Diane Dayhoff - VP, IR Craig Menear - President, CEO Carol Tome - CFO, EVP, Corporate Services Ted Decker - EVP, Merchandising Mark Holifield - EVP, Supply Chain and Product Development Marc Powers - EVP, U.S. stores.

Aram Rubinson - Wolfe Research Chris Horvers - JPMorgan Brian Nagel - Oppenheimer Gary Balter - Credit Suisse Simeon Gutman - Morgan Stanley Seth Basham - Wedbush Securities Peter Benedict - Robert W.

Baird Kate McShane - Citi Dan Binder - Jefferies Michael Lasser - UBS Scot Ciccarelli - RBC Capital Markets Dennis McGill - Zelman & Associates Matthew Fassler - Goldman Sachs Mike Baker - Deutsche Bank Greg Melich - Evercore ISI Eric Bosshard - Cleveland Research Company Laura Champine - Canaccord.

Good day and welcome to the Home Depot Q3 2014 Earnings Call. Today's conference is being recorded. [Operator Instructions] At this time, I'd like to turn the conference over to Ms. Diane Dayhoff, Vice President of Investor Relations. Please go ahead..

Thank you, Audra and good morning to everyone. Joining us today on our call are Craig Menear, CEO and President; Ted Decker, EVP of merchandising; and Carol Tome, Chief Financial Officer and Executive Vice President Corporate Services. Following our prepared remarks, the call will be opened for analyst questions.

Questions will be limited to analysts and investors and as a reminder we would appreciate it if the participants would limit themselves to one question with one follow-up please. If we are unable to get to your question during the call, please call our Investor Relations Department at 770-384-2387.

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 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 Web site. Now, let me turn the call over to Craig..

Thank you, Diane and good morning everyone. Well, I've spoken with many of you on past earnings calls, this is my first call as CEO and I'd like to start by thanking Frank for his leadership and guidance over the years.

Our effort as a leadership team will be to continue to drive our strategic framework and to take on the opportunities that lie ahead for our business. Now let's turn to the quarter. Sales for the third quarter were $20.5 billion up 5.4% from last year. Comp sales were positive 5.2% and our diluted earnings per share were $1.15. Our U.S.

stores had a positive comp of 5.8%. In the third quarter as we saw in the second quarter, we had broad-based growth across our geographies with all three of our U.S. divisions posting mid-single digit comps. Every region positively comped in the quarter as did 39 of our top 40 markets.

We saw growth in ticket and transaction in the third quarter and we were particularly pleased with the strong transaction growth as each month in the quarter had positive comp transactions. As Ted will detail, all of our merchandising departments positively comped and we continue to see strength in the core of our store.

Our service businesses had comps above the company average with strength in windows, countertops and water heaters. Both our consumer and Pro businesses grew during the quarter. The growth in our pro business continues to be anchored by our large spending Pro which grew at approximately 2x the company average.

So as we look at the trends across our business broad-based geographical growth, strong comps and higher ticket installed projects growth with both our Pro and consumer and strength in the core of the store, we continue to see a recovering home-improvement market in the U.S.

On the international front, our Canadian business posted comps above the company average and local currency for the quarter making it 12 quarters in a row of positive comps. Comps in local currency for our Mexican business were in line with our company average yielding their 44th consecutive quarter of positive comps.

Sales from our online channel grew almost 40% in the quarter and this was particularly impressive as we anniversary growth of over 50% in the same quarter last year. We saw increased traffic to our sites, growth in online conversion and an increase in the number of orders being picked up in the store in the quarter.

We continue to invest in interconnected retail. Across our online properties we improved navigation, enhanced search capabilities and expanded chat functionality during the quarter. And our supply chain team opened our Paris, California direct fulfillment Center, the second of three planned direct fulfillment centers.

These automated facilities will support our online growth with the balance of cost efficiency and speed in shipping online orders to meet our customers' needs. Interconnected retail also requires us to rethink space allocation within our stores.

Almost 40% of our online orders are picked up in the store using our Buy Online Pick Up In Store and Buy Online Ship to Store capabilities. This year we are installing dedicated storage bays in 550 stores to improve the customer experience. The U.S.

housing recovery continues to track in line with our expectations with home price appreciation and housing turnover being the drivers of growth for our business. And we have also seen improvement in GDP growth. As Carol will detail, we are reaffirming our sales guidance and our diluted earnings per share guidance for the year.

Before I close, I'd like to briefly comment on the data breach. First, we apologize to anyone impacted by this. From the start our guiding principle has been to put our customers first.

Our customers who won't be responsible for any fraudulent charges incurred through the breach and we will continue to offer free credit monitoring and ID theft protection to any impacted customers. We will continue to invest and enhance security measures to protect our customers' information.

Finally, I'd like to congratulate Marc Powers, a 28 year Home Depot veteran who was recently promoted to Executive Vice President of U.S. Stores. Marc has been instrumental in improving customer service, making him an ideal fit for the role. The power of the Home Depot begins with our company's strong culture and commitments to its values.

