Home Depot, Inc. (HD.US) 3Q24 Performance Communication Meeting: Establishing downstream supply chain facilities network with same-day to next-day delivery service covering 90% of the U.S. population.

On November 13th, Home Depot, Inc. (HD.US) held its 24Q3 performance exchange meeting. Ted Decker, Chairman, President, and CEO of Home Depot, Inc., stated that over the past few years, the company has built a downstream supply chain facility network, including 19 direct fulfillment centers, enabling them to cover 90% of the U.S. population with same-day to next-day delivery services. Recently, Home Depot, Inc. has expanded the range of products available at these facilities to provide faster delivery speeds for more products, and significant improvements have been made to the website to better communicate faster delivery options. In addition, in terms of overall customer experience for professional customers in-store, the company has introduced professional customer experience managers to help improve communication between in-store professional customers and external sales teams, providing a more seamless experience and excellent service. In the third quarter, sales for professional customers performed well, surpassing DIY customers. On the marketing side, 2024 was another record-breaking year for Home Depot, Inc.'s in-store and online sales during Halloween. In the upcoming fourth quarter, Home Depot, Inc. plans to maintain business growth momentum through annual holiday, Black Friday, and gift center activities. Q: You mentioned that hurricane impact caused a decrease in sales by about 55 basis points in the third quarter. What is your view on the impact on different categories, and whether these sales skew towards DIY rather than Pro? A: The impact of hurricanes on various categories is very similar, such as generators, cleaning products, lumber, etc. This is related to the work we have done to help communities prepare for these events. Q: When considering the fourth quarter, how do you split the expected 2.5% year-on-year decline between hurricane-driven and core business impacts? A: Our performance guidance mainly reflects the outstanding performance we saw in the third quarter, benefiting from hurricane-related sales, while also reflecting the fact that the weather has been unusual throughout most of this quarter. Therefore, the annual outlook is basically a continuation of the third quarter performance, with hurricane-related sales having some impact on the fourth quarter. Q: How much of your business do you now classify as demand-driven, and how much as discretionary? Can we say that larger projects are being postponed while demand-driven, repair-type projects are being completed? Additionally, do you have a description of the full-year trends for these two categories? A: Distinguishing between demand-driven projects and discretionary projects is always challenging. We can say that demand-driven projects are being completed. We have talked about positive engagement in home improvement, as well as with our professionals. But the larger, discretionary projects have been postponed, and this balance has remained constant throughout this year. Q: Can you talk about SRS and the progress you have made in cross-selling products and services between the two companies? Then, can you specifically discuss the sales contribution in the third quarter? A: We are very satisfied with the progress of SRS. The primary task is to support their implementation of their business growth strategy, which they are achieving through existing branch openings, new branch openings, and internal acquisitions to achieve what we call composite growth. They continued this in the third quarter. They opened many new stores, developed their business, and even made a few small acquisitions. So, their strategic plan is progressing as expected. In terms of cross-selling opportunities, the initial work we are doing is providing their product catalog to our customers through Pro Desk and our external sales resources, which we have seen great acceptance of. SRS sales through the Home Depot, Inc. ecosystem are obviously very small, but these specific sales are accelerating at an incredible three-digit pace. We have also started offering our product quotes to their customer base. They contributed $2.9 billion in the third quarter. In the approximately seven months we have owned them, they are expected to contribute $6.4 billion in sales. Q: Gross margin decreased by 40 basis points, can you break down the impact of SRS? How do we view the trend of gross margin in the coming years? A: When you look at year-on-year, the main impact of the gross margin compared to last year is only the combined impact of SRS. Therefore, the gross margin is in line with our expectations, and we have not changed the guidance for the full year gross margin. In the third quarter, the impact of SRS was about 80 basis points, so you can calculate that the gross margin for the rest of the business has increased significantly, in line with our expectations, reflecting the benefits of scaling back. For 2024, the impact of SRS on the year is about 45 basis points, as we have owned them for only about seven months, but the annualized figure for SRS's impact on gross margin is about 70 basis points. The reduction in transportation costs contributing to the gross margin has been in a dynamic growth state in the first half of the year, but has largely disappeared from a year-on-year perspective. Overall, we are very pleased with the performance of the profit margin, and we have not changed our expectations for the full year gross margin. Long-term, we expect the gross margin to remain stable, as it is part of our operating model. Our excellent supply chain team improves efficiency every year, and we reinvest these efficiencies, reflecting our position as the most valuable customer in the market. But also, acquiring SRS did indeed change the profit base of our business. Q: My main question is about market share. While the macro and housing are very important, you are also doing a lot to better serve your customers and all different types of customers. The company's performance this quarter seems to have improved relative to the industry. What specific categories do you think you have gained more market share in? A: We have always