Good day, ladies and gentlemen. Welcome to The Home Depot Third Quarter 2016 Earnings Conference Call. Today’s call is being recorded. [Operator Instructions]. At this time, I'd like to turn the conference over to Ms. Diane Dayhoff, Vice President, Investor Relations. Please go ahead, ma’am.

Thank you, Catherine, and good morning to everyone. Joining us on our call today are Craig Menear, Chairman, CEO and President; Ted Decker, EVP of Merchandising; and Carol Tomé, Chief Financial Officer and Executive Vice President Corporate Services. Following our prepared remarks, the call will be open for analyst questions. Questions will be limited to analysts and investors, and as a reminder we really would appreciate it if the participants would limit themselves to one question with one follow-up please. If we are unable to get to your question during the call, please call our Investor Relations department at 770-384-2387. Now before I turn the call over to Craig, let me remind you that today’s press release and the presentations made by our executives include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to the factors identified in the release and in our filings with the Securities and Exchange Commission. Today’s presentations will also include certain non-GAAP measures. Reconciliation of these measures is provided on our Web site. Now, let me turn the call over to Craig.

Thank you, Diane, and good morning, everyone. We had a strong quarter for both sales and earnings, as we continue to see strength across our business. Sales for the third quarter were 23.2 billion, up 6.1% from last year. Comp sales were up 5.5% from last year and our U.S. stores had a positive comp of 5.9%. Diluted earnings per share were $1.60 in the third quarter, up 18.5% versus last year. In the U.S., all three of our divisions posted positive comps in the third quarter led by our Southern division. All our regions positively comped except one region in the North. In New England, we had a small negative comp due primarily to a state sales tax holiday in fiscal 2015 that did not repeat in 2016. Internationally, our Mexican and Canadian businesses had another quarter of solid performance. Mexico and Canada reported positive comps in local currency marking 52 and 20 consecutive quarters of positive comp growth, respectively. As Ted will detail, we saw balanced growth from both ticket and transactions. All of our merchandising departments posted positive comps and we saw healthy balance of growth among both our Pro and DIY customers, with Pro sales growing faster than DIY sales in the quarter. Our Pro business continues to be driven by a strong offering of brands that Pros demand consistent product innovation, as well as enhanced delivery and credit offerings to help them more efficiently manage their business. In the third quarter, we anniversaried the acquisition of Interline and are proud of the team's efforts in the first year. The Interline integration continues to progress as we work to execute against the business use cases to leverage Interline's capabilities. We're excited about the opportunity Interline provides us to expand our share of wallet with customers. We…

Thanks, Craig, and good morning, everyone. We were pleased with our results in the third quarter. We saw strength across the store, balanced between Pro and DIY customers as well as continued growth in our online business. All of our merchandising departments posted positive comps led by appliances which had double-digit comps in the quarter. Lumber, tools, outdoor garden, indoor garden, lighting, décor and flooring were above the company's average comp. Plumbing, hardware, building materials, kitchen and bath, millwork, electrical and paint were positive but below the company average. We continue to see balanced growth between transactions and average ticket in the quarter. Total comp transactions increased to 2.4% while comp average ticket grew 3.1%. Our average ticket increase was slightly impacted by commodity price inflation, mainly from lumber and building materials. The total impact to ticket growth from commodity price inflation was approximately 35 basis points. In addition, our average ticket growth was negatively impacted by approximately 33 basis points primarily due to a weaker Mexican peso. Looking at big ticket sales in the third quarter, transactions over $900, which represent approximately 20% of our U.S. sales, were up 11.3%. The drivers behind the increase in big ticket purchases were appliances, flooring and roofing. Once again, we saw strong outperformance in many Pro heavy categories as Pro sales grew faster than the company's average comp. This led the strong comps in commercial and industrial lighting, fencing, plywood, pressure-treated decking and interior doors. At the same time, we also saw strength with the DIY customer as they undertook various projects around the house. This project business drove strong comps in special order carpet, tool storage, laminate flooring and vanities. Weather remained favorable throughout the quarter and extended the outdoor project selling season. By leveraging forecast analytics, strong supplier collaboration and…

Thank you. [Operator Instructions]. We’ll hear first from Michael Lasser with UBS.

