Craig Menear - President, Chief Executive Officer Ted Decker - Executive Vice President, Merchandising Carol Tomé - Executive Vice President, Chief Financial Officer Marc Powers - Executive Vice President, U.S.

Stores Mark Holifield - Executive Vice President, Supply Chain Kevin Hofmann - Executive Vice President, President Online Diane Dayhoff - Vice President, Investor Relations.

Dan Binder - Jefferies Chris Horvers - JP Morgan Seth Sigman - Credit Suisse Aram Rubinson - Wolfe Research Simeon Gutman - Morgan Stanley Brian Nagel - Oppenheimer Michael Lasser - UBS Matthew Fassler - Goldman Sachs Jaime Katz - Morningstar Mike Baker - Deutsche Bank Scot Ciccarelli - RBC Capital Markets Greg Melich - Evercore ISI.

Good day and welcome to the Home Depot Q4 2014 Earnings call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Diane Dayhoff, Vice President, Investor Relations. Please go ahead, ma’am..

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

Questions will be limited to analysts and investors, and as a reminder, we 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. Reconciliations of these measurements is provided on our website. Now, let me turn the call over to Craig..

Thank you, Diane, and good morning everyone. Sales for the fourth quarter were $19.2 billion, up 8.3% from last year. Comp sales were positive 7.9% and our diluted earnings per share were $1.05. Our U.S. stores had a positive comp of 8.9%. We finished the year strong with our largest quarterly sales growth for the year in the fourth quarter.

We continue to see broad based growth across the store and our geographies. Our three U.S. divisions each exceeded their sales plan and all 19 U.S. regions saw mid-single digit comp growth or better in the fourth quarter. As Ted will detail, all departments had positive comps and we had strong growth in ticket and transactions in the quarter.

Strength in our pro driven businesses as well as double digit sales growth in our service business also aided ticket in the quarter. As a result, both average ticket and transaction counts reached new fourth quarter record highs.

Our sales were aided by a strong response to our holiday décor, gift center, as well as our Black Friday events during the quarter. Our online channel also had a strong performance over the Cyber week period with record traffic and orders, while at the same time our online customer service scores improved.

For the year, our online business grew over $1 billion, a growth rate of over 36%. Almost 40% of our online orders were picked up in the store, a testament to the interconnectedness customers desire for our business.

Marc Powers and the store operation team, along with our IT team, completed the roll-out of our second generation First Phones in the fourth quarter.

This latest customer service tool provides a more intuitive smartphone interface, internet access to convert online sales in the aisle, integrated mobile checkout for line busting, and greatly improved overall processing speed.

On the supply chain front, Mark Holifield and the supply chain team worked tirelessly to manage through a difficult environment and even drove productivity through our network. As we go forward, there is a tentative labor agreement at the west coast ports.

It will take a while to get our freight moving more efficiently there, and we have a challenging transportation environment that continues. We’ll continue to leverage our distribution network to minimize any impacts to in-stock rates.

Internationally, both our Mexican and Canadian businesses posted positive comps in local currency for the quarter, making it 45 and 13 quarters in a row of positive comps respectively. We also completed the acquisition of HD Supply Hardware Solutions, formerly known as Crown Bolt, in the fourth quarter.

Through bringing the business back into the Home Depot family, we expect to further enhance our supply chain capabilities and product offerings in hardware.

Looking at the full year of 2014, we achieved our highest retail sales in company history, and through driving productivity and expense control we also reached the highest net earnings in company history.

Adding over $4 billion in sales and almost $1 billion in net earnings requires flexibility and coordination on multiple fronts, and our associates and suppliers were able to respond effectively. For 2015, we believe overall GDP growth and continued tailwind from housing recovery will be the principle drivers of growth for our business.

Consensus 2015 GDP growth forecast calls for moderate growth, and most housing data points towards a continued moderate recovery in the U.S. housing market. Based on this outlook, we expect comp growth in the U.S. of approximately 4.5%.

As Carol will detail, we expect similar growth in our international businesses but currency headwinds could result in lower total company growth; therefore, we expect total company comp growth of approximately 3.3 to 4.5% and corresponded diluted earnings per share of $5.11 to $5.17.

In 2013, we set out long-term financial targets to achieve a 13% operating margin and a 27% return on invested capital by the end of fiscal 2015. Our guidance implies that we will accomplish these goals and will continue to drive growth and productivity in the business in 2015 and beyond.

Finally, today our board announced a 26% increase in our quarterly dividend to $0.59 per share. The board also authorized a new share repurchase program of $18 billion. We remain committed to maintaining a disciplined capital allocation strategy to create value for our shareholders.

We will invest to sustain and grow our business and return excess cash to our shareholders through dividends and share repurchases. I want to close by thanking our associates for their hard work and dedication to our customers in the fourth quarter and throughout the year.

For the second half of the year, 100% of our stores qualify for success sharing, our profit sharing program for our hourly associates. This is our largest second half payout to date. We look forward to continuing this momentum in 2015. With that, I’d like to turn the call over to Ted..

tools, lumber, millwork, lighting, décor, building materials, kitchen, bath, and hardware. All the rest of our departments had positive comps in the mid-single digits. Pro categories had tremendous growth during the quarter and we saw double digit comps in compressors, siding, roofing, ladders, concrete, fasteners, and several lumber categories.

