Good day, everyone and welcome to The Home Depot Q2, '17 Earnings Call. Today's conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Ms. Diane Dayhoff, Vice President, Investor Relations. Diane, please go ahead.

Thank you, Debbie, and good morning to everyone. Joining us on our call today are Craig Menear, Chairman, CEO and President; Ted Decker, EVP of 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 Craig, 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 the factors identified in the release and in our filings with the Securities and Exchange Commission. Today's presentations will also include certain non-GAAP measures. Reconciliation of these measures is provided on our website. Now, let me turn the call over to Craig.

Thank you, Diane, and good morning, everyone. We had a strong quarter achieving a milestone of the highest quarterly sales and net earnings results in the company history. Sales for the second quarter were $28.1 billion, up 6.2% from last year. Comp sales were up 6.3% from last year, and our U.S. stores had a positive comp of 6.6%. Diluted earnings per share were $2.25 in the second quarter, up 14.2% versus last year. We continue to see broad based growth across the store in all geographies. In the U.S. all three of our divisions posted positive comps in the second quarter as did all of our 19 regions and top 40 markets. Internationally, both Mexico and Canada posted another quarter of positive comps in local currency. Our solid performance was driven by the outstanding execution of our store and merchant teams delivering value and service for our customers across multiple events both in store and online. As Ted will detail both ticket and transactions grew in the quarter and all of our merchandising departments posted positive comps. We saw a healthy balance of growth from both our Pro and DIY categories with Pro sales once again outpacing DIY sales in the quarter. We believe that the work that we are doing to enhance the service capabilities for the unique needs of our Pro customers continues to resonate. We are focused on being a valued partner for our Pros by offering solutions both in-store and at the job site that help them to more effectively manage their business. This includes enhancing our leadership position in tool realm. During the quarter, we closed on the acquisition of Compact Power Equipment, a leading national provider of equipment rental and maintenance services. Compact Power has provided larger jobsite equipment rentals at more than…

Thanks, Craig and good morning everyone. We had a great second quarter driven by strength of both our Pro and do-it-yourself customers. In addition, our online business continued its momentum as online sales grew approximately 23% versus last year. We saw broad-based growth across the store as all of our merchandising departments posted positive comps. Lumber, Electrical, Tools and Flooring had double-digit comps in the quarter. Building Materials, Appliances, Indoor Garden and Decor were above the company average. Plumbing Millwork, Kitchen and Bath, Outdoor Garden, Hardware, Paint and Lighting were positive but below the company average. In the second quarter, total comp transactions grew by 2.6% and comp average ticket increased 3.6%. Commodity price inflation in Lumber, Building Materials and Copper positively impacted average ticket growth by approximately 68 basis points. During the quarter, we held a Memorial Day, Father’s Day and Red, White and Blue events. These events drove excitement in our stores for both customers and associates and we were very pleased with the results. Looking at big ticket sales in the second quarter, transactions over $900, which represent approximately 22% of our U.S. sales, were up 12.4%. A few drivers behind the increasing big ticket purchases were appliances, flooring and certain Pro heavy categories. Transactions for tickets under $50 which now make up approximately 16% of our U.S. sales grew by 1.5% in the quarter, reflecting, among other things the return of our Outdoor Garden business in certain parts of the country. In the second quarter Pro sales outpaced the company average driven by both our high spend and low spend pros. We saw strong comps across several lumber and building material categories, as well as categories like pipe and fittings, power tools and wire. Sales to our DIY customers also should strengthen the quarter, with flooring,…

Thank you, Ted and good morning everyone. In the second quarter, sales were $28.1 billion, a 6.2% increase from last year. Our total company comps or same store sales were positive 6.3% for the quarter with positive comps up 5.8% in May, 5.9% in June and 7.2% in July. Comps for U.S. stores were positive 6.6% for the quarter, with positive comps up 6.6% in May, 6.2% in June and 7% in July, versus last year, a stronger U.S. dollar negatively impacted total sales growth by approximately $64 million or 0.50%. In the second quarter, our gross margin was 33.7% a decline of 6 basis points from last year. The year-over-year change in our gross margin is explained in largely by the following factor. First, we had nine basis points of gross margin expansion in our supply chain, driven primarily by increased productivity. Second, we had approximately 8 basis point to our gross margin contraction due to a change in the mix of products sold. And finally, we had 7 [ph] basis points of gross margin contraction due to higher strength than one year ago. In the second quarter, operating expense as a percent of sales decreased by 44 basis points to 17.8%. In the quarter, our expenses were $20 million over our plan, due primarily to a true up of our bonus accrual. Even so our operating expenses as a percent of sales were better than our plan due to our strong sales deployment. One last comment on expenses. As we told you last quarter, we expect our expense growth factor to vary by quarter giving year-over-year comparisons and the timing of investments. Looking ahead, we expect our expense growth factor to be lower in the back half of the year than it was in the first half. Our…

