The Home Depot, Inc. (HD) Q3 2011 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

Scot Ciccarelli - RBC Capital Markets, LLC, Research Division David A. Schick - Stifel, Nicolaus & Co., Inc., Research Division Daniel T. Binder - Jefferies & Company, Inc., Research Division Eric Bosshard - Cleveland Research Company Christopher Horvers - JP Morgan Chase & Co, Research Division Kate McShane - Citigroup Inc, Research Division TJ McConville Michael Lasser - UBS Investment Bank, Research Division Greg Melich - ISI Group Inc., Research Division Gregory Hessler - BofA Merrill Lynch, Research Division Michael Baker - Deutsche Bank AG, Research Division Colin McGranahan - Sanford C. Bernstein & Co., LLC., Research Division David S. Strasser - Janney Montgomery Scott LLC, Research Division Brian W. Nagel - Oppenheimer & Co. Inc., Research Division

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

Thank you, 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 analysts' questions. Questions will be limited to analysts and investors, and as a reminder, we would appreciate it if the participants would limit themselves to one question with one follow-up please. This conference call is being broadcast realtime on the Internet at earnings.homedepot.com. The replay will also be available on our site. If we are unable to get your question during the call, please call our Investor Relations department at (770) 384-2387. Before I turn the call over to Frank, let me remind you that today's press release and the presentations made by our executives include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties 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 $17.3 billion, up 4.4% from last year. Comp sales were positive 4.2% and our diluted earnings per share were $0.60. Our U.S. stores had a positive comp of 3.8%. From a geographic perspective, we saw positive comps in all but 5 of our top 40 markets, with particular strength in areas such as our New Jersey and South Atlantic regions, where there were significant storm impacts. As Craig will detail, we saw growth not only in storm-related product categories but also in our core categories. An interesting broad indicator of this is that our strongest division for the quarter was our western division, which was obviously not affected by Hurricane Irene. We're also pleased that the growth in our overall transaction count has improved sequentially each quarter this year. On the international front, our Canadian business had essentially flat comps in the quarter and our Mexican business had another quarter of positive comps, making it 32 quarters in a row of positive comp growth. Sustained positive performance quarter-over-quarter for 8 years in a row, a testament to the great job that Ricardo Saldivar and the team in Mexico are doing. In the U.S., we still don't see and we don't expect to see in the near term any meaningful tailwind from the housing market. Inventories remain high, pricing is under pressure and credit is still difficult. Private fixed residential investment, PFRI, as a percent of GDP, is still at a historic low. In this type of environment, it's critical that we effectively invest in our business and keep focused on customer service. To that end, Marvin and his team rolled out 3 major initiatives during the third quarter: Buy Online Pickup In-Store; a new scheduling system for our associates; and a new centralized return to vendor process. These have involved significant operational changes in our stores over a compressed period of time. It's an indication of the effectiveness of our field leadership team that we could execute these initiatives without significant store disruption. Both the new scheduling system and the new return to vendor process are allowing us to increase customer facing hours in our stores at the same time that we're improving overall labor productivity. Our supply chain investments are also delivering significant benefits for the business. As Carol will discuss, we leveraged supply chain expenses in the quarter. As you know, last year, we completed the build-out of our Rapid Deployment Centers, RDCs. Not all of those facilities were mechanized from the start. This was a conscious decision to gain speed in the rollout and to learn about the processes within the RDCs before committing to mechanization. As we've added mechanization, we're seeing benefits in capacity, efficiency and accuracy. We're now underway with mechanizing 3 more facilities and by the end of fiscal 2012, 18 of the 19 facilities will be mechanized. Year-to-date in the U.S., we've handled approximately 65% of our cost of goods through centralized distribution, compared to approximately 25% for all of 2007. We have a goal of 75% by 2015. On the merchandising front, Craig and his team along with Matt and the IT team, continued to make significant progress on developing tools for our merchandising transformation. If you've followed Home Depot for a while, you know that one of our major areas of opportunity is in upgrading our legacy special order systems. We're now in the midst of a multiyear initiative to replace the legacy system, not with one major change-out but with a series of incremental releases. We're about 1/3 of the way through this effort and are very pleased with the success to date. We've digitized our catalogs and are putting the building blocks of the new order management system in place. We're also in the midst of a major upgrade of our dot com platform, which we anticipate completing by the end of this fiscal year. But this is not only about technology. There are underlying improvements in our merchandising processes that owe more to business alignment than technology. We now have a process for developing and executing our off-shelf and cross merchandising strategy across the company. This may seem straightforward, but it's involved some trial and error blending of centralized merchandising direction with local entrepreneurial activity. As we've gained alignment, we're now seeing steady improvement in sales and unit growth from our off-shelf activity as we add more merchandising excitement and value to our stores. We will continue to invest in our business to improve customer service and productivity. Along with that, we believe it's also critical to continue to invest in our associates. Approximately 81% of our stores would qualify for Success Sharing based on our third quarter results, and our objective is to maintain record levels of Success Sharing payouts to our hourly associates. Finally, today, our board announced a 16% increase in our quarterly dividend to $0.29 per share. Carol will discuss our updated capital allocation principles in a few minutes. Our guiding philosophy has been and will continue to be to maintain discipline on our capital allocation, focus on creating value for our shareholders and maintain a solid financial footing for our business on a sustaining basis. Let me close by thanking our associates for all their hard work and dedication in the third quarter. And with that, let me turn the call over to Craig.