Our millwork categories also had another quarter of great performance led by double digit comps in patio doors, windows, interior doors and exterior doors. Maintenance and repair categories continued to perform well and we saw comps above the company average in products like water heaters, wiring devices, cleaning, conduit and caulks.

Décor products were also strong with comps above the company average in vanities, bathroom fixtures, decorative holiday, interior lighting, and hard surface flooring. Several events had record performance during the quarter.

Black Friday was our biggest sales in history, helping drive double digit comps in categories like appliances and grills for the quarter. Our gift centers performed extremely well and we saw double digit comps in tool storage, portable power, power tool accessories, and hand tools. Finally, our storage event was well received with double digit comps.

In 2014, we reviewed 154 product categories or roughly a third of the store using our merchandising planning tools. Results to date have been promising. For example, in vanities we created store clusters based on certain SKU attributes like vanity size and finish. This allows us to better match our assortments to customer preferences in those clusters.

Additionally, we leveraged data from our online channel to bring a new assortment of products to the stores which allows customers to choose from different vanity tops and storage cabinet combinations. This assortment is currently in about 100 U.S. stores and we plan on setting several hundred additional stores throughout 2015.

In the fourth quarter, total comp transactions grew by 4.9% and for the year we set a new transaction record with over 1.4 billion total transactions. In the quarter, comp ticket increased 2.9%. Our average ticket increase reflects about 16 basis points of growth due to commodity price inflation in products such as lumber.

Transactions per ticket under $50, representing approximately 20% of our U.S. sales, were up 3.1% for the fourth quarter. Transactions per ticket over $900, also representing approximately 20% of our U.S. sales, were up 10.3% in the fourth quarter.

The drivers behind the increase in big ticket purchases were appliances, water heaters, and several installation service categories such as windows, roofing, and sheds. For the year, our average ticket grew by 1.9%. Now let me turn our attention to the first quarter.

We’re excited about the launch of our new color solution center, featuring Behr, Glidden, and our Home Decorators Collection pain brands. We worked closely with our supplier partners and leveraged consumer insights data to create a better shopping experience for our customers.

The new center clearly outlines our paint assortment, expands our color offering, and simplifies the selection process. We plan to roll it to all U.S. stores by the end of the second quarter. For our pro customers, we are introducing new and exclusive products in Milwaukee, Makita and DeWalt, all leaders in professional tools.

New products within the Milwaukee FUEL line-up, like the circular saw and Whole Hog heavy duty drill, have increased battery life, power and durability, saving our pros time and money on the job site. We’re looking forward to spring and are excited about several new product categories in grills and patio.

In grills, we have a new and exclusive brand launch with Nexgrill and are introducing several exclusive models from Weber and Kitchenaid. Our expanded assortment online offers numerous options from premium grills to pizza ovens.

Our patio assortment continues to grow, including a new collection from Brown Jordan, new fabric and color options in our Create Your Own collection, and expanded accessory offerings. For the gardener, Vigoro’s new colored mulch in red, black and brown offers a 12-month color guarantee at a great value.

Our spring Black Friday event will once again offer amazing values for our customers. The stores will be loaded with exciting products and exclusives on items like live goods, grills, and outdoor power equipment. We’re looking forward to a great spring season. With that, I’d like to turn the call over to Carol..

Thank you, Ted, and good morning. In the fourth quarter, sales were $19.2 billion. Comp sales were positive 7.9% for the quarter with comps of 7.8% in November, 7.9% in December, and 8% in January. The continuing strength in the U.S. dollar negatively impacted total company comps by approximately $149 million. Comp sales for U.S.

stores were positive 8.9% for the quarter with comps of 8.8% in November, 8.6% in December, and 9.3% in January. For the year, our sales increased 5.5% to $83.2 billion, and total company comp sales were positive 5.3%. Comps for U.S. stores were positive 6.1%.

Our total company gross margin was 35.1% for the fourth quarter, 10 basis points higher than last year driven by gross margin expansion in our U.S. business. The year-over-year margin expansion in our U.S. business is explained by the following.

First, we experienced 18 basis points of gross margin expansion due to productivity within our supply chain and lower fuel costs. Second, we are starting to see a turnaround in our shrink performance and lower shrink contributed 7 basis points of gross margin expansion.

Finally, we experienced 15 basis points of gross margin contraction due primarily to a change in the mix of products sold, namely a higher penetration of lower margin product categories like appliances and lumber. For the year, we experienced 6 basis points of gross margin expansion.

Operating expense as a percent of sales decreased by 139 basis points to 23.7% in the fourth quarter. Our expense leverage reflects the impact of positive comp sales growth and continued focus on expense control. Fiscal 2014 operating expense as a percent of sales was 22.2%, a decrease of 90 basis points from what we reported last year.

For the year, our expenses grew at 25% of our sales growth rate, in line with our most recent guidance. Just a comment on data breach-related expenses. In the fourth quarter, our gross data breach expenses were approximately $20 million.

