The Home Depot's (HD) Management Presents at RBC Global Consumer & Retail Virtual Conference (Transcript)

The Home Depot, Inc. (NYSE:HD) RBC Global Consumer & Retail Virtual Conference Call May 27, 2020 12:00 PM ET

Company Participants

Richard McPhail – Chief Financial Officer

Conference Call Participants

Scot Ciccarelli – RBC Capital Markets

Scot Ciccarelli

Good morning, everyone. I’m Scot Ciccarelli, Senior Hardline Retail Analyst at RBC. I want to thank everyone for taking some time out of their busy schedules to dial into our virtual consumer conference. With us this morning for this session, we have the senior management team of Home Depot, including CFO, Richard McPhail; as well as Isabel Janci, Head of Investor Relations. So Richard and Isabel, thank you very much. We greatly appreciate the time that you guys have provided to us and our investor partners today.

So Richard, you’ve had a pretty interesting 18 months or so on the job, without question, with the changes and challenges in a short period of time. And we’ve known each other for quite a while now, and I’ll bet you didn’t nearly expect it to be quite as eventful as it has been. So with that, I think where I would like to start is just kind of level set everyone. Can you help us better understand, Richard, kind of, how’s the demand trends changed during the quarter? Because, obviously, there’s been a lot of big swings, positive and negative for other retailers. But if you can kind of give us Home Depot’s cadence, a little bit – in a little bit more granularity, that might be helpful.

Richard McPhail

Yes. I sure will, Scot. And it’s great to be with everybody today. The opening comment I’d make, Scot, is, certainly, while this is not a situation any of us could have foreseen or drawn up on paper, one thing that I have been struck by is the flexibility of our company and our operating model and our associates to step up to the challenge that the pandemic has created. Early in the quarter, mid-March, as COVID was declared a pandemic, we said, look, we have two objectives here.

The first objective is to be there for our customers and our communities, to provide them with the products they need. And the second objective was to ensure the safest shopping environment possible for our customers and for our associates. And so the decision to prioritize safety had a direct material impact on sales performance for the quarter, but it was a decision that we would have made in exactly the same way had we the chance to do it over again. And so I’m just – I’m proud of our company, and we’ll talk a little bit about that flexibility as we go on.

As you think about the demand patterns in the quarter, there were really three phases to the quarter. And so the first phase was the entire month of February and the first few weeks of March, really weeks one through seven for our quarter, we started out February very strong. We had positive mid-single to low double-digit comps in all departments and really had – saw great strength across the store and across our customer cohorts in home improvement.

About week four and five, we saw COVID prep beginning, and so we saw an increase in customer demand for those categories you would expect, like cleaning and safety and security, but also elsewhere across the store. So the first seven weeks of the quarter were strong. Then as COVID was declared a pandemic, and as shelter-in-place orders were rolled out in rapid fashion across the country, and as we were one of the first retailers to implement significant restrictions on our own traffic to ensure safety of our customers, we saw our sales reflect those policies.

And so to give you a sense of what we did, we removed 25% of our operating hours from every week. So we began closing our stores at 6 p.m. in order to allow our associates to thoroughly clean our stores and prepare for the next day. We also limited customer counts across our company. And regardless of what store volumes, regardless of what local restrictions might have been, we said this is the right thing to do. And so those two actions, the operating hours restriction and the customer count restriction, certainly impacted the quarter by several hundred basis points of comp, in our estimation. It’s hard to calculate.

But if you think about that second period of the quarter, Scot, it was really sort of weeks eight through 10. So the last week of March and the first two weeks of April where we saw our sales performance sort of flip into what became double-digit negative comps by the end of that period. It’s also notable that we intentionally restricted traffic in other ways. We canceled our annual spring Black Friday event. And it’s not often that any business says, our primary objective is to keep customers out of our stores and to limit sales, but that’s precisely what we decided to do. And so we saw the impact.

We also suspended certain installations of projects like kitchens, for instance, that would have been deemed nonessential in many local areas. So we saw negative comps in most departments in weeks eight through 10. And then after that, in week 11, as we saw stimulus checks begin to hit, as we modified our operations to open up ways of serving our customers that really didn’t even exist prior to COVID, curbside pickup being one of them, we saw sales rebound and very quickly saw comps accelerate back into double-digit territory by the end of the quarter. And that strength was seen really across all departments with the exception of a few.

Three departments that are more installation intensive, think about kitchens and flooring and millwork. Those are – require more installation. Pros being in customers’ homes. And so those lag performance. But setting those aside, we saw strength across the store, and we saw that strength continue into the first two weeks of May.