Thank you. [Operator Instructions] We’ll go first today to Simeon Gutman with Morgan Stanley.

Thanks, good morning. Quick question I guess on the recovery. The longer the recovery persist, I mean just natural it seems like the market is getting some angst, that there is eventually going to be a shoot or drop. How do you get comfortable with the tenure of the recovery, clearly the business is performing great, and if there are yellow flags, how do you know what you are looking for?

I mean, I’d say Simeon that we’ve had obviously a protracted recovery here, and it has been clearly driven from housing which has been a steady but slow recovery in the market. You know we continually look at months of supply, there is 4.3 months of supply in the market of housing availability against a historical norm of six, that clearly is helping to drive improvement in home value appreciation, but housing starts haven’t returned to their norm yet either. The only thing that’s kind of run on an historical averages is housing turnover. So, we see this housing favorability continuing as we look forward. And I think the watch out for us is, you wouldn’t want to see affordability become an issue, but that at this point doesn't seem to be a concern for us at all.

Right. As we look at the affordability index, it stands at 153%, so long ways to go before that would be a watch out for us. And recovery is a difficult thing to put your arms around. But if you look at simply PFRI dollars they’ve only recovered 70% of the loss. So, if you put that into baseball terms like [Indiscernible] 6 [Indiscernible]. The other thing that’s really interesting to us is the age of the housing stock. We’ve talked to you a lot about 66% of the housing stock being older than 30 years. Did you know that 51% of the house stock is older than 40 years and as houses age, well, they need more of repair.

It’s more spend.

Okay. That’s helpful. My follow-up is one e-commerce and I’m sure this will be topical. I just want to ask one angle of it. So, in using the power tool category as an analog for how to think of appliances, the pushback that we been getting is that look Home Depot has done a great job in powered tools, but they have a lot of exclusive brands and labels which is different than appliances, and ultimately appliances will be harder to control given some of the large national brands. Can you can you share some thoughts on that comment?

Look, what I would say is, we have a lot of categories of goods in our stores, over 200 plus categories of goods. And we compete with lots of folks across all of those categories. And candidly by category the strategy is different because the categories are different. And so, our job is to create the strategies that allow us to be the customers’ advocate for value across the categories and compete accordingly. And it varies by category what our approach is.

We’ll go next to Michael Lasser with UBS.

Good morning. Thanks for taking my question. I have two questions on market share. First, it looks like your total sales increased slightly less than the category according to the Census Bureau. So where do you think you might have lost some share to during the quarter? And then I have a follow-up on that.

Actually based on the NAICS 441, it actually looks that we gained share in the quarter. We don't believe we lost share in the quarter.

No. We’re up 20 basis points.

Yes. 20 basis points year-over-year.

20 bps to 28.12.

Right.

Okay. And then the second part of the question is on e-commerce, the e-commerce channel within home improvement overall. Do you think that you're gaining share within that channel within the category? And what rate of growth do you think the home-improvement category is growing online?

So, we actually have an interconnected retail approach and our customers are blending the physical and the digital world together. And we look at share in totality as it relates to Home Depot's gain in the market against what the market is growing.

And we’re pleased with the share gains. It’s important to remember that over 43% of our online transactions are picked up inside of a store. This is One Home Depot. Not an online or in-store business, but it’s One Home Depot.

Okay. Thank you very much.

We’ll go next to Dan Binder with Jefferies.

Thank you. As you just mentioned different strategies for different categories online, obviously appliances have been in the news recently, I know you do some of your appliance business online. I was wondering if you could just talk a little bit about the complexity of that transaction, how the customers shopping it in the store even if they're ordering it online and where you think your competitive advantages are if you start to see that category become more available online at other competitors?

