Good day, ladies and gentlemen. Welcome to The Home Depot First Quarter 2018 Earnings Conference Call. Today’s call is being recorded. [Operator Instructions] At this time, I’d like to turn the conference over to Isabel Janci, Vice President of Investor Relations. Please go ahead.

Thank you, Katherine. And good morning. Joining us on our call today are Craig Menear, Chairman, CEO and President, Ted Decker, Executive Vice President of Merchandising, and Carol Tome, Chief Financial Officer and Executive Vice President, Corporate Services. Following our prepared remarks, the call will be opened for questions. Questions will be limited to analysts and investors and as a reminder we would appreciate it if participants would limit themselves to one question with one follow-up. If we are unable to get to your question during the call, please call Investor Relations at 770-384-2387. 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 and could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in the release and in our filings with the Securities and Exchange Commission. Today’s presentations will also include certain non-GAAP measures. Reconciliation of these measures is provided on our website. Now, let me turn the call over to Craig.

Thank you, Isabel. And good morning, everyone. Sales for the first quarter were $24.9 billion, up 4.4% from last year. Comp sales were up 4.2% from last year with the US comps of positive 3.9%. Diluted earnings per share were $2.08 in the first quarter. We are pleased with our performance in the first quarter and the fundamentals of our business remains solid. As Ted will detail, excluding weather impacted categories, our pro and core interior project business remained strong in the quarter and we saw healthy growth in maintenance and repair categories. From a geographic perspective, weather impacts can be seen in the variability of performance across Canada, our three US divisions and 19 regions. Our largest division is the Northern division, which posted flat comps due to weakness in our seasonal categories. The Southern and Western divisions saw relatively better weather trends and comped above the company average. On the international front, Canada posted a slightly negative comp in local currency while Mexico posted positive comps in local currency. You've heard us talk about the bathtub effect based on when spring breaks where weak seasonal sales in the first quarter are counterbalanced by strength in the second quarter. We expect that effect to be true this year, and over the past few weeks, as Spring has finally arrived through the US and Canada, we are seeing strong customer demand. Part of the strength we saw in the business can be attributed to the health of our Pro customer as Pro sales once again outpaced DIY sales in the quarter. Investments aimed at deepening our relationship with our Pro customers are yielding increased engagement, which translates to incremental spend. While still early, the combination of enhanced associate tools in the store and expanded delivery capabilities are gaining traction with…

Thanks, Craig, and good morning, everyone. As you heard from Craig, we are pleased with our performance in the quarter. Excluding our seasonal business, sales exceeded our expectations. We saw significant strengthen in our pro business, interior projects and maintenance and repair categories. The extreme winter weather in the quarter had a negative impact on our garden categories, which historically represents around 15% to 20% of our first quarter sales. Our garden departments had negative comps in the quarter, driven by softness in chemicals, fertilizer, mulch and live goods, just to name a few. Looking at our departments, appliances, electrical and lumber had double-digit comps in the quarter. Lighting in our garden departments were negative with the lighting comps reflection of LED price deflation, all other merchandising departments were at or above the company average. In the first quarter, comp average ticket increased 5.8% and comp transactions decreased 1.5%. If we exclude our garden business, we saw positive comp transaction growth. Commodity price inflation in lumber, building materials and copper positively impacted average ticket growth by approximately 111 basis points. Foreign exchange rates also positively impacted average ticket growth by approximately 41 basis points. Our cold and wet weather impacted some outdoor related projects. This didn't prevent our customers from completing a variety of interior projects. Categories like interior doors, bath fixtures, storage and organization, interior paint, door locks, ceiling fans and window treatments all had comps above the company average. Floor maintenance and repair categories also performed well during the quarter with strong results in safety and security, water heaters, plumbing repair, pipe and fitting and air circulation. As you heard from Craig, in the first quarter, we saw continued traction with our Pro. Pro heavy categories like lumber, gypsum, insulation, pneumatics, wiring devices and flooring tools all had…

