The Home Depot Q2 2023 Earnings Conference Call Insights

Key highlights from The Home Depot (HD) Q2 2023 Earnings Concall

Management Update:

• [00:02:32] HD said all three of the company’s U.S. divisions posted low-single-digit negative comps in the quarter.

• [00:05:27] The company saw an increase in spring sales and strength in smaller ticket projects in 2Q. However, HD also saw a continuation of the trend of softness in certain big-ticket discretionary type purchases.

Q&A Highlights:

• [00:22:35] Christopher Horvers with JPMorgan asked if the home improvement industry is bottoming out and how is HD thinking about the trends going forward. Ted Decker CEO replied that home improvement industry is moderating, but still resilient. Uncertainty remains on how quickly PCE shift will occur and how monetary policy will impact consumer sentiment.

• [00:27:01] Christopher Horvers from JPMorgan also asked if the decline in average ticket in 2Q indicative of an accelerating shift to smaller ticket projects. Richard Mcphail CFO said HD is seeing a convergence of ticket and transactions, which is a positive sign for the business. However, there is still softness in certain large ticket discretionary item purchases.

• [00:29:00] Michael Lasser of UBS enquired if it is more likely that Home Depot can achieve a comp sales decline of less than 5% for the year, given the trend of small transactions replacing large transactions.  Richard Mcphail CFO replied that HD is confident in its 2Q performance, but is watching the uncertainties in the market, such as Fed’s rate hikes and budget deal, closely. The company is also watching its share of PCE, which has been reverting back to 2019 levels as consumers shift spending from goods to services.

• [00:31:55] Michael Lasser of UBS asked if HD’s operating expense growth sustainable, or will it need to reinvest heavily in operating expenses even if the cycle recovers in 2024? Richard Mcphail CFO answered that HD does not expect to make another outsize investment in wages in the near future and expects margin expansion based on operating expense leverage.

• [00:35:42] Zach Fadem of Wells Fargo asked about the differences between the $500 million in cost savings next year and the 10-20 bps of productivity benefit this year, and whether the latter is in the base today or builds through the year. Richard Mcphail CFO said that the company expects to achieve productivity benefits of 10-20 bps this year through ongoing efficiency initiatives. The company also expects to achieve $500 million in cost savings in 2024 through the rationalization of its cost structure.

• [00:40:10] Scot Ciccarelli at Truist enquired if HD expects inventory levels to continue to drop, or has the bottom of the destocking process been reached? Richard Mcphail CFO replied that HD is pleased with the progress it has made on its inventory position, and its in-stocks are better than they have been since before the pandemic.

• [00:44:33] Steven Zaccone from Citi asked if the sequential improvement in homeowner engagement largely weather-driven or if it’s due to some elasticity of demand as inflation eases in some categories. Ted Decker CEO answered that HD is attributing the sequential improvement in homeowner engagement to weather patterns, with the West region being the best performer.

• [00:46:39] Chuck Grom with Gordon Haskett enquired if it’s possible that HD may not fully realize its $1 billion wage investment this year due to the negative comps and transactions, and the flexibility of its transaction-based labor model. Ted Decker CEO replied that HD’s financial profile is not expected to change significantly due to the wage investment, as the company has factored in the number of hours that will be utilized during the year.

• [00:47:32] Chuck Grom with Gordon Haskett asked about the computer vision technology that HD is using and how it will benefit customers in the near term. Ann-Marie Campbell EVP said HD is using the technology to help associates find products in the overhead. The company is currently piloting the technology in select stores and expects to roll it out to all stores later this year.

• [00:53:21] Michael Baker with D.A. Davidson queried of HD still expecting the housing market to be down mid-to-high single-digits in 2023, or are there any new indicators that suggest otherwise. Ted Decker CEO said that the company believes that the housing market is still facing challenges, but that the long-term fundamentals for home improvement demand remain strong.