The Home Depot, Inc. (HD) Q1 2011 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to today's Home Depot First Quarter 2011 Earnings Conference Call. Today's conference is being recorded. [Operator Instructions] Beginning today's discussion is Ms. Diane Dayhoff, Vice President and Investor Relations. Please go ahead.

Thank you, Yvonne, and good morning to everyone. Welcome to The Home Depot first quarter earnings conference call. Joining us on our call today are Frank Blake, Chairman and CEO of The Home Depot; Craig Menear, Executive Vice President, Merchandising; and Carol Tomé, Chief Financial Officer and Executive Vice President, Corporate Services. Following our prepared remarks, the call will be open for analysts' 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. The conference call is being broadcast real time on the Internet at earnings.com -- 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. 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.

Thank you, Diane, and good morning, everyone. Sales for the first quarter were $16.8 billion, down 0.2% from last year. Comp sales were negative 0.6% and our diluted earnings per share were $0.50. Our U.S. stores had a negative comp of 0.7%. We had expected to post a positive comp for the quarter despite the difficult year-over-year comparison with a strong first quarter in 2010. Carol and Craig will provide more detail but the dominant factor impacting us this past quarter was weather. Both our southern and western divisions posted positive comps for the quarter but our northern division had a difficult spring and particularly a difficult April as weather was colder and wetter than last year. Since the northern division is our largest division, this was determinative for our overall results. Non-weather-related categories such as electrical, tools and kitchens performed well versus our plan and versus last year. But our garden categories had negative comps and there were impacts throughout our business for products related to outdoor projects. On a geographic basis, roughly 40% of our U.S. regions are in our northern division, and they all negatively comped. This same pattern was reflected in our top 40 markets. On a positive note, we saw strength in areas of the country with good weather and in some of the hardest-hit housing markets like Phoenix, Orlando, Miami and Los Angeles. Texas was also an area of strength. It doesn't feel good to post a negative comp and it doesn't feel good to provide weather reports, but weather aside, there were some encouraging signs from the quarter. It is useful to remember that we anniversaried not only the U.S. homebuyer tax credit, but also the strong run-up in lumber pricing from last year. Also, GDP was not as strong as predicted in…

Thanks, Frank, and good morning, everyone. Comps for the quarter came in slightly below our expectations. While we anticipated tough comparisons in the first quarter, most of the miss to expectations was related to weak performance in our indoor and outdoor garden categories, particularly in the northern division. This is a result of the winter that wouldn't end. You can see the impact of weather in our transaction count, which was down 1.9% year-over-year in the first quarter. On the positive side, total company average ticket was up 1.5% or $0.81 to $53.35 for the first quarter, driven for the most part by strength in nonseasonal and non-commodity categories. Before we get into the department results, let me comment on the request from vendors for price increases. On our last earnings call, I'd mentioned that we were seeing an elevated number of these requests due to increasing raw material costs. These requests continued throughout the first quarter. However, we are starting to see the number of requests flatten out. We review each of these requests on an individual basis and our portfolio strategy drives our go-to-market actions, as it has in the past. Though we were pleased with the results in our core businesses, during the quarter, we saw strength across many of our key categories with electrical, kitchens, tools, plumbing, paint and flooring posting positive comps. Hardware also outperformed the company's average comp for the quarter. And excluding outdoor categories, we would have exceeded our sales plan for the quarter. We are seeing ongoing trend of maintenance and repair categories performing well. Categories that drove positive growth related to maintenance and repair include pipe and fittings, light bulbs, appliance parts, cleaning and plumbing repair. Simple decor categories also continued to perform well. We saw positive comps across all hard…

[Operator Instructions] And we'll take our first question from Deborah Weinswig with Citi.

Can you just talk a little bit about the impact of mix on margins in the quarter? Carol Tomé: Absolutely, Deb. As we talked about, we did have 28 basis points of gross margin expansion in the quarter, 24 of which came from the U.S. Now 14 of that was all mix related. We had a lower penetration of lower margin categories like garden and lumber, and that drove 14 basis points of margin expansion. We also had 4 basis points of margin expansion coming out of Canada. That was all mix related as well.