After estimating our insurance recovery, we recorded approximately $5 million of net data breach related expenses in the quarter. For the year, our gross data breach expenses were approximately $63 million, and after expected insurance recovery our net data breach expenses were approximately $33 million.

Our operating margin for the quarter was 11.4% and for the year reached 12.6%. Interest and investing income increased by $111 million in the quarter, reflecting a gain on sale of 4.1 million shares of HD Supply common stock.

Since the beginning of the year and including the fourth quarter transaction, we have sold 12.2 million shares of HD Supply common stock for $323 million or $0.15 of earnings per diluted share, of which $0.05 was recognized in the fourth quarter. We now own approximately 4.1 million shares or 2% of HD Supply outstanding shares.

In the quarter, interest expense increased by $31 million from last year due primarily to interest associated with higher long-term debt levels than one year ago. Our income tax provision rate was 34.1% in the fourth quarter and 36.4% for the year.

The tax rate for the quarter and the year reflected the benefit from favorable tax settlements and the Tax Increase Prevention Act of 2014, which provided a one-year extension of certain expiring tax credits.

Diluted earnings per share for the fourth quarter were $1.05, an increase of 43.8% from last year, and for the year diluted earnings per share were $4.71, an increase of 25.3% compared to the prior year. Moving to some additional highlights, during the fourth quarter we opened three new stores, two in Mexico and one in Canada.

We ended the year with 2,269 stores. At the end of the year, selling square footage was 236 million, flat to last year, and sales per square foot increased 5.3% to $352. At the end of the year, inventory was $11.1 billion, flat to last year, but that’s a bit distorted due to a stronger U.S. dollar.

On a currency neutral basis, inventory dollars were up approximately $193 million from last year. Inventory turns were 4.7 times, up from 4.6 times last year. Payables were also flat to last year, again distorted by the impact of a stronger U.S. dollar. On a currency neutral basis, payables were up $98 million from the prior year.

We generated strong cash in the year and used that cash, as well as proceeds from an incremental debt offering, to invest in our business, repurchase our shares, and pay a healthy dividend to our shareholders. For the year, we spent roughly $1.6 billion in capital, including the recent acquisition of HD Supply Hardware Solutions.

We repurchased $7 billion or 80 million of our outstanding shares, including $1.26 billion or 12.4 million shares in the fourth quarter, and we paid $2.5 billion in dividends. Our capital allocation philosophy supports our commitment to deliver high returns on invested capital.

Computed on the average of beginning and ending long-term debt and equity for the trailing four quarters, return on invested capital was 24.9%, 400 basis points higher than at the end of fiscal 2013. We detailed our 2015 guidance in our press release, but I want to take a few moments to comment on a highlight.

Remember that we guide off of GAAP, so fiscal 2015 guidance will launch from our reported results for fiscal 2014. Further, our earnings per share guidance does not take into account any expenses that we may incur in the future for data breach-related claims. While these expenses are reasonably possible, they are not at this time estimable.

When we are able to estimate these expenses, we will provide an update to our guidance. As we look to 2015, we expect U.S. comps to grow at GDP plus approximately 150 basis points coming from the recovery in the housing market. We project similar growth rates in Canada and Mexico, yielding total company comp sales of 4.5%.

With the benefit of new stores, we project total sales growth of approximately 4.7%. The recent significant strengthening of the U.S. dollar, however, suggests that total company sales growth could be lower.

As a result, we are providing a range of sales, comp sales, and diluted earnings per share growth to reflect the difference between 2014 average exchange rates and current exchange rates.

If foreign currency exchange rates remain where they are today, this would cause a negative impact to fiscal 2015 net sales growth of approximately $1 billion, dropping our projected total sales growth rate from 4.7% to 3.5%, and our projected comp sales growth from 4.5% to 3.3%.

For 2015, we are projecting our gross margin rate to remain flat to what we reported in fiscal 2014. This projection is based on our belief that we will experience growth rates higher than the company average in lower margin categories like building materials offsetting projected gross margin expansion coming from continued productivity.

We don’t expect our gross margin to be materially impacted by exchange rates. On a currency neutral basis, we are forecasting our expenses to grow at approximately 40% of the rate of our sales growth. This is higher than the expense growth factor we reported in fiscal 2014 for a couple of reasons.

First, we had some expense benefit throughout the year in our casualty reserves and other items that we do not believe will repeat. Second, as we continue to harden our IT security, we will be investing in higher level of IT resources to achieve our goal. For the year, we project that our operating margin will grow by approximately 60 basis points.

We don’t expect our operating margin to be materially impacted by exchange rates. We expect our diluted earnings per share to increase by approximately 10% to $5.17, but if exchange rates remain where they are today, our projected diluted earnings per share would be approximately $5.11.

As Craig mentioned, in support of our commitment to share repurchase, our board just announced a new share repurchase authorization of $18 billion, replacing our remaining authorization of $1.5 billion.

Our 2015 diluted earnings per share guidance includes our plan to repurchase approximately $4.5 billion of outstanding shares during the year using excess cash. For the year, we project cash flow from the business of roughly $9 billion. We will use our cash to invest back into the business.