Dan, look -- if you look at the interconnected experience, candidly for appliances, there are lots of other categories. In many, many categories the shopping experience starts in the digital world even though it might finish in the physical world or in some cases actually finish in the digital world as well. It is truly a blended experience today where the customer, the front door of our store is no longer at the front door of our physical store for many, many product categories. The customer starts digitally looking at product, doing research and then in many cases particularly in large ticket they come in and they actually want to talk to one of our associates before they make a purchase, but we clearly in big-ticket categories we sell both in the physical and the digital world.

And then, if I can just ask one other question related to delivery. Can you give us an update on how many of the stores are able to deliver to the Pro within two hours now?

Yes. We've actually rolled out the delivery program at the end of fiscal 2016, Mark Holifield is here. I’ll let Mark…

Yes. Hey, Dan. Our buy online deliver from store and our deliver from store capabilities were fully rolled out at the end of last year and we offer the two and four hour window options at all of them at this point.

And Mark, certainly we’ve seen sequential growth in our delivery business every week in the quarter. So our customers are responding very well to this offer.

Very healthy growth.

Great. Thanks.

We’ll take our next question from Christopher Horvers with JPMorgan.

Thanks. Good morning. Can you talk about, Carol, last quarter you talked about Pro being up two times DIY. Does that trend continue? And can you talk about the growth that you’re seeing in the Pro versus DIY. What does that make you all think about what's going on in the market now and in terms of the duration of the growth going forward?

Sure. So, yes, our Pro’s grew twice as fast then the DIY, actually expanded that gap a bit in the second quarter. And Chris, I can recall talking to you last August about our sales, our Pro’s going out on vacation. Well, based on what we’re seeing in the stores today our Pros are not on vacation. The stores are busy and our sales are quite good.

Nice. And then, I think one of the questions that was asked on our last that was really interesting and I wanted to put out there. You have companies like Wayfarer spending a lot in advertising in Amazon reported to be more interested in the category. So, obviously as you saw these companies get rewarded with sales growth and not necessary profitability clear in Amazon's last report. So do you think that given this increased interest in greater advertising spend, do you need to flex some muscles here and maybe deleverage advertising a little bit to defend the Home Depot brand in the home related categories?

Chris, I’d say, one of things, I’m very proud of the team. They have worked really hard over the past several years to drive dramatic improvement in terms of the effectiveness of our marketing dollars to reach a customer in a space where they have a high level of interest. So, we have been on a path to balance our approach in terms of marketing both in traditional media and in digital media, and the team has been able to drive incredibly effective returns on our marketing spend.

We spend more on digital on the second quarter than we did TV and radio combined. So the team is doing an awesome job at getting more eyeballs, higher return on that spend.

Yes. Our overall advertising spend is up, lower single digits, but as we’ve essentially made more significant pivot to digital marketing it's over half our marketing right now. That's a medium that you can get good insight on the return on your spend and as Craig said, the team just done a great job continuing to increase the return on that spend, so leveraging that low single digit to a much more productive return on overall ad spend.

I’m sure you do a lot of key search terms and so forth there. Is that becoming more expensive to you as Wayfarer and Amazon focus more on the category?

I mean, it various by category by day candidly.

Understood. Thanks very much.

Yes.

We’ll go next to Brian Nagel with Oppenheimer.

Hi. Good morning.

Good morning.

Nice quarter.

Thank you.

So my first question, I guess is follow-up on some of other e-commerce type questions, but maybe to exactly Chris was saying some minute ago. You other e-retailers are online only chance if they may at least indicate some interest gain into this category. But from your vantage point are you seeing anything suggest that anyone’s coming out with the much, much more price aggressive effort in one that you would have to match or you choosing to match?

I mean, Brian, we’ve invested obviously in tools and capabilities to inform our merchants in terms of the overall competitive position in the marketplace both in the digital and in the physical world. And this quite candidly has been something that the company has been focused on since its inception in terms of making sure that we’re driving value. Core belief that I have is as merchants, we are the customer’s advocate for value period. And that's the job of the Home Depot and the Home Depot merchandising team every single day. So we must stay focused on a competitive offering and quite candidly value is defined by what the customer is willing to pay for it.