said it's difficult to analyze market share, but if you look at government statistics on personal spending on housing, furniture, etc., the statistics are worse than our performance. So from the government statistics perspective, we have increased market share; and from the performance of other listed companiesLook, the performance of most of our categories has also improved. For some categories, we have seen increased engagement, such as with seasonal categories, including Halloween. Paint continues to be a great story for us.Although we did see some external business related to the weather we talked about, we have made significant progress in Pro the Paints, partnerships with Bayer and PPG, our services (enhanced in-store service model) and our job site delivery expansion, all of which have helped us increase our market share in that segment and are very satisfied with the team there. Moving on to building materials, we continue to see strong performance in the building materials business. This has been the case for several quarters in a row. Therefore, as Ted mentioned, it is difficult to analyze this. We have looked at many different data sets, but we are very confident that we will continue to gain market share in any market. However, these are just a few areas where we see continued accelerated growth. As I mentioned, especially in the building materials area, the situation there continues to improve. Q: Large ticket items seem to have declined this quarter, even considering the hurricanes, in some categories you mentioned, such as generators. How do you classify this? Do you think there is some election noise? What changes do you think need to be made to truly change these categories? A: Due to weather and hurricane-related demand, our sales this quarter were clearly much better than we expected. Do not forget about the weather. This is not just about doing landscaping when the weather is good, but also about considering the limited number of days professionals lose, as they can pretty much be on site every day in October when it is dry nationwide. The ongoing concern for us is the macroeconomic uncertainty and the high interest rate environment that continues to put pressure on larger renovation projects. Therefore, we focus on the return of personal consumption from goods to services. This has largely been addressed, and we have basically gone through the prerequisitional period of demand during the epidemic. The high interest rate environment is once again putting pressure on larger, usually debt-financed renovation projects and existing home sales. Although the Fed has cut rates twice, since the rate cut in September, mortgage rates have actually risen by about 60 basis points. The two rate cuts total 75 basis points, but term and mortgage rates have therefore risen by about 60 basis points. This continues to affect housing turnover rates, with the current housing turnover rate at only 3%, the lowest in 40 years. Normally, our turnover rate is around 4.5% or 5%. However, large projects usually require financing, whether it is cash financing or home equity lines of credit. These are decreasing. Therefore, we remain very optimistic about the prospects for home improvement. We must work hard to overcome the current macroeconomic uncertainty and interest rate pressures on home improvement demand. But this is after all a market, and the market will rebalance, and renovations will rebalance. We just think we haven't fully rebalanced yet. Q: In the 17 markets where you launched the incremental Pro features, how much performance difference is there compared to the rest of the base markets so that we can better understand the impact of these features? A: As we consider a larger share of Pro, this is a huge opportunity - complex Pro, we are investing in an end-to-end experience. We talked before about our ability in complex business. Today, I emphasized the excellent work he and his team have done in-store Pro. When we consider the entire ecosystem, we want to have a great experience outside the store, and we want a great experience inside the store. So we have to do these plans simultaneously. As you said, the more they interact with our capabilities, the more we see room for growth. When we consider these 17 markets, it is important for us to ensure that we provide a great experience to build confidence. We are very encouraged by the development of the 17 investment markets, where we have built ecosystems. Our investments in basic capabilities, inventory breadth and depth, supply chain, delivery, and important sales teams have increased our share in all these markets and performed well, with shares in these markets in the single digits. For example, we just launched a trade credit service, but this service has really resonated with customers. And we are able to get involved in some projects that we don't normally get involved in. So we are very pleased with the current situation. We are very happy with the involvement of the in-store team, who are providing a great experience for in-store Pro. Some strategic adjustments we made in the second half of the year to drive our leadership participation. We focus on improving the checkout speed and convenience of Pro, ensuring that we have plenty of inventory of products that customers need, and integrating Chip and the team's tools, resources, and features developed for external Pro, which also add value to the in-store Pro experience. We like how the ecosystem is blending together in these markets and other markets. Q: The longer interest rates remain high, the more homeowners delay projects, but once rates drop, a stronger recovery is brought about? If rates do not fall next year, can the home improvement industry still grow in 2025? A: Interest rates are indeed high, putting pressure on sales, especially on HELOC (home equity line of credit) extraction. Currently, the HELOC extraction rate is about 25% of recent extraction rates. Therefore, interest rates are clearly having an impact. But I'm not sure - we discussed that when rates fell to 6%, we immediately saw activity in the real estate market. We saw this a few weeks ago - months ago, before rates actually rose. I think there is a bit much discussion about the direction of rates, with the certainty of rate cuts leading people to wait for lower rates.