Thanks, Frank, and good morning, everyone. Sales in the third quarter were driven by continued strength in the core of the store, as well as storm recovery. We saw growth in both average ticket and transactions during the quarter. 10 of our departments posted positive comps for the quarter. The departments that outperformed the company's average comp were tools, electrical, indoor garden, building materials, plumbing and hardware. Paint, flooring, lighting and kitchen showed positive comps. Comps in lumber, outdoor garden, bath and millwork were negative for the quarter. Cleanup activity from the impacts of Hurricane Irene and the resulting flooding led to strength in storm-related products, such as generators, pumps, extension cords and wet/dry vacs. We also saw a continued strength in roofing and gutters as customers repaired damage from early harsh winter weather. We estimate that the impact of storm-related sales to be approximately a point of comp. The temperatures normalized after a hot August, and we saw our customers return to simple outdoor projects in outdoor living categories. We're particularly pleased to have posted positive comps in categories such as patio furniture, fireplace, walk-behind mowers, grills and lawn accessories given the strong performance we saw in outdoor living categories during the third quarter of 2010. Outdoor projects, such as fencing, exterior stains, exterior paint and irrigation also performed well in the quarter. We did see some regional variances. For example, with drought-like conditions in parts of the southern division, we saw tough sales of riding mowers and live goods, partially offset by strong sales of water. The maintenance and repair categories that make up the core of our store continued to perform well. Project basics, such as pipe and fitting, fasteners, air circulation, hand tools, chemicals, clocks and appliance parts, were positive. And as customers prepared for winter, small maintenance projects like installation and waterproofing also sold well. Great brands and innovative products led to positive performance in portable power, Power Tool Accessories and Hand Tools during the third quarter. We offered outstanding values in power tools from brands like Ryobi, Milwaukee, Makita, RIDGID and DEWALT and we're seeing consistent response to these brands from our customers. We have also seen positive results from our Pro customers in Hand Tools from the Milwaukee and DEWALT lines that are exclusive to The Home Depot. We continue to deliver innovation through the extension of our LED light bulb offering for the home. At the beginning of the third quarter, we added the first 2 LED bulbs that will fit most customers' recessed cans. Additionally, we just added the first commercially available 75-watt equivalent LED A-line replacement. We saw our total transactions grow by 1.2%, while average ticket also increased 3% for the quarter. The transactions per tickets under $50, representing approximately 20% of our U.S. sales, were flat for the third quarter. As I mentioned earlier, we are pleased with our ability to manage effectively against categories that were significant transaction drivers in the third quarter of 2010. Transactions for tickets over $900, which also represent approximately 20% of our U.S. sales, were up 3.6% in the third quarter. Strength in roofing and generators contributed to the growth in our average ticket. During the third quarter, lumber prices were essentially flat to last year. Concrete pricing was elevated but began to come down at the end of the quarter. The total impacts to comp from commodity inflation during the quarter was approximately 40 basis points. As we look forward to the fourth quarter, we're facing the anniversary of the expiration of an energy-efficient tax credit in the U.S. that increased sales in millwork and home services during the fourth quarter of 2010. We are also lapping strong performance from our Gift Centers, as well as our Black Friday line up last year. We planned for this, and we're projecting to deliver positive comps in the quarter. We're excited about our decorative holiday and Gift Center offerings, as well as our Black Friday lineup. We have expanded our LED Christmas light selection to over 70 different options, and earlier this month, we gave customers rebates for trading in old incandescent strands. We also have added several new holiday decoration offerings from Martha Stewart. Our Gift Center offers outstanding values, with strong lineups of hand tools, power tools, safety items, tool storage and special buys. And finally, we have a strong line up of special buys for Black Friday, including appliance offers. We're excited about the products and values that we have to offer our customers in the fourth quarter and we invite you to visit us in store, online or through our mobile apps to check them out. And with that, I'd like to turn the call over to Carol. Carol B. Tomé: Thank you, Craig, and hello, everyone. In the third quarter, sales were $17.3 billion, up 4.4% from last year. Comps or same-store sales were positive 4.2% for the quarter, with comps up 5.2% in August, 4.1% in September and 3.5% in October. Comps for U.S. stores were positive 3.8% for their quarter, with U.S. comps up 4.5% in August, 3.4% in September and 3.4% in October. In the third quarter, our gross margin was 34.4%, an increase of 15 basis points from last year, of which 13 basis points came from our U.S. business. The gross margin expansion in the U.S. was driven by 26 basis points of benefit arising from our supply chain transformation, offset in part by a change in the mix of products and services sold, as well as higher shrink compared to last year. For the year, we expect moderate gross margin expansion. Operating expenses as a percent of sales decreased by 45 basis points to 25.1%. Our expense leverage reflects the impact of positive sales growth, as well as continuing cost control. While we had $26 million of natural disaster expense arising from storm damage, we leveraged every major expense line in the quarter. For the year, we now expect total expenses to grow at approximately 20% of our sales growth rate. Interest and other expense for the third quarter totaled $158 million, slightly higher than last year due to higher debt levels. Our income tax provision rate was 35.9% in the third quarter, and earnings per share for the third quarter were $0.60, up 17.6% from last year. Now moving to our operational metrics, during the third quarter, we opened one new store in Mexico and one new store in St. Croix. We temporarily closed one store in Bennington, New York due to flooding damage, and we expect this store to reopen during the fourth quarter. At the end of the third quarter, we were operating 2,246 stores and selling square footage was 235 million. Reflecting the sales environment, total sales per square foot for the third quarter were $293, up 4.3% year-over-year. Now turning to the balance sheet, at the end of the quarter, inventory was $10.7 billion, down approximately $300 million from a year ago. Inventory turns were 4.3x, a modest improvement from last year. We ended the quarter with $41.5 billion in assets, including $2.2 billion in cash. In the third quarter, we repurchased $800 million or 23.6 million shares of outstanding stock. Year-to-date, we have repurchased $3.1 billion or 87 million shares. It is our intent to continue using excess cash to repurchase shares, and we plan to repurchase approximately $400 million of outstanding shares in the fourth quarter. Computed on the average of beginning and ending long-term debt and equity for the trailing 4 quarters, return on invested capital was 14.1%, 210 basis points higher than the third quarter of fiscal 2010. On the capital allocation front, we continue to have a disciplined and balanced approach, investing in our business and returning cash to our shareholders in the form of dividends and share repurchases. In this regard, we have a few items to call out. First, year-to-date, we spent roughly $820 million in capital expenditures and anticipate that our total capital spending for fiscal 2011 will approximate $1,250,000,000. Second, as Frank mentioned, we just announced a 16% increase in our quarterly cash dividend to $0.29 per share. With this, we are lifting our targeted dividend payout ratio to 50%, up from our previous target of 40%. Third, as of the end of the third quarter, we have $6.8 billion remaining in our share repurchase authorization. It is our intent to use excess cash to repurchase shares and complete the authorization by the end of fiscal 2014. And finally, we're assuming a slightly more conservative financial risk profile and are targeting to maintain an adjusted debt to EBITDAR ratio of approximately 2x. Our updated shareholder principal guidelines reflect our view that a solid dividend coupled with prudent use of cash will create the most value for all stakeholders. Now let me turn to our outlook for the balance of the year. Remember that we guide off of GAAP. Our sales performance continues to outpace real GDP growth, driven by strength in the core of our store, as well as certain weather-related sales and merchandising events. Year-to-date, our sales have grown by 2.9%. We face a tough sales comparison in the fourth quarter, but consistent with earlier guidance, we continue to project that our fiscal 2011 sales will grow by approximately 2.5%. Our business continues to perform to our expectations, and we're seeing positive comps thus far in November. Based on our year-to-date results and our outlook for the fourth quarter, we now project fiscal 2011 earnings per share to increase approximately 18% to $2.38. While we intend to repurchase $400 million of outstanding shares in the fourth quarter, given the timing of the repurchases, they won't have a meaningful impact to our full year EPS guidance. Now we'll share our 2012 guidance with you during our fourth quarter earnings call, which is scheduled for February 21. 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 Chris Horvers with JPMorgan. Christopher Horvers - JP Morgan Chase & Co, Research Division: First question, just delving into the 2.0 debt to EBITDAR target, up previously -- or down previously from 2.5%. So I just was curious if you could spend a little more time talking about that decision. I think that dividend, after raising the dividend, you kind of get back to a similar capital distribution level in either situation, but I was just curious what the conversation was among senior management and the board.

