The Home Depot (HD)

Q4 2010 Earnings Call

February 22, 2011 9:00 am ET

Executives

Diane Dayhoff - Senior Vice President of Investor Relations

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

Craig Menear - Executive Vice President of Merchandising

Marvin Ellison - Executive Vice President of U S Stores

Francis Blake - Executive Chairman and Chief Executive Officer

Analysts

Alan Rifkin - BofA Merrill Lynch

Gregory Melich - ISI Group Inc.

Colin McGranahan - Bernstein Research

Michael Lasser - Barclays Capital

Peter Benedict - Robert W. Baird & Co. Incorporated

Matthew Fassler - Goldman Sachs Group Inc.

Deborah Weinswig - Citigroup Inc

Stephen Chick - FBR Capital Markets & Co.

Wayne Hood - BMO Capital Markets U.S.

Christopher Horvers - JP Morgan Chase & Co

David Schick

Brian Nagel - Oppenheimer & Co. Inc.

Laura Champine - Cowen and Company, LLC

Presentation

Operator

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

Diane Dayhoff

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

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

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

Now let me turn the call over to Frank Blake.

Francis Blake

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

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

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

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

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

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

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