Scot Ciccarelli

That’s kind of interesting, Richard, like, given all the restrictions that you guys self-imposed on the company, you still did a 7.5% U.S. comp, right? So like, obviously, the core demand was pretty strong. So you kind of talked about the categories. Anything – differences from a geographic perspective that would be kind of worthwhile noting?

Richard McPhail

Well, I think the two outliers. We had positive comps in all three of our divisions. We had positive comps in all regions, but two. Those two being New York metro and South Florida, which includes Puerto Rico. And so obviously, New York metro has been hit harder than perhaps any region in the country with respect to the impact of COVID and shelter-in-place. And South Florida and Puerto Rico were impacted by the fact that we actually had to close our stores for all practical purposes for a period of time. So those are the regional differences that really stood out.

Scot Ciccarelli

Got it. And then, I guess, discussed by yourselves and some of your Charlotte-based friends, pretty big – at least some difference between kind of Pro and DIY trends in the quarter. Can you help us understand kind of how those respective channels, if you will, kind of evolved? Do you have enough detailed data to kind of tell you how that evolved?

Richard McPhail

Both Pro and DIY grew during the quarter. They were both positive comp customer cohorts. We saw strong engagement, again on both sides as the quarter began. As we saw the shelter-in-place mandates rolled out, we saw pressure on the larger Pro. Our smaller Pro had steady performance during the quarter relative to the rest of the company. The larger Pros faced a number of headwinds. There were many municipalities that deemed a lot of what you would call Pro activity as nonessential. Pros had more challenges getting permits and inspections.

There was really just a reluctance on the part of many customers to invite Pros into their homes. And so all of those really combined to put pressure on the Pro. I think the good news coming out of this, Scot, is that the underlying demand for projects and those projects that would be executed by the Pro is still there. We don’t see customers canceling installations. We see them postponing them. But we know demand is there. We think the homeowner is – has been resilient through this period over the last few months. And so we’re hopeful that as permitting offices and job site inspection starts, those large Pros will come back, and we’re certainly hearing anecdotal evidence that, that is the case.

Scot Ciccarelli

Interesting. Okay. And then just one more comment on the demand. I want to ask about some of the changes that you guys have implemented to be able to handle the flexibility that you’ve talked about. Do you think you pulled demand forward into the first quarter? And if so, was any of that demand incremental? Or do you think that becomes potentially, let’s call it, a bit of a headwind in latter quarters?

Richard McPhail

I think it’s very hard to say, but I’ll tell you, there’s no question that our customers were – had a different focus on repair and home improvement projects because they were at home. And I think as you – as we saw our interactions with customers increase through the quarter, we more than doubled the number of customers that we interacted with this quarter. And so when you see patterns like that, you know that there’s some demand being created out there.

So hard to say the nature of pull forward or not, but we do think that our customers as a whole have become reengaged in DIY and home projects. We saw encouraging signs actually in kind of our middle level ticket comps, where you think about the sort of ticket between 200 and 500, really seeing impressive growth. The nature of those transactions really are project-oriented. And so we think that there could be an increased focus and appetite for projects.

Scot Ciccarelli

Well, it’s fine because when I’ve had multiple discussions with various investors, you have the conversation, and at night, people are putting in flooring or painting a room because, again, they’ve been locked in the house. But I think that makes sense for a lot of people. So do you think – and obviously, you guys saw a massive surge in your e-com business this past quarter. So I guess the questions are twofold. Do you think, a, we’ve seen a, let’s call it, permanent shift towards e-commerce, just going to do a lot more business through your e-commerce channel from here on out? And, b, related to that, does your success in e-commerce potentially open up the door to more e-commerce competition over time?

Richard McPhail

I think it’s – first of all, it’s too early to extrapolate trends we saw. But what I do think was just such an encouraging sign that we’ve invested in all the right places was our ability to handle traffic over the period. For weeks on end, we were operating on a daily basis at a higher level of traffic than Black Friday and Cyber Monday last year. And so with really zero practical periods of any disruption whatsoever. So we feel great about our ability to execute on very high levels of interaction.

The other real positive, with respect to folks interacting with our website was the level of app downloads, which nearly doubled from their normal quarterly and weekly run rate. And the engagement with my account sign-ups and e-mail tripled our normal run rate. And so we know our customers so much better now. We think that, that’s going to pay dividends. As far as customer behavior and intention to transact on the website versus coming into the store, it’s very hard to predict right now. And I think a lot of behavior is driven by customer mindset around social distancing. We did see, implemented in a matter of days, the ability for customers to pick up products curbside.

