The Home Depot, Inc. (HD) Q4 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 Marvin R. Ellison - Executive Vice President of U S Stores Mark Holifield - Senior Vice President of Supply Chain

Colin McGranahan - Sanford C. Bernstein & Co., LLC., Research Division Christopher Horvers - JP Morgan Chase & Co, Research Division Wayne L. Hood - BMO Capital Markets U.S. Eric Bosshard - Cleveland Research Company Dennis McGill - Zelman & Associates, Research Division Laura A. Champine - Collins Stewart LLC, Research Division Alan M. Rifkin - Barclays Capital, Research Division Brian W. Nagel - Oppenheimer & Co. Inc., Research Division Gregory S. Melich - ISI Group Inc., Research Division Scot Ciccarelli - RBC Capital Markets, LLC, Research Division Matthew J. Fassler - Goldman Sachs Group Inc., Research Division TJ McConville Michael Baker - Deutsche Bank AG, Research Division David Gober - Morgan Stanley, Research Division

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

Thank you, Dave, and good morning to everyone. Welcome to The Home Depot Third Quarter Earnings Conference Call. Joining us on our call today are Frank Blake, Chairman and CEO of The Home Depot; Craig Menear, Executive Vice President, Merchandising; and Carol Tomé, Chief Financial Officer and Executive Vice President, Corporate Services. Following our prepared remarks, the call will be open for analyst questions. Questions will be limited to analysts and investors and as a reminder, we would appreciate it if the participants would limit themselves to one question with one follow-up. This conference call is being broadcast real time on the Internet at earnings.homedepot.com. The replay will also be available on our site. If we are unable to get to your question during the call, please call our Investor Relations department at (770) 384-2387. Before I turn the call over to Frank, let me remind you that today's press release and the presentations made by our executives include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties 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 fourth quarter were $16 billion, up 5.9% from last year. Comp sales were positive 5.7%, and our diluted earnings per share were $0.50. Our U.S. stores had a positive comp of 6.1%. From a geographic perspective, we saw positive comps in all of our top 40 markets. The unseasonably warm weather helped customer traffic and clearly was a factor in our sales performance. We've also seen the steady recovery of some of the hardest hit markets like Florida and California. Our major Florida markets all outperformed the company average, and California was in line with the company average. Both states have posted positive comps for 8 consecutive quarters. As Craig will detail, we saw strength in our core merchandising areas, as well as in our holiday Gift Centers and we had strong growth in customer transactions with sequential comp transaction improvement each quarter this year. On the international front, our Canadian business had positive comps for the quarter and our Mexican business had another quarter of positive comps, making it 33 quarters in a row of positive comp growth. Operationally, Marvin and his team are making progress on our customer service initiatives. Based on the changes we've made throughout the year, we now have approximately 53% of our store labor hours dedicated to customer-facing activity. Just 4 years ago, we were at 40%. So this is a significant improvement in a short period of time. It's required a lot of detailed planning and focused execution at the regional district and store level to make this happen, and this speaks to the alignment of our store operations and support teams. We are also very excited about a new service offering our operations team is in the process of rolling