Yes. Chris, let me make a general comment and then turn it over to Carol. I first agree with your comment in terms of the return of money to our shareholders. We also looked at the fact that while we've had the 2.5x guardrail that we've described, actually, for the last several years, we've been running at about 2x. So we thought that it was better just in terms of transparency to say here's what we think is the right target for us going forward. And obviously, as our earnings improve, that will have capacity for additional debt. Carol? Carol B. Tomé: Right. And you've seen that this year, we raised to $1 billion of incremental debt earlier in the year while maintaining that 2x ratio. So looking ahead, as our earnings grow, it gives us more borrowing capacity and financial flexibility. But we also think in this low growth economic environment, a solid financial condition is a competitive advantage and we're really pleased with where we are. Now you might say, "Oh gosh, interest rates are low. Don't you have an opportunity to borrow?" Our perspective is interest rates will remain low for a while, so no hurry to rush out to the market. Christopher Horvers - JP Morgan Chase & Co, Research Division: And then on a follow-up on the expense side, if you back out the $23 million or $26 million, it looks like you would have leveraged SG&A about 60 basis points. So I was just curious if there was any incentive comp drag in there. And also, should we think about 20 basis points of SG&A leverage per point of comp? It was a bit lower, so I was just trying to figure it out there. Carol B. Tomé: Well, sure. In the third quarter, our expenses grew about 59% of our sales growth rate and there are a couple of factors you need to keep in mind. First, we did have $26 million of natural disaster expense arising from flooding. And then last year, you may recall, we had a $20 million gain on the sale of real estate that didn't repeat this year. So there's a little bit of year-over-year distortion. For the full year, we're expecting our expenses to grow at about 20% of our sales growth rate. And that's a real tribute to just the great work that the team is doing in driving productivity in all expense lines.

