The Home Depot, Inc. (HD) Q2 2012 Earnings Report, Transcript and Summary

Diane S. Dayhoff - Vice President of Investor Relations Francis S. Blake - Executive Chairman and Chief Executive Officer Craig A. Menear - Executive Vice President of Merchandising Carol B. Tomé - Chief Financial Officer, Principal Accounting Officer and Executive Vice President of Corporate Services Marvin R. Ellison - Executive Vice President of U S Stores

Daniel T. Binder - Jefferies & Company, Inc., Research Division Budd Bugatch - Raymond James & Associates, Inc., Research Division Aram Rubinson - Nomura Securities Co. Ltd., Research Division Kate McShane - Citigroup Inc, Research Division Colin McGranahan - Sanford C. Bernstein & Co., LLC., Research Division Christopher Horvers - JP Morgan Chase & Co, Research Division Alan M. Rifkin - Barclays Capital, Research Division Matthew J. Fassler - Goldman Sachs Group Inc., Research Division Gregory S. Melich - ISI Group Inc., Research Division David A. Schick - Stifel, Nicolaus & Co., Inc., Research Division Michael Lasser - UBS Investment Bank, Research Division Scot Ciccarelli - RBC Capital Markets, LLC, Research Division

Good day, everyone, and welcome to today's Home Depot Second Quarter 2012 Earnings Conference Call. Today's conference is being recorded. [Operator Instructions] Beginning today's discussion is Ms. Diane Dayhoff, Vice President, Investor Relations. Please go ahead.

Thank you, Alicia, and good morning to everyone. Welcome to The Home Depot Second 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 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. 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 that could cause actual results to differ materially from our experiences and projections. 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 may also include certain non-GAAP measurements. Reconciliation of these measurements is provided on our website. Now let me turn the call over to Frank Blake.

Thank you, Diane, and good morning, everyone. Sales for the second quarter were $20.6 billion, up 1.7% from last year. Comp sales were positive 2.1%, and our diluted earnings per share were $1.01. Our U.S. stores had a positive comp of 2.6%. From a geographic perspective, all 3 of our U.S. divisions had positive comps. As expected, comps for the northern division, our largest division, were below the company's average because of this year's early spring, which pulled seasonal sales forward into the first quarter. We continue to see recovery in the markets that were hit hardest in the downturn, particularly Florida and California. Their comp performance improved from the first quarter and they were among our best comping regions in the second quarter. For the half, we had solid performance across the country with only one of our top 40 markets with negative comps and that was just barely negative. As Craig will detail, we see strength in the core of the store, and customers continue to engage in simple decor projects. Our customer transaction growth was down sequentially from the first quarter, but that's largely a reflection of the seasonal shift from the early spring. Our Pro business grew in the quarter. This is another positive sign because Pro sales face a difficult year-over-year comparison with last year's strong roofing sales due to storm repair. We also had double-digit growth in our services business, with strong growth in our kitchen installation business where Marvin and his team have focused on improving the customer experience. Our customer satisfaction surveys now show that we can deliver an installation experience that consistently hits at or above 9 on a 1 to 10 customer satisfaction scale. Our services business has now seen 7 consecutive quarters of growth. Much like the Pro customer, this business was under disproportionate pressure during the downturn. On the international front, our Canadian business posted positive comps for the third consecutive quarter with comps above the company average in local currency. And our Mexican business had another quarter of positive comps, making it 35 quarters in a row of positive comp growth. As we discussed at our Investor and Analyst Conference in June, we have a number of strategic initiatives underway to position our business for a best-in-class interconnected retail experience. These initiatives touch every part of our organization. On the dot-com side, we relaunched our mobile website for homedepot.com. Our upgraded mobile site provides significant new functionality including the ability to buy online and pick up in-store and this now represents over 35% of our mobile sales. The in-store execution of Buy Online Pick Up In-Store is a focus for Marvin and the store operations team. We take surveys from our customers on our performance, timeliness, completeness of orders, ease of transaction and Marvin has set the same objectives for constant improvement in customer satisfaction as we have for our in-stock business. We are also preparing for the launch of buy online ship to store this year, which will significantly expand the range of options available to our customers. On the merchandising side, Craig and his team continue to expand the breadth of SKUs available online. And organizationally, we had integrated online and in-store data, pricing analytics and product line review teams along with our merchant teams. This may not sound significant, but it's a key step in driving our own interconnection as those teams are now responsible for thinking through the full customer experience regardless of whether it begins in the store, on the computer or on the smartphone. Last week, we opened a new call center in Utah to support our interconnected business and we'll open another call center in Georgia this quarter. We've also begun the development of new distribution centers to support direct-to-customer fulfillment and expect to complete this effort over the next 2 years. You may have noticed the addition of new decor offerings as part of our usual second quarter storage event. We're leveraging the capabilities of our Home Decorators Collection business, which began and continues as a decor-oriented catalog and online business, but which also adds a design capability for us that we're now using for branded in-stock products. In the quarter, we also launched our first pilots with our Redbeacon platform. One of the advantages of the online space is that it gives us the ability to experiment, expand offerings and test the leverage we can generate from the combination of our physical and virtual presence. As we look into the back half of the year, there are positives from the first and second quarter that give us some confidence. Weather aside, we see strength in the core of our store, stabilization within the hardest-hit housing markets in California and Florida and signs of gradual improvement within the overall housing market. Housing now is a contributor to GDP growth rather than a drag, and private fixed residential investment as a percent of GDP improved in the quarter. As we've previously discussed, we view our business as more correlated to GDP growth than the housing market given the current depressed levels of housing-related spend. Consensus GDP estimates have been revised downward lately, which would indicate more downward pressure than upside opportunity in our sales guidance. But as Carol will discuss, given our out performance in the first half, we are maintaining our sales growth guidance and our raising our earnings per share guidance for the year. Let me close by thanking our associates for their hard work and dedication. Based on this quarter's results, all of our U.S. stores, every one of them, qualified for our first half Success Sharing. As a reminder, Success Sharing is our profit-sharing program for our hourly associates. This is a record level of participation for us with the highest ever Success Sharing payout and we're very proud of that result. And with that, let me turn the call over to Craig.