Good morning. Thanks a lot for taking my question. Craig, the question here is how do you comp the comp in the fourth quarter and the first quarter given the very cooperative weather conditions that you saw last year? I know you briefly touched on that but maybe you can provide a little bit more detail? Plus what are you looking for to ensure that you don’t misread the state of a cycle and either respond too quickly or too slowly to potentially changing market conditions?

So on how do we comp the comp, I’ll recall this was the conversation we had going into fiscal 2016 coming out of last year. Quite honestly, that’s the hard work that the team does immediately following the performance that we had last year in the fourth quarter. We are up against big numbers. U.S. comp in the fourth quarter last year was 8.9%. But that’s really the work the team started doing immediately following the close of that quarter. So we feel confident in the programs that merchant teams have laid out, the support with the supply chain teams and then of course our store associates taking those programs and driving them. Quite honestly that’s our job. That’s what we need to do. Carol Tomé: And if I could just jump in, it’s Carol here. So we are in the middle of November and we are on track to deliver the sales that we just guided to.

And then in terms of what you look at so that we don’t miss anything, we’ve shared in the past I think that we’re constantly watching ticket and transaction and when you step away from the downturn in the mid-2000s, the previous downturn was 2001 and we saw a decline in average ticket. That was a little bit of a leading indicator. Now we have to be careful because ticket can be affected by things like weather. So when you have big ticket sales, for example, in the first and second quarter on things like tractors, weather can impact that. So we do watch ticket carefully. We balance that with transactions. What we’re seeing in the business right now we like a lot. We see a nice balance between ticket transactions. Carol Tomé: And in fact transact accelerated through the quarter.

Yes.

Throughout the quarter?

Yes.

And Carol you mentioned that you anticipate some share gains in the fourth quarter. Historically you really haven’t factored share gains into your longer-term outlook. What’s changing now that’s giving you the confidence to put that in there where you had an impact? Carol Tomé: Well, as we look at the environment we see that there are share donors in certain categories. Ted called out that appliances was a double-digit comp for us in the third quarter. It contributed 50 basis points of our overall growth in the quarter, as for the year. And so as we look to the fourth quarter, it’s always a big appliance selling season and we would expect to continue to grow appliances in the fourth quarter.

Michael, we’ve obviously made a lot of investments over the past few years to make sure we’re positioned to be able to capture that.

Okay. And if I could add one last one on the SG&A recognizing that you have one-time items quarter-in and quarter-out, good guys and no so good guys. So SG&A has been growing 2% to 4% after being up at a much more moderate pace, I’m talking on a per square foot basis. So are we just at a point where the business requires a little bit more investment because you’ve had so many years of strong comp, and so the flow through might not be as strong moving forward? Carol Tomé: Well, I can take you back to the beginning of the year. We said that our expenses would grow at 40% of our sales growth rate. We are now seeing that our expenses this year will grow at 32% of our sales growth rate. And what that means, year-to-date our expenses have grown at 37.5% of our sales growth rate. For the fourth quarter, we should expect a lot of leverage on the SG&A line, principally because we have year-over-year expense items that we will not repeat in the fourth quarter of this year. Last year we had outperformance and bonus, we had some store cleanup costs. Those items will not repeat in the fourth quarter of this year, so expect a good flow through. Longer term, as we talked about and we talked about this at the beginning of the year, because of items like rising people costs and we’re not alone. All companies are faced with rising people costs, over the longer term we would expect our expenses to grow at 50% of our sales growth rate. And we’re not providing guidance for 2017 today but you would expect next year for us to come back and tell you it should be more in the 50% area.

Excellent. Thanks so much.

We’ll now hear from Seth Sigman with Credit Suisse.

