Highlights from HD's Q2 Conference Call: Average Ticket Increased 3.3%; Total Customer Transactions Grew 1.1%

Home Depot, Inc. (NYSE: HD) reported Q2 EPS of $0.86, $0.03 better than the analyst estimate of $0.83. Revenue for the quarter came in at $20.23 billion versus the consensus estimate of $19.96 billion. Shares are trading up 4.20%

Highlights from HD's Q2 Conference Call:

• Home Depot sees FY2011 EPS of $2.34, versus the consensus of $2.30. The Company confirmed that it expects fiscal 2011 sales will be up approximately 2.5 percent from fiscal 2010.
  
• (Francis S. Blake, Chairman and Chief Executive Officer:) e, and good morning, everyone. Sales for the second quarter were $20.2 billion, up 4.2% from last year. Comp sales were positive 4.3% and our diluted earnings per share were $0.86. Our U.S. stores had a positive comp of 3.5%.
  
• From a geographic perspective, we saw positive comps in all but three of our top 40 markets with particular strength in our Midwest and south Atlantic regions.
  
• We were also encouraged that soft housing markets like California, Florida, Arizona and Nevada were positive in the quarter and the spread of performance across our major markets continued to narrow.
  
• We expected to see an improvement in sales in our Northern division following a very difficult spring season, and after a soft May, we did see that with our Northern division posting our strongest positive comps in the U.S. Our Southern and Western divisions were also positive, again reflecting a stabilizing environment across the country.
  
• We had a return to positive transaction growth in the quarter as well as an increase in average ticket.
  
• On the international front, our Canadian business had flat comps for the quarter and our Mexican business had another quarter of positive comps, making it 31 quarters in a row of positive comp growth.
  
• We are continuing with the roll out of our buy online, pick up in store, BOPUIS capability. We have over 100 stores with BOPUIS now and our roll out will be complete in the third quarter.
  
• On the store operations side, Marvin and his team continue on the path of switching tasking hours to customer facing hours. We have piloted a new scheduling system for our associates that will eliminate approximately 30 hours per store per week of manual scheduling activity.
  
• Our supply chain efforts are delivering significant benefits to the business as we leverage supply chain expenses even in the face of increasing fuel costs.
  
• Balanced against the positive performance in the quarter and our progress against key initiatives, the U.S. housing market remains under stress.
  
• Private fixed residential investment as a percent of GDP continues to set a 60-plus year low of 2.2% and the key measures of health in the housing market: starts, turnover and pricing remain depressed.
  
• We do not expect any meaningful improvement in the housing market for the back half of 2011 and events here and across the globe would suggest that there are more risks to the down side than the upside on GDP growth.
  
• (Craig Menear, Executive Vice President, Merchandising) We had a solid performance in the second quarter driven by three factors: first, the seasonal business and outdoor projects; second, the repair business from harsh winter and spring storms; and finally, the continued strength in our core departments.
  
• During the quarter we saw strong sales across many of our key departments with out-performance of the company average comp in building materials, electrical, kitchens, indoor garden, outdoor garden and tools. Hardware performed at the company average, paint, plumbing and flooring delivered positive comps, but less than the company average, comps in lighting were flat while comps in lumber and millwork were negative for the quarter.
  
• We leveraged the capability of our merchandising tools at a new level in the first half. Category assortments were planned at a more detailed level than in the past, using outdoor patio categories as an example, we planned not only dining and seating combinations by local store, but also cushions, umbrellas and chairs. Another capability merchants had was the ability to more quickly identify trends at a local store level.
  
• Widespread heat as the quarter progressed drove strong performance in ceiling fans, air conditioners and portable fans. Our Air Movement product category saw double-digit positive comps and contributed approximately 30 basis points to U.S. comps in the second quarter. Watering and Irrigation products also delivered positive comp performance, especially in our Southern division.
  
• Additionally, we had good performance in appliances driven by outstanding values and in part by refrigeration sales due to increasing replacement needs caused by soaring temperatures.
  
• As North America came out of the winter thaw, customers needed to repair or replace snow-damaged roofs, gutters, lawns and live goods. Violent tornados and storms in the spring increased roofing repair sales to customers in the Southern division. In addition, floods across the country resulted in the purchases of cleaning supplies, pumps and pressure washers.
  
• Performance in our core departments of Electrical, Hardware, Paint and Plumbing continued to be encouraging. Products such as portable power, power tool accessories, hand tools, fastening tools, conduit boxes, circuit protection devices, adhesive tapes and compressors were positive performers in the second quarter.
  
• Based on independent third-party tracking of consumer activity, we gained unit share in five of 13 departments during the second quarter: Flooring, Plumbing, Electrical, Lighting and Kitchens.
  
• Our average ticket increased 3.3% and total customer transactions grew by 1.1%.
  