Thank you, Ted. And good morning, everyone. Before we discuss our first quarter results, I want to mention a change in our accounting policy. During the quarter, we adopted ASU number 2014-09, which pertains to revenue recognition. This standard changes the way we account for certain items related to our private label credit card and gift card programs. While the new standard changes the geography of certain items on our income statement, it has no impact on operating profit. Looking at our first quarter results, the change in accounting caused a $131 million increase to gross profit and a corresponding $131 million increase to operating expenses. Note that the $131 million increase in gross profit was driven by a $33 million net increase in sales and a $98 million decrease in cost of goods sold. While we did not recast our historical financial statements to reflect to this accounting change, included in today's press release is a quarterly Pro forma view that shows the impact to the accounting standard as if it had been in place during fiscal 2017. So with that, let's move on to our first quarter results. In the first quarter, total sales were $24.9 billion, an increase of 4.4% from last year. Versus last year, a weaker US dollar positively impacted total sales growth by approximately $104 million or 0.4%. Our total company comps were positive 4.2% for the quarter with positive comps of 5.6% in February, 5.9% in March and 2.2% in April. Comps in the US were positive 3.9% for the quarter with positive comps of 5.1% in February, 5.5% in March and 2% in April. As you may have personally experienced, April was one of the coldest and snowiest months in more than 20-years. In the first quarter, our gross margin was 34.5%,…

Thank you. [Operator Instructions] We'll hear first from Simeon Gutman with Morgan Stanley.

Thanks. Good morning. My first question is all about weather, and it's got a couple parts. Can you clarify, you said garden was negative. Is April the largest month for garden? And then you also mentioned that Northern is your biggest division. If we assume it's, let's say, 40%, I think that would imply Southern, Western would be north of likes 6%, 6.5%. Is that fair?

So in terms of garden, April is not necessarily the biggest month in garden generally, that is May. And we actually don't break out the divisional numbers. But Northern division is our largest division.

Okay. And maybe just a follow-up. Were the remaining divisions, I guess, Southern and Western, were those trajectory similar or were there a big discrepancy between them? And then have their quarter-to-date trends held up? I'm assuming Northern is the one that's been broken - that's breaking out, but has Southern and Western stayed the same or strengthened?

Actually, all areas are breaking out with this change in the weather.

We're so pleased with the performance across our geographies. And if you look at the performance in the first quarter, the Southern division had a slightly higher comp than the Western division. But remember, the Southern division has some hurricane related sales in it. So if you normalize for hurricanes, the divisions performed pretty much the way they should have performed. It was really in the north and it come back and the whole business is coming back.

Okay. And my follow-up question. I think the issue of the markets contemplating here is the cycle question versus what the weather is doing. And so I don't know how you look at it, but if there is something that's slowing that's more than weather and it doesn't seem like that's the case. I guess, how obvious are these signals and how much lead time do you think you have to be able to see them?

I mean, first of all, this clearly is really a garden story for us. The miss in terms of garden was significant against what we planned.

And Craig, maybe we could just quantify that for you. If you back up the gardens, our comp for the quarter would have been 6.5%.

All right. Okay. Well, thank you for the color and good quarter other than the weather.

Thank you

And our next question comes from Michael Lasser with UBS.

Good morning. Thanks a lot for taking my question. So of that 230 basis point impact from the weather, is that a net number, so that's net of the hurricane benefit? And what percentage of that - of those sales do you expect to recoup in the second quarter?

The storm affected sales were roughly 135 basis point impact. And we actually expect to capture the majority of those sales and as we're seeing that happen in May.

And my second question is on the initiatives that you outlined. Both the 200 stores that you touched with the new signage package, what comp are you seeing those stores produce above and beyond the corporate average? And then as part of that, can you also touch on your Pro delivery initiatives? Is that helping you more with existing customers or customers who really haven't done business with in the past?

So let me – I'll touch on the store a minute here and then Mark Holifield is here and can speak to the delivery. 250 stores that we implemented is signing and refresh packaging. We're obviously just completing those. We did that investment for our stores over a couple of year period, or doing that because of the pilots that we ran previous to that. And so we've built that lift into our guidance. And that's something that we're rolling here over the next two years across all the stores.

And Craig on the new delivery that's out there, the car and van delivery that's really driving sales across the range. We have a lot of buy online, deliver from Store customers who are trying out the car and van delivery. And our Pro customers, our existing Pro customers and new customers are using the do for on that.