I want to thank our associates for their hard work and dedication to our customers based on this quarter's results over 99% of our stores would qualify for Success Sharing our profit-sharing program for our hourly associates. With that, let me turn the call over to Ted..

Thanks, Craig and good morning everyone. We were pleased with our performance in the third quarter. The strength in the core of the store, growth of our Pro customers', excellent execution and seasonal events and the continued implementation of our merchandising tools all contributed to these results.

All merchandising departments posted positive comps. Millwork, tools, kitchen, indoor garden, lumber, lighting, bath and plumbing were above the company average. Flooring, hardware, building materials, decor, electrical, paint an outdoor garden were positive, but below the company average.

The core of the store continue to perform and we saw comps above the company average and maintenance and repair products like water heaters, light bulbs, power tool accessories, hand tools, cleaning, pipe and fittings and wiring devices.

There was also strength in simple decor with comps above the company average and plumbing fixtures, decorative lighting, vanities and hard surface flooring. Pro-heavy categories continue to grow and we saw comps above the company average in insulation concrete, pressure-treated wood, dimensional lumber, HVAC and gypsum.

Our millwork categories also had another quarter of great performance led by comps above the company average in interior doors, exterior doors and windows. Our Labor Day fall cleanup and harvest events provided great values and were well-received by our customers resulting in solid comps and outdoor power, storage, decorative holiday and grills.

Using our merchandising planning tools, we were able to add innovation and localization within our fastener and builders hardware categories. In fasteners, we recently completed a reset resulting in a more effective mix of our private label brand Everbilt with national brands.

With this reset, we also introduced a larger assortment of innovative specialty fasteners. In cabinet hardware, we adjusted the assortment throughout the U.S. to better serve customers on a local level. As a result, these categories comped above the company average in the third quarter.

Total comp transactions grew by 3.1% while comp ticket increased 2.1% for the quarter. Our average ticket increase was positively impacted to reflect approximately 10 basis points due to commodity price inflation from product such as lumber, transactions for tickets under $50 representing approximately 20% of our U.S.

sales were up 1.9% for the third quarter. Transactions for tickets over $900 also representing approximately 20% of our U.S. sales were up 5.9% in the third quarter. The drivers behind the increase in big-ticket purchases were water heaters, flooring and countertops. Now let me turn our attention to the fourth quarter.

Our strategy of partnering the suppliers to bring innovation value to the market has never been stronger. This quarter we continued to deliver on the promise with the addition of 21 new Kohler SKUs to our bath and kitchen faucet lineup. These faucets will bring the latest in innovation and style and are exclusive to the Home Depot.

For our Pro customers, we will be featuring an exclusive series of carbide tipped reciprocating blades from Diablo. These blades are designed for extreme metal cutting including high-strength alloys, cast-iron and stainless steel. This breakthrough technology provides up to 20x the cutting life of standard blades saving our Pros time and money.

With the holidays nearing, we are once again offering an outstanding assortment of products in our gift centers. We will feature great deals on hand and power tools including amazing values from Milwaukee, Makita and DeWalt. In holiday décor, we continue to bring innovation in the latest offerings to our customers.

We have become the leading destination for the category both in-store and through our extended assortment online. We are excited about our lineup of pre-lit trees and have added many new styles including one that can change between 56 different light functions and color options using remote control.

Finally, I'd like to mention the outstanding special buys that we have planned for Black Friday and Cyber Week. We will have extreme values for the traditional DIYer and professional customers including some amazing offers on appliances.

With all of these exciting products events and great in-store execution we look forward to driving excitement this holiday season. With that, I would like to turn the call over to Carol..

Thank you, Ted and hello everyone. In the third quarter sales were $20.5 billion a 5.4% increase from last year. Our total company comps or same-store sales were positive 5.2% for the quarter with positive comps up 5.3% in August, 4.8% in September and 5.4% in October versus last year a stronger U.S.

dollar negatively impacted total company comps by approximately $109 million or 60 basis points. Comps for U.S. stores were positive 5.8% for the quarter with positive comps of 5.8% in August, 5.2% in September and 6.2% in October. Our total company gross margin was 35% for the quarter an increase of 10 basis points from last year.

Our gross margin expansion is explained by the following. In the U.S., we experienced 5 basis points of gross margin expansion due to three factors. First, enhanced productivity and lower fuel cost in our supply chain drove 7 basis points of expansion. Second, lower deferred financing cost, drove 4 basis points of gross margin expansion.

And third, we had higher shrinks that one year ago, which drove 6 basis points of gross margin contraction. Our international businesses also contributed 5 basis points of gross margin expansion in the quarter due primarily to higher levels of co-op and rebate than one year ago.

For fiscal 2014, we would expect to report gross margin expansion of approximately 5 basis points in line with what we reported for the first nine months of the year. In the third quarter as a percent of sales total operating expenses decreased by 56 basis points to 22.6%.