Our 2015 capital spending plan is approximately $1.6 billion, and 11% increase from what we spent in fiscal 2014 in support of interconnected retail and to continue to harden our IT security.

We will also use our cash to pay our dividend, and as Craig mentioned, we just announced a 26% increase in our quarterly dividend which equates to an annual dividend of $2.36, in line with our targeted dividend payout ratio of 50%. Our commitment to shareholder returns continues to be a hallmark of the Home Depot.

So we thank you for your participation in today’s call, and Kayla, we are now ready for questions..

[Operator instructions] We’ll take our first from Dan Binder with Jefferies..

Hi, good morning. Carol, you made some good progress on expense growth last year, in particular the first half of the year. I was wondering if you can just talk a little bit about how you view that 40% expense growth rate as a percent of sales front half versus back half..

Sure. So let me take you back to the guidance that we provided one year ago where we said that we thought our expenses for 2014 would grow at 33% of our sales growth. Fast forward to the end of this year, we did better than that. Our expenses grew at 25% of our sales growth, and there were a couple of reasons for that.

We had good guidance throughout the year. We talked to you about some of those principally in our casualty area, this being workers’ compensation and general liability, and some other good guys that we don’t think will repeat next year. Further, we had $33 million of data breach-related expenses.

Now, we aren’t projecting for next year, but we are projecting higher investments in our IT infrastructure, including people. So if you look at the good guys that we had, including the data breach-related expenses, it nets out to $70 million.

If you added the $70 million to the expenses that we reported for 2014, you would have seen that our expense growth factor for the year was more like 33%, and then if you run off of that adjusted base for 2015, the adjusted expense growth factor is about 33%. So hopefully that gives you some color as to what we’re thinking about in expenses..

And does it look a little bit lopsided front half versus back half?.

Yes, as you know, we run our business obviously by quarters, but it’s almost easier to run it of halves because weather plays such havoc with our sales.

If you look at the spread of the year by half, I will tell you the top line is pretty tight and the expense growth factor is actually higher in the first half of the year than it is in the second half of the year.

Then, if you break it down by quarters - and again, the quarters can be all over the place, as we know, because of weather - but it would suggest that the expense growth factor would be higher in Q1 and Q2 than it would be in Q3 and Q4. Hopefully that’s helpful..

Yes, thank you..

We’ll take our next question from Chris Horvers with JP Morgan..

Thanks and good morning. Just a follow-up on that. Wal-Mart has raised a lot of questions about wage pressures in the United States, and a lot of investors are curious how that might impact other big retailers out there.

So do you have any comment on your exposure to minimum wage and how the Wal-Mart announcement could affect the competitive environment?.

Chris, we have prided ourselves on paying above the market as a company for a number of years. That’s our intent going forward. We continually look at the market on a market-by-market basis and make adjustments where it’s appropriate..

Okay, so it doesn’t sound like--it sounds like you’re already above and it doesn’t seem to be any issue for you this year..

Yes, again - with the guidance we’ve given, we’ve taken into account what we continually do, and that’s adjusted according to each given market as it’s needed..

And you may have seen our announcement to hire 80,000 seasonal workers, and Marc Powers was sharing with us this morning that we’re having great applications..

Right, from across the country. We have strength out in the west already with our spring sales, and we are able to keep up with our customer demand and deliver on a great customer experience by keeping up with the hiring from our hiring pools.

As we look across the country, we don’t think we’ll have any issues whatsoever supporting the demand that we’ll have this spring across the country as well..

Understood. Then Carol, it seems like your guidance doesn’t--your share repurchase guidance doesn’t embed any incremental leverage.

You ended the year about 1.8 times, so can you talk about has the philosophy changed in terms of the leverage level that you will target, and sort of what the rationale is behind that?.

Sure, Chris. I’ll take you back to a year ago where we guided share repurchases of $5 billion, but we ended up doing $7 billion. This year we’re guiding $4.5 billion. We tend not to guide debt finance share repurchases, but our philosophy regarding leverage has not changed. Our adjusted debt to EBITDAR ratio, as you point out, stands at 1.8 times.

That gives us $2 billion of borrowing capacity, so as we have shown in the past two years, we’ve guided and then we’ve done more. It’s not our intent to let the adjusted debt to EBITDAR ratio drop..

Perfect. Have a great spring, guys. Thanks..

We’ll go next to Seth Sigman with Credit Suisse..

Great, thanks and good morning. Just a question on gross margin, and it may be for you, Carol. You guys have done a great job managing it. The guidance for flat seems pretty consistent.

I’m just wondering on the mix if that should be a bigger impact in 2015 than in ’14, and just generally, are there maybe some offsets there on the positive side like we saw in Q4? I guess there’s also an expectation for some deflation across the various input costs, so how do you think about that?.

Well, we think about it very carefully. We start with our approach on where the business is going, and we believe that we will have outpaced growth in lower margin categories just because we haven’t fully recovered some of those lower margin categories.

If you look at peak to trough sales, we have categories that have not fully recovered to the tune of $4 billion of sales. I’ll call out one of those - that would be millwork. Peak to trough is still a billion dollar opportunity for us. As Ted called out, we had great growth in millwork in the fourth quarter. We want those sales to come.