• For example, transactions of tickets over $900 representing approximately 20% of our U.S. sales were up 5.4% in the second quarter.
  
• For our professional customers, we are rolling out DEWALT hand tools exclusive to The Home Depot and DEWALT'S new line of 20-volt lithium-ion power tools. The new 20-volt lithium-ion battery has 35% more run time and is approximately 35% lighter than its current lithium product. Hand tools including DEWALT'S utility knives, that features blades 35% sharper, 20% stronger and 75% longer lasting than traditional utility blades.
  
• We also have new product introductions in our Decor line up. We're introducing Home Decorators' collection premium faux wood blinds at great value with added features. Innovation also extends beyond just the product. Our new blind cutting machine simplifies the cutting process saving our associates time and better servicing our customers.
  
• (Carol B. Tom, Chief Financial Officer and Executive Vice President-Corporate Services) In the second quarter sales were $20.2 billion, up 4.2% from last year. Comps or same-store sales were positive 4.3% for the quarter with 1.8% comps in May, 6.2% comps in June and 4.9% comps in July.
  
• Comps for U.S. stores were positive 3.5% for the quarter with U.S. comps of 0.8% in May, 5.7% in June and 4% in July.
  
• In the second quarter our gross margin was 34%, an increase of eight basis points from last year of which 11 basis points of growth was driven by our U.S. business offset by three basis points of contraction arising from our Canadian business.
  
• First, we realized 12 basis points of leverage and medical expense due to a lower cost per participant among other factors. Second, we realized 13 basis points of leverage and depreciation expense arising from fully depreciated assets.
  
• For the year we now expect total expenses to grow at approximately 30% of our sales growth rate.
  
• Interest and other expense for the second quarter totaled $146 million, about the same as last year. Our income tax provision rate was 36.5% in the second quarter. For the year we expect our effective tax rate to be approximately 37%.
  
• Now turning to the balance sheet. Inventory remains in good shape. At the endof the quarter, inventory was $10.8 billion, down $3 million from a year ago.
  
• Inventory turns were 4.4 times flat to last year. For the year, we anticipate a small improvement in inventory turnover. We ended the quarter with $42.3 billion in assets including $2.6 billion in cash.
  
• In February, we told you that our 2011 capital-spending plan was $1,350,000,000. We now believe that our 2011 capital expenditures will be $1,275,000,000, primarily as a result of fewer new stores and the new store-opening pipeline.
  
• We expect that certain quarters will exhibit such a disconnect as there are factors such as weather-related sales, storm-damage related sales and event-driven sales that on a short-term basis can't be matched to any specific economic statistic. Because of these factors, we still project that our fiscal 2011 sales growth will be approximately 2.5%.
  
• (Q&A) First, since you opened up the dialogue, just curious if you could elaborate on what exactly quite positive means in terms of trend, because obviously we're very focused on if the markets had any impact to your sales. And then my follow up is on gross margin. You know, a lot of questions after your competitors' call yesterday exactly what the pricing environment is. Is it becoming irrational? So in that, did you see any promotional pressure unexpected promotional pressure, has the environment - has the environment changed, and also did you see any fuel pressure in your cost of goods? (A) Well, I'll start with an answer to your first question. Based on the guidance that we have given you, it implies a 3% comp in the back half of the year. And that's where we're trending. So from that perspective, it's quite positive. (A) This is Craig. Overall from promotional activity in the market really seems to be pretty common to what we have seen so far in the year. Haven't really experienced any big differences at all. (A) And as it relates to, Mark, if you want to talk about fuel pressure? (A) Right. In terms of the fuel pressure, the 26 basis points of supply chain improvement came after offsetting 9 basis points of fuel pressure, fuel price pressure.
  
• I guess my question is you comment before that you feel that you have disconnected from the housing market. Now it seems like you have disconnected from GDP a little bit. I guess the question is what are you guys using as kind of a guide post for kind of your same store sales performance at this stage? (A) So, Scott, I'd say - I mean, and to Carol's comments, we're not saying we're disconnected from GDP. There are always some events in quarters that explain ups and downs. So we think for our results it's still going to be very important that we see GDP growth. At the same time, you know, we also think our job with all of you is to report on what we're observing, and we observed strength in the second quarter even as GDP was under some pressure.
  
• Okay. And that's helpful. And then any other color on the growth on the transaction side, so the fantastic? Because obviously that's something that was a big driver of the quarter. (A) Yeah, in terms of transactions, you know, we talked about the fact that there would be a little bit of a bathtub effect in the half. And as the garden business strengthened in the second quarter, that is obviously a significant part of the transaction growth that takes place. You know, certainly in outdoor garden, for example, a lot of customers were out making repairs. But we also saw strength across the store as well in the core of our store performed well, which is also a driver to transactions.

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