Okay. And then, Frank, in your comments, you had talked about your First for Pro program. Can you talk about exactly where you are with that? And what do you think have been the biggest drivers of the improvement in the Pro satisfaction scores?

Sure. Thanks, Deb. And Marvin Ellison, who's our head of U.S. stores, is here, so I'd ask Marvin to address that.

Deb, it's really a couple of things. In serving our Pro customers, time is money and that's a very simple statement. So we look at getting them in and out fast. We have dedicated loaders, dedicated cashiers, we use our First Phone for a mobile point-of-sale, which allows us to check them out a lot faster. And really, the positive result is just about getting them in the store and out of the store faster and providing a level of service with the associates being in the aisle, in front, engaging them and allowing them to get their questions answered and their services met in a lot faster manner.

Great. And then last question. You talked about a strong start to May. Has that been geographically broad-based as well as from a category perspective? Carol Tomé: Yes, it has.

We'll take our next question from Colin McGranahan with Bernstein. Colin McGranahan - Sanford C. Bernstein & Co., Inc.: First question, just obviously the weather didn't cooperate and, I think, rightly, you kept inventory levels where you wanted. Hopefully, weather's getting better, but if it doesn't through 2Q, is there any way you can quantify what the gross margin pressure might be from a little bit of accelerated markdowns on seasonal goods? Carol Tomé: As we've looked at the forecast for the second quarter as well as the balance of the year, we've run a number of different scenarios. And we feel good about our inventory and our ability to drive the margin expansion that's in the full year guidance. As you'll recall, at the beginning of the year, we said we would have modest gross margin expansion. As we look at where we stand, a number of different scenarios, we still believe that guidance will hold.

And Colin, we use our merchandising tools and forecasting capabilities that we put in place to actually look at this on a week-by-week basis. And we look to make any appropriate adjustments if we don't see the type of sell-through that we're looking for. So always looking to optimize sales in the process. Colin McGranahan - Sanford C. Bernstein & Co., Inc.: Okay. That's helpful. And then, Craig, just a quick follow-up for you. You said in light of gas, food, apparel, inflation, that you are, I think, "sharpening focus on value." Can you talk about any of the product categories or any of the moves you're making there on that value message?

Well, we have sharpened our pencil as it relates to outdoor products that the customer uses most in their garden. We're also looking at things in the maintenance and repair area where customers are under pressure because of the things that you mentioned where we know they absolutely need to make repairs and we want to help them through that process. Colin McGranahan - Sanford C. Bernstein & Co., Inc.: Okay, fair enough.

Thanks, Colin.

And we'll take our next question from Matthew Fassler with Goldman Sachs.

I want to focus my question on gross margin as well. To the extent that you're looking for some expansion here and that mix was the biggest contributor to gross margin growth in Q1, if you could talk broadly speaking about the drivers of gross margin, does mix continue to work your way at the supply chain and logistics kind of pick up? And also in that thought process, what's your thinking on the promotional environment as you saw it in Q1 and how that factors into your gross margin thinking? Carol Tomé: Well, I'll start with the gross margin comments. I want to talk a minute about supply chain and the benefits that we're seeing from supply chain. As we all know, we faced fuel pressures in the first quarter. It was about a $23 million headwind. We covered that headwind through the great efforts of our supply chain team and the productivity that we're seeing off of the RDC. So the 5 basis points of margin expansion that we attributed to a portfolio strategy and supply chain was really all supply chain covering that headwind. So as we look at the balance of the year, we see good benefits coming off the supply chain, as we anticipated. And as you know, longer term, Matt, we are anticipating getting 40 basis points off of our RDC network.