Our third quarter expenses included $28 million of net expenses incurred as part of our data breach. We carry a $100 million insurance policy for breach-related expenses. The gross amount of breach-related expenses incurred in the quarter was approximately $43 million.

For the fourth quarter, we are projecting our known and gross breach-related costs to be approximately $27 million and after insurance a fourth-quarter net breach expense of approximately $6 million.

For fiscal 2014 given our projected known net breach-related expenses of $34 million, we now expect fiscal 2014 operating expenses to grow at approximately 27% of our sales growth rate. Interest and other expense for the third quarter was $113 million down $75 million from last year. The year-over-year decline is due to the following.

First, interest and investment income increased by $102 million reflecting $100 million gain on the sale of HD Supply common stock. During the quarter, we sold another block of HD Supply common stock. This brings the total pretax gain on sale of HD Supply common stock this year to $212 million.

We now own approximately 8.2 million shares, or 4% of HD Supply's outstanding shares. Second, interest expense increased by $27 million from last year due to an increase in long-term debt outstanding and some interest payments on state tax settlements.

Our income tax provision rate was 37% in the third quarter and we expect our income tax rate be approximately 37% for the year. Diluted earnings per share for the third quarter were $1.15, an increase of 21.1% from last year. During the third quarter, we opened two new stores in Mexico for an ending store account of 2,266.

At the end of the third quarter, sign square footage was 236 million. Total sales per square foot were $348, up 5.8% from last year. Now turning to the balance sheet, at the end of the quarter inventory was $12 billion and inventory turns were 4.7x flat to last year.

We ended the quarter with $41.5 billion in assets including $2.2 billion in cash and cash equivalents. Moving to our share repurchase program, in the third quarter, we received 4.5 million shares related to the true-up of an accelerated share repurchase or ASR program we initiated in the second quarter.

Additionally, in the third quarter, we repurchased $2.24 billion or 24.2 million of our outstanding shares all on the open market. For the remainder of the year, we intent to repurchase approximately $1.26 billion of outstanding stock for total fiscal 2014 share repurchases of approximately $7 billion.

Computed on the average of the beginning and ending long-term debt and equity for the trailing four quarters return on invested capital was 22.2%, 250 basis points higher than the third quarter of fiscal 2013.

Moving to our guidance, for the first nine months of fiscal 2014 our sales growth was in line with a plan we laid out at the beginning of the year. And as we look to the fourth quarter nothing has come to our attention the changes our point of view.

So today we are reaffirming our sales growth guidance for the year of approximately 4.8% and comp sales growth of approximately 4.6%. This guidance features total company comps of approximately 5% in the fourth quarter consistent with our plan but as you heard from Ted we are ready for a strong Black Friday and holiday selling season.

For earnings-per-share remember that we guide off of GAAP. We are reaffirming fiscal 2014 diluted earnings per share guidance of $4.54 an increase of approximately 21%.

This earnings-per-share guidance includes a $5.74 billion of share repurchases completed in the first three quarters of 2014 and our intent to repurchase approximately $1.26 billion in additional shares in the fourth quarter. Thank you for your participation in today's call and Audra, we are now ready for questions..

Thank you. [Operator Instructions] We will go first to Aram Rubinson with Wolfe Research..

Thanks. I appreciate the opportunity to ask a question and welcome aboard, Craig we're glad to have you..

Thank you..

I was hoping you could outline some of your priorities at least to start.

I don't want to put you on the spot, but just kind of some broad brush philosophies and whether you think that will be kind of subtle changes that we'd expect whether it's SG&A, whether it's capital allocation, how should we think about your outlook on things like that?.

I mean I would start with the comment that our strategic framework is really built from the customer back in terms of what they expect from the Home Depot. It's clearly been a strength that we have pivoted off of.

It will evolve as the interconnected retail portion of our business evolves, but I wouldn't look for a dramatic departure from any of the strategies that we've had in place. We think that framework works..

Okay, thank you, well said. And if I could just follow-up to ask maybe Carol or anybody about the performance of the categories that you're my kind of shrinking in-store to accommodate sales online I think maybe or to accommodate sales let's say so cabinets have shrunk to accommodate appliances and carpet has shrunk to accommodate hardwood.

Can you talk about the performance of the categories that have actually been shrunk to accommodate other categories whether you are seeing growth there or whether you are seeing a contraction they are in line with the footage?.

This is Ted. Overall we're seeing growth certainly some of those categories are shifting sales to online, but overall we're happy with the performance of the portfolio..

Okay. Thanks. And best of luck, guys..

Thank you..

Thank you..

We will take our next question from Chris Horvers at JPMorgan..

Thanks, good morning everybody..

Good morning..

Good morning..

A couple of questions.

