The Home Depot, Inc. (HD) Q3 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

Colin McGranahan - Sanford C. Bernstein & Co., LLC., Research Division Peter S. Benedict - Robert W. Baird & Co. Incorporated, Research Division Daniel T. Binder - Jefferies & Company, Inc., Research Division Michael Lasser - UBS Investment Bank, Research Division Thomas J. McConville - Raymond James & Associates, Inc., Research Division Laura A. Champine - Canaccord Genuity, Research Division Eric Bosshard - Cleveland Research Company Gary Balter - Crédit Suisse AG, Research Division Scot Ciccarelli - RBC Capital Markets, LLC, Research Division Michael Baker - Deutsche Bank AG, Research Division Matthew J. Fassler - Goldman Sachs Group Inc., Research Division Dennis McGill - Zelman & Associates, LLC David Gober - Morgan Stanley, Research Division Christopher Horvers - JP Morgan Chase & Co, Research Division Alan M. Rifkin - Barclays Capital, Research Division

Good day, everyone, and welcome to today's Home Depot Third 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, ma'am.

Thank you, Vicky, and good morning to everyone. Welcome to The Home Depot Third 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 expectations 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 third quarter were $18.1 billion, up 4.6% from last year. Comp sales were positive 4.2%, and our diluted earnings per share after adjusting for the closure of our stores in China were $0.74. Our stores in the United States had a positive comp of 4.3%. We faced a difficult year-over-year comparison in the quarter, particularly in our Northern division because of the overlap from Hurricane Irene last year. Despite this, all 3 of our U.S. divisions had positive comps. The Southern division was our strongest division for the quarter. Of note, all of our major markets in Florida showed quarter-over-quarter comp improvement, and in the Western division, our major markets in California had growth rates above the company average. Both of these are signs, we believe, of a continuing healing in the housing market. In all 33 of our top 40 markets had positive comps, and our markets with negative comps were primarily in the Northeast. On the international front, our Mexican business had another quarter of positive comps for the 36th quarter in a row, or 9 years of quarter-over-quarter positive comps. In Canada, we had positive comps for the fourth consecutive quarter, as Bill Lennie and his team continue to improve our business there. And during the quarter, we announced the closure of our big box stores in China. After several years of effort, we concluded that we could not make our big box retail model profitable there. As you will hear from Craig, in the U.S., we continue to see strength in the core of our store and the company had solid growth in both transactions and ticket in the quarter, making this our sixth consecutive quarter with transaction and ticket growth. We also continued to see recovery in our Pro business. Our Pro sales grew during the quarter, though at a slower rate than our consumer business, due in part to comparisons to the strong sales in roofing from last year. On a regional basis, it's encouraging to see our Pro sales growth matching consumer growth in key areas like northern California and Phoenix. During the quarter, we also rolled out several enhancements to our Pro website, including a bulk pricing program online that mirrors our in-store bulk pricing program, and Marvin and his team continue to focus on improving the in-store experience for our Pros. We look at customer satisfaction surveys for both our Pro and consumer segments, and our Net Promoter Score for Pros is now consistently over 70%, as is our consumer score. Our installed services business had another quarter of positive growth, with strength across the country and in all key programs. This is another critical area where we have implemented improvements to our website, in this case with a functionality called MyInstall that's specifically designed to improve the transparency and communication in install projects and to simplify the customer experience. We will be adding capabilities to MyInstall throughout 2013. In the quarter, we completed the purchase of U.S. Home Systems, a kitchen and bath refacing business. This company's business was already effectively 100% Home Depot-based, but the acquisition will allow us to create more effective interconnection between our stores and the U.S. Home Systems in-home selling platform just as we've done with our roofing, siding and windows businesses. We continue to work on improving our supply chain, and in the quarter, we completed the mechanization of all of our Rapid Deployment Centers, which will further improve the cost effectiveness of this platform. Disasters such as Hurricane Sandy create enormous demands on a supply chain, and our team responded. To date, we have shipped approximately 4,000 truckloads of product to assist the communities impacted by the storm. As Carol will discuss in more detail, we are updating our earnings per share and sales guidance for the year based on our outperformance in the third quarter. We anticipate that over several quarters' time, Hurricane Sandy will have an impact to our sales comparable to that of Hurricane Irene, but the exact timing of that is uncertain. As a more general comment on our market, we believe the U.S. is still working through the issues associated with the housing crisis. Credit availability remains a major issue. But we can start to see the housing market as an assist to our growth rather than an anchor. That is consistent with the national numbers which now show housing as a positive contributor to GDP. Private fixed residential investment as a percent of GDP has improved for the fourth consecutive quarter to 2.5%, though it is still well below previous historical lows, not to mention its 60-year average. Based on this quarter's results, 95% of our stores would qualify for Success Sharing, our profit sharing program for our hourly associates. This is a reflection of the hard work and dedication of our associates, and I'd like to give a special thanks to all of our associates who have worked to help the communities impacted by Hurricane Sandy and Hurricane Isaac. They have worked tirelessly under difficult circumstances, often in the face of disruption in their own lives caused by the storms. Helping in a time of need is a core part of The Home Depot culture, and we are very proud of their efforts. And with that, let me turn the call over to Craig.