Next, we'll hear from Colin McGranahan with Bernstein. Colin McGranahan - Sanford C. Bernstein & Co., LLC., Research Division: I wanted to actually follow up on the capital allocation first. Carol, you said that you thought that 2.0 was "the right leverage ratio." Yes, I think the academic work would suggest that that's probably not the optimal cost of capital for a company like you. So how are you arriving at 2.0 as the right? And then just to follow up on that, is there any sense here that you want to keep a more conservative ratio for either economic reasons because you're uncertain about the future or a more conservative ratio so that you have maybe some dry powder expansion outside the U.S.? I know you've -- or outside of North America? I know you've talked about or potentially acquisitions down the road, so that you have capacity if you wanted to do something like that. Carol B. Tomé: It's such a great question in terms of the right ratio because all day long, from an academic perspective, we should say that really, we should put a lot more leverage into our capital structure, perhaps go down to a BBB rating or less to optimize the weighted average cost of capital. And yet when you look at it, you really believe it can create shareholder value that way. We think that by maintaining an adjusted debt to EBITDAR ratio of 2x, we're projecting growth in 2012 and beyond. That's going to add additional borrowing capacity into our capital structure, afford us a tremendous amount of financial flexibility. Colin McGranahan - Sanford C. Bernstein & Co., LLC., Research Division: And what is that financial flexibility for? I guess that was my second question. Carol B. Tomé: Well, as you know, we're investing our capital in our existing business. As we think about financial flexibility, what our actions have shown is that we use it for the shareholders. So when we borrowed the $1 billion this year, we returned that to the shareholders through an accelerated share repurchase.

Yes. And I would also say, Colin, this is not a signal that there's something different in our minds internationally or anything like that. In fact, I mean, this is really just a slight move from what we've previously said and no move at all from what we've been doing over the last 3 years. Colin McGranahan - Sanford C. Bernstein & Co., LLC., Research Division: Okay. I'm still not sure I'm certain with the thinking there, but a second quick follow-up, just in terms of your comments around the tough sales compare, are you seeing any impact yet from anniversary-ing the tax credits in some of those categories? Carol B. Tomé: Well, if I could just jump in and then Craig will comment, November is our toughest comparison, as you know, and we're positive comping thus far this month. If you look at the performance by category, millwork is one of our softest categories.

Right, we're definitely seeing the pressure from the growth in millwork last year versus this year. It was one of the areas that we negative comped in, in the third quarter. We anticipate that it will be a very tough comp in the fourth quarter based on the overlap of the tax credit.

Next, we'll hear from Brian Nagel with Oppenheimer. Brian W. Nagel - Oppenheimer & Co. Inc., Research Division: First, just a question on the comp progression for the quarter. So you indicated that whether -- and I'm assuming you're talking mostly about the hurricane, I just want to -- so as you look at the comp progression for the quarter, was the majority of that weather benefit then in the month of August early in the quarter?

Yes, it was. Brian W. Nagel - Oppenheimer & Co. Inc., Research Division: Okay. So basically, the comps have kind of progressed evenly through the quarter. The second question, I just wanted to ask a question on the capital allocation discussion to EBIT, the timing. You made the announcement today on the dividend and the targeted debt ratios. As you decide to do this, is this more a reflection of what you're seeing inside your business, inside The Home Depot enterprise? Or is it more a reflection of external factors you decided just now? Carol B. Tomé: Well, generally, we've been on a cadence of lifting the dividend every year in the January, February timeframe. As we sat back and looked at the performance of the business, the confidence that we have in all the initiatives that we've got underway and our prospects for the future, we said there's no better time than to lift the dividend. Now, you shouldn't expect us to lift the dividend again in January or February of 2012. You should expect us to come back at the end of 2012 or the beginning of 2013 to look to lift the dividend again. We felt there was no better time. We also just wanted to add a little bit more definition around the targeted adjusted debt to EBITDAR ratio. I can't tell you the number of times we get asked, "When are you going to lever up to 2.5x?" We set 2.5x as a cap, not a target. We are now setting 2.0 as the target, and we will maintain the target.

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

Carol, you set me up. When are you going to lever up to 2.5x lease adjusted debt to EBITDAR, I guess? But -- the strategy makes sense. You weren't getting credit for keeping it at or below 2x, so now you're merely signaling that that's what you're going to do. But under -- are there certain triggers for -- so if you started to see 4% comp growth for an extended period of time like you have?