Thanks and good morning. I just want to follow up on the question about the cycle and the outlook for demand in the category. Can you give us a sense of what you’re seeing in terms of bigger ticket discretionary projects? Are you seeing any sort of change in the types of projects consumers or Pros are focused on, basically anything that would indicate that we’re maybe heading into a different part of the cycle?

When you look at the larger ticket sales, it’s coming we believe from multiple areas. It’s coming from the strength in the Pro business, it’s coming from our services business, it’s coming from things like the appliance sales growth. So it’s a broad aspect of drivers behind the ticket. And when you look at the third quarter, actually our transactions over $900 was the largest quarter growth of the year. Carol Tomé: I think it’s important to just step back and look at where we are in terms of the cycle and focus on home price appreciation, because that’s a big driver of our business. Since 2011, homeowners have seen a 95% increase in their home equity. That’s come about because of rising prices as well as if you have a mortgage, you’ve been making mortgage payments since 2011. So homeowners really do view their home as an investment and not an expense. So the question is, okay, great, well what does it mean for 2017 and beyond? While we see home prices have recovered in certain parts of the country, there are other parts of the country where we are still double-digit down from peak. Those areas include Chicago and Atlanta. So in terms of where we are for the cycle, you can’t look at the averages because the averages will kill you. You have to look at the market. And when you look at the market, we see real opportunity for continued improvement. There’s really interesting statistics that comes out of the Harvard Joint Center for Housing Studies and they call it the leading indicator of remodeling activity. And this leading indicator of remodeling activity suggests continued growth throughout the fourth quarter, throughout 2017. They don’t produce the report past 2017 but their work suggests we will continue to grow.

Okay. Thanks for that. And then maybe a good follow up here would be you guys have rolled out a couple of key offerings to better serve the Pro including credit and advanced delivery options. I know it’s very early, but do you think that’s playing a role in driving big ticket and the strength we saw this quarter? And do you think these options are driving in maybe a different customer or changing behavior within the store?

As you said, we’re still in the process of rolling out, it’s early days. We have not completed the rollout of BODFS, our Buy Online, Deliver from Store, yet we’re now up to about 1,600 stores where we’ve launched the program. As I mentioned in my comments, we’ve seen double-digit growth in deliveries. So certainly we think that that is beginning to have a positive impact and making it easier for our Pro customers as well as DIY customers to engage and shop with The Home Depot. Carol Tomé: On the credit side, it’s important to note that we have little over 900,000 Pros that hold a private label credit card with us. We’ve converted over 20% of those Pros onto our new value product. And for those who have converted, 64% of those are activating the new value prop. So we see growth in those accounts. And as we continue to convert and add new Pros into the program, we expect this to be a top line benefit. Today, it’s growing. It’s not materially impacting the top line but it’s growing and we expect that to continue to grow over time.

That’s great color. That’s very much. Carol Tomé: Yes.

Thank you. Our next question will come from Christopher Horvers with JPMorgan.

Thanks. Good morning, everybody.

Good morning.

So I wanted to follow up on the hurricane. The $100 dollars of sales related to storms, is that hurricane and flooding combined? And just related to the hurricane, can you talk about how much the hurricane lifted the month of October in the U.S.?

The number is both in total. Candidly, the flooding has been an impact throughout the entire quarter and a larger driver. Carol Tomé: It was the biggest part of that $100 million.

Interesting. So the hurricane lift to October actually sounds like it was certainly – if you’re talking about 50 basis points for the quarter and most of that being related to flooding then maybe 50, 70 basis points of lift to the month of October simply from the hurricane? Carol Tomé: Not that much.

No. Carol Tomé: Just the timing of the hurricane and where it hit; not that much. We saw significant cost coming of the flooding. In fact, I think you know we had to shut down a store, we lost a store. Part of those storm-related expenses I called out on the SG&A line is because we had a – it could liquidate the inventory, clean up the store and get it back open which we did do, which is very exciting for us.

Yes, the flooding happened at the end of Q2. So the flooding impact was the entire quarter and was a much bigger impact. Obviously, the hurricane was in October.