Thanks, Frank, and good morning, everyone. We are pleased with our performance in the third quarter as sales exceeded our expectations. The departments that outperformed the company average comp were lumber, decor, kitchen, paint, lighting, bath, electrical, outdoor garden, indoor garden, hardware and flooring. Plumbing, tools and millwork performed positively, while comp sales in building materials were negative due to a tough year-over-year comparison in roofing. In the last week of the third quarter, we experienced around $70 million lift in sales, including batteries, flashlights, generators and extension cords as customers in the North prepared for the threat of Hurricane Sandy. Looking ahead, it's difficult for us to forecast the magnitude of ongoing cleanup sales in the affected areas. In the beginning of the third quarter, I told you that we'd be setting our holiday assortment in half the time previously required by leveraging our supply chain and merchandising execution teams, and we did just that. The objective was to extend our fall cleanup selling season and allow time for an additional fall event, which exceeded internal expectations. These efforts along with great fall weather drove double-digit positive comps in walk-behind mowers, riding mowers, pressure washers, exterior stain and chemicals. Portable outdoor power, exterior paint, lawn accessories, soils and mulches, fertilizers, grills and planters all performed above the company average comp. Patio furniture and live goods had a positive performance in the quarter as well. In the third quarter, we began setting some of our appliance showrooms to include Electrolux, Whirlpool and Frigidaire brands. We will complete the rollout of our 120-store pilot during the fourth quarter. These appliances are available online through homedepot.com and can be ordered in all of our stores. And we are pleased with the results we have seen so far. For the balance of the business, we continue to see momentum in maintenance and repair and simple decor. On the maintenance and repair side, departments such as hardware and electrical as well as categories such as cleaning and plumbing repair continued to perform positively. Bath, lighting, flooring and interior paint performed well within simple decor. As part of our interconnected retail strategy, we are inspiring and educating our customers through our Style Guide available on the Web and for the iPad. The Style Guide is rated 4.5 stars out of 5, and it is consistently a top 100 app in the App Store. And this week, we will launch the holiday version of the Style Guide. Total transactions grew by 1.7%, while average ticket increased 2.9% for the quarter. Our average ticket increase was impacted somewhat by commodity price inflation from lumber. The total impact of the ticket growth from commodity inflation in lumber was approximately 70 basis points. Transactions for tickets under $50, representing approximately 20% of our U.S. sales, were flat for the third quarter. Transactions for ticket over $900, also representing approximately 20% of our U.S. sales, were up 4.3% in the third quarter. The drivers behind the increase in the big ticket purchases were strength in appliances, flooring and in-stock kitchens. Now let me turn our attention to the fourth quarter. Innovation remains a key part of our leadership strategy. And one of the products we're excited about is our second generation Ryobi lithium batteries with fade-free power. Our lithium plus batteries offer better performance for existing tools, fuel gauges and extreme weather performance. We bring to market the looks customers want with the features they need. In the fourth quarter, we will be exclusively launching a new wood plank look porcelain tile from MARAZZI. This new product will give customers the ease, maintenance and durability of a porcelain tile with a wood finish they desire. Additionally, we'll introduce the Moen Haysfield motion-sensing faucet exclusive to The Home Depot. This faucet delivers consistent hands-free activation even when the handle is in the off position, with 2 sensors that provide flexibility and convenience in many kitchen tasks. We are also the exclusive home improvement launch partner for Kidde's worry-free smoke alarms. These alarms utilize lithium technology eliminating battery changes for 10 years, saving our customers on average $40 in battery replacement while enhancing safety. And finally, we have an outstanding offering of products in our Gift Centers for the holiday season and our best lineup yet in holiday decor. The offerings in our Gift Centers will feature an extensive assortment of hardware and holiday items for gift-giving and decorating. For Black Friday, we have outstanding special buys with extreme values for our traditional DIYers and professional customers. And with that, I'd like to turn the call over to Carol. Carol B. Tomé: Thank you, Craig, and hello, everyone. Before I begin my remarks, I want to remind you that in the third quarter, we closed 7 big box stores in China, and as a result of the store closings, recorded an after-tax charge of $165 million or $0.11 per diluted share. The charge included the impairment of goodwill and other assets, lease terminations, severance and other charges associated with the store closings. In our press release, we provided a supplementary schedule that sets forth the impact of these charges. And for the purpose of today's call, I'm going to talk about our financial performance on an adjusted basis, adjusting out the financial impact of the China store closings. So with that, sales for the third quarter were $18.1 billion, a 4.6% increase from last year. Comps or same-store sales were positive 4.2% for the quarter with positive comps of 2.6% in August, 5.1% in September and 4.8% in October. Comps for U.S. stores were positive 4.3% for the quarter, with positive comps of 3% in August, 5.2% in September and 4.6% in October. On an adjusted basis, our total company gross margin was 34.6% for the quarter, an increase of 22 basis points from last year. Our U.S. business drove 13 basis points of gross margin expansion in the quarter, while our international business, principally Canada, contributed 9 basis points of gross margin expansion. In the U.S., our gross margin expansion is explained by the following factors: First, our shrink reduction efforts are gaining traction, and we realized 10 basis points of margin expansion due to lower shrink. Second, we experienced 7 basis points of margin expansion due to lower costs in our supply chain. And third, we experienced 4 basis points of gross margin contraction due to a change in the price and mix of products sold. On an adjusted basis, operating expenses as a percent of sales decreased by 93 basis points to 24.2%. Our expense leverage reflects our strong sales performance and some favorable year-over-year comparisons. Year-over-year, we had $21 million of natural disaster expense that didn't repeat this year. Additionally, our credit card expense in the third quarter of fiscal 2012 was $37 million lower than last year due primarily to benefits arising from our private label credit card program. Interest and other expense for the third quarter was $150 million, a slight decrease from last year. On an adjusted basis, our income tax provision rate was 36.4% in the third quarter. Let me note that on a reported basis, our tax rate was 40.2% in the third quarter because we didn't realize any tax benefit from the charges associated with the China store closings. On an adjusted basis, diluted earnings per share for the third quarter were $0.74, an increase of 23.3% from last year. On a reported basis, diluted earnings per share were $0.63, reflecting the $0.11 per diluted share impact of the charges associated with our China store closings. A few other items of note. During the third quarter, we opened 2 new stores in Mexico and closed 7 stores in China for an ending store count of 2,250. At the end of the third quarter, selling square footage was $235 million and total sales per square foot were $307, up 4.6% from last year. At the end of the quarter, inventory was roughly $11 billion, up $243 million from a year ago and inventory turns were 4.6x, up from 4.3x last year. We ended the quarter with $41.7 billion in assets, including $2.6 billion in cash. Moving to our share repurchase program. In the third quarter, we received 5.6 million shares related to the true-up of an accelerated share repurchase or ASR program we initiated in the second quarter. Additionally, in the third quarter, we repurchased $700 million or $10.2 million of our outstanding shares. This included 900,000 shares repurchased in the open market and 9.3 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 completion of the ASR program in the fourth quarter. Further, we plan to repurchase $700 million of outstanding shares in the fourth quarter, bringing our total share repurchases to $4 billion for the year. Computed on the average of beginning and ending long-term debt and equity for the trailing 4 quarters, return on invested capital was 16.1%, 200 basis points higher than the third quarter of fiscal 2011. As we head into the fourth quarter, we are faced with unknowns surrounding the magnitude of the damage caused by Hurricane Sandy that is home improvement-related and the speed with which impacted areas will recover. In addition, we are heading into the winter months where weather could hamper the rebuilding efforts. Our hearts go out to those who were impacted by this horrific storm, and we will do our best to be there when our customers need us. But forecasting the impact of damage-related sales prospectively would simply be a guess. So our guidance for the year is going to reflect our performance for the first 9 months of fiscal 2012, coupled with our plan for the fourth quarter. And given our third quarter performance, we are lifting our guidance. We now expect fiscal 2012 sales will increase by approximately 5.2% on a 53-week basis. From an earnings per share perspective, remember that we guide off of GAAP, so our guidance includes the $0.11 per diluted share impact related to the China store closings in the third quarter. We're projecting fiscal 2012 diluted earnings per share to increase approximately 18% to $2.92 on a 53-week basis. So we thank you for your participation in today's call. And Vicky, we are now ready for questions.