So that's -- look, Michael, that's a great question, great comment. These things are situational. So as the situation changes, we could obviously change what our target is. But as Carol said, we thought for the purposes of transparency, it was better to say, "Hey, this is what we've been doing for this -- for the last 3 years." We don't see this changing going forward. When we do see it, if circumstances change, growth starts to accelerate a lot more, then you might have a different answer.

Okay. Understood. And then on the promotional side, is there a philosophy to promote to the comp? And by that, I mean you anticipated that you have a difficult fourth quarter comparison. So does that mean that you're intentionally planning some activities to comp the comp? And is that different than how you've been in the past?

Michael, we're always trying to build the business to drive comp performance year-over-year. And I think the key focus that we've been trying to have for the past several years is to drive everyday great value for our customers, to build our business bay by bay so that we're driving consistent performance. Certainly, we go in and we create events. We're conscious of the fact that we need to, in total, cover that volume, but it doesn't necessarily mean that it's going to cover in that category.

Okay. Let me sneak one last one in there. The 3 initiatives that were completed during or near completion during the third quarter, have there been incremental costs associated with those activities such that we should see some benefits to the cost structure moving forward?

This is Marvin. From a cost standpoint, the answer is no real incremental cost. These are big initiatives and the goal is to hit our 60-40 ratio of service and task. So the goal primarily is to drive productivity. We believe that we're going to see productivity improvements in the short term, but more productivity improvements will be in 2012 and going forward. Carol B. Tomé: And if I could just jump in, some of the costs that we did experience was capitalized cost associated with new technology. So if you look at our capital spending, it's up year-on-year and most of that delta is in the area of technology.

Next, we'll hear from David Strasser with Janney Capital Markets.

Two questions. First, going to the capital allocation, when you look on your capital allocation, who are you benchmarking against sort of to make some of these decisions? Carol B. Tomé: We look at the world, is the broad answer. It's hard to look at a retailer to say, "Ah-ha, this is a company that we want to emulate." So we look broadly at the Dow Group of Companies, the S&P group of companies. There's some really good stories out there to follow. One good story would be McDonald's. We love what McDonald's has done, but there are other companies as well.

I guess in the past, you had -- I think Frank, you had mentioned at one point JCPenney, but they seem to have changed strategies pretty dramatically, I think, over the years as well.

I guess -- the other question was?

They may be in the process of doing that.

Yes, exactly.

One other -- if you mentioned, did I miss talking about appliances? It seems to have been a very volatile category in the third quarter in that there seems to have been winners and losers throughout the industry. I was just trying to get a sense where are you guys -- how you guys did in that area.

We were mid-single-digit negative in appliances.

Do you think you gained lost share?

We believe we lost just a little bit of share in the quarter.

And when you're doing -- losing share there, do you think it's because of just an unwillingness to match on price? Do you think there's anything structural there? Do you think it was just sort of around near-term pricing?

I don't think there's anything structural there. I think it's just there's activity in the marketplace. We have a portfolio strategy. We're comfortable with the position that we take in appliances, not looking to be the leader in that business. Carol B. Tomé: I think that's the key, isn't it? I mean, we're #3 and we're happy being #3.

Right.

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

I'll ask one question and a follow-up. The question just on the cadence of the buyback, so I think you're saying about $3.5 billion this year. And then the $6.8 billion to 2014 equates to something in the $2.3 billion range. So a significant slowdown. I guess the question is, is there upside to that number? Or is it really just a signal that you're just going to buying back less annually? And then I'll ask my follow-up upfront. It would relate against the Appliance business. So I think, hhgregg and Sears were pretty aggressive in the quarter. What are you seeing in November, particularly from your biggest competitor in terms of pricing in general but specifically on appliances as they seem to be signaling a more aggressive posture? Carol B. Tomé: So I'll start with the cadence on the buybacks. We gave some color today, hoping it would help you build your models. The way I would think about it is we're spending $2.5 billion with cash generated from the business to buy back shares this year. So you should assume at least $2.5 billion next year. That would mean $2.5 billion in '13, with remaining $1.4 billion in '14. However, as we just talked about, with increased earnings, we will have borrowing capacity. Just like we did this year, we raised $1 billion that takes us to the full $3.5 billion. So as we look at next year, we'll have borrowing capacity which would allow us to accelerate some of the share repurchases. I don't want to tell you the day, the time as we sit here in November because we want to be opportunistic in terms of debt capital raising. But there is clearly an opportunity to accelerate it, but hopefully, this is helpful from a modeling perspective.

On the appliance front, we've seen the market be fairly aggressive in this category. We see that it's off to a strong start in terms of the promotional activity, if you will, in the business as we head into the holiday season here. We're candidly pretty comfortable with the plans that we've put together for the business in the fourth quarter. So again, it fits within -- our plans fit within our portfolio strategy overall.

Next, we'll hear from Dennis McGill with Zelman & Associates.