Again, I think that, that’s reflective of customers perhaps not wanting to walk down isles of a store at the moment. But time will tell as our economy reopens. Now what I do think is lasting is that we’ve exposed so many customers to the new capabilities that we’ve built over the last decade, whether it is that fantastic homedepot.com platform or it’s the multiple forms of fulfillment that we have now enabled, to make sure that we are the fastest, most dependable home improvement company with respect to delivery in our space. And so any exposure, we think, to the assets we’ve built, great exposure. We’ll be there to serve our customers the way that they want to be served. But it’s a little early to extrapolate trends.

Scot Ciccarelli

You actually touched, Richard, on one of the other questions I wanted to ask. I mean, are there any kind of specific examples you can think of where you guys have made all these investments in e-commerce and your supply chain capabilities that you just would not have been able to execute on, say two or three years ago, but now you can because you’ve made these investments?

Richard McPhail

What I think is interesting is while the customer-facing investments of homedepot.com and the capabilities of one supply chain are light years ahead of where they were five years ago, an area of investment that maybe doesn’t seem all that exciting is exciting to us. That’s our IT infrastructure. And our IT team has done a phenomenal job over multiple years, thinking through how to make us a more agile company.

And so if we had not made investments in our infrastructure, we would have never been able to pivot in areas like enabling curbside, in areas like building a customer count app within, I think, hours is probably the way to put it, rather than days. There are so many numerous examples of that, but we’re really proud of the flexibility that our IT environment has created for us. And Scot, I think that’s the word that keeps coming to my mind, again, the flexibility that we have created for ourselves through these investments. We don’t have to be the best predictors of the future. We need to be the most flexible operator as possible, so that we can be there for our customers as they need us.

Scot Ciccarelli

Got you. And then just given, you guys have been on this multi-year journey in terms of all the investments that you’ve been making that was outlined a couple of years ago at your analyst meeting. Has the current COVID situation maybe change how you’re prioritizing any of these investments, like now we have to make sure we have this capability, even though that was maybe two or three years down the road on the original plan?

Richard McPhail

Well, I don’t think we’ve seen it come in terms of a shift in material resources or even cost. And again, we have our IT infrastructure to thank for that. The heavy lifting and the money has been spent. And so that investment has allowed us to, in a very agile way, in a cost-effective way, flex towards things like curbside. We – I would say, from an overall sense, we have more confidence now than we ever have, that we’ve invested in the right areas. There will always be some flex in our – in how we invest in the business. But for the most part, I think we’re pointed in the right direction.

Scot Ciccarelli

Got it. Housing. So I’m just wondering, has the COVID-19 pandemic altered your view of the housing market? Because it seems to me, on the one hand, you obviously have people caught at home, like we were just talking about. You’re more home-centric in terms of your thought process. People probably aren’t traveling as much. So some of those travel dollars end up going back in the home. It has elements of 9/11 when people weren’t traveling, which is probably the whole kickoff or catalyst for the housing boom and bust that we went through in the early 2000s. But on the flip side, you have a strained economy. You have much tighter credit market. So when you kind of balance those two, if you think about the next, let’s call it, four to six quarters, right, like not the next quarter, but the next four to six quarters, how are you thinking about the housing market versus, let’s call it, that home-centric mentality?

Richard McPhail

Well, I wouldn’t want to extrapolate anything four to six quarters right now, Scot. But for the most part, those dynamics in the housing economy that most influence home improvement demand have remained relatively stable. And so we haven’t seen anything that really changes our view of how the housing economy will impact home improvement. I think there’s an open question on how much demand will be stimulated regardless of what the housing economy looks like, just kind of that – the question over have we truly stimulated demand for projects again. With people sitting at their homes, is there a new pecking order with respect to where the customer puts their next dollar? We just don’t know. But I’d say it’s too early to tell with respect to housing. I will say again I think the homeowner has remained a relatively resilient customer as we’ve gone through the COVID situation.

Scot Ciccarelli

Got you. And so one of the things I know you guys have historically tried to track is any kind of trade down activity that was one of the signposts, if you will, before the housing downturn. And I think even back to the onetime frame, are there any particular product categories? Any at all where you’ve seen any trade down activity? And related to that, Richard, are there certain categories you kind of say, look, if we were to see some sort of trade down activity, this is probably where it would manifest?