[Operator Instructions] We'll take our first question from Colin McGranahan with Bernstein. Colin McGranahan - Sanford C. Bernstein & Co., LLC., Research Division: First question is just on Sandy, and I understand the difficulty in projecting anything at this point given the amount of damage and the speed with which recovery is done. But Craig, it sounded like firstly, you said that you thought the overall benefit or overall impact to be similar to Irene. And I guess I'm wondering why it wouldn't be larger given a larger magnitude of damage. And Carol, did you just imply that your guidance for Q4 does not include any impact from Sandy, and how do you reconcile those 2? Carol B. Tomé: Right. Well, let's just start with the impact from Irene. Last year, we had $230 million of sales from Irene in the third quarter, $130 million of sales from Irene in the fourth quarter, for a total of $360 million of sales. And of course, it's a rough estimate but this is our best guess of the sales coming off from the hurricane. So we would envision going forward, we would have at least $360 million coming off of Sandy. The property damage, as we understand it, related to Irene was about $16 billion. The property damage for Sandy is about $20 billion. So it would suggest possibly higher sales, but it's impossible for us to know right now. As we look at our guidance for the fourth quarter, you are correct. We are including no benefit from Sandy in our guidance because again, determining what it will be prospectively is very difficult. I will say however that our sales for November are quite good. But interestingly enough, the strength is coming out of the West and the South and not so much out of the North, because as you all know, our customers are still very, very much in turmoil. You may have personally experienced some of this yourself. So this is going to be a different type of recovery than what we've seen in the past. Would you agree, Craig?