Thanks, Frank, and good morning, everyone. We finished the second quarter with solid results. There were 3 main drivers to the quarter's performance: first, the core of the store delivered in line with expectations; second, as we shared with you in the first quarter, record-setting weather in February and March pulled forward activity that otherwise would have occurred in the second quarter; and third, we lapped the impact of significant roofing repairs made in the same period a year ago. The departments that outperformed the company's average comp were decor, lumber, kitchens, paint, electrical, tools, bath, flooring and plumbing. Hardware, lighting and millwork performed positively while sales in garden and building materials were down. The impact of the weather and drought-like conditions caused our garden business to be slightly negative, and comp sales in building materials were down due to tough year-over-year comparisons in roofing. Last year, we experienced several storms in the Southeast and repair activity in the North, which drove our roofing sales. In the quarter, the core of the store continued to perform. Maintenance and repair categories such as lightbulbs, appliance parts, safety and security, wiring devices, plumbing repair, pipe and fitting and builders' hardware performed above the company average. Project completors such as power tools and accessories, electrical tools, tape, adhesives, lubricants and fasteners also positively comped. And as I've shared in the past, the customers continue to spend on simple decor updates for their home. We saw double-digit positive comps in spray paint, laminate flooring and area rugs. Wall décor, organization, paint, bath accessories, specialty carpet, door locks, hard window treatments and wood flooring all performed above the company average. Total transactions grew by 0.6% while average ticket increased 1.8% for the quarter. The average ticket growth was positively impacted by commodity inflation, which contributed approximately 50 basis points in comp as well as strength in larger ticket categories. Transactions for tickets under $50, representing approximately 20% of U.S. sales, were down 0.7% in the second quarter. We believe this is a result of the pull forward of seasonal sales into the first quarter. Transactions for tickets over $900, also representing approximately 20% of our U.S. sales, were up 3.4% in the second quarter. The drivers behind the increase in big ticket purchases were strength in HVACs, appliances, kitchens and flooring. Now let me turn our attention to the third quarter. In addition to the GDP headwinds Frank mentioned, we'll also face tough sales comparisons resulting from the impact of last year's Hurricane Irene. The impact from lapping this storm is factored into our plan for the third quarter. We're pleased with the outstanding offerings, incredible values and special buys our merchants have created to drive business in the third quarter. Recently, we announced an expanded appliance line, including Electrolux, Whirlpool and Frigidaire. These appliances are available online through homedepot.com and can be ordered in all of our stores. Additionally, in over 100 stores, we plan to expand the footprint of our appliance showroom to display the broader brand presence. Coming this fall, our Husky brand will experience several product upgrades. We are introducing new lines of a Husky hand tools for both the Pro and DIY customers. The new assortment offers industry-leading quality and innovation. Husky products are exclusive to The Home Depot. And we've ramped up our air compressor mix to feature up to 9 new Husky SKUs. And we will complement the Husky hand tool mix with new Husky tool storage solutions. We continue to bring innovation and value to Husky soft-sided storage. And in the third quarter, we're excited to reintroduce our line Husky steel storage products, including the new mechanics tool chest designed with 50-pound ball bearing drawer slides, heavy-duty casters and lid reinforcements with gas struts. We also will be the exclusive home improvement launch partner of the new Delta brand toilets. This new line of product includes innovative features such as SmartFit tank-to-bowl connections and integrated supply lines. Also from Delta, 16 new SKUs of Foundations-branded faucets will be added to our assortment, a brand the resonates with our Pro customers. Innovation in key technologies is also part of our leadership strategy. We continue to be innovative in LED and we will be introducing 15 new lightbulb SKUs in the third quarter. These lightbulbs are the second generation of product from our original line of EcoSmart LED bulbs and will deliver a new look, improved efficiency and better lighting experience. Also, we'll be launching 41 new LED fixtures in stores during the third quarter, and we'll continue to offer an enhanced selection of over 1,000 LED fixtures online. And finally, with capabilities created through our supply chain