We want to recover those sales, and so we want to provide plenty of room within our margin guidance to allow for that to happen. It doesn’t mean, however, that we’re not focused on productivity. We are focused on productivity. We will drive productivity, but we want to make sure that we leave plenty of room for growth in the categories.

Further growth will naturally happen; and maybe, Ted, you want to give some more color to that?.

That’s right. We track our 40 largest classes, and 16 of those have not recovered from peak.

Predominant categories there are in lumber and building materials, so we saw great results in those categories in Q4 and expect that going into 2015, so that will be some margin pressure, and holding flat is because we exceed productivity in other parts of the business..

Seth, I think if you look back at the guidance we’ve given over the past several years in terms of how we would actually deliver, it’s been a combination of expense control and increasing our op margin. That has always played out just a little bit differently than the way we’d planned it, based on what happens in the marketplace.

So we’ll remain focused on productivity, and the pressures in the market and how we want to apply our pressure in the market will ultimately determine where those two lines fall..

Okay, thank you. That’s helpful. Then maybe just one follow-up. As you look on trends on the ticket side, big tickets, nice to see the improvement there.

Maybe more from a merchandising perspective, are there still areas where you can push up pricing, whether it’s adding more technology or adding different brands to the mix?.

Well, I wouldn’t say we specifically look at pushing up pricing, but certainly as we’ve talked to running the business as a portfolio and applying our merchandising and planning tools on assortments, we’ve seen that when we offer innovation and a better assortment, the customer has followed those price points.

But again, we’re letting the customer take us there, just showing great assortments and innovative product, and the customer is responding. .

I think two great examples of that are what’s happened over the years in lithium technology and LED. Clearly the customer is willing to spend a higher ticket for those products because of the benefit they get from them..

Okay, great. Thanks very much..

We’ll go next to Aram Rubinson with Wolfe Research..

Hi, thanks.

It’s Wolfe Research, how are you?.

Hey Aram, how are you?.

All right. A couple things.

Can you talk about the inventory a little bit? Carol, I know you mentioned that there was some FX element, but it still would have only risen 2% on kind of an adjusted basis, so I’m curious whether or not you had shortages getting inventory in, or whether you’re just getting more efficient on that line because the turns would have improved pretty significantly, with or without that adjustment..

Well, I think our supply chain has done a masterful job of managing a very difficult situation. For sure we’ve had some challenges on the west coast, but if you recall last year, we had challenges domestically because of Snowmageddon, so when you net it all out, our inventory was in pretty good shape. We are on a march to get to a five times turn.

On the guidance that we gave you this morning, we’re not going to get there in 2015. We’re very careful here - we don’t want to go out of stock.

[Indiscernible] productivity and inventory, it will go up another tenth or so in 2015, but we don’t want to do this in a way that would put harm in our business, and our [indiscernible] rates are really pretty good..

We’ve shared with you in the past that our number one priority is in stock. Clearly we will focus on inventory productivity, but that can’t come at the expense of in stock. Mark, I don’t know if you want to--Mark Holifield is here. I don’t know if you want to comment a little bit on the question around the port..

Yes, good morning. Transportation has been a challenge. Clearly the west coast port situation has been tough with 12 to 16-day delays there generally in getting our import product in, but we’ve been able to get that product through.

There is a fair amount of uncertainty what the new normal will be once the ports get back to normal, but we’ll continue to leverage our supply chain to drive inventory turns and, most importantly, in stock..

Well, good job driving a comp like that without a great logistics backdrop. The follow-up, if I can, is just in terms of categories. You gave us some characterization of the growth in certain categories.

Can you tell us where maybe you’re seeing kind of either outsized market share gains or maybe even some market share losses, and maybe kind of where in ’15 you’re putting your big foot forward?.

Well, I’d say that we saw market share gains across [indiscernible] categories we track with public information, we’ve gained share in 11 of those categories, so it was pretty broad-based. I think those same categories are likely to continue into 2015. We’re very excited about new paint color solutions center.

We’re going to invest in another 170 stores expanding appliances. You’ve heard us talk about our hard set flooring.

We’re also going to reset the inbay hard set flooring this year, which is great new tile product, a lot of wood-look tile that are getting up to two and three feet in length, so all that new exciting product is going to be coming into the store.

We continued to invest in our tool centers, so you saw the double digit comps really across the board in our power tool categories. That’s great innovative product, but we’ve also been going back every year, doing a couple hundred stores and refreshing our tool crib. So we’ll continue with all of those initiatives and look to take more share..

Okay, best of luck, guys. Thanks for the call..

We’ll go next to Simeon Gutman with Morgan Stanley..

Thanks, good morning, and very nice results. A question on sales - it was a nice acceleration this quarter. Can you attribute it to either the underlying home improvement market getting stronger? I don’t know if there was any recovery you could detect post-breach.

I’m not sure the segment is very gasoline price-sensitive, but to any extent, do you think that could have played a role?.

A couple of comments, and I’ll ask Carol to comment as well. So as it relates to the gasoline, we’ve looked hard over the years to try to look at the correlation gas prices to sales, and we have not been able to draw that correlation.