Got it. And my follow-up question and shifting gears a bit, flooring. I think you call that out another bright spot. Again, from a competitive standpoint there's been – there’s others companies now they are pushing to the flooring [Indiscernible] perspective. Overall what do you see as far as, I guess, how would you characterize the consumer demand of the category than are you see anything from stepped-up competitions you had to react to?

As Craig said, it's a great point we competed over 220 categories. Flooring is a very big category and there are actually lot of competitors have been and will be. We see consumer demand very strong and the consumer is responding to the Home Depot value proposition. So we have innovative product. We have exclusive product. We have new technology and exclusive launches at the Home Depot. And we've worked very hard on her in-store selling model and Ann and her team are just doing a great job communicating that value to the customer in both are hard and soft flooring and they’re both doing extremely well as I called out double-digit comps for the category.

Thank you. Congrats again.

Thanks.

We’ll go next to Kate McShane with Citi Research.

Good morning. Thanks for taking my question. I was curious about your comment with regards to the reemergence of the first time home buyers. Is this the first time we’re seeing this and if this were emerging would this be enough to offset any slowing of price appreciation if there were to occur?

Well, its really interesting to see what happens with the first-time homebuyers in the second quarter. The highest number of first-time homebuyers since 2005. About 424,000 first-time homebuyers making up 38% of all homebuyers and up 11% year-on-year, so that’s good news. Why? Because first-time homebuyers tend to buy homes that need repair and remodel. So, as we see and we anticipated this happening with millennials coming into an age where they start to form families, children or pets or whatever their family unit might look like they're moving into the home which bodes very well for us and to your point it extends the recovery.

Thanks. Great. Thank you. And then, Ted had mentioned that the three events you conducted during the quarter. Just wondered if that deferred in any way versus last year and does that help explain some of accelerations into July?

They were similar events in duration as last year, Kate.

Thank you.

We’ll go next to Matt Fassler with Goldman Sachs.

Thanks a lot and good morning. My question relates to your discussion of sales trends by ticket. Can you just remind us whether that store-only, whether that's inclusive of online? And then I have a quick follow-up.

Yes. It’s all in.

It’s all in.

I guess, is there anything about the way consumers are shopping based on project or basket that would change the composition of that sales performance by ticket, just thinking about the outsize, extended outsize growth of the big-ticket piece and the fact that the small ticket piece has been growing at a slower rate for kind of equally consistent period of time.

The biggest driver behind that has been the recovery of our Pro customer and the growth that we've had in categories like appliances and flooring. Those are big-ticket purchases in and of themselves, so an appliance is clearly much larger than our average ticket. Our flooring job is significantly larger than our average ticket. And our Pro customer spends dramatically more than the average DIY customer. So those have clearly helped to drive the growth in tickets above $900. And then, we did see the recovery in the smaller ticket, Matt, as a result of the garden business coming back to a more normal state in the second quarter.

Great. Thank you so much, guys.

Yes.

We’ll go next to Dennis McGill with Zelman & Associates.

Hi, good morning and thanks.

Good morning.

One more question just going back to appliances and online, I think you said, 6% of sales are online now for the total store. Can you just maybe just fame appliances relative to that number and just give a little bit more detail on how you mentioned, Craig, the buying experience in some cases starting digitally and ending digitally. What percentage of those big-ticket transactions and appliances are executed online? Just kind of give some frame of reference to the categories as a whole already being an online category?

We don’t break that data. I mean, for a competitive reasons we would not share that data. Thanks.

Okay. I won’t count that as my question. And so my question is will shift to non-online. When you look at outdoor garden I guess for the first half of the year it’s a below-average categories, so I guess the weather comps year-to-year didn't really get the typical bathtub affect? Carol, when you look at the back half of the year do you expect that some of that could come back and the full year would balance out or is that lost demand at this point?

Some of the softness was – and softness is relative to the category grew, so [Indiscernible] and Ted, I wouldn’t think we get much of that.

No. I think some of the uptick we saw in July was that extended season all in, it was a reasonably good season, I wouldn’t say great, certainly colder and wetter early and it was really wet into end of June, so some late garden, but I think we’ve seen that and it just isn’t that big until you get into fall and then hopefully you’ll get a seed season and some planning season.

Okay. And then, second question just as it relates to inventory, Carol, how would you characterize inventory in the channel today when you just first store or same-store in the acquisitions and so forth thus far as what a supplier might be facing with projects and so forth. Is there less inventory throughout the channel today and if so can you quantify that in anyway?