Understood. And then one of the questions that we’re getting is how you’re thinking about or what’s implied in the fourth quarter related to annual guidance? I think some of the more skeptical investors out there are saying, hey look, you know, Home Depot is sort of implying EPS and comps below where the street is sitting for the fourth quarter. So can you talk about how you thought about approaching the guidance on the year and then how you thought about addressing those questions to investors? Carol Tomé: I think the easiest way to think about this is on a two-year stack basis. So the implied comp for the fourth quarter is a little over 3%. If you look at a three-year stack for the first half of 2016, the two-year stack comp is 10.6%. If you look at the two-year stack comp for Q3, it’s 10.6%. If you look then at the forecasted two-year stack comp for Q4, it’s over 10%. So skepticism abound, but we feel very comfortable with the guidance that we give based on these two-year stack.

Perfect. Thanks very much.

Thank you. Our next question comes from Scott Mushkin with Wolfe Research.

Thanks, guys. Sorry about that. Thanks for taking my questions. So I just wanted to poke a little bit more thinking about the environment going forward. Obviously, we had a big election and the market has taken off. But as we think about your business, obviously Pro has grown pretty fast but we have SG&A maybe growing about 50% of sales I think is what’s been said. So as we kind of think about the construct of '17 and beyond and knowing that there’s a lot of dry powder in the housing market, how do you guys think about your growth rate as we move out of the fourth quarter which has got a lot of noise and go into '17 and '18? Do you think we’re at the end of the cycle or could this cycle be a lot different?

The first comment I’d make, obviously we’re not prepared to talk about '17. We’ll do that on our next call. But what I would say is if you look at the drivers of growth, we don’t see significant change in the drivers of growth. We’ve had foundational GDP growth. We’ve had in housing home value appreciation, housing turnover, new household formation and then layer on top of that 65% of the housing stock in the U.S. is now in excess of 30 years old. All of those are drivers of business for us. There’s nothing that would indicate that we see that those would change. And as Carol said, there’s varying degrees of recovery amongst different parts of the country. So we don’t see anything on the horizon at this stage that would say anything should change in terms of the growth drivers in our business. Carol Tomé: And if you recall the investor conference we had in December of last year, we set forth a sales target of $101 million and operating margin target of 14.5% by 2018. As we sit here today, nothing has taken us off of that target.

I guess I was even thinking the more bullish side, could we – the recovery we’ve called it a zombie economy, growth cession, we’ve had a lot of different of words we’ve used for it. Is it conceivable as you look at your business over the last three or four years that it’s been obviously very good but a better environment, a better macro environment could drive growth higher? And have you guys thought about that?

It’s possible but we’re focused on the numbers that Carol just shared that we’ve laid out in our investor conference. That’s roughly $12 billion plus worth of growth between now and 2018 from where we started this year and that’s the equivalent of opening 357 new Home Depot stores which we won’t do. So that’s no small hill and we’re focused on achieving those numbers. Carol Tomé: The good thing is, Scott, we got a supply chain, we got a staffing model, we can adopt or change or adjust to whatever demand is coming our way.

And then just one – thank you for that. Just one clarification. Was the Pro growth sequentially, is it sequentially speeding up? And then I’ll yield. Thank you. Carol Tomé: The Pro growth was higher than the DIY growth in the third quarter but the sequential comment had to do with transactions not customer segment.

Thank you.

We’ll go to Simeon Gutman with Morgan Stanley.

Thanks. Good morning. Following up on some commentary, Craig, you were making about big ticket, so we know it was very strong and I think you called out appliances, flooring and roofing and that you’ve always try to gauge the balance of it. I guess for those categories to have been strong in Q3, how should we gauge the sustainability of those? Appliances seems to have been a share gaining category, it’s been good for a while, it’s probably a big fourth quarter category. Is flooring and roofing more weather dependent or is that more seasonal, or is it lasting?

Roofing obviously can be seasonal depending on what happens. If you get ice and snow, you’re not really repairing – you might repair but you won’t replace a roof. Flooring is less seasonal overall.