out. This year, our stores will be offering in-store repair services for power equipment and powers tools. Previously, we had an off-site third-party service that would provide equipment repair. We can provide that service ourselves now, leveraging our tool rental centers and reverse logistic centers, customers can have tune-ups and other maintenance completed at our stores. We think this will be a significant improvement and convenience for our customers and will enhance the overall value of our power tool and equipment product offerings. On the merchandising front, Craig and his steam continued to develop our merchandising tools. The most significant recent activity was the upgrade of our dot-com platform. This upgrade enhances the layout, visual appeal and responsiveness of our site and gives us a best-in-class platform for future interconnected retail development. Our supply chain investments continue to deliver benefits for the business, improving our in-stock rate and asset efficiency, as we again improved inventory turns this year. As of the end of 2011, we handled approximately 70% of our cost of goods sold through central distribution in the U.S. This compares to approximately 25%, 4 years ago. For 2012, as Carol will detail, we are expecting sales growth of around 4%, including the 53rd week and diluted earnings per share of about $2.72, again including the 53rd week and without factoring in share repurchases during the year. There are some interesting challenges in setting expectations for 2012. First, the macro data on housing suggest uncertainty. Private fixed residential investment as a percent of GDP remains near at 60-year low but has a slight uptick in the quarter to 2.26%. The Fed has noted that housing remains a drag on economic recovery with factors such as delayed household formation and credit supply, contributing to a continued imbalance between housing supply and demand. The Fed has suggested the policy actions will be needed to fix this, but it wouldn't appear that any major policy changes are likely in the near-term. Second, despite this, the performance of our business particularly in the back half of 2011, would suggest the strengthening market. This quarter's comps were achieved against a very strong fourth quarter comp in 2010 and exceeded our internal forecast. But we're mindful that this past December and January were the fourth warmest on record, with much of the nice weather occurring across the heavily populated eastern U.S. Better weather translates into improved sales for exterior categories like building materials and also translates into increased customer transactions, which lift the entire business. So we think it's too early to say that there's been a significant improvement in our overall market, but we continue to build a strong business on the basic repair and remodel needs of our customers, recognizing that we have a base of over 130 million aging homes. In this environment, we think our growth will be consistent with U.S. GDP, making some adjustments for positive weather impacts in 2011. In 2012, as in the last several years, we will remain focused on disciplined capital allocation and increasing shareholder return. We will continue to make the necessary investments in our business and return excess cash to our shareholders through share buybacks and dividends. We raised the dividend twice in 2011, and are targeting a 50% payout ratio going forward. Finally, I'd like to thank our associates for their hard work and dedication during this past quarter and the year. We're very proud of the fact that 96% of our stores qualified for Success Sharing in the second half of 2011, with our second-highest total payout ever. We look forward to even better results in 2012. And with that, let me turn the call over to Craig.