transformation, our merchandising execution team and partners in operations, we will be setting holiday at the end of the third quarter in half the time previously needed. This improvement will allow us to extend our fall cleanup selling season. And with this activity, we believe that we will deliver within -- sales within our expectations. And with that, I'd like to turn the call over to Carol. Carol B. Tomé: Thank you, Craig, and hello, everyone. In the second quarter, sales were $20.6 billion, a 1.7% increase from last year. Comps or same-store sales were positive 2.1% for the quarter with positive comps of 3.4% in May, negative 0.4% in June and positive 3.1% in July. Comps for U.S. stores were positive 2.6% for the quarter with positive comps of 3.6% in May, positive 0.2% in June and positive 3.8% in July. The variability in our monthly comps was due, in part, to year-over-year comparisons and the impact that weather and storms had on our sales. Our total company gross margin was 34.2% for the quarter, an increase of 17 basis points from last year, of which 15 basis points came from our U.S. business. In the U.S., we experienced 4 basis points of gross margin expansion arising from lower costs within our supply chain, and the remaining 11 basis points of gross margin expansion was due primarily to a change in mix of products sold, most notably a lower penetration of roofing sales this year versus last year. For the year, we continue to expect moderate gross margin expansion. In the second quarter, operating expense, as a percent of sales, decreased by 98 basis points to 21.7%. Our operating expenses declined $125 million from last year due primarily to the following factors: first, in the second quarter of 2011, we had $42 million of expense related to the impairment of Chem-Dry and natural disasters that did not repeat; second, this year, we experienced $42 million of favorability in our workers' comp reserves; and third, our credit card expense was $40 million lower than last year, reflecting lower debit card fees and a higher penetration of private label credit sales, coupled with the lower cost of private label credit. For the year, we expect expenses to grow at approximately 10% of our sales growth rate on a 52-week basis. Interest and other expense for the second quarter was $151 million, a slight increase from last year. Our income tax provision rate was 36.6% in the second quarter. And for the year, we expect our tax rate to be approximately 36.5%. Diluted earnings per share for the second quarter were $1.01, an increase of 17% from last year. Moving to our operational metrics. During the second quarter, we opened one new store in Mexico for an ending store count of 2,255. At the end of the second quarter, selling square footage was 236 million and total sales per square foot were $350, up 2.2% from last year. And now turning to the balance sheet. At the end of the quarter, inventory was $10.9 billion, up $150 million from a year ago, reflecting purchases made for our upcoming holiday season. Inventory turns were 4.7x, up from 4.4x last year. We ended the quarter with $42 billion in assets including $2.8 billion in cash. Moving to our share repurchase program. In the second quarter, we received 2.8 million shares related to the true up of an accelerated share repurchase, or ASR program, we initiated in the first quarter. Additionally, in the second quarter, we repurchased $1.5 billion or 23.6 million of our outstanding shares. This included 2.1 million shares repurchased in the open market and 21.5 million shares repurchased through an ASR program. For the shares repurchased under the ASR program, this is an initial calculation. The final number of shares repurchased will be determined upon the completion of the ASR program in the third quarter. Computed on the average of beginning and ending long-term debt and equity for the trailing 4 quarters, return on invested capital was 16%, 250 basis points higher than the second quarter of fiscal 2011. As we look ahead, we see signs of slowing U.S. economic growth, but housing appears to be a bit of a bright spot. August has started off in line with our expectations. Based on our year-to-date results and our outlook for the balance of the year, we continue to project fiscal 2012 sales will increase by approximately 4.6% on a 53-week basis. From an earnings per share perspective, remember that we guide off of GAAP. We exceeded our earnings per share plan in the second quarter, and with that out performance, we are lifting our earnings per share guidance for the year. We now project fiscal 2012 diluted earnings per share to increase approximately 19% to $2.95 on a 53-week basis. This earnings per share guidance includes $2.6 billion of share repurchases completed in the first half and our intent to repurchase an additional $1.4 billion of outstanding shares in the back half of the year. So we thank you for your participation in today's call, and Alicia, we are now ready for questions.