Okay. And then as a follow up I guess to thinking about, I think Carol you talked about looking at individual markets that there’s still some room to go. Can you distill a little further? You gave us geographic color by market. Can you talk about any performance? I don’t know if it’s oil markets, rural markets, any disparities on a regional level sort of beneath the geographic data that you provide, better or worse, that you could gauge the overall environment with? Carol Tomé: Well, in certain geographies like Texas where you may say that how the sale is performing there? We see double-digit comps in parts of Texas. So Texas is doing very well. I will tell you our stores in North Dakota are negative comping; two stores in North Dakota, so that’s not a surprise to us. It doesn’t matter to the overall company but that’s not a surprise. On balance, as Craig pointed out, we’ve got good growth across the country with opportunity for more growth.

And the way you look at pent-up demand you’ve shown us categories that have not reached their full potential. Do you look at your markets that way? Can you share any color about the number of our markets where we don’t think the housing market or our business has gotten back to let’s say some normalized demand level or has potential to keep going? Carol Tomé: Yes, we do look at it that way and as we’ve look peak to [indiscernible] markets that have not fully recovered.

Okay. Thanks.

Thank you. We’ll now hear from Matt Fassler with Goldman Sachs.

Thanks a lot and good morning to you. First question should be a fairly simple one. You gave us the comp for the big ticket bucket. Can you give us the small ticket and then we can solve for the rest of the business please?

Under 50, Matt, was 1.6% comp.

Got it, understood. And then secondly, you talked about share gains. You spoke about particularly categories like appliances which are more DIY focused. Can you give us a sense of the pace of share gains that you’re seeing in Pro and perhaps some of the categories that might be standing out from that perspective? And your sense I guess as part of that as to how the Pro market looks today from a growth perspective relative to DIY?

I would say the Pro is very strong. One thing we saw this quarter is we’ve always talked about the high-spend Pro and the low-spend Pro. The low-spend Pro comp was on par with the high-spend Pro. So that’s nice to see not only geographical but the high and low spend are each comping at that stronger rate in consumer. And as we look across departments, virtually every department had higher Pro spend comp than consumer. So the Pro is strong across the business. We continue to be extremely pleased with our lumber, building material business. Our tool business in particular just continues to accelerate and we’re taking meaningful share in the tools business.

And presumably we can tie to some degree that migration to Pro with the overall strong performance were the bigger ticket baskets for you?

Certainly, yes.

Okay. Thank you so much for that detail. I appreciate it.

We’ll continue on to Dan Binder with Jefferies.

Thanks. A few questions. First, August stood out as sort of a softer month. Was there anything in particular that you would highlight there?

It was an extremely warm month.

Okay. And then in the appliance business, it looked like the industry as well as you were a little bit more aggressive year-over-year. I suspect it may be in part to what you highlighted earlier just in terms of wanting to take share. But I was curious what your feelings were about the health of the appliance industry given what we’ve heard from vendors and what you see in your own business. In other words, is it taking higher promotions to drive that comp?

No, our promotional cadence is almost identical to last year and we see the strength in our portfolio across all of our brands and very, very strong across the board.

And then lastly on holiday, the holiday business every year that business seems to get bigger and I was just curious how you’ve ordered for this year? Is it up – are orders up double digit, what are you expecting in terms of the contribution to the fourth quarter?

Well, it’s a big business and a growing business. It’s still for the quarter not a determinative business for us. But yes, we bought into that. That was part of our growth in inventory and we’re expecting another great holiday season. I’d say also on the back of our Halloween and Harvest, we bought into that as well this past year. We’re extremely pleased with the performance of that deck of holiday segment and looking forward to an equally strong Christmas period as well.

Okay. Thanks.

And Mike Baker with Deutsche Bank has our next question.

Thanks. So I just wanted to follow up on the Pro and can you estimate for us what you think your share of the Pro business is compared to your share of DIY? And eventually what do you think you could gain in terms of share for the Pro business?