Thanks, Frank, and good morning, everyone. We're extremely pleased with our performance in the fourth quarter and the quarter's results were driven by several factors: solid execution of our game plan for the holiday season, including decorative holiday, Black Friday and our Gift Centers; unusually warm weather that drove increased demand for exterior project categories, which we quickly responded to in order to take advantage of the opportunity; and continued strength in maintenance and repair categories, as well as interior projects. 13 out of 14 departments posted positive comps for the quarter. The departments that outperformed the company's average comp were tools, electrical, building materials, paint, lumber, lighting, outdoor garden and flooring. Hardware, bath, kitchens, indoor garden and plumbing showed positive comps. Comp in millwork was negative for the quarter, as we anniversary the expiration of an energy-efficient tax credit in the U.S. Last quarter, I told you the key drivers for our fourth quarter performance would be seasonal categories such as decorative holiday, our Black Friday lineup and our Gift Centers. We delivered positive comp performance for Black Friday and the Black Friday weekend, a strong start to the holiday season. Our Gift Centers also had positive results with double-digit comps overall, led by power tools, Power Tool Accessories and Hand Tools. And as I mentioned last quarter, we increased our decorative holiday buy this year and delivered double-digit comps in that category. And finally, although it was a slight drag to our overall comp, we posted positive comps in appliances for the quarter, against an outstanding performance last year. Warmer-than-expected weather encouraged customers to tackle exterior projects. Our merchants reacted quickly to this opportunity, working alongside our stores and suppliers to leverage our supply chain and drive results. This nimble response facilitated double-digit comps in gutters, roofing, vinyl siding, patio furniture, fencing, exterior paint, pressure washers, exterior lighting and concrete. These positive results more than offset negative performance in winter weather categories such as snow removal, fireplaces and portable heating as the heavy snowfalls of January 2011 were not repeated. Simple interior projects also performed positively in the quarter, driving results in laminate flooring, recessed lighting, bath accessories, ceiling fans, door locks, floor tile and faucets. We are pleased with our performance in interior paint, driven by a number of products. First, our exclusive line of BEHR paints, which had been rated #1 by independent testing. Second, our new Glidden DUO Paint + Primer. And finally, our innovative line of specialty paint from Rust-Oleum and Martha Stewart. In addition to the strength in seasonal products, exterior projects and interior projects, the maintenance and repair categories that make up the core of our store continued to execute well in the fourth quarter. Comps in categories such as light bulbs, cleaning, pipe and fitting and caulk were strong in the fourth quarter. We were pleased with the continued integration of our online business with our stores through expanded assortments, customer reference tools, marketing outreach and online transparency of realtime inventory in our stores. We saw a total transactions grow by 3.6%, while average ticket also increased 2.4% for the quarter. In the U.S., transaction growth was seen across the store with positive growth in 13 of 14 departments. Transactions for tickets under $50, representing approximately 20% of our U.S. sales were up 1.3% for the fourth quarter. Transactions for tickets over $900 also representing approximately 20% of our U.S. sales were up 3% in the fourth quarter. Strength in tools and hardware, electrical, building materials, paint and flooring contributed to growth in the average ticket. During the fourth quarter, the total impact to comp from commodity inflation was approximately 20 basis points. As you will recall at this time, last year, I mentioned that we had seen a number of requests from our vendors for price increases as a result of elevating raw material costs. We have seen that number level off over the year, and we have proactively worked with our suppliers to rollback prices as commodity prices have come down. As a reminder, we review each request on an individual basis and our portfolio strategy drives our go-to-market actions. As we look back at our initial expectations for 2011, we thought transactions would lead average ticket growth for the year. However, while transaction growth was positive for the year, average ticket growth was even more positive, driven by a strong recovery and innovation in areas such as LED and lithium technology and strength in kitchens. The strong performance in our kitchen business, which is positively comped for the last 2 years in a row, is a testament to the assortment of value our merchants have delivered in that category. As we look to 2012, we believe that we are well positioned through continued -- great integrations of our merchandising tools, optimization of our supply chain, great values and innovative products to continue the positive growth trend in transactions and average ticket. In the first quarter of 2012, we're introducing new products across the store. We are announcing an improved version of our BEHR Premium Plus Ultra Interior Paint and Primer in one. This new formula has better stain-blocking capabilities and improved adhesion on multiple surfaces. This enhancement increases durability and scuff resistance even with a shorter drying time. In appliances, we are introducing new Maytag ranges equipped with AquaLift cleaning technology, an innovative interior coating that cleans in less than an hour, without high temperatures, harsh chemicals or odor. We will also be introducing a new washer and dryer laundry-pairs from GE and LG. In our seasonal business, we'll be offering a new line of power tools for the garden from Ryobi, starting with a swing trimmer and hedge trimmer featuring a 40-volt lithium-ion rechargeable battery system. This lithium technology offers gas-like performance in a quick charge platform, which can be charged thousands of times over the life of the battery. Rolling out to all stores in February, we are happy to offer our customers an expanded 7 day or less carpet install program. This program, in partnership with Shaw Industries, allows us to offer speed along with a great quality assortment for our customers. Also in flooring, we are upgrading our tile assortment in the first quarter. Finally, I'm proud of the hard work completed by our merchants to drive value for our customers through the special buys available in our stores now as part of our Savings Spectacular event, as well as a great spring lineup of product offerings. And with that, I'd like to turn the call over to Carol.