We’re growing inventory to support ourselves. We also want to drive productivity as Craig called out in his remarks. And so we’re always going to look to improve the velocity of our inventory return that might going to press us. As Craig always said, the customer service starts with in-stock, you got to have with the customers want and certainly we will do that working with our supplier partners.

So the inventory, I think turn into a frame earlier being earlier been up a little bit, is that a same-store representation?

That is One home depot representation includes inventory in our stores and in our distribution centers.

Yes. The total inventories are 545 million in the quarter.

Okay. Very good. Thank you, guys.

Thank you.

We’ll go next to Alan Rifkin with BTIG Corporation.

Thank you very much for taking my question. Carol, you mentioned that the expense factor in the second half should be lower than in the first half. Given the fact that typically second half revenues and aggregate are less than the first half and you said that you forecasted comps to be a little bit lower in the second half versus the first half. Is the reason for a lower expense factor in the second half entirely due to compact power or are there other things going on there?

Let me give you a little bit more color on our expenses that I put in place. As you know we stepped up our capital spending program this year taking our total spending up to $2 billion including $359 of capital to invest in our stores and certain of our stores are getting new wayfinding package, new flooring and lighting, new restrooms, break room and so and so forth. That capital comes with the next step. Now, we didn’t plan for the activity over every quarter and in fact a lot of that activity took place in the second quarter. And so I look at our expense performance in the second quarter, but it was planned, expenses related to our store investment which would include old write-offs with old fixtures and reset expense and that sort of thing. Year-on-year it was up $19 million. So it was pretty lumpy in the second quarter. That won’t be as lumpy in the back half of the year and that’s really the driver of expense growth factor first half versus second half.

Okay. Thank you very much. Appreciate that. And then follow-up, with respect to Compact Power either Craig or Carol, could maybe just talk about the margin structure for that business. Would it be correct to assume that it’s a lower gross margin, as well as lower SG&A business and what effect on a full-time basis to EBIT margin does the acquisition of Compact Power in and of itself has?

Happy to talk about it. First, the Compact Power, the revenues for Compact Power are recognized on a net and not a gross basis. So you have gross margin associated with that business, it’s highly margin accretive. And Alan, that’s one reason why our gross margin guidance for the year has change from what had been down 15 basis points to now down 10 basis points. Because the revenues are recognized on a net basis and because there are expenses in Compact Power it put some pressure on our expense growth factor for the year. We had guided that the expenses would grow at 43% of our sales growth. We’re now suggesting 46% of our sales growth, that’s because there are no revenues we will report on net basis, but they are expensive. If you look at EBIT of Compact Power, its very accretive. In the back half of the year this is a small business, strategically very important. But in the back half of the year Compact Power should contribute a penny of EPS accretion.

Okay. Thank you very much, Carol.

Welcome.

We’ll go next to Scot Ciccarelli with RBC Capital Markets.

Good morning, guys. Carol, you’ve already highlighted how the housing stock in the U.S. continues to age. And obviously, that’s been a pretty big thing for you over the last, call it, two years or so. Do you happen to -- I know it’s something you guys have been looking at for a while. So do you happen to have any analytics around the home improvement spending maybe by vintage or do you know if there's an average percentage spend relative to an average home price?

Yes. A couple of data points. Homes build before 1980, the average annual home proven spent is $3500 a year. Homes build after 2000 the average annual home improvement spent is $1500 a year. So there’s a pretty nice delta as the homes age. The other interested data points and we haven’t proven this analytically in our own research, but I’ll share with you anyway because I think it gets very interesting. We look at John Burns Real Estate Consulting Group a lot. We’ve got some really interesting data in housing. And they say, that for average every percentage point improvement in real wages and real wages are up this year after inflation 2.2%. They say for every percentage points increase, there’s a 1% increase in the repair and remodel spend. Interesting, we haven’t proven that, but it stands to reason. You got more money in your pocket you’re going to spend some more money on your home.

Yes. That makes sense. And then just a quick follow up. You also mention how first-time home buying is finally starting to accelerate. Again that should be good for duration, but just based on historical purchase patterns would you expect that the impact your small ticket performance? Presumably there's a little – a lot more kind of nickel dime type projects that are probably done, but I don't if that's true or not.