So share around the Pro is a little bit elusive but again, we try to triangulate on the number. I think what we’ve looked at is we’re playing now in a $550 billion market with the addition of the MRO for hospitality, institutional and multifamily. We think total share for The Home Depot plays somewhere in the 15% range inclusive of all of Pro and DIY and services, and we believe that our DIY share is sitting somewhere in the neighborhood of 27% to 28%.

Okay. And so we back into Pro being about 10% given the penetration --?

10% or 12% give or take, yes.

Okay. Thank you. And then a couple of other follow-ups. Promotional cadence, you said you were relatively similar but what have you seen from any of your competitors? And particularly on appliances, one of the big vendors had pretty strong appliance units but very low dollars because of mix and pricing. So I’m wondering if you’re seeing any of your competitors be irrational, because that’s something that I think has impacted you guys in the past when some competitors got a little irrational with appliances.

Well, I would say appliance is included but our entire Q4 cadence is identical. I can’t think of anything that were meaningfully different from Q4 of last year. I would say broadly across the business in portfolio and categories, we are focused on offering an everyday low price to our Pro and consumer customers.

Right. So that’s your offering. You’re not seeing anything irrational from competitors I guess is the question.

Time to time, folks run promotions; they try to drive their business. That’s just the nature of the business these days and we see that. We see that with the competition but we’re going to work hard to try to remain focused on our everyday value for our customer.

Okay, great. Thanks for the color.

Thank you. We’ll continue on to Dennis McGill with Zelman & Associates.

Hi. Good morning. Thank you. Carol, one question on the inventory side; I think obviously last quarter you mentioned some error in the algorithm and just curious if you could update us there as far as where you guys are on the in-stock? And then more broadly just how you’re thinking about inventory management now and in the future? We’ve heard a lot of suppliers talk about inventory adjustments, the big customers and curious if you feel that to be somewhat tied to just the end market of point of sale or if that’s more strategy on the distribution side? Carol Tomé: Well, I talk about some of the inventory findings. First, our in-stock rates are a tick higher than they were year-on-year. That’s exactly where we want them to be. We bought in for the season, so our inventory is healthy. We are ready for this season. The quality of inventory has never been better. If I look at clearance, in active, e-velocity, we’re at the lowest levels in the 21 years that I’ve been here. So never better in terms of quality. And in terms of where we think the inventory may go, we’ve got a lot of initiatives on the way in the supply chain roles and maybe Mark Holifield could comment on Supply Chain Sync and so on and so forth.

Yes. We’re pleased with the results of the Supply Chain Sync, certainly pleased right now with the state of our inventory. As Carol outlined, a tick higher than last year, well prepared for Q4 and we’ve increased our JLQs for our Pro customers a bit. In terms of Sync, we continue to roll that out. The way to think about that, our RDC network handles about half of our cost to goods sold. We’re live in two-thirds of our RDCs at this point with about two-thirds of the COGS, the cost of goods sold, dollar volume through there. We will be rolling to the north RDCs here as we go through the next several months and that will complete the rollout in terms of the RDCs, and then we’ll continue to roll to other vendors as we continue.

I think the most important thing as it relates to inventory, obviously we look for productivity but first and foremost is we’re looking to continually improve our overall in-stock position and be able to take care of the customers’ needs in the quantities that they need.

Okay. And then second question just as it relates to both Canada and Mexico I guess kind of different impacts going on, but hoping you can maybe speak to the fundamental backdrop in Canada with housing market looking a little bit weaker there, just what you’re seeing as far as your performance, whether that’s share gain or maybe we shouldn’t be worried about some of the housing metrics? And then in Mexico under the new administration, any thoughts as how it could impact your business with policy or immigration reform, et cetera?