Yes, I think it is. I think the other comment I'd make, Colin, is it's a different storm than Irene. This was much more impacted in terms of water flow, Irene was stronger wind impact. So there's a little different needs that exist in this storm versus Irene. Colin McGranahan - Sanford C. Bernstein & Co., LLC., Research Division: Okay, that's helpful. Then my follow-up is on expenses. If I look at the expenses last year and back out the Irene impact of $21 million, and then I back out the $37 million of credit benefit this year, it looks like kind of trying to normalize that, SG&A or operating expenses were up about 2.2% year-over-year. Is that a kind of a normal growth rate you're thinking about now as you work through some of the benefits? And while we're on expenses, depreciation was up year-on-year for the first time since 3Q '08. Is that now -- have we reached the bottom in declining depreciation with more system spending going forward? Carol B. Tomé: Well, let me answer the last part of that question first. Yes, because the investment in IT, and we write our IT investments off over a shorter time frame, typically no longer than 6 years, we anticipate that you will start to see year-over-year increases in depreciation. And that's an okay thing, because the IT investments that we're making are giving us a positive ROI. From a normalized SG&A perspective, as we've told you back in June, we would expect long-term that our expenses would grow around 38%, 40% of our sales growth. This year, it's going to be a little bit different than that. On a 52-week basis, if you back out the impact of China, our expense growth will be basically flat. But on a normalized basis going forward, we would expect more in the 38%, 40% area.

Next we'll hear from Peter Benedict with Robert W. Baird. Peter S. Benedict - Robert W. Baird & Co. Incorporated, Research Division: Just diving into the categories a little bit more. Craig, maybe can you talk to us about the trends you're seeing in the window business? How is that been going the last few quarters, and what's your outlook there?

So we actually had positive comps overall in our millwork business, and our window business has come back from previous years, which were hit pretty hard during the downturn. So we've actually seen positive growth. Hopefully, that answers your question. Peter S. Benedict - Robert W. Baird & Co. Incorporated, Research Division: Yes. That's helpful. And then maybe just between your larger Pros and your smaller Pros. I know you guys have spoken in recent calls about the larger Pro doing better, any indication that smaller Pro is starting to see some of that as well?

The larger Pro is still doing better, Peter.

Next, we'll hear from Dan Binder with Jefferies. Daniel T. Binder - Jefferies & Company, Inc., Research Division: My question was regarding your comments about credit expense being lower year-over-year, I was wondering if you could elaborate a little bit more on that. And then secondly, on the inflation front, what you're expecting with building material inflation in the coming quarter -- or in the fourth quarter, I should say? Carol B. Tomé: Sure. Well, as it relates to our credit expense, as I think you will recall, we've kept our cost of credit at 1.3%. So we do share in the profitability of the portfolio. And the portfolio this year is more profitable than it has been, for a couple of reasons. One, higher sales, that's a good thing. But also, the net losses in the portfolio are down. In fact, we're projecting that the loss rate will be below 6% by year end. Contrast that to 2010 where the loss rate was 14%. So as the portfolio becomes more profitable, we share in that profitability. On the inflation side?

Yes. As it relates to inflation, obviously, lumber prices are remaining at this stage of the game higher than previous year. We've seen some drop in copper as it relates to year-over-year in the past few weeks. So our anticipation at this point is that we'd probably see similar type of movement in lumber. Don't see anything really taking that down short-term. Daniel T. Binder - Jefferies & Company, Inc., Research Division: So about another 70 basis point benefit you think to Q4 comps from that sort of thing?

No, the penetrations change quarter-to-quarter.

Next, we'll hear from Michael Lasser with UBS.

Coming back to the topic of Hurricane Sandy, can you just give us the number of stores that you think will be impacted by this event versus Hurricane Irene to give us some indication of the order of magnitude?

So Michael, I would say there'll be a fewer stores. The breadth of Irene, it impacted more stores than any storm in our history, certainly when we've taken -- when we've looked at that. So it declined some with Sandy, but as Carol and Craig were discussing, the nature of the damage also was more severe. So there'll be fewer stores impacted, but the impacts might be more significant with those localities.

And will it be a significant amount -- well, will the delta between the number of stores be significant?

I mean I'd say it depends what you'd say is significant. But if you say 1/3 fewer stores just kind of ballpark but take that only directionally. Yes, so a significantly fewer number of stores. It's less, but again, the magnitude of the damage faced in those areas is higher. Carol B. Tomé: Let me just say we are going to have some fun planning these store sales trying to determine which stores get the impact from the hurricanes. But we'll do our best in that regard.

Okay, that's very helpful. And then a question on the strength you're seeing in the Southern markets, in the Western markets. Is the consumer behaving any differently with respect to the good -- the selection of good, better and best products? So as the cycle manifests, might you have to assort a little differently to meet customers' changing tastes, and could that impact your margin?

So, Michael, I'm really not seeing that much geographically that's different. So it's not as though the California consumer is coming back, but is more on the opening price point or mid-price point. There really -- we're not seeing that much of a difference regionally.

So you're really just seeing more folks participate in the market?

Yes, correct.

Next we'll hear from Budd Bugatch with Raymond James. Thomas J. McConville - Raymond James & Associates, Inc., Research Division: This is actually TJ McConville filling in for Budd. Frank, in your commentary and in the release, comments related to housing, I mean I think you noted we're still in the work-through phase, but it certainly sounds like you're incrementally a little bit more positive. Can you talk about maybe what you're seeing in the progression of the recovery and how that affects your -- some of your long-term targets maybe that you talked about at the Analyst Day in June?