Yes. And as it relates -- Matt, this is Craig. As it relates to, really, how we're going to market, compared to what's happening in the marketplace, we're continuing to focus on really being the customer's advocate for value and trying to drive everyday great value for our customers. We believe that, that's what they're looking for. And we're using our portfolio strategy to drive the business. And there's been varying different promotional activities in the marketplace, but we're sticking to our strategy. We believe it's working for us. Carol Tomé: And I think we could say that we view any blanket discount with caution.

Got it. And then by way of follow-up, your average ticket remains relatively robust against, obviously, the appliance stimulus a year ago. I'm not sure how much of that has to do with maybe seasonal taking a backseat to some bigger ticket categories in the quarter. But if you could talk about the broader status of big ticket transactions and customers' comfort in that arena, that would be great.

Yes. So Matt, on transactions less than $50, we were down about 2.2% in the quarter. Certainly, that has a -- the big impact there is in fact the seasonal businesses, which drive a lot of lower ticket products. Likewise, on tickets greater than $900, we were down 2.6% and there's certainly a mix impact to the growth in the average ticket as a result of the lower transactions.

And to the extent that you were down 2.5% in the $900 and over, is that OPE-driven? Or are there other categories that are under pressure?

Certainly, OPE was not a great first quarter and that had an impact. It's a continued impact to large discretionary-type spends. The one call out exception to that is what I mentioned in my comments in that we did have a terrific performance in our Kitchen business with the great offerings that we have out there. But we're still seeing those bigger ticket discretionary projects under pressure with the customer. Carol Tomé: And if I might add a little more color, Matt, to that, remember $900 doesn't necessarily mean an item. It can also include items in a basket, and as Craig commented, we're not seeing our Pro comeback fully yet. And so that's impacting that business as well.

And we'll take our next question from Chris Horvers with JP Morgan. Christopher Horvers - JP Morgan Chase & Co: I wanted to ask first about the follow-up on the ticket expansion that you were just talking about. It's interesting. Clearly, you're driving some great values and some great promotions in kitchen cabinets. But I assume that you've been trying that for the past 5 years. So what has really changed here? And do you think that the consumer's stepping up? We started with some paint, now we're going after some promotional cabinets. Are we building the ticket basket? Do you feel like as if we're making progress on that side?

Chris, I think it's a combination of a lot of work that's been happening over a few years. We have been working to be able to put programs in place that will allow a customer to upgrade their kitchen no matter how they want to do that, whether that is simply refacing or refreshing their kitchen. We have options for the customer in those categories. If they want to go in and start that project tonight with assembled cabinets, we have worked to improve our offering there over the past couple years, and likewise, if you want to tear your kitchen out and start over, we've got great value propositions, including our new Martha lineup of kitchens that has been extremely well received by our customer.

Chris, this is Marvin. In addition to that, we focused a lot on training the last couple years, on project training and on specific values that we offered to the customers for our associates. In the past, we didn't do a great job of educating our associates on the value that we offer on our products in stores, as well as the selling process. And we spent a lot of time with our Customer First program in going to each associate in each department specifically in these -- the core areas and really spending time on deliberate steps to how you satisfy a customer and how you engage a customers' buying. Those types of projects. Christopher Horvers - JP Morgan Chase & Co: So then can you talk about then how did the inside of the store do? The non -- not patio, not excluding the outdoor, could you isolate what the comp was performance in the nonseasonal categories?

In terms of the categories that did well, and you look at the businesses that actually performed with positive growth, flooring, paint, tools, plumbing, electrical, all of those categories, the core center of the store actually had a very solid performance in the quarter overall. And in contrast to exterior projects, which were pretty difficult, obviously, there wasn't much happening outdoors. So real strength in the core of the center of the store. Christopher Horvers - JP Morgan Chase & Co: Okay. And then one quick follow-up on the previous question about gross margin. As you think about Lowe's 5% off new rewards program, how do you view that? How do you view your response? And how was the performance of your 10% off everyday items program? Carol Tomé: Well, we view blanket discounting with caution. We do use credit as a selling tool, as you know. Our everyday value proposition is if you spend $299 on our private label card, it's 6 months no interest minimum payment. Last year, we offered a everyday savings program, as you recall, which was if you used our private label card and you bought everyday items like light bulbs, trash bags, batteries, those sort of items, you would get 10% off. Initially, we liked what we saw and it was a tender shift play. So we saw a nice tender shift from bankcards onto our private label card, which, as you know, carries a lower cost. But then it just petered out. And what we found is that the customers weren't responding the program and so the tender shift that we saw was only about a point and a half. Not very exciting to us. So we determined that, that's not the value proposition the customer's looking for and we will be winding that program down.