Yes, let me start with Mexico. Obviously, there have been changes in Mexico over the years. We’ve been able to drive an unbelievable performance in Mexico through all those changes and we’ll continue to see us doing that. We’re very pleased with our business in Mexico. The team has done a phenomenal job down there of growing that business and positioning us as the largest home improvement retailer in Mexico. As it relates to Canada, clearly what you’ve seen in Canada and what we’ve experienced is in the province of Alberta, in Saskatchewan where more dependent upon energy, clearly we have seen fresher there that we haven’t seen in the balance of the country. But the team has worked hard to offset that pressure and grow the business overall. And we’re very pleased with our business in Canada and the team has done an amazing job to offset that pressure in the West.

Okay. Thank you, guys. Good luck.

Thank you.

Brian Nagel with Oppenheimer, please go ahead.

Hi. Good morning. Thanks for taking my questions.

Good morning.

First question, and this I know is a really big picture and early. But with the change in administration here in the United States, any initial thoughts as to how you’re thinking at Home Depot how the shifting political landscape could impact your company?

Our job is to stay focused on our customer to make sure that we’re driving the most convenient interconnected experience leveraging all the asset base that we have and that we’re driving value for our customers through great values and through great innovation. That is our sole focus. It’s what we’re all about. It’s what we need to stay in tune with so that we stay relevant to our customers.

Okay. I appreciate that. And then secondly on the – I know there’s been other questions on appliance as well, but my question here is it seems as though just watching a wide number of – a large number of retailers that more and more chains of various sizes are pushing into this business. So with that I guess I’m asking are you seeing increased competition from other retailers pushing into the business. And if so, what form is that taking and have you had to change or are you considering changing how you go to market in appliance as a result of that?

Yes, there are obviously more folks jumping into this business. But again, as Ted described, we have a very strong appliance business. We’re gaining share in the category. We like our model.

Yes, we’ve not seen an impact from new entrants and we don’t envision any change to our go to market strategy on appliances.

Thank you.

Scot Ciccarelli with RBC Capital Markets, please go ahead.

Good morning, guys. Carol, I wanted to go back to one of your earlier comments regarding market-by-market differences. Yes we know that some markets haven’t necessarily recovered from a home price perspective, but we actually have seen pretty rapid home price appreciation in other markets. And at least in pockets, we’re starting to hear about some pricing pressure in some of those. So I guess the question is, are there some high, let’s call it, home appreciation markets where you’re starting to see any flowing in big ticket sales? Carol Tomé: Yes, so I actually looked at that this morning. I went to the San Francisco Bay area and I went to Seattle, because those are two markets where you’re seeing real home price appreciation. And I went to see how we’ve seen a slowdown in big ticket or anything that would cause us to be concerned, and we don’t see anything at this point.

Got you. Okay. And then just quickly shifting to gross margin, I know you previously talked about gross margin expansion in the back half of this year. Maybe I just had the cadence a bit wrong, but I guess I would have expected some modest expansion in 3Q. Was there anything else that may have impacted the gross margin that you didn’t already cite? And has your outlook for 4Q changed at all? Carol Tomé: No. We were very pleased with our gross margin performance in the third quarter. We expanded by 6 basis points. And based on the guidance I had given you, you should expect similar expansion in the fourth quarter.

Roger that. All right, thanks guys.

Seth Basham with Wedbush Securities, please go ahead.

Thanks a lot and good morning. My question is around trade up and trade down. Have you guys seen any trends in consumers trading up to more expensive products with Interline or trading down for that matter?

That’s something we watch and have given color on previously and we see a similar trend where our comps are strong across the value line with higher comps in the higher price point goods. And we think that is a lot driven by innovation in the fabulous product that we’re bringing to the market.

Yes, if you think about the two products in power tools that Ted called out in his comments, those are unbelievable innovations that clearly help drive ticket within the category and expansion of benefits for the customer.

Got it. And in terms of big projects that consumers are doing, are we seeing bigger tickets associated with those projects as they prefer more expensive items to complete them? Carol Tomé: You can look at our services business and our services business up year-on-year. We exited a few businesses at the end of last year. If you ignore the businesses that you exited, our services business which has an average ticket north of $1,000 grew faster than the company average in the third quarter.

Great. Thank you very much.