So our map isn't perfect, but our modeling would suggest that the majority of these delivered sales are incremental.

Incremental for customers that you are already doing business with or more so attracting customers who you both got it. All right. Thank you so much and good luck.

Yeah. Thank you.

Thank you.

We'll continue on to Zach Fadem with Wells Fargo.

Hey. Good morning. Could you talk a little bit about the competitive environment in the paint category. Have you started to see any step change there in terms of promotions? Any thoughts on what you think the key drivers are for you to maintain and when sharing the category this year?

Sure, I would say that the paint promotional environment is certainly for us, it's the exact same year-over-year. We are not seeing any more promotion out of others in the marketplace either. We are very happy with our paint performance. Our comp was at the company average and we saw the strongest interior paint comp gallon performance we've seen in a long time. So we are happy with our brands. We have the best brand with their in the marketplace. We're thrilled with our expansion of PPG and Ann and team are doing a fantastic job of selling in the stores.

Got it. And to follow-up, is input cost for items like lumber and building materials continue to grind higher. First of all what are your expectations there for the year. And is there any concern in your mind on your ability to pass along the higher prices to customers in this environment?

Well, the two areas we've seen, the largest cost request are in clear commodities. So looking at lumber and copper for example, those generally are the market passes on, most of those products are priced weekly and well known pricing indexes in the market tends to follow that. So we've had no problem passing that on. I will say lumber in panel prices are at historic highs. We don't see that abating at all. We're up about 30% year-over-year. Certainly, don't wanted to go a whole lot higher. But for right now we've been able to pass on and not seeing degradation in units. The other area and things like laundry where you had a very specific tariff. The entire industry has accepted that the cost increase based on the tariffs and you're seeing retails in all competitors that have gone up more or less mirroring the impact from the tariff.

Got it. Thanks so much guys appreciate the time.

Our next question comes from Steve Forbes of Guggenheim Securities.

Good morning.

Good morning.

Craig, you mentioned piloting the first new supply chain facility this summer. But can you tell us or help expand on that and what type of facility is it in and maybe just give us your updated plan for this year as far as how many and what type of facilities you plan on opening in 2018?

It’s Mark Holifield here. The facilities we are going to be doing first are market delivery operations which are the hubs out there. These are stockless locations that will be delivery hubs for big and bulky products like appliances and vanity's and things like that. Later this year we'll be testing our flatbed distribution capability and opening our first local direct fulfillment center.

And Steve, I'd like you to remember that this is a 5 year plan. We've committed $1.2 billion in our supply chain over the next 5 years. We will spend as much in year four and five as we do in year one through three. So it’s definitely going to ramp up over time.

Yes so I mean, perhaps the way to think about this is if you think back to our RDC rollout years ago, in the first year 2007 we had exactly one RDC. In 2008, we did four, 2009, we did seven, 2010 we did seven. So you'll see a ramp somewhat similar to that across the five years of supply chain transformation ahead.

Thank you. And then just a quick follow up, on retail services, so recognize the percentage of revenue here. But it's a topic I find interesting as you think about the opportunity to build brand awareness and share of wallet right with the DIY consumer here. So can you touch on how that business performed during the quarter?

Yes, our services business represents about 4% of our total sales and grew low single digit, really driven by HVA window treatment.

Thank you.

But too much exterior business happening.

Thank you.

We'll continue on to Keith Hughes of SunTrust.

Thank you. Credit question, specifically in flooring, you did very well in flooring particularly carpets, kind of a declining industry, but as you called out luxury vinyl plank, I assume you mean LVT there is growing well. Could you talked about your heart service offering? How that's growing? And which sees the future?

Yes. Overall flooring again, we're very happy. Our comps in flooring were above the company average for sure led by the LVT. That product is just a fantastic product, solid or waterproof, a final product that looks like tile and or lead. The rest of the business is solid. I mean a lot of sales moving into that LVT product, but you know the rest of the business is sort of low single digit comp.

Okay. Thank you.

Our next question comes from Chris Horvers with JPMorgan.

Hi, good morning. This is Tori on for Chris.

Good morning.