Carol, I guess just first question would be around inventory. Can you maybe talk about the decline in the quarter and how you guys are viewing inventory overall and maybe highlight some categories where you're being either more conservative or more opportunistic? Carol B. Tomé: Well, we're thrilled with our inventory performance, and we've just spent a lot of money transforming our supply chain, so we're hoping to see this come through. As you know, we've committed to get a full turn of improvement over the next several years. If you look at where we are seeing it, part of it is really just in terms of the quality of the inventory. Our clearance levels are as low as they had ever been in our company history. And then Craig, you might want to give some color on just how we're going about forecasting and. . .

Sure. I mean, all of the tools that we've been building and putting in place -- the forecasting system that was put into place has helped us better manage the inventory on a day in, day out basis. We've absolutely worked hard over the past several years to do a much better job of managing our seasonal inventory. But now, we're seeing benefits come through in our basic categories as a result of these tools that we've put into play. Obviously, the RDC allows us to effectively put inventory where it's needed, with the last minute allocation that's put into place. So it's all of these elements that are coming together that's helping us leverage the inventory investment. Carol B. Tomé: And then if I could just jump in, I would say in-store execution is also helping. So Marvin, you might want to give a couple of comments about power packdown and what we do there.

Dennis, as a little bit of perspective, when product comes from the RDC, over 80% goes directly from receiving to the sales floor. I've been here over 9 years, and that's a big difference from what we've seen in the past. If you walk our stores today, as Carol mentioned, you'll see less product in the overhead than in the history of the company. It's not because we are doing anything other than getting the right product at the right place at the right time and we have some very fundamental things that we're doing in the store just to keep the product on the shelf, stay in stock, so we can limit the amount of inventory and have product on the shelf for customers to buy. It's a very fundamental approach, but the RDC and the technology Craig mentioned allows us to do this much better than we ever have before.

That's the most important thing, is the fact that when we look at inventory productivity, that is always measured against in-stock. And so we're constantly making sure that as we look at the investments we're making in the inventory that, that is balanced by the fact that we have to continue to improve our in-stock position for our customers, which we have.

Okay. And so a follow-up on that would be, I guess, Carol, do you have a target of where you'd like to end this year on inventory? And then bigger picture, as you continue to refine the distribution network, working capital with a nice swing this year versus the last. Any general thoughts on how we could think about that in '12? Can you continue to strip working capital out of the business in total? Carol B. Tomé: Yes. So we should show some -- modest improvement in inventory turns year-on-year by the end of the year. That certainly is our target and we're on path to deliver that. As we look to 2012, we'll give you more color in February, but I can tell you we're building our plans right now and we're building working capital as a source of cash for 2012.

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

When you look at the different size buckets that you guys lay out for us, I think it's interesting that you've had actually a pretty nice gain in 3 of the last 4 quarters, not necessarily intuitive given kind of what we're seeing in the broader housing market. I get the fact that stuff like storms can certainly help and skew the data little bit, but are guys seeing -- or do you sense there's a little bit of change in consumer appetite for bigger projects? Or has 3 the last 4 quarters just had its own unique aspects?

I think what's happening is as you mentioned, certainly as I call out, roofing, generators, those type of things that are storm related, certainly helped. But the fact that we had a positive comp growth in our kitchen business again is an indication of the work that we've done to really develop the business, give value to the customer across any way they want to buy a kitchen, whether that's in stock, take it home today, special order, have their cabinets refaced. All those being positive, being a bigger-ticket sale, has contributed to the past few quarters in terms of the big ticket growth. And candidly there, that's an area where we're taking share because the industry itself isn't growing from everything we can gather from our supply base. Carol B. Tomé: The other thing, we've just started up a new consumer insights team and we're getting some very interesting data. If you look at the third quarter, both our transactions and our ticket grew, as you know. But when you break it down between consumers and Pro, we saw an increase in transactions and ticket for the consumer. But in the Pro, transactions were down but the ticket was way up. So the Pro who's shopping with us is more sticky and is buying more with us.

Interesting. And then just any thoughts or color regarding year-over-year comparison for that big ticket bucket? Obviously, you were up. I think it was north of a 9% increase last year in the fourth quarter?

Yes. Carol B. Tomé: The fourth quarter was a strong quarter.

It was a very strong quarter last year. Carol B. Tomé: I think we've got to anniversary that.

And again, as I mentioned, we were aware that we have to deliver upon those comps. We've built programs across the store to be able to do that. There's businesses, for example, where the continued development of LED helps drive increase in ticket inside of that category. Lithium tools, for example, carries a higher ticket than NiCad power tools. So there's elements across the store that we're driving to continue to build the ticket in our business.

Next, we'll hear from Dan Binder with Jefferies & Company. Daniel T. Binder - Jefferies & Company, Inc., Research Division: I just wanted to jump back to the competitive landscape for a minute, your main competitors' shifting more towards EDLP. I'm just curious if you're feeling compelled or seeing any need to price match in certain areas of the store. And there also seems to be a little bit more of an emerging online growth by some other players. I'm just curious how you're viewing the online opportunity longer term. I know you're investing a lot in that currently.