Our next question comes from Greg Melich with Evercore ISI.

Great. I have two questions. I think one is just a follow-up, Carol, on Interline in that last comment. So if we look at Interline, could you give us the impact on SG&A in the quarter and also just how that business is going? Presumably it’s also growing faster than the company average. Carol Tomé: So Interline contributed $300 million of growth year-on-year. The gross margin [ph] obviously impacted the gross margin. And in terms of EPS, we generated $0.02 of EPS off of Interline in the quarter.

And what did it do into SG&A? Carol Tomé: It was pressure. It was in the overall guidance that we gave.

Okay, so we’ll back into that. And EPS was slightly accretive? Carol Tomé: Yes, about $0.02.

And then my real question sort of ties back to the SG&A. I think you mentioned that given rising wage pressures and other costs that we should go forward thinking about 50% growth of sales into 2017 and perhaps beyond. How should we think of that? Is it simply if sales are growing 5% that we should assume SG&A dollars grow 2.5%, or is there like a baseline that it grows and then it’s 50% of a comp above that or am I thinking about it too much? Carol Tomé: You’re thinking about it too much, because our – our largest expense is payroll and we have an activity-based model. And so we have so much opportunity to adjust to the payroll staffing out of our stores. So just use 50%. Will it be perfect? No, but it’s good enough for modeling purposes.

Okay. And so that’s more of just letting us know that the fourth quarter where SG&A really isn’t going to grow, as a comparison issue we shouldn’t use that as a new trend. Carol Tomé: Exactly.

Got it. And then last, if I could sneak one in, the Pro side of the business if we were to disaggregate it and think about the buckets that were driving it, I think in the beginning, Craig, you mentioned a few different things. The new credit offer was last but delivery was focused. Could you give us any highlights there like, Carol, you did on the credit as to how the delivery tick-up is doing and how you see the customer changing as they do that?

Again, we’re now rolled out with a new delivery program in about 1,600 stores and again, we’ve seen double-digit growth in deliveries. Now all of that is incremental. We think roughly 50% of that is incremental sales growth, but clearly some customers are taking up on the offer that we might have picked it up before as well. We anticipated that that would happen.

Great. And how many of your Pros do you think have used it?

That I don’t know.

Okay. Thanks. Good luck.

Thank you.

We have time for one more question, Catherine.

Yes, ma’am. We’ll go to Peter Keith with Piper Jaffray.

Thanks for letting me in. Great quarter.

Thank you.

I was curious on the recent step up in mortgage rates the last couple of days, if you have any thought on how that may or may not impact your business and maybe even making some comparisons back to 2013 when we saw another sharp rate increase? Carol Tomé: Yes. So we look at the affordability index, which is over 150%, so that’s good news. So now we went back and looked at, okay, historical percentages of household income used for mortgage payments. If you look at the years 1995 through 2000, 22% of homeowners’ income was used for their mortgage payment. It’s down now to about 14%. Interest rates could go up to 7% and no one is suggesting that will happen. But interest rates can go up to 7% and we would be back to about 22% of household income used for mortgage payment. So we got a long way to go before there’s any impact we think to our business from rising interest rates.

Okay, that’s interesting. Thank you. And maybe last for me, it’s interesting that mix was at gross margin positive. I guess we’re not used to seeing that in your business. Could you talk about what happened there and is that something that we might see going forward? Carol Tomé: Well, we had higher penetration of certain categories that had higher margin not because their retails went up but because we took cost out. I think we’ve talked to you in the past that we stood up a cost-out team that works with our merchants, and we really do try to drive productivity in our cost of goods sold. So it was that dynamic of a higher penetration in categories with cost out that really gave us the margin expansion.

Okay. Thanks a lot and good luck in the fourth quarter. Carol Tomé: Thank you.

Thank you.

Well, thank you everyone today for joining us. We look forward to talking with your on February for our fourth quarter earnings call. Talk to you then.

Thank you. Once again, ladies and gentlemen, that does conclude today’s conference call. Thank you all again for your participation.