So can you talk about whether you've seen or you saw any impact from the credit breach what did you hear from stores what was the pros saying in September/October, September trends did decelerate and then re-accelerate pretty nicely in October, so I was curious if you saw any of that was the breach and what you are hearing in the field around it?.

Chris, really it's very difficult for us to be able to determine if there was any impact. We were very, very pleased with the fact that we had positive transaction growth in each month during the quarter and I think that represents strength for our customers, confidence in the Home Depot and we appreciate that..

And don't mean this to sound defensive, but if you look at a three-year stack September was our hardest comparison..

Understood, right, okay.

And no real like I guess your stores aren't communicating anything up to you that's conclusive in either direction?.

No..

Okay. And then as a follow-up, Carol, curious if you could talk about your thoughts in November. Of course, I know you said nothing has come to your attention but you've heard a lot of retailers speak to what pickup or at least as good as sort of the trend from 3Q, so I was curious how you would describe your view of November..

Happy to talk about our perspective on November in the fourth quarter. As you know it's always tricky to forecast where sales will go in the fourth quarter because we're heading into winter. And I don't know about where you are, Chris, but it's mighty cold here in Atlanta.

That being said we're two weeks into November and I must say that I'm impressed with the sales that we've reported to date. So if there's a bias in or forecast I would say it's a biased to the upside..

Thanks very much. We like the word impressed. Good luck in the fourth quarter. Thanks guys..

Thank you..

We will go next to Brian Nagel at Oppenheimer..

Hi, good morning..

Good morning..

First off Craig congratulations on your new position..

Thank you..

Just a quick question on expense growth, I guess maybe this is more for Carol.

And I know there's a lot of moving pieces here with the breach-related expenses, but if I look at expense growth in the third quarter, was there some other upward pressure there versus the prior quarters? And then if that be the case, how should we be thinking about that as we come into the fourth quarter and then even into next year?.

Sure. So Brian as we've said at the end of the second quarter, we've had a great expense performance this year. And at the end of the second quarter, we said that we expected our expenses to grow at 23% of our sales growth.

But we also said that there would be quarter-over-quarter differences in that expense growth factor because of year-over-year comparison. So we always anticipated that expenses in the third quarter would be higher than our guidance for the year and that's turned out to be true.

So if I look at our expense performance pre-breach, we were right in line actually a little bit better than we thought. Of course, the breach has distorted this a bit. So now as we look at our expense growth factor guidance for the year, we are taking it up from what was 23% to now 27%.

So it's just a year-over-year comparison that makes some of the quarters look different, but for the year we're very pleased with where we are..

Got it.

And then as we think about the breach, are there – whether other expenses related to the breach and how Home Depot had dealt with the breach that were not captured in those one-time callouts?.

Well, I will tell you there was a handful of people who are working around the clock. And their cost has not been captured. Their payroll is their payroll. But I would think if we actually put an hourly rate on that maybe we should of captured a little bit more cost. But really we try to be as comprehensive as we could.

It includes legal fees, it includes the cost of credit monitoring, it includes the cost of IT, so we try to be as inclusive as we could..

Got it. Well, thank you and nice quarter..

Thank you..

Thank you..

We will next to Gary Balter at Credit Suisse..

Thank you. Welcome, Craig to your new position..

Thank you..

Just a question on the fulfillment centers, you mentioned I think Craig you mentioned – I mean Ted mentioned that you opened the second fulfillment center at this point.

Can you walk us through what you're seeing from the stores around the two fulfillment centers you have to date in terms – are you seeing a shift to more pro, are you doing job quantity deliveries to job sites et cetera? What's the impact of those fulfillment centers?.

I would start here with the fulfillment centers being set up in large part are focused on being able to have speed of parcel delivery to our customers when we complete the full rollout of all three centers in 2015. We will actually be able to hit about 90% of the U.S. population in 48 hours or less with parcel shipment.

That's the main focus of those centers overall. We're still in the early days of both of the centers that are open, but pleased with what we're seeing in terms of the order fulfillment and operations of those buildings..

So does that take some pressure off of the stores? Like right now how is that being sent to the customers?.

Well, obviously, partial shipment goes direct to the consumer from those facilities, but our customers – we also ship bulk product as well. Our customers are choosing to engage with our stores almost 40% of our orders through Home Depot.com in the quarter actually culminated in one of our Orange box stores..

Okay. And then a follow-up on the pro, can you update us on, if you track this data or if you share this data, but last year you talked about the average Pro is doing $6000 and a big effort with to try to increase that number to become more relevant to the Pro as a first call rather than a second or third call..

So the Pro customer we have seen growth in the average in the Pro over the past roughly 12 months. That average has moved up to approximately $6600 from the previous total and it's an area that we continue to focus on..

Thank you very much. .

We will go next to Simeon Gutman at Morgan Stanley..

Thanks for taking my question. To higher-level ones. First online growth, it's been solid for a pretty good amount of time and it does not seem to be cannibalizing store traffic or sales, which is pretty rare in retail these days.