[Operator Instructions] And our first question will come from Colin McGranahan with Bernstein. Colin McGranahan - Sanford C. Bernstein & Co., LLC., Research Division: First question, just on weather. Was there any way that you -- what about trying to quantify how much of an impact you thought that had in the quarter?

So, Colin, it's a little difficult to tell because when you look at -- we had some real strength in interior projects and you wonder whether or not that was driven just because of higher traffic because customers could get to the stores. But our best estimate at this point, is somewhere between 200 and 250 basis points. Colin McGranahan - Sanford C. Bernstein & Co., LLC., Research Division: Okay. That's very helpful. And then just following up, maybe it’s question for Carol or Craig on the gross margin. Can you just update just on how much is remaining in your multiyear gross margin expansion outlook and specifically, on supply-chain? Obviously, a pretty good performance here in the fourth quarter in supply chain with, I think, 50-some basis points of contribution versus incremental supply chain benefit that you expect as you automate DCs. And so just kind of an update on the gross margin outlook and where you are on that journey? And then, how are you thinking about pricing in 2012 and how that might impact gross margin?

And certainly, we're looking to continue to leverage our productivity, but we also want to invest that back in the customer to drive top line sales, and make sure that we're delivering outstanding values for our customers.

And next, we'll go to Christopher Horvers with JPMorgan. Christopher Horvers - JP Morgan Chase & Co, Research Division: Wanted to follow up a bit on the weather question. If you look at the monthly stacks, December in the U.S. was actually the best month. So I guess, thinking about that 200 to 250 basis points and December being the best stack against the energy tax credit, I mean, do you think you're being perhaps a little conservative in terms of the lift in the weather?

You're talking on a 2-year basis, Chris? Christopher Horvers - JP Morgan Chase & Co, Research Division: Yes.

Yes. As Craig said, Chris, this is an art, not a science on figuring out how much weather contributed to our sales. But certainly, December was a very warm month. January was a very warm month. And peeling apart how much of that is traffic. So nicer weather, people have an easier time getting to the store versus the more general uplift is just very tough. So our best estimate, as Craig said, is it's between 200 and 250 basis points. Christopher Horvers - JP Morgan Chase & Co, Research Division: And I guess, maybe the other way to look at that is to say, well, now that perhaps February, it's a little warmer year-to-year but maybe a little more normal or the gap. How's the business performed in the U.S. in February? Christopher Horvers - JP Morgan Chase & Co, Research Division: Okay. And then just one quick one as a follow-up. The buyback of $3.5 billion, it looks like it'd be about a $55 embedded price into that. Is that the right calculation?

And next, we'll go to Wayne Hood with BMO Capital.

Just my question relates to cash flow from operations that I think you expect to be about $6.6 billion this year, roughly flat with last year. And, I guess, I look at the big jump in your payable-to-inventory ratio to 47%. In the past, that's been in excess of 50% with where you are, where you're headed with turns. I'm just wondering, are you just being conservative in that cash flow outlook? Or are we getting to a point where $6.5 billion to $7 billion might be kind of a peak operating cash flow number?

Should we be thinking about 47% as a run rate for the coming year, payable to inventory.

Just how we thought about payables, we looked at it actually from a days perspective and we're projecting to increase payable days outstanding by 2 days in 2012.

Okay. My second question related to this is, why not repurchase more than the $3.5 billion because given the cash flow outlook, which suggest you're going to add another $1 billion to your cash balance for the year, unless you're going to make acquisitions or something, I'm not sure why you would want to take that cash balance up by another $1 billion?

And next, we'll go to Eric Bosshard with Cleveland Research Company.

Can you talk a little bit about what you observed with mix across the business in the fourth quarter and perhaps the back half of the year? And how you're thinking about where consumers are spending money in terms of price points as we go into 2012?

Sure, Eric, this is Craig. If we looked at the fourth quarter and in the back half, start with the fact that categories that have been a strength, remained the strength are our maintenance and repair with solid performance as a result. We did have the continued benefit of the repair going on in some of the areas affected by the hurricanes, which drove things like roofing as big repair projects. But we really did see strength across the interior of the store. Simple decor projects were very strong for us in the quarter. That was a -- continued to build on momentum that we had coming off of Q3. And then again, with the benefit of the warm weather, we actually saw project business, exterior project business take place at an accelerated rate, what you would normally expect later in the fourth quarter.