Clearly it is a positive thing when a customer has more disposable income in their pocket, so even though we can’t draw that correlation, that is a good news thing for us. I’d also say that we were very pleased with the level of transaction growth that we had in the quarter. Matter of fact, it was above what we had anticipated.

I think in large part that’s a strong response to the great programs that Ted called out in terms of the events that we put together and just awesome execution by our store associates as well. .

Maybe a few other data points we’d throw out.

On our pro customer for known data sets, and this would be looking at private label credit card sales for our pros as well as pros who are managed accounts, so our growth in those pros, that was above the company average, and that then is supported by the merchandise strength that Ted called out in his comments.

On the housing front, the data is really pretty interesting. Relative to what we thought would happen, home prices came in the year, I think around 4%. We thought they’d be in the 5 or 6% area, so they were up, not as much as we thought, but pretty much in line with what we thought. Turnover actually was down slightly, which was really interesting.

We thought we’d get a boost from turnover in 2014, and actually it was down slightly. [Indiscernible], the forecast is it will be up in 2015, which gives us a lot of confidence for the guidance that we just gave for the full year. The other thing I’ll throw out there, we’re spending some time researching.

We don’t have a good point of view, and maybe you want to do some of this as you do your research. There is this research that was done 10 years ago about a wealth effect on home price appreciation and how it might be a six to nine to 12-month lag.

If that were to be true, then you could attribute some of the benefit in the fourth quarter to the home price appreciation that occurred in 2013. We haven’t formally formulated our thoughts there. We’re studying this - this is research that, again, is 10 years old, but we’re looking into that because we find it to be very intriguing research..

Thank you. My follow up is regarding sales and leverage. Carol, you mentioned expense dollars grow at 40%, and you said some of it is a little bit more spending.

If sales growth ends up being better than your guidance, and you mentioned some of the higher ticket categories, I guess some of the building material areas getting better, and so maybe there is reason that you see a better top line next year.

Does that mean you’ll still spend at that rate to get 40%--I mean, 40% growth, or will you allow that to flow through to the bottom line?.

It really depends on how the sales growth comes. As you know, we have an activity-based staffing model inside of our stores, and payroll is our largest expense. If the outperformance was solely in the form of transactions, the expense growth actually would be more along the lines of 40%.

If it, however, came through ticket, it would all fall through the bottom line, so it really depends on how the sales come..

Okay, thanks. Good luck..

Thank you..

We’ll go next to Brian Nagel with Oppenheimer..

Good morning, nice quarter. A couple questions.

First off, with respect to the capital allocation and the buyback, and looking at the numbers you laid out today with the new $18 billion buyback [indiscernible], should we expect some type of, maybe I would say philosophical change between how you allocate capital between buybacks and dividends going forward, or will the split largely remain the same?.

Yes, I would say we’re not looking for any major change as you go forward.

We review our capital allocation approach with our board on a quarterly basis, and so if you look at what the board just authorized in terms of share repurchase, we’ve spelled out what we put into the plan based on excess cash, but clearly it implies that we’ll do more than that, given what the authorization was just put forth with. .

I would say, Brian, that our commitment to the dividend is solid. Could it be higher? That’s subject to the board’s decision. Would it be lower? No. So that gives you an idea of what might happen over time in terms of changing shifts between the percentage of dollars that go to dividends and share repurchase..

Got it. As far as my follow-up, you talked a lot about currency and the translation impact, I guess the negative translation, expected negative translation impact in 2015.

As we think about the gross margin and your guidance for potentially a flat gross margin in ’15, is there some type of benefit you’ll get from the sourcing side with the stronger U.S.

dollar that maybe could impact [indiscernible] gross margin guidance or could potentially represent some upside?.

Yes, so for the products that we source outside the United States from the United States, most of that is denominated in dollars because the currency footprint of our suppliers, even though they may be physically located outside the United States, the currency footprint is dollar denominated.

So we don’t see a lot of purchasing power benefits in that regard. I will say that actually there’s a slight amount of risk in Canada because Canada buys in U.S. dollars, a small portion. Now, we’ve hedged away--and that’s a transaction exposure. We’ve hedged most of that away, so I’m not worried about it - that’s why we’ve guided flat for the year.

I just wanted to share that with you..

Congrats again. Thank you..

We’ll go next to Michael Lasser with UBS..

Good morning. Thanks a lot for taking my question. Carol, I was hoping you could dig a little deeper into some of the comments that you just made about home prices and perhaps that being a driver of the strong performance over the last several quarters.

Is that your hypothesis that the reason why the business performed so much better than what would be suggested by a straight GDP model and by the fact that housing didn’t live up to what you had expected it to be in 2014, the business performed very well due in part to a delayed response to home prices, or is there some other factor like a catch-up in spending as a result of pent-up demand?.

Well see, this is the question, isn’t it? We’re trying to get behind it, because if you looked just at our model, we way outperformed what the model would have projected. Now, Ted shared with you the market share gains we enjoyed, so we know that was a driver of it, but I think there’s something else going on. Is it delay factor? We don’t know.