[Operator Instructions] We'll go first to Dan Binder with Jefferies & Company. Daniel T. Binder - Jefferies & Company, Inc., Research Division: I was wondering if you could just share with us maybe a little bit more color on your web sales performance as you've been making investments in that area of the business. If you could discuss a little bit about what's selling best, what's happened as you've made price investments in that area? What the average ticket looks like and the margin behind that versus the store?

So Dan, this is Craig. We're very pleased with the direction of our business online. We do view this as total commerce because there's many projects that actually start online and actually complete in-store. When we look at -- we've made some significant investments in our online business. We upgraded to WebSphere 7. Big effort behind that, improved speed dramatically for our customers as well as features that allow the customer a better shopping experience online overall. And so we're very pleased with the performance where approximately 2% of our sales roughly come through our online business directly. Daniel T. Binder - Jefferies & Company, Inc., Research Division: And then as a follow-up, could you discuss a little bit about how the Pro customer is doing versus the consumer in terms of comps by group?

So Dan, this quarter, the Pro customer sales growth was lower than the consumer. But as I noted, if you take out -- we did have, and you heard it both in Craig and Carol's comments, we did have some tough comparisons on roofing. When you take out roofing, they were pretty much the same; same level of growth between the Pro and consumer. So we're very pleased with that because, as you know, this is one of the indicators for us of our business recovery.

We'll go next to Budd Bugatch from Raymond James. Budd Bugatch - Raymond James & Associates, Inc., Research Division: I guess I want to talk a little bit about the SG&A performance, which was terrific and I think the best SG&A ratio since maybe the second quarter of '06. Carol, you called out, I think, 3 items that explain sort of a difference between this year and last year. Can you talk -- and you talked about what you thought would be the ratio or the growth going forward, but can you kind of give us maybe the callouts as to what you think affects the third and fourth quarter? Do the working capital reserves, is that a true up that still affects third and fourth quarter? And the credit card expense, how do you think that will fare for the rest of the year? Carol B. Tomé: I'm happy to do so, Budd. We were pleased with our expense performance in the second quarter for sure. And as we look out for the back half of the year, we do expect expenses to be higher in the back half of the year versus last year relative to expenses being under the first half of the year for a couple of reasons. We talked to you about the fact that we are investing in interconnected retail. And that includes the new call centers that Frank mentioned, broadband expansion inside of our stores, delivery for dot-com. So we're making some investments in the back of the year, which will cause our expenses to be higher than they were last year. But we should see continuing benefit coming off of our credit card. And as it relates to workers' compensation expense, you'll recall that during our Investor Day, we called out an expense opportunity with regard to our casualty reserves. And in fact, we've called out that we thought we could get about $100 million between now and 2015. So we were pleased with the benefit that we saw in the second quarter. I wouldn't expect that to repeat in the back half of the year, but I would certainly expect to see continuing benefit between now and 2015. Budd Bugatch - Raymond James & Associates, Inc., Research Division: Okay. And as a follow-up, just as a quick follow-up, I go back long enough to remember when you used to parse out the operating expense by store expense and G&A expense. Can you maybe give us a little bit of a read of how that affects or how that looks today? Carol B. Tomé: Yes. Well, as Frank pointed out, we are so thrilled that 100% of our U.S. stores are in Success Sharing. And so if you think about what that means for bonus payments, bonuses are up year-on-year and we're thrilled with that. But we are able to offset that cost through cost-out in other areas. And I – we didn't spend a lot of time going through it, but we continue, Marvin and his team are doing a masterful job of leveraging payroll by moving ours away from selling -- non-selling tasks to selling and it's working very beautifully for us.

We'll go next to Aram Rubinson from Nomura.

Couple things. One at your Analyst Day, you gave us kind of a breakout of 4 different product categories: one that you'd want to own in the store; one that's online know-how and in-store pickup -- and in-store experience; one that's kind of growing across channels; and one that's kind of more a defend share. I'm wondering if you guys look at comps or sales trends by each of those buckets because of the online significance in there and curious how that's trended year-to-date?