Great. And then one follow-up. In terms of how you're thinking about promotions and managing your inventory in 2012, understanding you're talking about growth similar to GDP, which feels a little bit conservative in light of the second half of '11. I'm interested in how you're thinking about the promotional cadence, the promotional intensity and how you're managing your inventories in anticipation of that?

Again, we're still focused on continuing to try to drive value for our customers every day, so that is our remaining focus. We're continuing to work to break promotional cycles in our business. But with the supply chain capabilities that we've put in place, I think, this past quarter was an example of the nimbleness that we now have in our business and we can respond. So we feel good about the capabilities that we've built in the supply chain. In particular, our capabilities to respond to seasonal businesses. So overall, I'd say we're well positioned as we move into 2012.

Next, we'll go to Dennis McGill With Zelman & Associates. Dennis McGill - Zelman & Associates, Research Division: Just a question focused on some of the regions, you mentioned California being at the company average and Florida being above and 2 areas that we wouldn't normally attribute to being volatile from the weather standpoint. So just wondering if you could elaborate there, particularly in California, where it seemed like weather was pretty steady year-over-year, especially with some of the housing metrics improving in those markets?

Dennis, I think that's exactly the point. I mean, wanted to call out California and Florida because they really aren't weather-related. And so that's an indication that there was more than just weather, which ties back to why we triangulate around the 200 to 250 basis points coming from weather. And I think just exactly as you said, that those markets are more reflective of not a housing recovery, but a stabilization in the markets that we've seen over the last 2 years, as they've just -- they've gotten kind off there, off the floor in effect on housing. Dennis McGill - Zelman & Associates, Research Division: Is there anything in the product for category results in those areas that would differ from what you talked about nationally, that would be indicative of different trends?

Nothing radically different in those areas. Dennis McGill - Zelman & Associates, Research Division: Okay. And then just lastly, on the point, with Florida being above company average and being a pretty big chunk of the stores, any particular areas that would be offsetting that?

In terms of what was below the company average? Dennis McGill - Zelman & Associates, Research Division: Right.

So we had some challenged performances in areas of the southwest, areas of what we call the northern plains, some areas that saw some difficulty.

And next we'll go to Laura Champine with Collins Stewart.

I had a question about market share. As we look back at 2011, were your share gains more driven by product differentiation or price differentiation? And how does that impact your merchandising and pricing decisions in 2012?

So, Laura, I'd say just one general comment, which is our market, certainly for us, is very hard to work through what the share gains and share losses are between the government reports and the third-party reports. Frankly, the government reports would suggest that we lost share in the quarter, which we have -- that's a head scratcher for us. And some of the third-party share data also had some interesting anomalies. So I'd say, more of, and I'd ask Craig to address this, I mean, really the pricing decisions are driven more by the portfolio strategy in our customer. What we want to do from a customer rather than from a share gain perspective.

Yes. I think, the gains that we’ve made in the business, in terms of driving performance, has been really 3 key factors: number one, it's the work that we continue to do on the assortments, to make sure that we're driving relevant product to the customer and the marketplace. The value proposition around those assortments, so that we are using our portfolio strategy to apply pressure on the marketplace. And then third, is our store associates and their ability to drive the business and take care of the customer, get excited about the product that we give them and translate that excitement to our customers.

So just if I can follow-up, if I'm looking in the stores this year, will they appear more or less promotional than they did in 2011?

I would say that you won't see a major difference. Again, we're trying to work to break categories. I've shared in the past, there's particular businesses that are tough to break the promotional cycle. But we're working hard to do that. Our objective is to drive every day great value for our customers.

And next, we'll go to Alan Rifkin with Barclays Capital.

Carol, the 4.3x inventory turn is the best number you guys have posted in quite a while, and one would have to believe that part of that improvement is coming from the RDC initiative. I was wondering if you can maybe shed some color on where you think that number can go longer-term in conjunction with the RDC continuing to benefit?