Do you have a sense of what your market share of just the online home improvement industry is? And then any update whether it's margin neutral the online business or better and how you look at it?.

We really don't have a good way to try to get at a full market share for the online space. So that's one we really don't have a good handle on. And then we look at the business in total on a portfolio approach as it relates to it being commerce again customer 40% or so picking up in-store.

We really look at it as a portfolio approach in terms of overall profitability of the business and that's really how we look at it..

And maybe another way to look at it is just the census data because we do run it as one business and if you look at our market share from the census data, we increased market share by 23 basis points now at 27.07%.

Okay. And then my follow-up is regarding merchandising and some of the scientific assorting. And Craig we used to hear from you when you are the head merchant about some of the enhancements that were being made and then the one still to come.

But, I guess when I hear localized the sorting and some of the things that are happening, I would've thought some of those were tackled already. So I guess granted that merchandising will probably still evolve.

Can you just give us or Ted now I guess a high level of what the merchandising initiatives on the table, what are some of the intriguing opportunities from here?.

Sure. I would say that we've made good progress on developing the tools – the tools can always be enhanced but foundational they are developed and they have been rolled out to the merchant community.

As you know we review about a third of the business each year, so while we've had these tools in place for a couple of years now, we still haven't reviewed the entire store utilizing leveraging the new tools. And I would say that certainly the second time and the third time that a business is reviewed with a tool we're going to get better and better.

So when you think about localization we start with our clustering tool where we are using our online sales data as well as our store sales data to identify localized demand then we sort the store using our new assortment planning tools to that local demand.

And then a newer set of tools that we haven't talked that much about and I do see promise in the future is in space. So once you have your demand and your assortment, how do you best get the appropriate micro space facing rate of sale and we have tools for that that we're starting to use.

And then in macro space when we think about businesses that are shifting online or more so than others areas that we're trying to grow to bring excitement into the store we will be looking at a macro perspective in the store utilizing tools of how best to find space for those categories..

Would you say it's early days with this or I don't want to put a baseball analogy to it but just try to contextualize it..

I would say early. I would say mid-on the development of tools early on our usage of them..

Great, thank you..

And we will take our next question from Seth Basham at Wedbush Securities..

Good morning..

Good morning..

Can you give us an update on your by online deliver from store initiatives where you are piloting it, how the pilot is going when you expect to roll it out?.

Mark Holifield is here, I will let him address it..

Hey, Seth, Mark Holifield here. Yes, by online deliver from store were in pilot at this point in two stores and the pilot is going well. It's a very small pilot at this point. Most important thing is that we get the customer service experience absolutely right and once we are confident in that we will begin the rollout..

Okay.

So the rollout is planned for later this year or is that a 2015 event?.

I'd look for that in 2015..

Great. And then as a follow-up on the services business you guys are seeing very strong growth in the installed services.

Can you give us a sense as to what's driving that? Is something in the back end or is it just strong demand across the categories?.

We've seen obviously as home value appreciation has happened customers are certainly more willing to invest in their homes. I think you also see services growing as a result of you have an aging population and I know for myself where I used to love to do things. I actually have Home Depot services do things now that I would have done previously.

So I think it's a combination of that macro trend and the improvement in the home values. And then we've worked hard internally to enhance the customer experience and make sure that we are monitoring how we actually provide the experience to the customer. Mark, I don't know if you have any additional comments..

This is Marc Powers. I just took over services. So I can't claim all the progress, but I have been closely involved historically with this and driving the customer experience. So we do follow-up surveys with our customers to make sure we are improving the customer experience consistently and we see we're making strong progress in that.

We also interact strongly as you might imagine with our service providers and give them feedback on their performance and hold them accountable to the standard of customer experience that we expect out of our brand..

Got it. Thank you very much..

Thank you..

And our next question comes from Peter Benedict at Robert W. Baird..

Hey guys, thanks for taking the question. First one for Mark Holifield. Mark, it sells like transportation was a little bit favorable at least Carol called that out.

Just wanted you to maybe take a minute here talk about some of the puts and takes in transportation right now, you got the port issue, you've got the driver shortage issues, you've also got fuel obviously that's helping. So maybe just give us a sense of where you stand and how you see transportation as you look out over the balance of the year..

Yes, thanks Peter. It's absolutely a very challenging environment with lots of disruption out there. So we were very pleased to see supply chain contribution to gross margin given that.

The disruptions at the ports in general transportation delays have been pretty difficult the last few weeks but thanks to a lot of hard work our team has been able to land our Black Friday freight. We don't see any disruption to our supply chain for Black Friday.

But we are concerned over the long-haul here the West Coast ports, the rail situation, the driver shortage, all look to create uncertainty in terms of transportation rates going forward. So that's definitely a concern pretty hard to predict given the fluidity of the situation that's out there..

I will say, Peter, we have put all that into our guidance this uncertainty; we factored some of that in. The other thing that I would say is that 7 basis points of margin expansion that we received in the supply chain only 2 was fuel related. So Mark and his team are driving great productivity within the four walls of our distribution centers.