And we'll take our next question from Brian Nagel with Oppenheimer & Co. Brian Nagel - Oppenheimer & Co. Inc.: First, quick question and I know we spent a lot of time talking about the weather, the impact of the weather in Q1. But just so we're clear, I want to see maybe how you were thinking about this. So sales were impacted by adverse weather over the last maybe late in the quarter, you said things have gotten better here in May. But how should we think about going forward from here? Is it just a matter of timing? So if the weather improves, those sales essentially get made up. Or do we reach a point where maybe some of those sales evaporate? How should we think about this as we progress through Q2 and maybe through the next few months?

Brian, it's a good point. There is a point where you do start losing some sales, and, Craig, you might want to comment on that.

Sure. So what we've done is we've actually gone in and looked at multiple year history by category. Certainly, at this point, there is a little bit of business we felt in pre-emergence and in live goods that we probably won't recapture. But when you look at the majority of the seasonal business, it's running along that multi-year average. So we really don't have a significant concern. I think if something were really unusual to happen and weather continued to be horrible through the month of May, you get to Memorial Day, we'd have to deal with it in a little different manner, but I don't see that happening. Brian Nagel - Oppenheimer & Co. Inc.: Okay, very helpful. And then, Frank, a question for you. We've spent a lot of time over the last few quarters taking about how you look at your business and some of the, sort of the drivers there and how you've seen this, sort of say, break from some of the traditional housing metrics, more just a general consumer confidence. So obviously, a lot of noise in the quarter with the weather, but as you looked at the business progress over the last few months, and we've seen continued weakness in some traditional housing measures, have you seen that relationship continue to break down here?

Yes. I'd say this quarter sort of underscores it, Brian, because as I called out, we had some strength in markets that are still pretty tough on the housing side. And so it was much more -- if you look at our southern and western divisions positively comping and actually those areas having some of the most problematic housing issues, you really get -- we're more GBP dependent, and obviously, in the spring, we're weather dependent. And that's really how, as Carol called out, that's how we're looking at the remainder of the year. Brian Nagel - Oppenheimer & Co. Inc.: Got it.

We'll take our next question from David Strasser with Janney Montgomery Scott.

Kind of looking on the Internet and where you're spending a lot of money continuing to build out e-commerce, I mean, I guess, one of the issues that I keep hearing about is pricing transparency. And can you talk a little bit about what you're trying to do to help -- to combat that or to -- particularly like with mat pricing and what's going on from a power tools standpoint? I'm just trying to understand some of the opportunities there or some of the challenges.

Yes. I mean, certainly, you're right, David. The information to the consumer is more readily available than it ever has been before. We're certainly monitoring the activity to look at what's going on in the marketplace to make sure that we're competitive on a day-in, day-out position and reacting accordingly. There's certain -- there's opportunity to look at driving products that are exclusive to you. We work hard on differentiation, and differentiation applies to the big box as well as it does to the online space.

And as far as mat pricing, is that something that's becoming more aggressively enforced or not as online matures?

I don't know that I'd say that I've seen any major change in that at this point in time.

Okay. And actually, can I just change the topic one second? Looking at -- just trying to understand with D&A going down in dollars, just trying to get a sense, Carol, probably best how should we thinking about that going forward? I mean, is it more the lack of store growth? Is it less IT spending, just from a modeling standpoint to think about it a little bit more? Carol Tomé: Yes. It's really related to the store growth. We just got fully depreciated assets falling off of our asset register. So if you think about where we're spending our dollars, we're spending our dollars in IT. We're spending our dollars maintaining. Most of that is expense, not capital. And in terms of new store growth, which is the biggest piece of our capital -- asset base, if you will, that's very, very slow.

