leverage in the business to protect the margins?
So I I do think if you just think about the basics of what you used to see, Chris, and and what I would expect you’d see as we laid out in ’23 now. We’ll have an investor conference coming up this December, but we laid out a base case expectation for the Home Depot to grow three to 4%, which is our base case. It doesn’t mean we’re happy with that. So that’s that’s our base level of expectation. Our p and l, our operating expense begins to lever around 3% in in our current environment, which is still a little bit inflated, right, from an input cost perspective.
And you can think generally, you know, a natural rate of leverage is about 10 basis points of leverage per point of comp over that 2%. But we also outlined an accelerated case in our expectations. And so in in a base case, like, you’d you’d expect coverage to create mid to high single digit EPS growth with that three to 4% sales growth. In the accelerated case, we simply say the more we can supercharge sales growth to drive higher EPS growth, the more we’re gonna continue to reinvest. Right?
And so there’s always a choice of dropping to the bottom line versus reinvesting. I can tell you both productivity and reinvestment are there’s there’s a lot going on in both of those areas. In fact, for 2025, in in our guidance, our guidance reflects in in margin a natural rate of deleverage of about 20 basis points, which is that difference between 3% and our 1% guide. Then it reflects SRS mix in the fifty third week. Underneath that, a tremendous amount of productivity that has that we are reinvesting in the business.
Productivity in our supply chain, productivity in our store operations. It those those things fuel our ability to invest to win in the future. And so you should always expect that we’ll continue to reinvest in the business, but we we wanna earn that in productivity. And then what about at this deferral accentuates? And we have the, you know, two years of negative comps, traffic driven labor model, like, at two point fixed variable costs become more fixed.
So if we enter enter a tougher environment, do you still have that Home Depot flexibility to manage the infrastructure? We we will assess the environment as it develops, and we’ve always proven that we, you know, we we’re stewards of the bottom line. We’ll do the right thing for the business long term. It will also reflect the economic environment we feel like we’re in. Recall that at the end of twenty three, we announced we were reducing our fixed cost to $500,000,000, which we did.
And so we do maintain flexibility in our model. I would also say, though, it’s our responsibility to run this business as efficiently as possible every single day. We’re not waiting for some hypothetical situation to tighten our belts. We we keep tights up every single day. One thing that we do believe in, though, is staffing appropriately.
So, you know, we we look at our associates and their presence and ability to serve customers as the most important asset we have in the company. Those powers do fluctuate with transactions. So the growth transactions, they shrink with transactions, and so there’s a natural mitigation. But there’s nothing more important than our customer experience as enabled by that associate. And so we’re very careful to manage that that level of staffing appropriately for our customer.
Any questions? I have another one. And so going back to the price, no. I think the consumer has really digested a lot of price. In a lot of categories, durables, price came back down, but for for everyday needs, you know, pick up the consumer, food is, you know, somewhere between 20 to 40 something percent of the average spend per month, and those prices haven’t really come down.
And a lot of that, you can say that without all needs. Needs generally don’t deflate consumption. Those products, their needs. Consumers absorb a lot of inflation. Mhmm.
The consumers have been hyper value seeking still in the past couple years. You did manage price very well. You did pass a long price in that last cycle. Do you think it’s different this time? Because home people have to eat a little bit more this time because of the environment the potential environment.
Well, you know, I I I would say, in fact, you know, durable goods has been in a deflationary position for, you know, more than a year and a half. We saw our prices those cost and price generally settle mid twenty twenty three and remain very stable through 2024. We do think we’re priced sharply compared to the market. It’s our job to bring our best values to our customers every single day. We’ll keep doing that.
And so who will respond to the environment as we see it unfold? We certainly did see sensitivity in ’23 and ’24. When you when you have ticket, you know, when you have negative ticket and negative transaction, you know, you you simply have to do what is necessary to drive minimum some minimum deposits, which is why I think in our market, you saw stability in price. Chris, I think the the best way to put this is you should bet on the Home Depot every single day to optimize cost and price as sharply or better than anyone else on the consumer economy. Great.
Any other questions? Fantastic. Richard, we really appreciate your time. Great to be here. Thanks.
Bye.
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