Yes. First, I'd say the comments are very much in line with what we said in June, that we see housing having to go through a workout period, and we'd say we're in that workout period now. That's a positive though because we're working through issues, and now housing is a little bit of an assist rather than a negative. It was interesting just when we look at the number of times used the word consecutive as we've gone through just this earnings call, we've had a number of quarters of consecutive performance that starts to give you some confidence that the market is healing. There are still lots of issues out there. There are a lot of credit issues in particular that we're concerned about, and obviously, broader policy issues. But if you look at our performance this year and take a 2-year quarter-over-quarter, our business continues to progress. Carol B. Tomé: We might add a little more color perhaps on the housing, Frank, if that would be helpful. We've got a high level and I'll call it imperfect model, but we have looked at drivers of housing that could impact our business, focusing principally on turnover. And if you look at how housing turnover is performing this year, on an annualized basis, about 4.5 million units. We know from a study back in 2008 that the average spend is about $3,500. If you then calculate our market share against that and look at our anticipated comps to be versus GDP growth, we would estimate that housing turnover is impacting our comps by about 50 basis points this year. So as Frank pointed out, we're on the path of recovery. Thomas J. McConville - Raymond James & Associates, Inc., Research Division: Okay, that's very helpful, Frank and Carol. I appreciate that. And then moving along to some of those policy issues that you may have noted there, Frank. Can you talk about maybe what some of the outlook is or what the planning is from a resource allocation and capital allocation perspective on what the potential impacts of, let's say, what a fiscal cliff might look like, specifically, maybe your dividend versus repurchase decisions or something like that?

I think we'll wait until we let the policymakers resolve those issues before giving you hypothetical responses to them.

Next we'll hear from Laura Champine with Canaccord.

Along those lines, what, Carol, is your estimate for the impact of the changes in health care regulation in 2013? Carol B. Tomé: Laura, we're still working through this. It's highly complicated for all of corporate America, but with a company like The Home Depot with over 300,000 associates, we've got to study this very carefully. And we're waiting for the rules to get formalized. So once we know, we will tell you.

Okay. And then on the appliance store pilot, how are you judging success from a quantitative basis? And if you are successful in whatever the metrics are you're looking to achieve, how large could that rollout be across your chain?

So as we do with every pilot and every reset in our stores, we obviously go through a financial assessment of what we're looking to achieve, and we lay out targets for that. It's very early at this stage in the pilot. We haven't completed our 120-store rollout yet, we still have that to finish in the fourth quarter. And we do like the early results that we see. Based on how the rollout continues and how the sales perform, we would then determine what the next steps might be and how many stores that would actually roll to.

And are you looking for incremental sales per square foot, or what are the metrics that you're looking to see improve?

Yes, certainly that would be -- one of the metrics that we look at is exactly that, how do we actually continue to drive incremental sales. Yes. Carol B. Tomé: The really interesting thing about our approach here is that it's not just a store story, it's also a dot-com story. So we really like the penetration that the new brands are selling on our website. And Craig, you might want to talk about that.

Yes. The -- all of our brands are obviously available on homedepot.com for our customers to shop around the clock when they choose to shop. And likewise, we leverage homedepot.com and our delivery system to make those brands available on all stores today.

Next we'll hear from Eric Bosshard with Cleveland Research.

Wondering if you could talk a little bit, you highlighted the big-ticket progress in the quarter. I'm wondering if you could talk a little bit about what you're doing promotionally within big-ticket and across the business. And then also if you could link that a little bit to how you think the gross margin progression works from here.

Well, I'll address the big-ticket aspects. When you look at our growth in big-ticket, it's a culmination of a lot of things. Hard work by our associates in the stores. We've worked hard on the assortments over the past few years. Kitchens, for example, continue to be a positive growth story as they have been for the past couple of years now. We feel like we're taking share in those areas. We've improved our flooring business overall. As a matter of fact, Eric, what I would say is that if you looked at our decor businesses in total, they actually outgrew the company average. So I think customers are beginning to be willing to step in and do the decor projects like flooring, like kitchens. We've had a nice quarter in appliances as well. So I think it's a combination of a number of things, including an assortment, our effort by our associates and our stores to drive this business. Carol B. Tomé: On the gross margin front, we would expect the fourth quarter gross margin to be flattish relative to last year, principally because of what we're anniversary-ing. You'll recall, the fourth quarter of 2001, we had 53 basis points of margin expansion coming off of our supply chain. We're not expecting that in the fourth quarter of this year.

And then if I could just follow up, Craig, in terms of the promotions in decor, you talked about gaining share. Would you say that year-over-year promotions across those categories are similar to a year ago, more promotional, less promotional, how would you characterize that?

Pretty comparable to where we were a year ago.

Next we'll hear from Gary Balter with Crédit Suisse. Gary Balter - Crédit Suisse AG, Research Division: First, a comment, doesn't count as a question. Could you get more generators in your store in Vauxhall, New Jersey?

We're working hard on more generators. Gary Balter - Crédit Suisse AG, Research Division: Okay. Could you -- Frank, you sounded more positive overall on signals of a housing recovery, and you walked us through the numbers, and we heard like consumer spending is just as strong as the commercial spending. What are the signals -- could you go a little deeper into what you're seeing that builds that confidence up?