For some prior quarters, it would seem that Pro is comping 10%. Is that fair? And can talk about the performance of Pro in the first quarter and if you think that impacted the business?

Well, we certainly had a strong Pro quarter, and it outpaced the DIY business in total, largely due to the fact that the garden business was obviously down dramatically in the DIY space. But we're very pleased with our Pro, and Bill, if you want to add to that?

Well, Craig, just kind of a follow-up on engagement. Craig mentioned the tools that we're providing to our account managers in the stores are passes. And as they get more engaged, we are seeing customers expand the number of categories that they purchase. We are seeing them start to utilize more services like delivery, and then as a result, we're seeing accelerated growth in the accounts that are managed by our passes. So great strength in Pro and top performing Pro trades, where our renovator remodeler, our property investors and property managers. So we're pleased with the progress and the trajectory of the business.

And as my follow-up, following up on the May commentary, can you talk about what you've seen from the acceleration from Pro versus DIY quarter to date?

I mean, we're seeing both in May. The whole store is lifting.

Thank you.

Our next question comes from Seth Sigman with Credit Suisse.

Thanks. Hey, guys, good morning. A couple of follow-up questions here. So first, just on the delivery from the store. It's continue to grow at this double-digit rate pretty much since you guys have rolled it out. Can you help us understand how meaningful that is today in terms of the overall contribution? And also, the influence that it may be having in driving higher transaction size, because it does seem to be a big differentiator for you? Thanks.

I mean, we're pleased overall with what's happening on the delivery side of that business. We don't break out those numbers specifically. But we are seeing very nice growth. And as Mark said earlier, that is attracting both incremental business with current customers and new customers into the business.

Okay. And then when you look at the online growth this quarter, up 20%, obviously, very strong again. Is it fair to assume there was really little weather impact there? And you discussed a couple of things that may be helping. Any more insight into where the growth is coming from, the types of categories? And also, from a profitability perspective, just the progress that you're making there in improving the margins in that business? Thank you.

So let me, I'll answer the second part of that and I'll turn it over to Kevin Hofmann. From a profitability standpoint, we run this on a portfolio basis, and it's an interconnected experience. So in many, many cases, the experience starts in the digital world, it may finish in the physical world. Over 45% of our orders the customer chooses to pick up in one of our stores. So we manage the portfolio, if you will, on a profit basis across the channels.

Excuse me, just from the health of the online business. So we were really pleased with the traffic growth we saw. Ted mentioned we had double-digit improvement in our conversion rates because of the experiential improvements we've been putting in place. But just super excited some of our fastest-growing sales are what we call those interconnected sales, where the customer is buying online, picking up in store; buying online, shipping to store, and that was some of our fastest growth. And really across the store, flooring did great, plumbing did great, electrical did great. We were very pleased.

So there actually is an impact from a seasonal standpoint in the online business, When it's snowing on the ground in April, people aren't really looking online for a patio furniture, for example. So it's kind of funny, but there actually is an impact.

Okay. Understood. Thanks very much.

You bet.

We'll continue on to Brian Nagel with Oppenheimer.

Hi. Good morning.

Morning.

So my first question. Just on the ticket growth. Clearly, a lot of discussion around weather. If you look at the ticket growth, it tracked higher in the quarter and I think went highest rates in a while. What's behind that? And how should we view the sustainability of that metric? And I have a follow-up.

I'm assuming you're referring to the $900 and above.

Or the average ticket of 5.8.

Or the average ticket of 5.8.

Yeah. I was talking more about the number in the press, the average ticket of 5.8.

So if you look at the average ticket of 5.8, think about the commodity impact plus the FX impact, and that gets you back to kind of where we've been running all of 2017 quarter-by-quarter.

Okay. So it's – there hasn't much changes besides those.

No, not at all.

Okay. That's helpful. Then the second question I have, I guess, from a bigger picture perspective. We talked a lot about just you mentioned the ongoing strength of the macro environment. Clearly, look at my screen right now, we do have rates rising, albeit on lower – historically low levels. The question I have is, what do you watch? I mean, why you guys were very good jumper watching a lot of factors out there. What are you watching for maybe some potential, early indications of an impact of higher rates upon your business?