The last thing I would say is on inventory, we were pleased with our inventory performance. The turns flat year-on-year given the disruption in the supply chain. Actually we've added one date of lead-time and that actually if you back out that additional day our inventory turns would have been up year-on-year.

So we were pleased given this challenging environment..

Good, that's great color. Thank you. And then Carol, I guess is the follow-up would be for you. Help us understand how you're thinking about the dividend payout ratio longer term.

I mean are there any developments out there that would compel you to maybe raise that a bit at some point or do you think 50 is where you'd like to stay?.

Well, we love paying out 50% of our earnings on a dividend which means at the end of year we will look back at what we earned and cut it in half that will be the new dividend. So it looks like we will have a nice increase coming at us in February.

As we think about this longer-term, Craig and I will be talking about what that optional payout should be.

And you can imagine in an environment of a company that's a maturing company strong cash flow giving excess cash back to the shareholders in the most efficient way is something we should try to do and a higher dividend payout may be on the agenda, but we will be talking about that..

Clearly, we'll talk about that and we'll talk about it with our Board and make those calls..

Okay, terrific. Thanks so much, guys I appreciate it..

Thank you..

Our next question comes from Kate McShane at Citi..

Thank you for taking my question good morning..

Good morning..

My question was on the Pro sales that you mentioned that were very robust by comping 2x the company average during the quarter.

Can you remind us how much the large Pro grew during Q2 and if what you saw in Q3 was a sequential acceleration and how do you think about your market share for this large Pro customer?.

Kate, I think our comments were that the large spend Pro which makes up about 30% of our Pros; they grew 2x the company average. Our Pro customer in total grew about the company average. If you look at the large spend Pro that double-digit growth would have been the same in Q2..

Okay, thank you. And then my second question was just on interconnected retail and it's great to hear all of the new initiatives for that.

I just wonder from a cost standpoint, we are just seeing accelerated cost for this initiative going forward?.

Well, we run our business as a portfolio as we've talked to you all along. So yes, there are costs. We're standing up new distribution facilities and we have costs associated with that, but we drive productivity and other facilities to cover those costs.

So it's all in the portfolio that we run to drive towards that 13% operating margin target that we set forth last year to reach that by the end of 2015..

Okay, thank you..

We will go next to Dan Binder at Jefferies..

Hi, good morning..

Good morning..

My question was related to the expenses in Q3. You mentioned that 99% of the stores qualified for the Success Sharing planning and I was curious if bonus accruals were in line or higher-than-expected in Q3 given the real results this far..

Right. So Dan we are accrue bonuses based on the number of financial metrics, for the stores and Success Sharing it's based on sales.

As we reaffirmed this morning, our sales growth guidance is the same now as it was at the beginning of the year which means the accrual isn't any higher than it would have been, actually less in the last year because last year we were blowing away our sales plan. So bonus expense actually was a bit of a hilt in the third quarter..

And then my second question was related to credit.

You cited that is an issue for some of the Pros in the past, have you seen any improvement on that front?.

As we look at our private label credit card, we see that within our Pro segment 71% of all Pros who were asking for a new account are being approved. The average line that's being approved is about $6,900. So we feel pretty good about the availability of credit for our Pros.

Now, not all Pros ask for a private label card and so we understand that providing credit to this important customer is really important and we are looking at other ways in which we might get credit to them besides our private label card is there some other sort of financing vehicle that we should be providing so we're exploring that..

Okay. Thank you..

Our next question comes from Michael Lasser at UBS..

Good morning thanks a lot for taking my question. As you've seen, really strong results in the category such as appliances, flooring which are areas that you focused intently on in the last couple of years.

What have you learned that you can now extend to other areas that maybe you haven't previously shared about your ability to take market share in new and upcoming ways?.

Well, one of the key things and maybe obvious as much as we talk about interconnected retail, but you never would've thought appliances would be as strong as it is as an online category.

Even flooring one of the key products that we're moving into our new DF facilities is hard surface flooring so customers quite happy to order complete flooring jobs and direct delivery to the home.

So I think that's a key learning that the interconnected -- the online experience can both be educational and inspirational, but also be used for commerce on big-ticket items like flooring and appliances..

I think the other comment I have is really important for us to be working closely with our manufacturers' to continue to drive the innovation in the product that delivers value to our customers. And I think there are opportunities around the store to continue to focus on that and we will.

We put pretty strong emphasis in a few key categories that we put a stake in the ground LED technology, lithium technology we've seen great results in those businesses as a result of that focus with our key suppliers. And I think that something we have to continue to do..

Okay, that's helpful. My follow-up question is, we see the results of some of your competitors who are struggling whether it's those that are specialized within the flooring category or those that are trafficking and some of the categories that you also traffic and yet are attached to – predominantly attached to malls.