Aram, I would say that we, candidly, we look at the comps across each of the businesses. I haven't exactly totaled them by those 4 categories. But inside of those, we certainly look at it. So if you remember, the categories in the red at highest risk. Actually, right now, we're performing very well in those categories. We like that. The areas in the yellow were growth opportunities, both in-store and online. And some of those are some of our stronger growth areas that we're seeing, particularly in our online expansion as we broaden the assortments in a lot of the simple decor categories. And then, if you recall the lower left-hand side, which was kind of more maintenance and repair and things that we felt would have less pressure, we experienced some pressure in that business as it relates to garden with the pull-forward from first quarter and the drought conditions that impacted things like live goods and so on.

Well, I'm very impressed that you remembered all those bucket offhand. And then, one quick follow-up, your DSOs were flat -- I'm sorry, your DSIs. Your inventory days were flat. Wondering if you can kind of characterize the balance inside the mix and whether or not kind of having the lawn and garden being kind of outsourced really help save the margins or how that would have looked otherwise? Carol B. Tomé: Well, we were very pleased with our inventory performance. Turns were up year-on-year, that's how we look at it. And as we mentioned in the call, we have made purchases for our holiday season, many of those purchases coming from outside of the United States. We have paid for those. But the inventory's on the water making its way to the stores.

You don't feel heavy anywhere is what you're saying? Carol B. Tomé: I feel really good about inventory levels, don't you, Craig?

Yes, I feel very comfortable with where we're at, overall, in inventory. Carol B. Tomé: Yes.

We'll go next to Kate McShane from Citi.

I was wondering if there was any more detail you could give behind your Buy Online Pick Up In-Store and how that may be contributing to the comp and what you're expecting the contribution to be from this buy online ship to store going forward?

So Kate, it's still a very, very small -- I mean it's a fraction, a fraction of a small part. But it's important directionally for us because we really do believe if you look out over the next 5 to 10 years that interconnecting the virtual physical presence is going to be a key differentiator. So right now -- and then also by the same token, if you looked at comp performance on Buy Online Pick Up In-Store sales, very high growth but it's small base.

We'll go next to Colin McGranahan from Bernstein. Colin McGranahan - Sanford C. Bernstein & Co., LLC., Research Division: First question for Carol. Just back on SG&A, understanding those 3 -- those buckets and it was helpful understanding how they look going forward, but if we strip those out, SG&A dollars would have been still pretty flat on the sales per square foot and comp store sales up. So it sounds like you had some labor dollar productivity improvement given that bonuses were higher. Understand the shifting of tasking to selling, but can you comment a little bit about on what labor productivity looked like and maybe where some of the productivity improvements are coming from? And if there was anything else in the other SG&A bucket, advertising or anything else, that was favorable? Carol B. Tomé: Yes, we leveraged hourly payroll by 21 basis points in the quarter, of which 18 basis points came from non-selling. So that's really what Marvin is doing in terms of driving tasks out of the store. Terrific performance. And Colin, as you know, we've got a laser-like focus on cost out, so I can go line-by-line to tell you we were down in common area maintenance. We were down in advertising. We were down in a number of other expense areas as we're just getting much better -- we're running a better business. And Marvin, maybe you want to talk about some of the activities that are going on inside the store.

Yes, Colin, if I can take you back to 2011, we rolled out centralized Return to Vendor. A big, big process change for us, but if you think about it, every store in the chain had a minimum of 40 full-time hours in the backroom processing vendor returns. We stood up [indiscernible] central reverse logistic centers, a big deal, great productivity for us. In addition to that, we worked hand in hand with Matt Carey's team on labor productivity and scheduling. Rolled out a enterprise-wide in the U.S. scheduling system and payroll system for all stores, enabled us to take the schedule-writing process, in some cases, to 3 to 5 days to a matter of hours. So I can go through a list of projects that we put in place to drive productivity in the stores. We're excited about what we've done. We have the 60-40 target that we hope to complete in 2013. And as Carol mentioned, I mean, our goal is simply to figure out ways to take nonproductive, non-service-related payroll and shift it to the sales floor and also to continue to drive profitability. Colin McGranahan - Sanford C. Bernstein & Co., LLC., Research Division: Great, that's helpful. Sound like a good process going on. Second question for Frank, more strategic. Just on acquisitions, maybe you could talk about what the rationale was behind U.S. Home Systems acquisition during the quarter? And then, thinking about a potential Lowe's acquisition of Rona, how would that impact your thinking and your strategic positioning in Canada?

So on the first, on USHS, as you know, really, they were 100% dedicated to The Home Depot or effectively 100% dedicated to The Home Depot. And much like the acquisition we did earlier in MeasureComp, which was also a company that was 100% dedicated to The Home Depot, there are benefits to us to just making it part of the company. There are efficiencies we're going to gain. We think there's a tremendous improvement in customer experience that we can drive as we connect our store experience with that in-home selling on USHS. And I'd also say, on USHS, as you might remember, Colin, many years ago, we bought another company that was exclusively dedicated to Home Depot on in-home selling that did roofing, siding and windows. Marvin and his team have been driving that business. We like the experience that we can provide to customers on that and we want to be able to do the same thing on USHS. And on the second comment, our strategy will remain the same in Canada, and we're very pleased with how we're doing in Canada.