Yeah. So there are a number of things that we look at, obviously. During the recovery, we were always looking for green shoots and our looking for red flags, luckily we’re not seeing any of those. But here's what we're looking. As you see, rates are going up, 30-year mortgage, I don't know what your screen is showing. The last time I looked, it was about 4.6%., and it's on its way up projected to be up at least 5% by 2020. Historical mortgages over the past, gosh, 50 some odd years, it's 5.8%. So we're considerably under those historical mortgage rates. But we are super focused on the Affordability Index and what that means in terms of performance by market. So if you look at the Affordability Index for the country at large, it's 152%, which is still very good. The average over again decades is about 127%. So if the Affordability Index were to reach 127% or under, that would certainly be a red flag. And then we look at rising home prices coupled with rising mortgage rates, you see in markets where you might argue there's an overheated housing market or at least certainly one that's on fire, so there anything happening to our business? So I would call out two markets, Denver, Colorado and Seattle, Washington. Both have had seen extraordinary expansion of home price appreciation. The business there is very good, and the reason is because the economy is very good. So you can't just look at housing prices and interest rates and say, 'Oh, oh, you got to then look at what's happening to the economy.' So it's getting a bit more complicated than it has in the past because there are all these influences of business. But certainly, if I stop talking just tell you what we look at every day, we look at ticket and transactions, ticket and transactions. Because if you go back to the last recession, ignoring the housing downturn recession, but the last recession in the United States had 2001, our ticket was flat. So we're looking at that. And then, of course, transaction, because transactions can be an indicator of a few things, right? It could be an indicator of slowdown in demand or an indicator that competitors taking your customer away. So hopefully, that's helpful, Brian.

No, that’s all helpful. I appreciate. Thank you.

Yeah.

Our next question comes from Elizabeth Suzuki with Bank of America Merrill Lynch.

Hi, good morning, guys.

Good morning.

I think you had expected before to experience a similar net sales impact from Harvey and Irma in 2018 as in 2017. Is that still the expectation? And will it benefit be limited to the first half, or could there be some residual benefit in the second half as well?

Our expectation is that the sales will be the same year-on-year. The majority of the benefit will occur in the first half. There may be some trailing benefit in the back half because the issues in Puerto Rico are so dramatic, but it won't be material to the company.

Okay. And then shifting over to online, I mean, what are the product categories that are doing well online, and which are more traditionally sold in-store and don't do very well online? And then how frequently are you able to adjust your online pricing to stay competitive?

So, first of all, what I'd say is largely, our business online is incremental sales. We're growing the categories in store at the same time that we're growing online. And I'll let Kevin speak to the categories.

Yeah, as I mentioned, so still strength in our core tools department, our plumbing department, our electrical department. Really, the core of the stores have been performing very nicely. We've got a great bath business online as well. In your question around pricing, it's just like how we think about it in the store of being priced competitively every day and making sure that we differentiate, not just on price, but on the full service offering to the customer, the experience and all the things that we bring to the table. So very actively monitoring and managing the price situation online just like we do in the store.

We can move prices, obviously, online instantaneously. We purposely, because of how it impacts the store environment – prices in the store at a different rate than we do online.

And I don't want to forget that the interconnected aspect of our online business as well because things like the lumber department pages or building material pages are some of our most active pages because the pros are looking at price and the inventory available. So while they're not transacting as much online in those departments, we have great traffic on those pages.

Great. Thanks very much.

We'll continue on to Seth Basham with Wedbush Securities.

Thanks a lot, and good morning.

Good morning.

Could you guys give us some color on the comp or the growth in comp transactions by ticket size?

Yes, we talked about big ticket already. Our inspector wanting to know what happened with the smaller ticket?

Correct.

Yes. So as you would anticipate, for transactions with tickets of $50 or less, they were down year-on-year. That was because of our garden business. And I can make this really real for you. If you can think about penetration of tender and you may say why? If you look at penetration of tender in the quarter, our private label credit card penetration increased by 50 basis points. At the same time, our cash tender decreased by 50 basis points. And that was all related to our garden business, which is a smaller ticket activity.

Fair enough. If you think about the transaction growth overall ex-garden, how positive was it? And how does that compare to recent quarterly trends?