We’re studying this research. It’s 10 years old, but we’re studying it. Could it be this? There have been 3.6 million single family homes added to the rental stock between 2006 and 2013. That 3.6 million homes, they are under-maintained.

As those homes are moving out of rental into home ownership, they badly need remodels, and in fact the Harvard Joint Center for Housing Studies said that 2014 was the first year since 2005 where remodel dollars are up. So could it be some of that? I think the answer is yes.

Michael, we’re doing a lot of work in this regard, and as we formulate our thoughts here, we will certainly come back and share them with you..

Could it also be that maybe not only has the way that consumers looked at home improvement spending evolved, but also the way that consumers have looked at the Home Depot store has evolved, given that you’ve extended the penetration of fixed categories like appliances and consumables like cleaning supplies.

Do you think that’s a part of it as well, and I guess the question is how sustainable is it? Have you seen any slowdown in February as a result?.

Michael, I think it’s fair to say that we have and continue to evolve the offering in the store. There is no doubt about that. Ted called out some of the investments we’ve made, whether that’d be in appliances, whether it’d be in flooring.

As you pointed out, the expansion in categories like cleaning, which is a great repeat business for us, it’s a consumable.

I think it also goes to the hard work and effort that our store operations and all of our store associates have done over the past couple years to restore the service in our stores, so I think we have a better experience for our stores.

And Michael, we can’t forget the growth of the interconnected opportunity that we have, and we’re seeing the customer engage with the Home Depot across multiple channels.

Almost 40% of all of our transactions on HomeDepot.com actually finish in one of our orange box stores, so there’s a lot of change that’s happening in the retail environment right now, and we feel good about the offerings that we’re putting out to our customers and driving value, as well as the opportunity going forward to continue to do that..

Earlier in the call in response to a question, I said that the first quarter is planned to be our highest comping quarter. Looking at our results February to date, we are on our plan..

Awesome. Thank you so much, and good luck with spring..

Thank you..

We’ll take our next question from Matthew Fassler with Goldman Sachs..

Thanks a lot. Good morning. I have a couple sales questions, and the first relates to online.

If you could just help us out with the math of the contribution of the online business to comps, and then also qualitatively give us a sense if you’ve been able to measure what proportion, if any, of the online business that you’re doing is incremental to Home Depot from a customer perspective..

The answer to your first question is dot-com contributed 100 basis points to our comp in Q4, 110 basis points for the year. In terms of incrementality--.

Largely, we’re seeing growth in category both in-store as well as online. We have seen a few categories during 2014, like patio, make a harder shift to the online space in large part because of the digital capabilities allows us to do things like select your own cushions, which would be extremely difficult to execute in store..

Got it. My second question, your comps in the big ticket category or for big ticket transactions have continued to surge.

Presumably that relates both to categories like appliances but also to projects, so could you give us a sense as to whether you find projects as an asset class, if you all are kicking in, and what that typically means for the forward on sales, because those typically, I would imagine, last for some time..

Yes, so certainly appliances in our installation categories, we had double digit comps in our services businesses. Those are helping the ticket, but as we do see more projects, and those are when we tend to see more of the lumber and building material product in the basket, those are increasing.

We watch units per basket very carefully, and for years, as you can imagine, those were going down. We’re now starting to see modest increases in our units per basket, and that does speak to project work..

And in your experience over time, and I know it’s been a while since we’ve been able to talk about an upturn in this metric, is that something that tends to endure for a while as projects gain momentum?.

Matt, it’s been such a long time since we’ve had this. We’d have to go back and look at it. I don’t know how to answer that question..

Thanks a lot, guys. I really appreciate it..

All right, thank you..

We’ll go next to Jaime Katz with Morningstar..

Good morning. Following up on some of the economic questions from earlier, I know you guys usually talk about lending standards and how credit availability has changed.

Can you add some commentary on that this quarter?.

I’m happy to. It’s still tight. As we think about the recovery and the steepness of the recovery, it could be accelerated if mortgage underwriting standards were to be loosened up.

We’ve looked at surveys of bankers, and there has been a small, small percentage of them who have said they are loosening up on underwriting standards, but it’s still very tight..

Okay, and then as a follow-on, have you guys changed your longer term thoughts on the potential of either the Canadian or Mexico business, and just any sort of added information you have on either of those businesses would be helpful..

We’re very pleased with both our business in Canada as well as Mexico, delivering great performance year after year after year, so we continue to be focused on driving the business not only here in the U.S. but throughout North America..

Our businesses are very profitable in those countries. In 2015, we will open six stores, five in Mexico, one in Canada. That’s proof positive of how bullish we are on those businesses..

Excellent, thank you..

We’ll go next to Mike Baker with Deutsche Bank..

Thanks. A couple of questions on the comps, just to clarify. Carol, what did you say about the comp progression? I heard it as expenses when you were talking about it, so could you just repeat what you said about the comp progression through the year, and then I’ll have a follow-up to that..

Yeah, I started talking about the top line. What I said, if you look at the business by half, the comps would be very tight first half versus second half.

Then if you break it apart by quarter, we believe that the first quarter would be our strongest comping quarter, the second quarter our lowest comping quarter, and the third and fourth quarter about the same..