I mean, so going forward, does that number... Carol Tomé: The number continues to decline going forward.

At a greater rate? Carol Tomé: No, at about the same rate.

Okay, all right.

We'll take our next question from Michael Lasser with UBS.

You've clearly been a share leader as the home improvement market recovers. Have you been able to look back and directly tie some of the customer service initiatives to the performance? So perhaps you've been able to look at the Net Promoter Score by store and then correlate that to the performance of the score to get a sense for what you've been doing has really had impact.

Michael, we can't -- it's pretty tough to tie Net Promoter Score to particular stores and as we've been reporting over the last several quarters, we've seen improvement in that. You'd like to think that, that ties to our overall performance. But it's -- we've actually had improvements in Net Promoter Scores even in difficult quarters. So this is a long-term, I mean, I think it's a long-term sustaining improvement that we're trying to achieve, and I wouldn't to try to tie it to a quarter's results.

Mark, this is Marvin. The only thing I'll add to that is Craig and I talk a lot about merchandising value. The service in the stores will drive transactions. And so we try to create that sustaining model in the stores. Frank is right; it's not a quick fix and it's not something that you can directly correlate. But there's not a huge variance between our stores from a service score standpoint. They're pretty tightly correlated, which means that we try to have service standard consistent in all markets in all stores. And we think if we can sustain that, then what we'll see will be continued improvement in our transactions. But as mentioned, we're very weather-dependent this time of the year and even with great service and value, you're going to have a drag on transactions when Mother Nature's not cooperating. But that's our philosophy: Value on the merchant side, service in the store. And we think, consistently, that's going to lead us to a positive transaction, which also will drive sales.

Understood. That's really helpful. A quick follow-up question. Last year, you rolled out a checkbook tool to the stores and you saw a nice benefit from a tighter expense control. How far along do you think you're in that process? Are you reaching the end of the benefit? Carol Tomé: Well, Michael, as we mentioned, we were $83 million under last year. We were also under our plan. So we continue to derive benefits from the new checkbook tool and other tools that we've introduced to manage our expenses.

We'll take our next question from Budd Bugatch with Raymond James. Budd Bugatch - Raymond James & Associates, Inc.: I guess, my question, first question goes -- you increased the earnings per share guidance to $2.24 from I think it was $2.20, and $0.02 of that's for the share repurchase program. The other $0.02, Carol, is that for what's going to happen in the third -- second, third and fourth quarter? Or for your overperformance in the first quarter? Carol Tomé: That was based on our overperformance in the first quarter relative to our plan. Budd Bugatch - Raymond James & Associates, Inc.: Okay. And you said that you were underspent or under your plan in spending and you said that you're going to push increased advertising into the second quarter or second half, I can't remember which. Can you kind of quantify for us what that might be? Carol Tomé: Sure. We were underspent relative to last year, our advertising dollars was $14 million. And as a percent of our total spend, it reflects 25% of our spend in the first quarter as compared to last year where we had 27% of our advertising spend in the first quarter. So we were pushing it into the second quarter because we think that makes more sense to align our advertising spend with our top selling months. So if you think about expense management for our company, at the beginning of the year, we said that expenses would grow at 70% of our sales growth rate. We were under our expenses in the first quarter relative to plan because some expenses didn't materialize the way we thought they would, particularly payroll tax. I'm giving you more color than you probably want. But anyway, because we were under our expense plan in the first quarter, as we reforecast the balance of the year, we now think expenses will grow at about 60% of our sales growth rate. Budd Bugatch - Raymond James & Associates, Inc.: Okay. That's very, very helpful. And finally, if I could, just -- you talked about kitchens doing well. Can you talk a little bit more granularly about appliances and how that performed? And what your outlook is for that merchandise classification, Craig?