Okay. And just a follow-up, if I may. I know, Craig, that you said big-ticket $900 and above was up about 3%. But I was wondering if you could maybe shed a little bit more color on exactly what you are seeing with respect to consumers' appetite for starting to undertake big projects? If you can kind of shed a little bit more color on the $900 and above transactions.

Sure. Yes, there's really kind of 3 factors that are helping to drive that larger ticket transaction. First of all, we're beginning to see the Pro perform more as our consumer has done over the past. So we're beginning to see the growth there, which is obviously, more around project business. The strength that we've had overall in our Kitchen business and Appliance business, obviously, contributes to the growth in the larger ticket as well. And then candidly, the third thing is a continued innovation that we're bringing to the market where customers are stepping in to better product whether it's things like LED, which obviously, allows them to save energy but, obviously, drives ticket for us or things like lithium technology or our paint offering, where we're seeing customers step up to better product.

Next, we'll go to Brian Nagel with Oppenheimer. Brian W. Nagel - Oppenheimer & Co. Inc., Research Division: First off, I don't mean to belabor the weather question but I know it's very topical here. But how should we think about it? You quantified -- the 200, 250 basis points benefit from the weather. So as we think about this, how much of that you think is -- will be just simply pulled forward and could result in maybe some sales weakness over the next few quarters? Or is it just likely to imply better consumption of those products?

Yes, it's a great question and it's one, it's very difficult to get your arms around. I think it's logical to assume that when you're doing exterior projects in the north in January, there may very well be some pull forward in the business from what normally maybe would have transpired in Q2. But it's very difficult to kind of put a number against that.

Really hard to get at. Brian W. Nagel - Oppenheimer & Co. Inc., Research Division: Yes, I understand. The second question I want to ask, more of a big picture type of question. But I think a lot of us are looking at the macro housing data, which has clearly gotten better over the last few months. And we're grappling with -- we've seen some of this before, over the last couple of years. We thought housing was getting better only to disappoint. From your standpoint, just looking from the overall macro environment right now, do you think what we're seeing lately is more sustainable than we've seen in the last couple of years?

Brian, I'd say a couple of things. First, we are now not -- we have no government programs to cloud what's happening. So we've kind of now anniversary-ed the last of that with the tax credit for energy efficiency that Craig mentioned. And the way we look at it is, there are some positives that you definitely see on housing. So you do see affordability is at great levels and you got some shadow of household formation that eventually will drive demand, and then you see some negatives. And clearly, credit availability is one of those negatives that really has to get solved for housing to kind of lead the way on recovery.

Our next question comes from Greg Melich with ISI.

Carol, you mentioned in your prepared comments that SG&A would grow at 50% of sales this year, a little bit more. Could you help us understand the variability of that, if sales ended up surprising to the upside. So I assumed that's based on sort of that 2.5%, 3% growth number. If you ended staying like the fourth quarter, would you expect that -- what sort of leverage would we expect on that?

Okay, great. And then second, this follows up to the cash flow from earlier. The $6.6 billion that would also -- I guess, I'm trying to reconcile your net income plus D&A to get to that $6.6 billion. And it seems like there's about a $700 million difference. And it sounds like you'd split the difference in that, might be some working capital improvement?

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

I know you touched upon kind of the aging U.S. housing stock out there. And I'm assuming that houses will need more repair maintenance activity as they get older. How do you guys kind of factor that part into your longer-term sales plans?

Well, so again, the point on the aging housing base is that that is what's been sustaining our business over the last couple of years is the repair, the basic repair business within homes. What we've seen over the last several years is, you can roughly anticipate that growing with GDP. People -- a lot of repairs are discretionary. We see it in our business and, really, what helps us is a lifting economy. And that's why we have positive growth in 2010, positive growth in 2011, and why we think we'll have positive growth in 2012.

But, Frank, when you look at, let's call it, what you would think of as kind of...

Could it accelerate? Is your question Scot, could it accelerate?

Yes.