Yes, sure. Part of it is, Gary, if you think back to 2011 where we had some strong quarters: second, third, fourth quarters, very strong. Each one of those quarters had its unique weather story. So it was difficult to kind of pull the strands out of what's more weather-related, what's the housing recovery look like. It felt like that was sort of the start of housing starting to heal but a little cautious about it. We've had -- this third quarter is an interesting quarter because it was a very tough compare for us, given the sales related to Irene, as Carol detailed. So the positive comp in this quarter, which again not really Sandy-related, Craig called out $70 million at the very end of the quarter. So the positive results in the quarter, combined with as I said, every quarter this year on a 2-year stack basis doing better, and again going to Craig's comments, strength in the core of the business, you go, we're starting to see -- I mean this isn't -- we're not lighting rockets over this and we don't want to get out over our skis, but we're starting to see the recovery of the housing market. And then -- I mean there are lots of data points that we look at this on, obviously. Geographically, the harder hit areas that were really the epicenter of the housing crisis appear to be on the mend and it's been consecutive, it's been consistent. So that's why we think it's healing.

Next we'll hear from Scot Ciccarelli with RBC Capital Markets.

Just curious, given where we are in the housing cycle and what appears to be a market still concentrated, if I'm listening to you right, Frank, in the basic repair and remodel portions of the home improvement markets, are you surprised at all that transactions under $50 aren't a bit stronger than flat?

So Craig, you want to just...

Yes, I'll talk to that a little bit. So when we look at transactions under $50, there is an awful lot of those transactions that fall into a few categories, very pleased with how we did in outside garden as you can imagine. That's a big transaction driver in that business. But then when you look at kind of what has happened in some of the categories, the average unit retail growth, so for example LED versus incandescent bulbs, has had an impact on that business. When you look at the expansion of what's happened in the retail side of the business in paint, you see transactions that maybe have fallen from what were under $20 to now over $20. And then there's some actions that we've taken as well in terms of how we're driving some off-shelf special buys, packs, value packs that have led to part of that shift in transactions under $20.

Got it. Understood. And then you had also, Craig, mentioned something about fourth quarter aggressive holiday deals, et cetera. Is that something you saw in the third quarter, or is that just an expectation that pricing will become more aggressive in the fourth quarter? Or is that just the normal holiday aggression in promotions?

Yes, as it relates to the fourth quarter, I mean we're excited about the plans we've put in place to aggressively go after the market. We have -- our merchants have worked hard to really create some outstanding values for our customers. We've got awesome values in our Gift Center. We've got a great holiday decor lineup. We do have outstanding values that we'll bring to the market around Black Friday, which is obviously a very aggressive time in retail. So we're excited about the offerings that we have forthcoming in the fourth quarter. Carol B. Tomé: And don't forget, in the month of December last year, we had a positive comp in the United States of 7.1%. So we better have a good holiday to comp that.

Next we'll hear from Mike Baker with Deutsche Bank.

So first, I wanted to follow up on the health care question. I understand it's very complicated and you're not sure what's going to happen, but maybe just help if you could remind us how your health care works now? Who is covered in terms of your part-time and full-time employees? And you stopped telling us your percent of part-time employees in your 10-K, but has that changed very much since the last time you reported that, which I think was 55% or 59% in the 2010 10-K?

Yes, first off on the -- on what we provide, and now this is speaking U.S., obviously. We provide health insurance to our full-time associates. For our part-time associates, there is a company -- in effect, we make available to them what might be called a mini-Med [ph] program. In terms of the ratio of full-time and part-time, I'm not sure when was the last -- I don't think there's been a major difference from the last time we disclosed. Carol B. Tomé: No. There's just not a major difference, no.

Okay. So -- but your in-store employees, full-time employees who aren't necessarily store managers, they are currently, what percentage of those are currently covered?

Well, so we make it available to all of our associates. And Mike, one of the questions for us is, and we're not going to get into our specific percentages on this, but one of the questions is, for us, in thinking about this program and understanding it and understanding the cost implications, is for those associates who do not now take advantage of the health care that we provide, why don't they take advantage of it? Are they covered by their spouse? Are they not taking the health care because for whatever reason, they don't choose to spend their money in that direction? And then as you shift into health care legislation, what will the impact of the health care legislation be on those associates? All of those in addition to the regulatory issues that Carol referenced that still need to be resolved, there's sort of a base understanding that we need to develop on what behavioral changes this will create within our full-time associate ranks, and that has a significant impact on how we estimate the cost. So as Carol said, as soon as we feel comfortable and confident of what the impacts will be, we'll be sharing that with everyone.

Fair enough. One more real quick one. The guidance, the full year guidance, that excludes the $0.11 impact from China. Does it include the $0.03 benefit roughly that you had in the first quarter? Carol B. Tomé: It does.

[Operator Instructions] Next we'll hear from Matthew Fassler with Goldman Sachs.

My first question, you've addressed sort of the magnitude of the impact you expect from Sandy on the top line. Can you talk about its impact up and down the P&L? For example, you spoke about some storm-related expenses from last year that you cycled and were not repeated in Q3, but we see those in Q4. How you think about storm-related sales perhaps impacting the gross margin rate as they drive sales over the remainder -- over the next several quarters as well? Carol B. Tomé: Of course. Because Sandy was so coastal on its nature, and we don't have stores built along the coast, we were very fortunate and we had little to no damage in our stores. So do not expect any storm-related expense in the fourth quarter. We do have a Homer Fund, which is a 501(c)(3) that we've established that will take care of our associates in need but those -- that won't impact our P&L. From a margin perspective, it really is going to depend on the products that are sold.