It was a positive 1.1% for the quarter and continues to be positive. As we said, May comps for the company are double-digit positive.

Thank you.

We'll now hear from Dennis McGill with Zelman & Associates.

Hi. Good morning. Thank you. First question just had to do with the pilot program on the delivery from car and van. Can you maybe elaborate a little bit there what you're seeing from that uptake and particularly at big category or customer level? Are you seeing Pro versus DIY being more heavy with that uptake?

It's still early days, and customers are choosing to purchase all sorts of things. It could be a Pro on a jobsite leading something. But there's a lot also on the Buy Online, Deliver From Store front. So it's interesting to see where it goes. It's not taking a real pattern at this point.

Okay. Great. And then Carol, can you elaborate. On the transportation costs increase that you experienced in the quarter the deleverage there. Is that fuel alone? Are you seeing any issue with availability? And where do you see that trending for the year within guidance?

No, it wasn't fuel alone. We had eight basis points of gross margin contraction in transportation, of which three basis points was fuel and five basis points was the pressure in transportation. We're not alone. All companies are facing higher transportation cost. And as you know, as our practice, we will figure out a way to work through this, but we certainly got some challenges ahead.

Okay. Thank you, guys.

Our next question will come from Dan Binder with Jefferies.

Hi. It's Dan Binder. Thank you. Carol, you mentioned a margin mix impact on gross margin. Was that primarily from the seasonal mix? And how should we think about that for Q2? And then my second question was around credit. And just curious if you can get your thoughts on demand for credit, use of the credit lines that are out there, average spending on credit and delinquencies?

Yeah. So, on the margin expansion that came from mix and acquisitions that was 14 basis points in total, of which six basis points was mix and eight basis points came from our recent acquisitions, those acquisitions being the Company store and Compact Power. As we look to the second quarter, obviously with an increasing penetration of the garden business, which is a lower margin category, that's an impact on gross margin. But we're going to have benefit in other areas, too. So nothing comes to our attention that we can't deliver the gross margin guidance that we just provided and updated with you today. On our private label credit card, really pleased with the performance. As I mentioned, we saw 50 basis point improvement in penetration year-on-year. What we're seeing is a very healthy portfolio. The average net receivable, which obviously isn't – underwritten by us, it's underwritten by a third-party, but it's over $12 billion. We had 1 million new accounts opened year-on-year and we're seeing pretty good utilization on those accounts. For the consumer, the utilization is around 29%. For the Pro, the utilization is around 23%. And our approval rates are north of 70% for both the consumer and the Pro. Part of the change in accounting for us is moving all of the aspects of our private label credit card up to the revenue line. And included in the benefit that we removed out of our selling expenses and moved up to the revenue line was gain share. Gain share is our profit-sharing program with Citi who underwrites this card for us. The way the portfolio has gains is there's an EBIT threshold that must earn and anything over that a bit threshold, we share in it. And that percentage of sharing changes over time. Embedded in that EBIT threshold, of course, is that you've got to make sure that the portfolio doesn't have high losses because that could impact your gain share and our losses. This is a long winded answer to your question. But our losses are running at or below historical averages. So the portfolio is very healthy.

Great color, thank you.

Our next question comes from Chuck Grom with Gordon Haskett.

Hi, thanks, good morning. Just on the gross margin line just follow-up on the transportation costs, just wondering if you could characterize how they came in relative to your original expectations? And then I have a follow-up.

We didn't anticipate deleveraging the supply chain in the first quarter to the extent that we did. The team did an awesome job. They were managing the demand pressure coming from all kinds of areas, so managed through it.

Okay. So you would expect that headwind to continue moving up heavily?

There is definitely pressure coming out of the back -- balance of the year, but will manage through it.

Okay. And then just on the weather here, obviously you guys have a lot of experience dealing with it. When you think about it, does the business get simply delayed here and you recover most of it? Or do you loose some of it because the window just simply closes.

No, we’ll actually recover most of the business there. There may be a piece here and there that you missed like part of pre-emergence, but even in that we feel like we're getting most of that business right now particularly in the north. So the majority of this business will be recovered.

Okay, thank you.