So appliances was a more difficult compare in the first quarter. We were down approximately 6.6%, had about a 20 basis point impact on the comp in the quarter. The industry rate now, the best information we can gather is projecting about a 1%-ish for the year. So the industry is projecting for things to improve. Budd Bugatch - Raymond James & Associates, Inc.: Okay. And your thoughts about that?

We believe it will head in that direction.

We'll take our next question from Daniel Binder with Jefferies & Company. Daniel Binder - Jefferies & Company, Inc.: It's Dan Binder. I know you mentioned that commodity inflation really didn't have an impact on the quarter. I was curious whether or not some of that ticket lift that you're getting is a function of some inflation across areas that you don't necessarily measure directly or tie to commodity inflation but to other vendor price increases. And whether that is a reasonable expectation over the course of the year to look for a 1% to 2% type of inflation benefit.

I think the ticket is -- it's a combination of a number of factors. It is a combination of the fact that the outdoor categories, particularly outdoor garden, was soft, which is a lower ticket, which helped drive the ticket in the quarter. It's a combination of the fact that we did well in our Cabinet business overall. It's also a factor of we've really been focusing on improving the value proposition across all of our line segments. So categories like our soft-sided tool storage, our paint program, we're doing well in products that are in the upper middle to upper end of our line structure and that's certainly having a benefit as well. And certainly, we had a benefit from the rise in copper. Carol Tomé: But here's just a data point, I think this might be helpful. If you look at our ticket growth, which is about $0.81 in the quarter, $0.32 of that was in our kitchens. And that wasn't inflation at all. Daniel Binder - Jefferies & Company, Inc.: Okay, that's helpful. The other question was on special order. You mentioned that you're 20% of the way to digitizing content. I'm just kind of curious how long it takes you to get most of the way on that.

It shouldn't take us a very long. We will easily have that done by the end of the year, if not sooner. Daniel Binder - Jefferies & Company, Inc.: Okay, great. And then finally, on the customer service side, obviously, the experience in the aisles has been notably better. It seems to be showing up in your customer service scores. I'm curious, though, if you dissect the customer service and look at the front end exclusively where there still seems to be a heavy weighting of self check out, do you sense that customers are looking for a shift to more one-on-one checkout? And if there's room to improve that experience?

Dan, this is Marvin. When we look at the quarter, our greatest improvement in service is in our front end scores. We put a big emphasis on this in the fourth quarter of last year knowing that as we approach spring this year, we wanted to have a faster, more friendly, more efficient checkout process for our customers. We renewed the training, we created an enhanced focus and we've been very pleased with what we've seen so far. And it's a priority for us for the balance of the year. It's something that, honestly, we have not historically done very well from a checkout perspective. We rolled out a new system that allows us to have any cashier to ring on any register so when we have backups, we don't have the process of getting a till out of the back office and setting up a register. We can allow any person to ring and that has sped up the ability to get customers out faster. And our Pro customers, as I mentioned earlier, are very pleased with checkout. The last point that I'll give you is our First Phones that we've talked about in the past, we do approximately 100,000 transactions per week at checkout with those mobile devices. That has been a tremendous benefit in speeding up checkout and customers love being in line and somebody to just walk up and ring them up right there and they can go out the door. So big focus and we're going to continue to put a big emphasis on it this year. Daniel Binder - Jefferies & Company, Inc.: Great. That's good to hear as a customer, too.

And we'll take our next question from Eric Bosshard with Cleveland Research Company.

On expenses, the reduction of the full year target, can you give a little bit more color? And I guess specifically, I'm interested in how you're managing or thinking about your investment in labor related to what you're doing with total expense spending. Carol Tomé: Right. Well, as you know, Eric, we've got an activity-based labor model and so we staff our stores relative to the sales that are inside the stores and nothing's changed in that regard. And of course, Marvin and his team are driving towards 60%-40% where 60% of the hours will be focused on selling, 40% on tasking. In terms of our new guidance, it's really reflected on some of the discrete cost pressures that we thought we would have in 2011 that don't appear to be as material. One of those, in fact, is payroll taxes, and I think we've discussed that with you. Many states said they were going to increase their payroll tax rates. These were states where we have a lot of people. That didn't happen in the first quarter. We're not sure it's going to happen in the second quarter. So that's just a function of our reviewed look on expenses. And then we tightened up our belt in a few other areas and things -- in areas that we can control. And so we feel real good about this guidance that we've given.