Yes. Short-term, we're still selling things that have lower gross margins. So we're still selling generators, that type of product, lumber to get basic repair done right now. And it really depends on how the sales progress from here as to what the whole [ph] mix of sale will be, which will determine where the margin falls. Carol B. Tomé: And again, rather than trying to guide to that prospectively, we'd rather explain to you what we experience.

Got it. And then the second question I have relates to buyback. So you've had one of the most successful and effective capital allocation programs in retail. Virtually every share you've ever bought back, given the stock today, is in the money. So that's worked out extremely well. You've shared with us in the past your intrinsic value calculation, that you've used to think about the buyback. What is your thought process in the buyback, and you said $700 million for the fourth quarter, in the short run and the long run with the stock having done so very nicely and the kind of approach you would expect to see? Any change in that from where we've been in the past year or 2? Carol B. Tomé: Well, first, Matt, thank you for your acknowledgment of our program. We have bought back about $37 billion worth of our shares at an average price of about $37. So the program has worked. And we do have a point of view on the value of our stock, and we're not there. We also look at it, what's the point we should retire debt versus buy back shares, so we've got a mathematical calculation that supports our activity, and we feel very committed to our share repurchase program where we are based on that point of view and the fact that sitting on cash on the balance sheet is not very value-creating for our shareholders. And just to that point, you'll note that at the end of the quarter, we had $2.6 billion of cash, so you may say, aren't you a little heavy? About $1 billion of that cash is outside the United States. We could get our hands on it, we could repatriate it, but then we pay a nice tax on that, so we elect not to. So when I think about the cash that we have available for use, it's about $1.6 billion, and we need about $1 billion-ish to operate. So that's what's giving support to the $700 million that we will buy in the fourth quarter. And one last comment on the share repurchase, as you know, we introduced new financial targets back in June, our 12-24 target, that's 12% operating margin and a 24% return on invested capital by 2015. Inherent in that 24% return on invested capital is that we will use excess cash to buy back shares.

Next we'll hear from Dennis McGill with Zelman & Associates. Dennis McGill - Zelman & Associates, LLC: Just a couple of quick ones. Carol, just to make sure the numbers you put out there for Irene and Sandy, net-net for the quarter storm demand would be a net negative, correct, year-over-year? Carol B. Tomé: Yes, sir. Dennis McGill - Zelman & Associates, LLC: Okay. And then as you think about the housing recovery and some of the things you've talked about from a bottom up, can you maybe put a little bit more color behind either at a market level or a state level sort of which would be at the top of that list, either the 33 markets or across the states where you're seeing the strongest year-over-year growth today?

So if you just look at the third quarter, Dennis, we saw strength, as I referenced, in Florida. We saw strength in California that was above the company average, which as I said, was to us a sign of a healing in the market. And elsewhere, we were more -- as Carol has commented before on these calls, the range of difference among our top 40 markets has actually compressed over time. We were sort of past the period where we'd have major markets that were significantly double-digit comping in comparison -- double-digit negative comping in comparison to other markets. Dennis McGill - Zelman & Associates, LLC: So if you look at Florida and California as an example, would the growth rates for those states put them in the top 5 across your network?

So I was looking at it from the market perspective. And if you looked at the top performing markets, then Florida would be at the top for the company. Carol B. Tomé: And in California, the growth rates are between 50 and 180 basis points better than the company average, just to give you a point of perspective.

Next we'll hear from David Gober with Morgan Stanley.

I just want to dig back a little bit into kind of what we're seeing in terms of the recovery. And Frank, I know you've talked a little bit about how you'd expect to further lead in a recovery and some of the characteristics you expect to see there. Just curious why you think that's maybe more of a coincident indicator at this point. And we're starting to see ticket pickup but that Pro is still more or less in line with the overall company average. What do you think is different than you would have expected, and maybe than what you've seen in prior recoveries?

So first off, David, I don't know that we can speak to prior recoveries because we really didn't have the data to analyze the differences. And I'd say the basis for our expectation, if you remember, we go back to 2008, 2009 and particularly post Lehman, our Pro business dropped off at a significantly steeper rate than our consumer business. Both were going down, but our Pro business was going down quite a bit more. So we had a theory, which today it looks so far so good, that as the market recovered, the Pro would start to pick up and would be part -- a key part of that recovery for us. Where I'd say we are now, where the numbers say we are now and as we called out in June sort of a workout phase, the Pro is recovering and -- but it's not yet at a point where it's surpassing the recovery of the consumer. And again, as we've referenced, the larger Pro is coming back a little faster. Carol B. Tomé: And just to put that into perspective, the larger Pro makes up 13% of our Pro sales. So the majority of our Pro sales are the smaller ones.

Got you. That's helpful. And just a little bit more on the geographic mix. I mean I think what we've seen over the last couple of years is a greater level of growth in urban and maybe close suburban areas. Are you seeing any signs that the geographic mix within markets is changing? I mean obviously, you addressed the Florida and California issues, but given that we've started to see signs that household formation is picking up, are you see the mix within markets change at all?

And shifting more to our more urbanly focused stores? No.

No, sorry. I mean the other way around, maybe more towards suburban and ex-urban areas than where it's been in the last couple of years.