We'll continue on to Matt McClintock with Barclays.

Hi, guys. Good morning everyone, McLintock. Carol, I was wondering if we take the housing question from more of a generational perspective. It seems like a lot of the long-term optimism for the housing market to stay strong is driven by the millennial generation forming households. But can you talk about maybe trend changes that you're seeing in the other generations. And I only ask because it seems like a lot of the story of baby boomers maybe moving downsizing their household seems to be kind of minimizing? Thanks.

Well as we look at mobility rates, we see mobility rates declining by all age cohorts, particularly baby boomers like me and there's been some great research that came out of the Harvard Joint Center for Housing Studies that suggest the desire is to age out in your home. Think about what that means for home improvement. There's nothing but opportunity. That's just one trend.

Can you can you maybe dig into some of how the opportunities do change for you and how you position yourself for some of those changes just a little bit more.

Well yeah, I mean if you think about flooring for example, that's something that people look at as they age in their home. How do you make sure you eliminate trip hazards? You think about the back three models and the ability to put in walk-in showers for example, so that you don't have to step into a bathtub or you have the potential to slip. You think about lighting around the home becomes an important factor both inside and outside of the home. You think about security, so there's lots of factors that go into how somebody thinks about changing their home if there aging out in their home.

Perfect, thank you very much for the color.

Our next question comes from Peter Benedict with Baird.

Hey guys, thanks for taking the question and appreciate in the Stamford, Connecticut store.

It's $1 million in the first week. It’s an awesome store.

There you go, well done. Given the traction online with categories like tools, electrical, bath, can you remind us how you're rethinking the space allocation within the stores to take advantage of the opportunities across different categories? That's my first question.

Sure. I think as I mentioned earlier, our online business for all practical purposes is incremental, so we actually haven't seen in the need to make a lot of shifts in space. It's something that we look at on a continual basis. But we really haven't had to do that at all.

No, I'd say, Craig, the space that we're doing speaks more than the interconnected nature of our online business where we're putting lockers in the front of our stores we will do about 1000 lockers of this year and we're also adding some bigger holding area for bulkier items near the front of the store. So space allocation is more for online pickup than any merchandising changes in the bay.

46% of our online orders are picked up in the store in the first quarter.

Okay. That's terrific. It makes sense. And then Carol back to kind of the red flag you're keeping an eye on out there, how about -- what are you watching when you think about the leverage guardware for the business interest rates are going up here. But I mean, is there a level or a point at which the 2.0 become something that you're not comfortable with? Or how should we think about that?

Well, I'm really pleased with how we've managed our capital structure over the past several years. If you look at our the amount of debt that we have outstanding, long-term debt, excluding current maturities, $24 billion. The average maturity of that debt is 13.6 years. The coupon is 3.7%. The latter maturity full of 40 years. So we really worked hard to not put any financial risk into the company. And with an adjusted debt, that are target of two times. That implies we can get the debt paid off in a very short period of time. So comfortable with that leverage. Always going to be mindful of not putting the company into financial distress, but we're comfortable with where we're today.

Okay. Sounds good. thank you very much guys.

Our next question comes from John Baugh with Stifel.

Thank you. Good morning. Just quickly you said you're hype are focused on the transactions and thanks for the 1.1 number in April X garden. I know you don't guide to that figure. But it sounds like May is well up. You've been running a 2-plus percent I believe fairly consistently. Is there any thought around that number for the year in light of the start to the first quarter? Thank you.

So the 1.1 was for the quarter X our garden business. It wasn't for April. So that was for the total quarter. And we think about the balance between ticket and transactions have been relatively even over time and that's how we plan the year.

Great. Thank you. Good luck.

Matt Fassler with Goldman Sachs has our next question.

Thanks, so much, and good morning. My first question is for Carol. You spelled out a 56 basis point impact on the expense ratio from your investment plan. Can you spell out here at the outset of that program where some of that money went and whether that's the kind of impact you would expect to see us through the year or whether there's a better top line that impact should dissipate a bit?