Yes. I mean, certainly, we think that as the economy continues to improve, hopefully as unemployment improves, that people will continue to want to do small and large projects in their home. So absolutely, that could improve. But as I said, what we found over the last couple of years is that anchoring ourselves to GDP is about the best predictor we have versus sort of baking in an assumption of what happens with an aging housing base.

Our next question comes from Matthew Fassler with Goldman Sachs.

Two follow-up questions, if I could. You addressed the question of expense growth relative to sales growth. If you think about EBIT dollar growth relative to sales growth or the flow-through. This year, you generated $0.34 on the incremental dollar sales down to EBIT, both in the quarter actually and for the year. Last year was 44%. What's your expectation for EBIT flow-through as you take a longer-term look forward? I know in the past, this might be quite dated, we had thought about 20% per annum. It sounds like the run rate is substantially better than that in the past and also, I think, for 2012. So any thoughts on that?

Got it. And then secondly, you talked about the impact of supply chain to gross margin. To what degree do you think your ticket and your sales benefited from in-stock, obviously, your inventory is quite lean, so you're not putting more product on the shelves. But do you think that part of the ticket improvement is in fact, a direct function of supply chain and is it possible to quantify that?

Yes. I mean, I would say that there is no question in our mind that part of our improvement in the business has been the work that's been done in the supply chain to make sure that we're delivering the product at the right time in the right quantities to our store. I don't think I can tell you a specific number that's very hard to calculate what that number would be. But we know that by having the capability, to have the right product in the right locations, having it in the quantities that the customer needs, when they expect it. Certainly, we believe has been part of our turnaround over the past couple of years in transaction growth and sales growth in total.

And where's the 99% a year ago, Carol, for the U.S.?

Matt, this is Marvin Ellison. A lot of improvements on IT, Matt Carey and his team deserves a lot of credit. We have inventory visibility in the store that we've never had before. Every item is located, so we know exactly where it's located on the shelf in the secondary department. And not only does that help with the transactions, but it saves a ton of productivity for the associates. So they're spending more time selling, less time looking for products. And all of those things, added together, just creates a better selling process and hopefully, we'll continue to see improvements across the board.

And next, we'll go to Budd Bugatch with Raymond James.

This is actually TJ McConville filling in for Budd. Question, several of our questions have been answered. But, Craig, you touched on it a bit earlier on the improvements in the professional customer, I know we've been patiently looking for some improvement in that part of the business. Can you elaborate on that a little bit more? I know last quarter, Carol told us that the transactions were down, but the ticket was up. Is that the similar trend? Or is there some sort of shift going on there?

No, we're actually seeing improvement right now with the Pro in both areas, both transaction and ticket overall. The other thing that we looked at in the fourth quarter is that, at this point, appears that the Pros who spend more with us are larger Pros, seemed to be performing better and that's encouraging. That they are getting more jobs, more work.

And TJ, this is Marvin. We talked a lot about initiatives that we put in place. If you think about this service for a second, we had 130 basis point improvement in Net Promoter Score for the overall store. But for the Pro area, it was 290 basis points. So when you think about the sales performance, a lot of that is attributed, we hope and we're cautiously optimistic too that the segment coming back. But also, we believe the merchants, the IT improvements, the service levels in the stores just making it easier for the Pros to shop and when you combine those 2 things together, again, we remain cautiously optimistic that we'll continue to see it.

That's very helpful. And, Marvin, could you share what those Net Promoter Score levels, the absolute levels are for the overall store and the Pro, if you wouldn't mind?

Well, the overall store is 70.7%. For the Pro, I don't have that number with me because the Pro is aggregated into the overall store number.

Okay. That's fair enough. The last question I have is housekeeping. How many of the RDCs, Frank, now are mechanized and are we still on plan to rollout as we expected in FY '12?

It's Mark Holifield. At this point, 16 of the 19 RDCs are fully mechanized and we're in the process of mechanizing 2 of them in this year.

Our next question comes from Mike Baker with Deutsche Bank.

First, competitively, are you seeing anything different promotional-wise and any benefit from Sears potentially closing stores?