Great. And then secondly, in terms of inventories, can you just review our restate and talk a little bit about where you expect to be at year end in terms of inventory performance? Carol Tomé: Yes. We expect inventory turnover to show a slight improvement from fiscal 2010. Inventory turns for 2010 was 4.1x. So we should be higher than that. Maybe another way to think about it is just, where's working capital going? Working capital will be a source of cash for the company in 2011. We are projecting that working capital, as a percent of sales, will drop from 10.3% in 2010 to 9.8% in 2011.

So I think working capital came out of 1Q up previously versus year ago. How does that -- what specifically happens over the next 9 months or next 3 quarters to make that shift? Carol Tomé: We've got to sell through the seasonal inventory. So if you look at our payables inventory ratio, you can see a pretty marked decline year-over-year. And it's simply related to our seasonal category. We have 6 selling departments that show improvement in inventory in the quarter. But in our seasonal categories, most of that product, not the live goods obviously, but patio and grills, those sorts of products, they're imported. We pay for those when they're shipped. You'll recall that we brought them in early in anticipation of what we had hoped would be a strong spring selling season. Well, we sold it in the south and the west. We didn't sell it in the north. We're going to sell it in the north, and our working capital will get righted in the second quarter.

Okay, that's helpful.

We'll take our next question from David MacGregor with Longbow Research.

Craig, just with respect, you talked about the impact of inflation. And I'm just wondering as vendors pushing you on pricing at this point, what was the impact of the timing on the past here on gross margins?

I'm sorry, I didn't catch that.

You've talk about the fact that vendors were pushing you on pricing. I guess, I'm just trying to get a sense of we've talked already about inflation was relatively flat in the quarter. But what was the impact on margins of the timing of that pass-through? Were you were able to pass through the price increases immediately? Or is there some push forward in margins into second quarter?

Yes. There was really no impact on a margin basis at all from inflation.

Okay. The second question, just online sales trends in April, and are we able to isolate weather impact by comparing online sales with in-store sales?

That's an interesting question, David. And actually, what you'd see, which isn't a huge surprise, is even though people may be indoors ordering online, if the weather is horrible outdoors, they're still not ordering a patio set. So interestingly, I mean, when you could have had a theory that said, "online would be sustaining even in bad weather," it really doesn't happen so much.

Okay, great.

We will take our last question from Peter Benedict with Robert W. Baird. Peter Benedict - Robert W. Baird & Co. Incorporated: Just a couple follow-ups, a lot of them have already been asked. But just, Carol, on the D&A, you said it's expected to continue to decline this year. Will that hold next year? You think D&A in '12 will be less than '11? Carol Tomé: Yes, it will be. Peter Benedict - Robert W. Baird & Co. Incorporated: Okay. And then can you talk a little bit about the promotional tone in the Outdoor Power Equipment business? Particularly kind of the riding mowers and has that kind of -- it's become a little bit elevated here versus your expectations? And then your indoor/outdoor mix, how does that flex kind of by quarter across the year?

So I would say that there's been a fair amount of promotional activity in the -- particularly in the Rider business. It's a shorter season. So people are trying to make sure that they don't miss that season, expected that to be a competitive environment. As it relates to the outdoor penetrations, we are roughly 30% outdoor project-type business in the first quarter. That is kind of close to historical numbers. It grows to about 35% in Q2. Peter Benedict - Robert W. Baird & Co. Incorporated: Okay.

Well, thank you, everyone, today for joining us. And we look forward to talking to you at next quarter's earnings release call.

And that concludes today's conference. Thank you for your participation.