We'll go next to Christopher Horvers from JPMorgan. Christopher Horvers - JP Morgan Chase & Co, Research Division: Can you share your latest thoughts about adding leverage? Holding the trend into year-end seems like your adjusted leverage ratio will decline maybe to about 1.7x. Understand you don't need the cash, but given the rate environment and you're a little bit more positive on housing, can you talk about the decision points on whether you would decide to let the ratio drift lower into year end? Carol B. Tomé: Be happy to. Our adjusted debt-to-EBITDA ratio stands at 1.7x today against a cap of 2x. So we have a little over $2 billion of borrowing capability pursuant to our guidelines, if you will. As we think about when and -- we'll access the debt capital markets, we look at it really from an environmental perspective. And by that, I mean the economic environment, which we would define as pretty volatile. While housing is a bit of a bright spot and that's good news, we wouldn't the call recovery today. We still I think we're in workout phase, working towards recovery. GDP forecasts have come down. We've got an election ahead of us. We have uncertain tax policy. We don't know what's happening in Europe. Chairman Bernanke has said he stands ready to take action, if necessary. So we think there's a kind of beta in the environment and when there's a ton of beta in the environment, not the best time to add debt leverage. So our point of view, Chris, that interest rates aren't moving anywhere. If we thought that there was an opportunity to be lost, we would have a different point of view. But we don't think there is an opportunity to be lost. So for now, we're sticking where we are and we'll tell you what we plan to do when we plan to do it. Christopher Horvers - JP Morgan Chase & Co, Research Division: So this doesn't -- I guess, given the amount of cash that you have, it doesn't necessarily impact how much you could buy back into the balance of the year? Carol B. Tomé: Well, as we look at our cash balance, and we are very pleased with that cash balance of $2.8 billion, a couple things to remember: first, we've only spent about $550 million of capital this year against our plan of $1.325 billion, so we've got a lot more capital spend in the back half of the year; second, we need about $1 billion to operate just given the size of our business, the seasonality of our sales, et cetera; and the third, not all of our cash is available. We do hold cash outside the United States, in Mexico, Canada and China. So we'll always have some cash on the balance sheet. Christopher Horvers - JP Morgan Chase & Co, Research Division: Okay. And then as a follow-up, you commented that the weather drove some of the variability on the monthly side in the quarters. Was the July acceleration at all weather-driven? And can you share with us whether you see much difference in U.S. comps in 3Q versus 4Q?

On the weather side of it, July's acceleration wasn't really driven by whether, itself. We had strength across the store in the month of July. Carol B. Tomé: And I'm not sure if your comment was on last year or this year. Last year, in the U.S. comps in Q3 were 3.8%, which about 100 basis points was driven by Hurricane Irene. Comps in the fourth quarter last year were 6.1%, which was driven in large part by that warm weather that we had in December and January. Now, we've planned for that as we built our plan for Q3 and Q4 of this year. So as we look at U.S. comps for Q3 and Q4 this year, they should be more or less in line with what we experienced in the second quarter. Is that helpful?

We'll go next to Alan Rifkin from Barclays.

I know that you said that ticket was up 3.4% while sales of small purchases actually declined slightly, but could you maybe shed some color on what you're seeing with respect to discretionary items regardless of price point?

Yes, Alan, I think we're very pleased with things like kitchens, which is clearly a discretionary spend and also a very large spend. The team has worked incredibly hard to build a better experience for the customer, whether that be through the product offerings that we have or Marvin's team and the service group on the install side of that experience and we saw strong growth there and we've grown that business now for almost 2 years. So we believe that we're taking share in those type of businesses. And it's an effort of continuing to remain focused on the value proposition that we're providing the customer in those bigger ticket categories. So whether it's kitchens, flooring, all of those businesses have performed and our sales and tickets over $900 have actually been solid performance, and we believe it's because of the value proposition that we're bringing to the market in those categories and taking share.

Okay. And one follow-up, if I may. As you continue to grow the dot-com business, obviously, at a greater rate than brick-and-mortar and obviously, I realize it's only about 2% of revenues, do you believe that you're taking share more so from other competitors? Or do you think that there's some cannibalization going on? And can you maybe just shed a little bit of color on how we should be thinking about the inherent profitability of dot-com relative to brick-and-mortar for, let's say, a given product?