I wouldn’t think so. No, because when they’re going into the homes they need to repaint them. And paint is not just a bucket of kind of put it down and paint, but it’s a tape and tarps and all the other stuff that goes with it.

Yes. I wouldn’t think so other than a trip for picture hanging or something like that, that would be under $50, but yes, your -- which we like.

Which we like, yes.

Older basket.

Right. So no real change in the cadence between big ticket and small ticket as you windup getting more first time home buying?

Still think so.

Okay. Great. Thank you.

We’ll go next to Keith Hughes with SunTrust.

Thank you. You mentioned several times earlier in the call that your Pro is up well in excess with the DIY. Can you give us any insight on product categories that they particularly well with the Pro in the quarter?

Well, certainly our building material categories did very well. Our electrical did very well, tools, consumers, consumer’s love our power tools, but the Pro’s are really the heavy users of that. Lumber is very strong, our lumber prices are nearer at all-time highs, our unit productivity is you know, the commodity prices we know will go up and down, we watch the units very carefully in lumber and building materials, and those have been very strong as well.

And you had mentioned earlier in the call, introduction about the Pro paint initiative. Is that is an area. Is that rank among your tops in terms of revenue of the Pro?

Yes. The Pro paint initiative that we have with each of their NPPG has been very successful. I'd say overall we’re pleased with our growth in our paint business. I'd say we’re holding shares if not gaining a little bit to share in paint, but our Pro paint initiative in particular is multiples higher growth than our DIY paint business.

Okay. Thank you.

We’ll go next to Scott Mushkin with Wolf Research.

Hey, guys. Thanks for taking my questions. So, I guess I wanted to take a step back and ask some boarder question. A lot has been asked on the call. I mean, as you guys look at your business, because obviously just performing terrifically and obviously a big tailwind from what’s going on macro, but also lot of the great things you guys are doing. What do you worry about?

So, I’d say there two things that are up there on the list. And one is we’re investing in the One Home Depot experience, that’s how the customer views us, not exactly how we’re built, so we have to do some things to get there completely. And you worry about the ability to execute on that fast enough and the change management that comes along with that. Second worry, I’d say, is the customer and their associate experience in our high-volume stores. Clearly, with the growth that we've had that puts pressure on in those stores disproportionately. And so, we’re going to have to invest to solve that situation and we’re working to put that in place, but those are certainly two worries that we have in the business.

Right. That’s really good insight. But I was just wondering if you could talk about kind of how things going so far this quarter, I mean, we had the retail sales numbers out today. There were good. We experience sometimes a third quarter low, because DIY is not as strong as Pro. I was just wondering any thoughts as we look into third quarter, anything we should consider?

Yes. Scott, as we mentioned just little bit earlier, we are quite pleased with our sales in August thus far.

All right. Perfect guys. Thanks very much.

Thank you.

We’ll take our next question from Matt McClintock with Barclays.

Hi, yes. Good morning, everyone.

Good morning.

It’s been a little over a quarter since you now had access to Interline inventory and your stores. And I was wondering conceptually how should we think about the benefit from that access, building and having an impact on your sales? How do you build awareness of that? Is that really what we’re waiting on to see an acceleration in the business form that or just how to think about that benefit layering in over the coming years? Thanks.

I mean, I’ll start and Bill is here who runs our Pro and Services business. But as I call out my comments, we’re actually very pleased with the use case one and use case two response from our customers and with that as well as the operative the team at Interline, Interline actually grew above the company average growth in the quarter or so.

Yes. Craig, thanks, quick comment. We’re now live in 1958 stores, so we basically have finished the rollout. We have 1500 stores that have access to Interline’s products next day and an additional 458 stores that are a two-day delivery. And we’re seeing great activity on a broad base of goods primarily servicing the trades from plumbing electrical hardware also strengthen the HVAC business. So it's doing a nice job of extending our product reach given us access to deeper inventories for Pro that are coming in and looking for project-based purchases. And then, overall, average ticket on par ramping up sequentially week-over-week and pleased with progress on the MRO business.

And then, Carol if I could have a follow-up just – and I’m sorry if I missed this, but the seven basis points of pressure from higher shrink. I have to ask about it because it almost offset the benefit from the supply chain. Could you just talk about what you are seeing there, what’s driving that? Thanks.