It's probably easy to assume that some of your strong performance of mid-single digit comps along with gross margin expansion is due to the results of those competitors.

So what do you expect moving forward? Do you expect that there will be any change in the competitive environment and your strong performance is sure to attract some attention and may influence some competitive response are you preparing for that?.

I think historically, candidly in the retail business, the competitive environment changes on an ongoing basis. And that's actually what's really fun about the retail business. And so we fully anticipate ongoing that across multiple different segments that we compete against that the market will react and moved and likewise so will we.

And we remain focused on continuing to take share..

Okay. Thank you very much and best of it luck to everyone in the new positions..

Thank you..

We will go next to Scot Ciccarelli at RBC Capital Markets..

Hi, guys. You talked about – earlier in the call you talked about some of the success that you've had with your Pro customer.

And Carol I know you just mentioned credit extension in another question, but what other key initiatives are you guys implementing to drive share gains with the Pro customer number one and number two are you doing anything that's materially different today than you were maybe a year or two ago to drive those share gains?.

I will let Marc..

Hey, this is Marc Powers. So we're focused strongly inside the store on building those relationships with our Pros and making sure that we are taking some of the friction if you will out of their transactions and dealing with us with Home Depot. You might have already heard about our program with Pro Xtra.

Last quarter I think we called out that we had 1.7 million members of Pros who signed up for Pro Xtra to receive special buys of the week.

Also different services that we are providing to them such as being able to return product in our stores without any receipts which takes a lot of friction out of their day in and day out transactions with us and now we're up to 2.5 million actually Pros who are participating in Pro Xtra.

So we're very pleased inside the store with our focus with that Pro customer segment and also outside the store we're seeing some strong traction and building relationships with our outside sales force as well..

And how big is that sales force at this point, Marc?.

Right now, we're – I believe we're approximately 150 associates in our exterior sales force..

Those salespeople who are really attached to our high spend Pros pretty good dug on important – the average spend for a high spend Pro is on average close to $30,000 a year..

Excellent. All right, thanks guys..

Thank you..

We will go next to Dennis McGill at Zelman & Associates..

Hi, good morning and thank you.

First question just has to do with Canada, it looks like you posted pretty strong numbers there for the last four to six quarters and just curious whether you think that momentum is sustainable and how much of that would you attribute to market as opposed to market share?.

I think first of all Bill and his team in Canada have done an outstanding job of driving the business in Canada and we look to see that continue that kind of performance. We think there's a lot of opportunities to continue to bring great value to our Canadian customers and drive for share gains in the market..

Right.

Do you feel like right now it's share gain any sense of how much of it is share versus market?.

That's pretty tough to tell. I would say I don't know that the Canadian market ever got quite as difficult as the U.S. market, but certainly they had their bumps along the way as well, but it's pretty tough to tell the difference on those..

We feel so good about Canada though that we are opening a store in Canada this year. We haven't opened a store in Canada for a number of years..

Okay.

And then Carol can you just review appliance performance in the quarter, however, if you want to phrase it relative to comps are just absolute?.

Sure. Appliances grew the company average for the quarter. For the year appliances that contributed 20 basis points of our comp growth..

Okay. Thank you..

And our next question comes from Matthew Fassler at Goldman Sachs..

Thanks a lot and good morning..

Good morning..

My question is really focused on inventory. Carol, the inventory was up a bit more than in the past.

You talked about adding I guess a day to back stock or having some plan to increase, can you just kind of contextualize that for us? Talk to us about how long you would expect that to persist?.

Right. Well, as Mark described the challenges within the supply chain disruption are real. They are real for all retailers. And so this additional day contributed probably $120 million to $140 million of inventory.

We also had some air movement inventory that we are carrying over a small amount less than $100 million, but because of the cool summer we didn't sell through all of our air movements. We are carrying that over and we will sell it next year, but there are no markdown risk.

But as a result of these factors, we aren't going to get us much productivity out of inventory this year as we had planned. But we feel great about our inventory position and as we look towards 2015, we're planning for inventory improvement.

And Mark do want to give anymore color to that?.

I think you said it pretty well, Carol. I think the most important thing about our inventory is that customer service begins with us being in stock and we are always going to pursue that first and make sure that our inventory productivity comes right after that..

Thank you so much, guys..

We will go next to Mike Baker at Deutsche Bank..

Hi, thanks.

I wanted to ask two questions one on the appliances as you said in line with company average, but where are you on adding the jumbo resets and those types of things? Do you have more of those then you did a year ago and where is that going? And then my second unrelated question if I could, is really just thinking about next year and I understand from a macro standpoint that you guys think a lot of the top line is driven by home price appreciation rather than existing home sales and I agree with that, but existing home sales have been down 11 months in a row.

How long can you continue to comp at 4.5 plus with declining existing home sales? Thanks..

Well, I will answer the last question and then Ted maybe you answer the first question. If we think about our 2014 growth it starts with GDP. The forecast for this year is 2.2%. We had to that about 200 basis points of growth coming out of home price appreciation in housing turnover.