So first and foremost, from a go-to-market strategy, ground zero for us is our portfolio strategy. We always go back to our portfolio strategy. What is it we want to stand for? How we drive the business? That determines both assortment strategy, as well as our go-to-market pricing strategy in the business. We've been focused for a number of years on driving to everyday great value for our customer. That remains our focus. Certainly, we have categories like appliances, where the industry still remains promotional. It's difficult to break those businesses as hard as we're trying. But our focus is really on trying to drive great value for our customers everyday. When we look at competition, we look at competition across a broad segment. It's not just our largest competitor in this space. We compete against multiple people, independents, as well as online competitors. And we're constantly looking at how we react to the market. Again, our portfolio strategy guides, where we react and how we react to what -- adapt and react in a given category. But that's a constant monitoring, both of brick-and-mortar retail as well as online retail, and making adjustments in our business to make sure that we're delivering value for our customers. Daniel T. Binder - Jefferies & Company, Inc., Research Division: Okay. So I guess with that said, are you finding that you're having to do any kind of material, price matching activity? Is that getting -- is that seeing any kind of increases? Or are you doing it in the aisles before the customer approaches you?

Yes. I haven't seen in our numbers any dramatic change in competitive price match data. We are constantly monitoring the market on a weekly basis, proactively making adjustments in our business as we need to. Carol B. Tomé: And we view broad discounting with a great deal of caution, and we have competitors who do offer broad discounts like with their private label card or something like that. And we aren't seeing that we have to match that.

Dan, this is Marvin. There's really great alignment between the store operators and Craig's field merchandising team. We're keenly aware of all of our competitors, but we have not seen any major changes in price match, not in the near term or even in the past. We're just very consistent with how we run our business. And as Craig mentioned, the portfolio strategy is the cornerstone and we provide input into that.

Next, we'll hear from Todd Duvick with Bank of America.

This is Greg Hessler standing in for Todd Duvick. Do you have a targeted credit rating? I mean, with the announcement this morning, as well as how your leverage has been creeping lower over the past several years, I wanted to see if you have a target there. And was that a factor at all for the rationale? Carol B. Tomé: Today, we have a split rating. We got a BBB+ rating from S&P and a weak single A from Moody’s. We think having an unsplit rating would be good, so a weak single A would be a good target for us.

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

You've shown I think what you characterized as a little bit better sales growth than the market. You've done better on expenses and better on gross margin. I guess, I'm curious as you think about 2012, the sustainability of what looks to have been some outperformance relative to the market maybe even relative to your targets across those 3 areas.

Well, Eric, that's -- our job is to continue to invest in the business so that we position ourselves to continue to gain market share. That's -- we don't stop. It wasn't like 2010 or 2011 we look at as one-off years. It's a sustaining effort, and that's really the purpose behind our investments on supply chain, merchandising tools and in the operational side. Carol B. Tomé: We're on a path to reach a 10% operating margin by 2013.

As you think about 4Q, characterized as this tougher comparison and see maybe [ph] that the market share gains or the upside sales performance may take a pause in the fourth quarter, I guess I'd be interested if you could broaden your thoughts on that if that's a one quarter event or if now the comparisons are tougher so we're going to see more in line with the market type of sales performance.

Yes. I think if you go back to the fourth quarter of 2010, I mean, it was a significant outperformance in 2010. And as we called out at the time, around our seasonal and appliance offerings. We know, as Craig said, that's in our plans for how we approach the fourth quarter but that delta performance was probably a one-off in that quarter. Carol B. Tomé: This is also the impact of the energy tax credit. In the fourth quarter of last year, we estimated it drove about 40 to 50 basis points of comp in the fourth quarter. As we've reflected on it and done additional work, it was an even bigger contribution. So that's not repeating this year.

And then one other follow-up, on the gross margin line impact of inflation, did you see any negative impact or notable impact on profitability from inflation in the quarter? Carol B. Tomé: We didn't. We would've called it out had we seen that.

Next, we'll hear from Budd Bugatch with Raymond James.

This is actually TJ McConville filling in for Budd. Carol, you mentioned quickly in passing the consumer insights team and what you're finding with your pro customer in reference to ticket and traffic. I would love to hear any of the other findings that you've had so far with that program as to maybe within the Pro, what the category changes have been, maybe if you're gaining share there, or anything that you've found early days so far.

So TJ, as Carol referenced and kind of if you take a step back, we had, had an outside third party firm that was helping us do consumer insights. We've now shifted and have that capacity in-house. And some of the very basic data is what we're just getting now, but it is just starting now. So around the very broad, "Hey, here's what your Pros are doing. Here's what your consumers are doing." So we really don't have additional items to share with you all.

Okay, fair enough. We'll look forward to hearing those data. And then secondly on -- Marvin, you mentioned earlier you're still looking towards 60-40 customer facing the task. Where do you stand today? And how much more of these 3 initiatives do you have to roll out the next quarter? And where do you think you'll stand after that?