So as it relates to sales, I mean, I think we're taking sales from the marketplace. We do monitor our in-store business in conjunction with our online business. And I would say at this point in time, don't see a lot of cannibalization in the business in total. And so we, again, are focused on the experience that we're delivering to the customer and want to make sure that we're providing an experience that allows us to grow that business by taking share from the market. Carol B. Tomé: And from a profitability perspective, as you know, we're on a path to reach a 12% operating margin by 2015 and that path includes the impact of dot-com.

We'll go next to Matthew Fassler from Goldman Sachs.

One question on the tone of business and then one follow-up on the balance sheet. Alan sort of touched on this a bit, but you talked about what you're seeing in terms of GDP forecasts and then obviously you see the cadence of the business day-to-day and what the rhythm is among categories. Is there anything that you saw kind of Q1 to Q2 x-ing out the weather that would have suggested or substantiated the notion of a slowdown in consumer spending, or are your cautious comments just a function of sort of what the forecasters are saying?

So I'd say, Matt, that the cautious comments are a little bit what the forecasters are saying. If you just look at our business and you look at the core of the store and you adjust for the pull forward, you'd actually say the core of the strong was strong in the second quarter.

Got it. And then Carol, obviously you had 2 quarters in a row of ASRs, which for those of us trying to reconcile shares, that was a bit of a nightmare, so -- I'm sure it's good for the company. If you could give us a sense as to how this sort of trues up as we get through the third quarter and the fourth quarter, what kind of share count we could look for because presumably you'll have a bunch of stock coming out with less of an expenditure in the second half Carol B. Tomé: Well, first, let me tell you why we do ASRs. They are a pretty efficient way to buy in big blocks of stocks and they're derivatives, as you can appreciate. And we can set the strike price wherever we want to set it. But the higher we set the strike price, the larger the discount to BWAP. So when we did the ASR for $1.4 billion in the second quarter, we set the strike at $65, which meant we immediately brought in 21.5 million shares. Now obviously, our stock's nowhere near $65. So as the ASR is completed, they're buying the shares in at the price every day. So it'll leverage down considerably. The economic benefit in doing this is almost $0.80 off the BWAP every day. So there's real value to be created by doing it this way. So you pick what the average stock price might be. The ASR expires on August 24. It could close out any time between now and August 24. But I'm thinking we'll get another 7 million shares in or something like that. So hopefully, that will be helpful.

So that comes in addition... Carol B. Tomé: To what we've already gotten, yes.

And then you've got -- then on top of that, you've got the incremental buyback that you guided to, which we should think about at market prices. Carol B. Tomé: Exactly.

So 7 million comes in with no incremental expenditure. That's the true up. Carol B. Tomé: That's right, more or less.

We'll go next to Greg Melich of ISI Group.

I had a couple of questions. First, Craig, on the ticket accelerated from 2.2% to 1.8% in the second quarter from the first. Can you describe how weather or perhaps disinflation may have impacted that, especially given that vendors' gross margins have started to improve as raws come down?

So the ticket improvement really was driven through a number of categories around bigger ticket spends, the HVAC, the appliances, the kitchen, the flooring. A little bit of drag on the bigger ticket was things like tractors, which were impacted both from a pull forward where if you were going to buy a tractor, you bought it in the first quarter, you're done. And as we called out, we estimated that the pull forward in the first quarter from the second would be roughly $125 million to $150 million; that's about what the number was and it impacted categories like tractors. Carol B. Tomé: And Craig, if I can just jump in for a second. There's a currency impact in the ticket in the second quarter. If you look at the ticket growth in the U.S. in Q2, it was up 2.5%.

Got it. And then secondly and this is maybe a little bigger picture looking forward for everyone. We now have Affordable Care Act is going to go forward. I'm curious to what you guys have done to sort of start preparing for that, whether it's looking at your full-time versus part-time labor, potentially outsourcing some certain things. I mean, Marvin mentioned re-tasking, maybe putting some business work back on vendors. Just thinking about this bigger picture as to how you guys are preparing for that?

So Greg, we're obviously spending a lot of time thinking through the implications of the Affordable Care Act and how we'll respond. But I would tell you we run our business the right way to run our business. We're not going to change full-timers to part-timers because of the health care legislation nor would we outsource work for that reason. The overriding -- the customer experience and what our associates provide to the customer experience in the -- I mean, that's our business.

Is there something that you're waiting for to be able to make some more decisions about how to do that best? And then...

Oh my gosh, there are so many -- there are a lot of -- there's a lot of regulatory uncertainty still. There are many -- when you get into -- this is obviously a very complex area and we spend a lot of time internally going through the -- here are the different variables that we've got to take into account. And there's a lot that still has to be determined.