Richard McPhail

I wouldn’t want to speculate on the last part of your question. The – we haven’t seen anything to suggest customers are trading down. And I think if you look at our big ticket performance, which is a slightly different point, big ticket was really hampered principally by our decision to stand back from installation of non-essential projects. And so I suspect that, that will reflect the ability for Pros to get back in the home. So we just – we don’t see any signal that the customer is trading down.

Scot Ciccarelli

Got it. One of the topics coming out of your recent earnings release and earnings call, you outlined $850 million of incremental expenses that you incurred because of, let’s call it, kind of COVID issues. Can you help us better understand what was kind of period specific versus what was maybe an accrual for 2Q or kind of the balance of the year? Because I do think there was some investor confusion on that based on the number of questions I received afterwards.

Richard McPhail

Okay. Sure. Well, I’ll – let me address it and let me know if it’s clear. So we did incur about $850 million of incremental expense related to support we provided to our associates. If you kind of break that into two broad categories, $700 million of the $850 million was principally related to the extension of paid leave benefits to our hourly associates, and those were in two buckets. First, we extended paid leave to all of our hourly associates, and then we provided a further extension of paid leave to associates that would have been considered high risk under CDC guidelines. Those – that paid leave was provided on a take-it-as-needed basis and when needed. So we did not require consecutive use of days off. We also told our associates if you don’t use this, we will pay it out to you. And so the fact that we underwrote the paid leave, in essence, required us to accrue for that anticipated expense in full in the first quarter. So those paid leave programs are really, in material respects, accrued for all in the first quarter, and we will have cash expenses that relate to them, but they’re all fully reflected in the P&L.

The second bucket would be the remaining $150 million that we incurred during the quarter. And these are related to ongoing payments, sort of paid as earned benefits in the form of weekly bonuses paid to our hourly associates as well as enhanced overtime pay. We extended our overtime rate to two times the normal rate. And so we incurred $150 million related to those programs in the first quarter. And those stretched out really over about half of the first quarter. Now it’s also important to note, we are managing – the management of our business on a pretty short cycle basis. And so we discuss these programs very frequently. Currently, these – the bonuses and enhanced overtime are extended through early June, and we’ll continue to monitor them.

Scot Ciccarelli

Got it. That’s all very helpful, and I think that clears up a lot. So in other words, the $700 million that we kind of talked about, it’s fully accrued for 1Q, but it’s for the associates to really use for the balance of the year because you’ve already said, look, if you don’t use it, we’re going to pay you for it anyway.

Richard McPhail

Exactly. It’s just – it’s basically the full cost of the paid leave program that we put in.

Scot Ciccarelli

Got it. Okay, cool. And then I wanted to squeeze one more in on ESG and sustainability. And I guess the question is, how important is ESG and sustainability to your corporate strategy? And are there any, let’s call it, recent initiatives that you’d want to highlight for the group? Because, obviously, ESG is a big AUM growth category and becoming increasingly investor to really also…

Richard McPhail

Yes. So it has always been part of what we do. And it’s part of our fabric, a foundational element of how we run our business, and it’s embedded within our corporate value. So we organize our approach to ESG around three key pillars. We have a pillar where we focus on our people. We have a pillar focused on strengthening our communities. And we have a pillar with respect to operating sustainably, and we have initiatives and targets across each pillar. If you have time, we have responsibility report on our website. It does a great job outlining the touch points and the targets that are related to those three pillars. Now – but this will always be a part of who we are and what we do.

Scot Ciccarelli

Is there anything that’s happened more recently in terms of within the last two years, like this is one of our new initiatives or it’s just kind of a continuation of all the changes you’ve already made?

Richard McPhail

Well, look, we’ve – just to give you examples, I think the categories of where we are really foot forward in carbon emissions and chemical reductions and just operating sustainably. We are on track, ahead of plan and fully completed in so many of those initiatives. But again, it goes back to core principles that we established a long time ago. So we haven’t done any hard pivots because this is part of who we are. And so I’d say we are front footed there and proud of what we’ve accomplished. We want to be an example in our industry. And so again, I would want to refer you to our website, because our program is extensive, and we have established hard objective metrics around those three pillars.

Scot Ciccarelli

That’s great. Well, with that, I think we’ve unfortunately run out of time. This is again kind of a speed dating event here. But Richard, Isabel, thank you very much. Appreciate the, a, the time; b, the partnership here and really appreciate the feedback. And it sounds like The Home Depot story just kind of keeps getting better. So we greatly appreciate that.

Richard McPhail

Scot, great to be with you. Great to be with everybody, and I hope everyone stays safe.

Scot Ciccarelli

All right. Thanks again. Appreciate it. Operator, the call is over. Thank you.

Question-and-Answer Session

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