I'll be honest, David, no. We haven't seen that.

Next we'll hear from Chris Horvers with JPMorgan. Christopher Horvers - JP Morgan Chase & Co, Research Division: So I wanted to follow up on the capital allocation question. I think that your view has recently been you didn't need the cash and rates aren't going up anytime soon, so there was no rush to add debt to fund the buyback. However, the other side of this is the stock price. So while it's below where you think it's worth, the market maybe is ahead of where you thought it would take it, and now you have an incremental positive view on housing, November is off to, what sounds like to a strong start, you have this potential bridge from Sandy over the next 2 quarters of tough weather compares. So I guess devil's advocate, why isn't now a good time to go add debt to the balance sheet and buy the stock below where you think it's worth? Carol B. Tomé: Well, all good questions. Here's our point of view on incremental debt. If you look at our adjusted debt-to-EBITDA ratio, we're standing at 1.7x against a maximum target of 2x, which would suggest by the end of the year about $3 billion of debt capacity, more or less. As we look into 2013, a couple of things. There is the fiscal cliff issue and we'd like to get through that because as we've talked about in the past, raising debt in an environment of high beta doesn't make a lot of sense, and there is no higher beta in my opinion than the fiscal cliff. Now, we'll know soon where that ends up. We've got $1,250,000,000 coming due in December of next year, we're going to refinance that. Gives an opportunity to add some incremental debt once we get through the fiscal cliff if we so desire. And when we make that decision, we'll let you know. Christopher Horvers - JP Morgan Chase & Co, Research Division: Fair enough. And then just as a follow-up on the shrink side, which is perhaps the only other question that hasn't been asked yet. It sounds like you said you're early on in the process, and really the first quarter that you've talked about it. So what are you doing there that you haven't done before? And do you expect this gross margin tailwind to sustain itself?

Chris, this is Marvin Ellison. Shrink really for us has in the past been a really good news story. This early part of this year, we had underperformance, and it's really a refocus. A refocus on operational process, refocus on merchandising, of packaging standards, just a refocus on execution. We have a new leader in the role. We have a really strong commitment involvement from all of our associates, and we're pleased with the performance in the second half of the year, and we're optimistic that the performance will continue for the balance of the year, and we'll take that into 2013. Carol B. Tomé: And you may recall when we set forth our 12-24 targets, 12% operating margin, we showed a walk on the gross margin line and there was an element of the walk that we called operational excellence, that's code for better shrink performance. So to Marvin's point, between now and '15, we continue to expect better performance there.

And I think, Chris, it's probably worth noting that we've gone through quite a few process changes over the past 3 years. And what process changes really creates uncertainty and a different view of transparency on how you impact shrink. So we had to make adjustments in the stores to really alter our processes to meet the needs and the understanding of our new process. So we feel real good about where we're headed, and again, we hope to keep the performance going into next year.

We will take Alan Rifkin with Barclays.

Just one last question, Carol, on Sandy. I mean realizing that obviously it is difficult to forecast revenues coming from the storm, if you believe that in the quarter, during the storm and following the storm, the benefits from Sandy will be equal to that of Irene, that would imply about $290 million realized in Q4, which would equate to about 180-basis point benefit on the comp line. Is that something that would be reasonable for us to expect? Carol B. Tomé: You need to build the models the way you build your models. We've given the guidance that we've given based on our plan because we just don't know how to forecast prospectively.

So, Alan, one thing just to keep in mind of why we're a little cautious on this and the comparisons to Irene may not be direct is you've got very different weather circumstances. So last year following Irene if you'll remember, fourth quarter was one of the warmest winters ever in the Northern division. And that helped in the Irene recovery. Don't know obviously sitting here today, what's the weather going to be like in New Jersey and New York as we head into the end of November and December and that will have an impact on the recovery efforts. So that's -- I mean, we've spent a lot of time thinking, "Gee, what's the right way to approach this issue for the fourth quarter and frankly the first quarter of next year." And that's why as Carol said, what we think is better is to tell you, "Look, here is roughly what we think Irene did. We think this is give or take, comparable to the impact of Irene." But the timing of it for us is just very uncertain. Carol B. Tomé: And I'll just pile on, we went back and studied every hurricane. And the average time to recovery is T [time] plus 6 months, with the exception of Katrina. This storm in many ways is like Katrina. New Orleans is still rebuilding. So you can -- I hope you can understand why we are cautious in our outlook regarding the storm-related sales.

Sure. No. Okay. I appreciate that, Carol. One last question if I may. Carol, you said that in the fourth quarter you're expecting gross margins to be flat despite the anniversary-ing of more than 50-basis point benefit less from the supply chain rolling off. In terms of the incremental gain to the gross margin, do you see that? And obviously you've spoken about shrink [indiscernible], do you see any changes in the mix benefiting your gross margins in Q4? Carol B. Tomé: Well, as Craig pointed out, we are a seasonal business. And if you look at lumber, we would expect a lower penetration of lumber in the fourth quarter, which would help our gross margin, as an example.

Well, thank you, everyone, for joining us today, and we look forward to have you join us when we report our full year quarterly and fourth quarter earnings at the end of February.

And that does conclude today's teleconference. Thank you all for joining.