We'll go next to David Schick from Stifel, Nicolaus. David A. Schick - Stifel, Nicolaus & Co., Inc., Research Division: Two questions. First, how are private label sales doing online would be interesting. And secondly, Frank, you talked about strength at kitchen install, and Craig, you talked about the value proposition that's helping to drive that. But any more detail on labor efforts, staffing, marketing around the incremental share you're grabbing there, as you said, would be helpful.

So I'll start on the second one, which is the kitchen sales and in particular just going back to a comment I made on the improvement on our kitchen install side, and Marvin may want to add a comment here. I'd say that one of the important things is the confidence of our associates in selling a kitchen install. And so you really have to look at it as a multi-year effort for Marvin and his team of building up our associates' confidence that when we sell a kitchen installation, it's going to go well. And we do very extensive voice of the customer surveys on this. And Marvin, you might want to add a comment.

Yes. Look, the key is the confidence of the associate. I mean, I can take you back to the days when I was a Division President and you could directly correlate poor-performing stores and markets and kitchen sales to their perception of the quality of the service providers. So to Frank's point, over the last couple years, we've taken some very specific steps in putting all of our service providers through our version of Customer First training. We rolled it out to the store, we rolled it out to the executive team, we figured, you know what, let's roll it out to the service providers because when you step foot in the home, you represent The Home Depot and you should have the same brand standard for customer service. That was a big deal because we'd never really done that before. In addition to that, we put some very rigorous standards in place on the voice-of-customer surveys. We changed the way the surveys are conducted. Now we have a third party that will physically contact the customer after an install and will go through a very brief survey, and we hold our providers accountable for the results. If they perform well, we give them positive incentives. If they don't, they can lose business, and in some cases, suffer exiting their relationship. All that being said, we're very pleased. Frank mentioned early on that our service scores are north of a 9 on a scale of 1 to 10. We've never had that before and we've sustained that. Our goal is to improve it. We still have concerns about getting better because we have high standards. But the service quality, the training has really played a big role and to help Craig's team take great value, create confidence and to install it in a way that we think is very consistent with the brand standard of our service proposition to the customers.

And as it relates to private label sales online where we have categories in-store online with same kind of makeup of private label versus national brand, product and sales are roughly in the same penetration ranges as they are in-store.

We'll go next to Michael Lasser from UBS.

From a product perspective, if you look at the categories that are most below peak volume levels, how did those perform during the quarter and where do you expect them to go over the course of the improvement in the housing recovery?

So the categories that are kind of past peak that would be those seasonal businesses that we're coming out of Q2. And candidly, the pull forward in Q1 had an impact on them, so businesses -- and as well as frankly some of the areas in the north had an impact from drought. So things like live goods and fertilizer had some weather impacts from the drought in the north. Things like patio and grills and riding mowers that are past their peak, we saw some pull forward from Q1 in those businesses.

Michael, do you mean within the year or over time?

Over time. I meant looking back to the peak of the housing bubble, you're doing 60% of the volume in kitchen remodels that you were back then and those were some of the best-performing during the quarter.

You got it exactly right. So if you look over time, the categories that have been hit the hardest are kitchen remodels and you've heard we're improving there. Jobsite tools is always an interesting category because they kind of correlate to job sites and I'd say stabilizing. It's stabilizing. Carol B. Tomé: Lumber as a penetration had a ways to go.

Lumber as a penetration still has a ways to come back, absolutely.

So you would characterize those categories as some of the better performing during the quarter? And then, I'm also curious about July into this quarter because, again, a historic relationship between the housing market and home improvement would suggest that you're going to start to see some of that activity really take shape in the second half of the year?

What I would say, Michael, is that what those categories that were hardest hit would say would be the market is stabilizing. As Carol said, we're kind of in a workout mode. But it's not like this has taken off. It's stable, it's improving and that's a positive in a workout sense, but they're not -- I mean, it's modest.

Okay. It's more of a slow grind higher than a sharp upturn?

Right, yes.

We'll take the last question from Scot Ciccarelli from RBC Capital Markets.

I guess I was asking a -- going to ask a question fairly similar to Michael. When you look at California and Florida, 2 areas that you basically had highlighted, do you see much of a difference in terms of mix from what you're seeing through the rest of the country, just given the fact that they're coming off such a trough level?

No, it's not a dramatic change in mix of sale.

Not at all?

Not really, no. The market's improving, but the mix is about the same.

Well, thank you for joining us on today's call, and we look forward to talking to you at next quarter in November.

That does conclude today's conference. We thank you for your participation.