I understand - okay, thank you.

Then I guess related to that, I’m just curious how--I guess you talked about February a little bit, but how does weather impact you guys in February? I think there were ice storms down in North Carolina, and it’s been crazy up here in Boston, so part of me thinks that that’s a positive - people are buying a lot of snow removal and heating and the like, but are you losing out? Would you normally be seeing some early spring business in some of the southern areas in February? How do I think about that? How does that net out? Thanks..

It’s interesting - as we sit here looking out the window, we have snow in Atlanta, a dusting as it were, but--. You know, the weather obviously is there in some form every year, which is why we kind of look at the business on halves when it comes to the seasonal businesses.

When you have weather, clearly your exterior businesses--when the weather is tough, exterior businesses pull back, you’re able to sell through the winter category goods. Then when the weather improves, you begin to see the outdoor businesses.

So it’s very early on in the beginning of the year, and we expect that weather over the half will play out as it does every year..

Yeah, this is our third now brutal end to the winter, and in each of the prior two we had excellent recovery. It’s still very early this year..

Right, okay. Makes sense. If I could have one more follow-up, the $18 billion in buybacks over the next three years, it sounds like you don’t need any incremental debt to get there, in your view..

Well, to accelerate it, we’d like to--we would obviously raise some incremental debt..

Sorry, could you repeat that?.

I’m sorry if I wasn’t clear. If we were to accelerate it and get it done before 2017, for example if we did more this year than we’ve guided, we would raise incremental debt..

Understood. Okay, thank you. .

We’ll go next to Scot Ciccarelli with RBC Capital Markets. .

Hi guys, thanks.

Can you provide a bit more color on the pro business? Historically, you’ve helped us understand kind of what the trends are with some of the bigger pros versus smaller pros, and then also, Carol or Craig, to the degree that you can, can you tell us what you’re seeing in some of the tests on the credit extension to the pros?.

So in the pro business overall, as Ted called out, when you look at businesses that we have that are heavily penetrated by the pro, we had very strong results. We see the pro coming back.

Candidly, we’ve lost a little bit of visibility with the breach and changeover of cards for the pro and our ability to track that as clearly as what we had prior to the breach, but all indications that we have, as Carol called out, indicate that we had a very strong quarter with the pro and we look to see that continue as we move into 2015..

And on the credit side, for our private label credit card the approval rates for our pro customer are 71.2% - that’s actually higher than the approval rates for our consumer customers, because we’re coming back with a second look.

If a pro applies for credit and is denied, we do a second look, and the second look has actually helped us bump up that approval rate, so we’re pleased with that. The average line is $6,900, so very pleased with our private label card and, to your question, Scot, particularly about extended terms.

We do have a pilot underway in a number of stores with extended terms, user terms that you can’t find any place, and our pros are responding very well to that, so stay tuned for more information on that topic..

Okay, very helpful. Thank you..

Kayla, we have time for one more question..

We’ll take our final question from Greg Melich with Evercore ISI..

Great, thanks. I guess I’m going to go with a couple follow-ups. One is on inflation and then on ecommerce. There was a bit of inflation in the quarter. I assume in the outlook, though, you don’t assume any.

Is that correct?.

Greg, that’s right. Our outlook is inflation-neutral..

Okay, and then a little deeper on ecommerce - thanks for the data there. It seems like you’re about a $4 billion business now. Could you tell us how it’s actually impacting the profitability and the margins, and I know you had one online fulfillment center who was up and running, and you were talking about doing another one.

Have we reached the point where we’re actually starting to leverage that business so that year-over-year it’s no longer a drag on margin? Thanks..

I’ll start with a comment, and then Kevin Hofmann is here, who runs our online business. I’ll let him add to it. If you look at the overall business again, please, we grew a billion dollars in our online space. We see this largely as additive to the business overall, and we manage this on a portfolio basis.

When you think about almost 40% of our transactions touching and interacting in the store, it’s kind of hard to parse out the pure ecommerce, if you will. We look at the margin overall in the business as a blended margin.

Having said that, there are categories that it’s more profitable to drive online, and there’s categories that are clearly the store is the best business model. We’ll continue to look at that and we continue to do things like invest in our direct fulfillment centers to be able to drive efficiency in that business.

Kevin, I don’t know if you want to update on the fulfillment centers?.

Yes, so we’ve successfully ramped up our first two facilities, one in Georgia and one in California, and they are doing very, very nicely. We have a third facility under construction and look forward to fully leveraging those and stocking those and delivering great service to the customer. So really, really pleased with how fast it’s come online..

So if I could follow up that, Carol, if you look at the 60 BPs of EBIT margin expansion this year, do you assume that this development in building the business and those facilities is a headwind or actually a tailwind at this point?.

Well, we’ve got to get the third one up and running, so that’s a bit of a headwind. We’re compensating for that headwind with cost out in other areas. We run our business from a productivity virtuous cycle, and we will continue to do that in 2015..

That’s great. Good luck, guys..

Thank you..

Well, thank you everyone for joining us today, and we look forward to talking with you next quarter..

This concludes today’s conference. Thank you for your participation..