That gets us to 4.4 and then there's about another 4/10 of growth coming from areas like appliances. That gets us to the 4.6% comp that we guided for the year. As we look to 2015 then we would look at GDP. GDP economists tend to want to be at 3%, so that's sort of looking like right now in the 3% area.

We tend to believe we will get help from housing because it's not turnover while down is still up as a percent of units 4% of units are turning, so if we will get help from turnover, we will get help from home price appreciation not as robust as it was last year, but it will continue to recover because it has not fully recovered.

And then lastly, we are very encouraged by the recent news that's coming out of the FHFA as well as a number of regulators who are really trying to address mortgage financing reform. While this has yet to turn into additional liquidity in the mortgage underwriting market, the news has been very good.

And we believe that could be a real bolster to our industry. If you look at homes that were sold or financed through cash that dropped to 24% in September, which means more people need loans, they need mortgages and so mortgage financing reform is really important for our industry and very encouraged with the recent news.

Now Ted on jumbo?.

Yes. On appliances so yes we comped in line with the company average but third-party reporting would suggest we took some decent share in the quarter, so we are pleased with that performance. We have over 1000 showrooms now that we have expanded the footprint.

We started this over two years ago about a quarter of those, 1000 are the bigger showroom that we call jumbo and that's where we essentially doubled the space of the appliance showroom and the balance of 750 odd are a Bigfoot where we only go up about 30%. So we've done about 1000.

We may we will continue to look at the performance and we won't certainly do every last door with an expanded showroom but we probably have a few more that we can take a look at..

Okay, thanks for the color. Very helpful. I appreciate it..

We will go next to Greg Melich at Evercore ISI..

Hi. Thanks. I had a couple of follow-ups. If you look at the inventory Carol that additional day, did that change the $800 million working capital benefit that you were expecting for this year? And then I wanted to follow-up on the Pro side..

Yes, we are not expecting $800 million of working capital benefit. I would knock that off by a couple hundred million..

Okay, great. And then on the Pro side, you mentioned some of the things you are doing in credit.

Could you just remind us how many of your Pros have signed up for your traditional private label card and how the pilot is going with the extended credit program?.

That's a very great question but for competitive reasons not going to share that number with you..

All right, can I do it a different way..

You can try..

If you look at your large Pros and look at the ones that are spending at $6600 right now what share of wallet do you think you have with your typical Pro?.

That's a pretty difficult number. We talk about it a lot but it's a really difficult number to quantify. We know there is upside opportunity. Let's put it that way..

I tried, Craig. Good luck everyone..

We've shared this data in the past we had a 5% increase in the average ticket for Pros or three more transaction that is a $1.2 billion opportunity so maybe that helps size it..

It does.

And just on the pilot if it does work when would you expect to roll that further on the credit offering?.

We will talk to you about that when we are ready to talk to you about it..

All right thanks. Have a great holiday..

Thank you..

Thanks..

And we will move next to Eric Bosshard at Cleveland Research Company..

Good morning..

Good morning..

Two things.

First of all in terms of the categories below plan or should not below plan but below average anything that you would draw from those are any insights as you look at the ones that are below average that you would conclude from that?.

I will give you one data point perhaps if I could and then Ted can give you more color. If you look at the selling departments that Ted talked about nine of 16 were 100 basis points of the average comp, so it was very narrowly bound..

Yes.

I wouldn't say there's a particular theme probably the category that is suffering from the mild weather is roofing so that would be a category we're happy with the business, but there have been no storms, there hasn't been a lot of inclement weather so the demand is that is lower and in life goods again the drought in the West Coast and the very mild summer in the north so you didn't get a lot of burnout of lawns and reseeding et cetera.

Those really are the only things..

Okay. And then secondly, you commented or someone made a comment about appliances and promotions during the month of November around Black Friday or Cyber Week. From a promotional standpoint where are you in that category or across the store.

I can see what your gross margin expectations are, but anything different or material going on in terms of your promotional intensity?.

No, the promotions are very similar to last year. We ran what we're calling a pre-Black Friday appliance event for largely the month of November and we're like-for-like to last year. .

Perfect. Thank you..

Audra, we have time for one more question..

And we will take that question from Laura Champine at Canaccord..

Good morning. Carol when you last spoke to the guidance level at 4.54 for the year.

Were you already contemplating a $0.05 benefit from selling HD Supply shares and if not why not raise the guidance by $0.05 other than maybe some wiggle room?.

Yes, Laura, that was contemplated in the guidance that we've given. Now we've issued a lot of press releases recently but we've had the 4.54 in for a while and that included the gain on sale of HD Supply..

Got it. Thank you..

You are welcome. End of Q&A.

Well, thank you everyone for joining us today and we look forward to talking with you at the end of the fourth quarter in February..

And that does conclude today's conference. Again, thank you for your participation..