No. We're really not seeing any major difference in promotional activity in the market right now.

Okay. And then just another sort of bigger picture view and it has been touched on a couple of times but still trying to figure out. How much do you think -- are you seeing any -- your customers buy higher-end products? Do more higher-end kitchen or higher-end bath remodels or is it more sort of entry-level price point relative to a couple of quarters ago? Again, I'm just trying to figure out if your results should be seen as a positive macro sign or is it more sort of company-specific and/or weather-related?

We, obviously, we focus on each segment within the line structure because we believe that there's opportunity in each, whether that's the opening price point, the mid-price point or the upper-price point. So there are certainly areas where customers focus in each one of those segments. But what I would tell you is that we're pleased with the growth that we've seen in particular categories as I mentioned, where customers are stepping up in things like LED technology. There's obviously a savings for the customers that relates to the energy usage in their home. But they're certainly willing to put the outlay out for a higher-ticket product to get that payback on their energy savings. Same thing would hold true in products like lithium technology, where the Pro consumer certainly sees the benefit of added power, longer runtimes, more battery charges in their unit. So they're willing to step up in spend at a ticket that's higher than NiCad. Or customers who are stepping in to organic or natural products, which generally carry a higher ticket. But they see the benefit that, that brings to them. So we're seeing both, I guess, is the way to answer the question. Where the innovation, the value proposition for the customer is there, on a upper-end higher ticket product. The customer is not afraid to spend money there.

Okay. And could I just ask one more follow-up, just same type of idea but maybe more simply within like a kitchen remodel or something like that. Where you have an entry level cabinet that you could buy or sort of mid-level or a higher level. Anything in those specific categories, whether it be bathroom or kitchen rather than an LED, which is sort of a, I think, step-up in a light bulb. Just the overall scope of the project, do people sort of opt in for the high-end stuff?

I would say in the kitchen business, it's actually been a blend. And it hasn't -- it's not that it skewed one way or another. It's actually been a blend of product.

Right.

But is that blend different than it may had been a couple of quarters ago, where it would had been like all entry levels?

No. It's been pretty much the same for the past almost 2 years.

Our final question will come from David Gober with Morgan Stanley.

Frank, you noted in your prepared remarks that you're now at about 53% of store labor hours allocated to selling. Is there any way to quantify the benefit to the comp that that's been providing, or any way to maybe identify specific department that have benefited from that shift in labor hours?

Well, again, I'll ask Marvin to comment on this as well. I think that a difficult -- it's a little bit like the in-stock rate. You know that being better in-stock translates into better sales. You know that having more customer-facing hours should translate into better sales. If you think about kind of the spectrum of retailers, we are much more customer-assist that many other retailers. Our associates drive a lot of discretionary purchase. So we think it's a plus, but it's very difficult to put a number to it.

So this is Marvin. We work with the merchants to try to understand their strategic focus for the year, so we can understand where we invest the labor. As Craig's team tends to focus on, the core categories like hardware, we will skew our labor allocation more heavily toward those core departments. We've seen strength across the business as reflected in the numbers. But I think Frank said it very well, hard to quantify specifically. What we do know intuitively is that we're a project business. We sell projects, not items and that require a level of service that you won't see in a typical retailer. So because of that, because of the training and because of the investments of what we estimate to be, on average, about 4 associates added on the sales floor and payroll for service, we think that it is definitely benefiting the business. But again, quantifying it specifically is always a little difficult.

Okay. And a follow-up if I could. Carol, you mentioned that your guidance assumes that the quarterly variability is fairly -- in a fairly tight band. Which surprised me a little bit given the variability in 2011 and some of the seasonal factors, it also implies that on a 2-year stack basis, that the business should continue to accelerate throughout the year. Is that a fair assumption? Is that what you guys are looking for? And is there anything else that we should be aware of within that seasonal outlook?

Well, thank you to everyone who joined us on the call today. And we look forward to talking to you next quarter.

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