Sure. So I talked about expense deleverage and leverage as a percent of sales. I didn't really talk about the expense growth factor. But let's use that nomenclature because that's how we've guided for the year. So the expense growth factor in the first quarter was 202% and the drivers of that were rev rack, which was 57%; investments in the business, 70%; and then what we call BAU, business as usual, 75%. And that business as usual, there's about 12% of acquisition-related expenses, companies that we've acquired. So we focus – then on the guidance that we gave for the year, clearly, it's going to get better. And it's going to get better for a couple of reasons. First, we have $167 million of hurricane-related expenses in the back half that will not repeat. So you should model higher expense growth factor in the first half than in the back half. Secondly, you've heard and we talk about this, we have a new labor model, which more effectively allocates our hours to our activity. That starts to kick in into June. So we should be driving more labor productivity than we saw in the first quarter. Then if I focus simply on the investments in the first quarter, the dollar amount of investments, and I'm not going to call this out every quarter, but because we’re just getting into this, I'll give you this color. Thee dollar amount of the investments were $144 million in the quarter. And those dollars were used for increased wages for our people, for increased advertising as we move to a more marketing technology platform; increases in display cost. You heard Craig call out what we're doing the sides of the stores. And then increase in headcount. We've got to have some people on Board to help us do all of these investing. In fact, I believe we've hired 350 people alone in our IT organization. So these are investments that we're making to reach those sales and operating margin targets that we laid out for 2020.

That is great detail. If I could follow-up on a couple of disclosures you made on the monthly trends. Was there any weather impact on the first two months of the quarter on February and March? And then, when you think about the bathtub effect, is April was really the only month that was impacted. You tend to recapture most of those lost sales in the month of May? Or does the bathtub effect push out towards June and July?

Yes. So there definitely was impact still in the other months as well. And the recovery of that, you'll get a significant piece in May, but it will actually flow into June and July as well.

That's great. Thank you, guys.

Our next question comes from Scot Ciccarelli with RBC.

Good morning, guys.

Good morning.

So are you seeing a greater appetite for jobsite delivery from your Pro customers?

Certainly.

Okay. So obviously, that is the case. Now over time, do you think that happens to change your historical real estate advantage that you've had against some of your major competitors or maybe even open the door to higher levels of e-commerce competition because then the physical location or physical structure of The Home Depot store maybe gets partly marginalized over time?

Actually, when you think about our location and footprint, we'll actually leverage that as an advantage overall to our business, where we are well-positioned across markets, including urban markets and sit within 10 miles and 90% of the U.S. population. So no, we actually see this as an advantage. And Mark?

Yeah, I mean, you'll recall from the investor conference, we outlined 40 flatbed distribution centers, and we expect to open those to take some pressure off of the stores. But our stores are going to be in the delivery business in smaller markets for a good long time. They're still ideally located and a great place to originate of those deliveries from. In urban markets, those flatbed distribution centers will take a lot of pressure off of those Hardlines stores.

I think the other thing you have to think about is actually, not just the downstream portion of our supply chain network, but the advantage that we actually have as a result of the upstream portion of our supply chain moving goods from our suppliers to our stores and our distribution centers. It's those things working in combination that will create the fastest most efficient delivery in home-improvement.

And Katherine, we have time for one more question.

Thank you. And our final question this morning is from Alvaro Lacayo will call you with Gabelli & Company.

Thank you. It's Alavro Lacayo here. Just one question on update on the capital allocation, Carol, last call, you said you were going to provide us with an update later on given that cash flow from operation was going to be a little bit higher than where we sort of guided dividend and should repurchases and just some commentary around there's any updated thoughts there?

Yeah. So we've been working on how to best use the cash this coming off the business through lower taxes. We aren't announcing anything today. We have a Board meeting this week. So we will keep you apprised, expect a more thorough update at the end of the second quarter. But with that, let me just say that our principles aren’t changing. The first use of cash is to go back and support of the business and our strategic imperatives. The second is to pay our dividend, and anything that's left over goes to share repurchases.

Great. Thank you very much.

Thank you.

And I'll turn the floor back over to our speakers for any additional or closing remarks.

Thank you for joining us today. We look forward to speaking with you on the second quarter earnings call in August.

Thank you. Ladies and gentlemen, again, that does conclude today's conference. Thank you all again for your participation. You may now disconnect.