TJ, we're going to end the year at roughly 55% and we're very pleased with that. When we started this a few years back, we were at 47% service to task. So we'll end this year at 55%. We think that we'll get north of 60% within the next 16 months. My team is responsible for working across, fortunately with Matt Carey's IT team, with Craig's team, to lay out initiatives for the upcoming years to keep this process growing. We don't see this as an endpoint. We see it is a continuous point of improvement. So we have initiatives that actually go through 2015. We're going to continue to drive productivity. We have a very simple philosophy of trying to take task out the store while driving productivity concurrently. And we've been very pleased with our payroll leverage and our ability to reduce overall payroll yet add hours to the sales force. So we're increasing coverage for service while reducing overall payroll because we're eliminating some of the tasks that in the past dominated all of our payroll staff.

Next, we'll hear from David Schick with Stifel. David A. Schick - Stifel, Nicolaus & Co., Inc., Research Division: Maybe if we could build on that. If you look at all the work you've done on the RDCs and distribution in general, but then combining it with what Marvin just talked about holistically on the efficiency of hours and tasking in the store, given the stage of all the work that you've done over several years, how should we think about the rate of change for both growth and leverage or just operating margin benefits of all that efficiency work in aggregate, the last couple of years versus next couple going forward? Carol B. Tomé: Well, you'll recall when we had our Investor Day back in 2010, we said we'd get 40 basis points of margin expansion off of the supply chain. I think there is more upside opportunity to this than down just looking at the performance for the past 2 quarters, which gives us just a tremendous amount of confidence in our treck towards that 10% operating margin that we really believe we'll deliver by 2013. David A. Schick - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And is the efficiency more targeted at just pure flow-through of gross? Or is it what it allows you to do labor-wise in the store? Or is that changing at all? Carol B. Tomé: I commented on the gross margin aspect, on the labor productivity. You're seeing it today. We leveraged hourly payroll in the quarter by about 38 basis points. So it was the key driver of the leverage that we experienced. And supply chain is a piece of this. All the new tools that Marvin and his team have introduced is another piece of it.

Next, we'll hear from Greg Melich with ISI.

Two quick questions. One, could you just give us the actual numbers for the comp traffic in ticket in the U.S.? Carol B. Tomé: The actual numbers for the comp in the U.S., the comp ticket was up 2.7% and the transactions up 1.1%.

On a comp basis. And then second is on SG&A, Carol, if I take the guidance of growing 20% of sales and just use your 2.5 for the year, I get deleverage in the fourth quarter. Is there -- is that because last year was so strong and that's just the flow-through to the SG&A side? Or is there something else that we're missing there? Carol B. Tomé: Well, there's probably some modeling nuances going on because we're showing that we will leverage expenses in the fourth quarter.

Got it. Okay. And then quickly then, credit, do you have the update on the credit penetration particularly given the strength in large ticket transactions? Carol B. Tomé: Yes. We're very pleased with how our private label credit card is performing in this environment. We saw a slight tick down in penetration, about 17 basis points to 22.7%. But the reason why I say we're very encouraged and pleased with the performance is simply when we look at new accounts. As you may recall, we have a consumer card and a Pro card, and 70% of the penetration is on the consumer, 30% on the Pro. If we look at approval rates for our professional contractors, they're up 300 basis points year-over-year. That's great news because you know how important the Pro is to us. If we -- yes, it's great. If we look at approval rates for the consumer, however, they're down about 400 basis points. And the reason why they're down is because of the requirements pursuant to the CARD Act and the ability to pay. It's very cumbersome to apply for a consumer card in our stores and it's cumbersome on our part. It's cumbersome on the part of our underwriter. So we have a number of changes underway to make it less cumb ersome, and we believe that will help increase the approval rates. It's not that the quality of the applicants is bad. It's just they don't have all the information necessary to get approved. Now our approval rates are still pretty good. They're 71%. So that's still pretty good, but we think if we simplify it, we'll get it even better.

We'll take our last question. We'll take that questions from Kate McShane from Citi Investment Research.

I was wondering if there was any more commentary about the successes that you're seeing with the Buy Online Pickup In-Store. Have you seen any increase in conversion as you get more people in the store with this initiative?

So we're pleased with how our total online business is progressing. We have currently about 9.5 million visitors to our site a week, which compares to about 6.5 million back in 2009. We continue to add SKUs to our business overall. We're north of roughly 300,000 SKUs at year end. And we made a number of changes to our site, as you probably have seen. So we're very pleased with the progress. We're obviously making an investment in our operating system right now, but our business hasn't reached $1 billion in total yet.

Kate, this is Marvin. We're very pleased just with the alignment. We talk about alignment a lot and we think that is a powerful component of success in our business, with the IT team, with Craig's team, with the dot com team. We have spent a lot of time, ensuring that we benchmark really good retailers not only in the U.S. but in Europe on how this process should work. The rollout was very smooth. The reception from our associates and customers have been very good, and we're excited about how well the stores are executing and how well the customer service feedback is coming back to us on how easy the process is and how transparent it is. So, so far, we're very pleased.

Well, thank you, everyone, for joining us today. We look forward to talking with you throughout the quarter and in our fourth quarter earnings call, which would be in the month of February.

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