As you know there are many drivers of shrink including higher staff and changes in operational processes and new systems. We have a cross functional team that is addressing us. We are hearing from other retailers that [Indiscernible] is up across the board. But we really focussed on what have we changed in front of our store that will have to cost some of this. And in fact the cross functional team has identified a few defects that we are correcting. And we will continue to work on this going forward.

Thank you very much for the color.

We’ll go next to Peter Benedict with Robert Baird.

Hey guys, thanks for taking the question. First it was just kind of the labor market and wages and availability workers. I mean, what are you guys seeing on that front, whether it be with the seasonal folks that you hire or some of the speciality or full time folks. That’s my first question.

So Peter we hired seasonally this year over 90,000 people and one of the great things that happened in this season was we enhanced our application process through improved mobile experience, it actually doubled our applicant pool. So we were pleased with that as a better experience for the applicants themselves and was pretty effective on our end as well. We are certainly seeing wage pressure and that varies market by market, but that’s something that we anticipated and planned for and it’s actually built into our guidance for 2017.

Okay, thank you. And then, Carol just curious on the FX, just to make sure I understand you correctly your guidance right now still assumes, I think it was the $250 million headwind from FX for the years, is that right?

In the back half, it’s actually $250 million. That’s right. So if you were to add that back, you would calculate the comp to be about the same as what we reported in the first half.

Okay. And then last one if I could, just sneak one in. The store refreshes that you’ve alluded to, remind us how many you are getting done this year, how many you think you could maybe do in 2018. And Craig, anything specific, I mean you talked about trying to alleviate some of the customer experience and associates experience friction that may occur in these high volume stores. Anything in particular that you are focussed on that you are seeing some improvement from as you kind of work to re-engineer the stores a little bit. Thank you.

The first part of the question in terms of how many this year or approximately 500 stores will get the updates that Carol referenced earlier as it relates to signage, navigational signage, lighting, Floor, break room, rest rooms and so on. And then in the high volume stores, you know we have to work to continue to prove the experience for the customer on the front end, in particular and get the customer through the registers with greater speed and then likewise those stores feel more pressure from office and bus pick up and we’re working to solve that for them as well. And that will be a different scenario by different type of stores, but those are the areas of focus.

And Peter, you know we’ve got an investor conference in December and so we’ll lay out our plans for 2018 and beyond at that conference.

Okay. Fair enough, thanks so much guys.

Debbie, we have time for one more question.

We’ll take our last question today from Seth Basham with Wedbush Securities

Great. Thanks for taking my question.

Sure.

As we look at the trends in small ticket sales relative to big ticket sales, obviously they have been underperforming for some time. Do you think that you are still gaining market share in some of the small ticket categories?

Yes, I would. I mean, the small ticket is healthy, we talk about the transactions being up 1.5, but that also comes with a strong positive comp associated with those transactions. And you know the mix of the business we used to talk about under 50 being 20 odd percent and over 900 being 20 odd percent. And that dynamic shifted as the customer has responded we think largely to the product and the innovation in the store. And again, we look at this every single week where are the sales coming from in the assortments and we continue to see the customer respond to the innovation and buy up the continuum on the assortment. An example of that would be in soils and mulch this year. So we talked about garden coming later which it did and we had a fine garden business in the second quarter, but we were a little less promotional on commodity mulch, because what we find is the customer is buying heavily into the organics. We have a number of exclusives in organics with Kellogg's and doctor Herbs and some of the Scotts miracle growth product and customers are happily trading up and we are talking you two and sometimes three and four times the cost for a bag of organic mulch over commodity mulch. So we look at it very carefully because it’s a natural and fair question that we continue to be comfortable with what the dynamic is of ticket growth. We look again that it’s exclusively this year product mix and then the effect of commodity prices, lumber and building materials. There has been no price impact on our AUR.

That’s helpful. And given that that’s [Indiscernible] of this call as we think about the e-commerce in fact it’s on the small ticket categories. Do you feel like you guys are better or less well positioned to gain share in some of the smaller ticket categories as a result of what’s happening with the online channel.

I mean we feel very comfortable although we competed across all segments of the line structure. Opening price point, mid price point, upper price point across channels.

Excellent. Thanks a lot guys.

All right.

Well thank you every one for joining us today and we look forward to talking to you next quarter.

Ladies and gentlemen, thank you for your participation. This does conclude today's conference. You may now disconnect.