Diane Dayhoff - Vice President-Investor Relations Craig A. Menear - Chairman, President & Chief Executive Officer Edward P. Decker - Executive Vice President-Merchandising Carol B. Tomé - Chief Financial Officer & EVP-Corporate Services Marc D. Powers - Executive Vice President-US Stores Mark Holifield - Executive VP-Supply Chain & Product Development.

Seth M. Basham - Wedbush Securities, Inc. Christopher Michael Horvers - JPMorgan Securities LLC Simeon A. Gutman - Morgan Stanley & Co. LLC Michael Louis Lasser - UBS Securities LLC Aram H. Rubinson - Wolfe Research LLC Michael Baker - Deutsche Bank Securities, Inc. Seth I. Sigman - Credit Suisse Securities (USA) LLC (Broker) Brian W.

Nagel - Oppenheimer & Co., Inc. (Broker) Jaime M. Katz - Morningstar Research Daniel T. Binder - Jefferies LLC Matthew Jeremy Fassler - Goldman Sachs & Co. Scot Ciccarelli - RBC Capital Markets LLC Dennis P. McGill - Zelman & Associates Gregory Scott Melich - Evercore ISI Jessica Schoen Mace - Nomura Securities International, Inc.

Peter Jacob Keith - Piper Jaffray & Co (Broker) Eric Bosshard - Cleveland Research Co. LLC.

Good day, and welcome to The Home Depot Q1 2015 Earnings Call. Today's conference is being recorded. 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 on our call today are Craig Menear, Chairman, CEO and President; Ted Decker, EVP of Merchandising; and Carol Tomé, Chief Financial Officer and Executive Vice President, Corporate Services. Following our prepared remarks, the call will be open for analyst questions.

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

Now before I turn the call over to Craig, let me remind you that today's press release and the presentations made by our executives include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, 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 measures. Reconciliation 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 first quarter were $20.9 billion, total sales and comp sales were up 6.1% from last year, diluted earnings per share were $1.21 in the first quarter and our U.S. stores had a positive comp of 7.1%. We were pleased with the start of the year.

We saw a more normal spring across much of the country in the first quarter. All three of our U.S. divisions posted mid-single-digit comps or higher, our Western division was our best performing division with strength in key markets, including San Francisco, Sacramento, Colorado and Seattle. All 19 of our U.S.

regions saw positive comp growth in the quarter. Both tickets and transactions grew during the quarter with particular strength in transaction growth. While our seasonal businesses were strong in the quarter, core categories also contributed to our performance. As Ted will detail, we were pleased with the growth in our Pro categories.

And our Installation Service business saw sales growth above the company average in the first quarter with strength in countertops, windows and water heaters. On the international front, both our Mexican and Canadian businesses exceeded our expectations in the quarter.

Ricardo and his team in Mexico posted double-digit comps in local currency, making it 46 consecutive quarters of positive comps. And Bill and the Canadian team posted comps in local currency above the company average, making it 14 consecutive quarters of positive comps.

Operationally, in the quarter, we hired over 75,000 associates to ramp up for our spring season. Flexibility is required to be successful in spring and our associates and store operators were able to do just that. They officially managed the freight flow within the store, while maintaining focus on providing strong customer service in the aisle.

And our second-generation First Phone enabled us to expedite the checkout process for customers during peak traffic periods. We had the highest first quarter transactions in company history and at the same time saw our Net Promoter Scores improved during the quarter.

As I mentioned on last quarter's call, we expected a challenging transportation environment in the first quarter due to the West Coast ports. While this proved to be true and created some pressure on in-stock rates, our supply-chain team worked vigorously and creatively to mitigate this condition.

The situation is improving and we'll continue to work to recover our in-stock levels. The retail environment continues to evolve, blending the digital and physical worlds together, and we at the same time are building out our interconnected capabilities. For the spring season, we work to further connect our in-store and online experiences.

From a marketing approach, we leveraged our digital marketing capabilities to more effectively target customers with relevant products and special buys. We not only offered more spring season product online, but also leveraged digital media channels to highlight local in-store assortments and create footsteps to our stores.

In the store, our mobile app helped customers identify product locations with our enhanced product locator. We are also interconnecting our distribution networks to more effectively meet the customers' demand for fulfillment options.

We have begun to roll-out the capability to flow buy online ship to store orders through our rapid deployment centers or RDCs, creating a more efficient flow to the stores.

For the quarter, our online sales grew almost 30% and with our digital properties being our virtual storefront, we were pleased with online traffic growing double-digits in the quarter as well. We will continue to invest in mobile, search and creating a frictionless transaction across the different channels.

While it's early in the year, our view of the macro environment has not changed much. The U.S. GDP growth was below consensus estimates for the first quarter, but housing data remains positive and supportive of the housing recovery, and the growth that we see in our business also supports the view of a continued recovery in the U.S. housing market.

As Carol will detail, because of our outperformance in the first quarter relative to our plan, we are increasing our sales and our earnings per share guidance for the year. We now expect fiscal 2015 sales growth of approximately 4.2% to 4.8%, and project diluted earnings per share of $5.24 to $5.27.

We remain focused on investing in our business and our associates as well as taking care of our customers. And I'd like to thank our associates for their hard work and dedication. Based on this quarter's results, 93% of our stores would be eligible for Success Sharing, our profit-sharing program for our hourly associates.

And with that, let me turn the call over to Ted..

Thanks, Craig, and good morning, everyone. We were pleased with our performance in the first quarter as we saw continued strength across the store. Sales were aided by a more normal spring and great events, including our annual Spring Black Friday.

The departments that outperformed the company's average comp were Tools, Indoor Garden, Outdoor Garden, Décor, Lighting, Plumbing and Appliances. Kitchen & Bath, Lumber, Hardware, Millwork, Building Materials, Paint, Flooring and Electrical were all positive but below the company average.

Pro Heavy categories continue to show great strength as we saw double-digit comps in Siding, Power Tools, Commercial Lighting, Fencing and Power Tool Accessories. In addition, pressure-treated decking, compressors, windows, tile-setting materials, concrete, board, insulation and fasteners all had comps above the company average.

Outdoor project categories were also strong during the quarter as we had double-digit comp sales in Lawnmowers, Chemicals, Outdoor Power Equipment, Planters, Lawn Accessories and Grills. The core of the store continued to perform well across the country as we saw strength in Maintenance and Repair categories.

Water Heaters, Cleaning, Hand Tools, Air Circulation, Wiring Devices, Adhesives and Light Bulbs all had comps above the company average. In Décor categories, Vanities, special-order cabinets, Ceiling Fans, Bath Fixtures, Decorative Lighting and Tile also had comps above the company average.

Our seventh annual Spring Black Friday delivered strong sales as the stores drove excitement around special buys that were well-received by our customers. Comps in Gardening Tools, Soils and Mulch, Watering, Live Goods and Patio were all above the company average.

We continue to work to mitigate the effects of the drought in California using our planning and assortment tools. We're featuring more water-saving products and landscape options like moisture control soils and mulches, drip irrigation systems and drought-resistant plants like succulents.

In addition, our stores in California are holding clinics to educate customers on these products and how to reduce water usage. As a result, both the Indoor and Outdoor Garden departments in the Western division posted comps above the company average. Total comp transactions grew by 4.4% for the quarter, while comp average ticket increased 1.7%.

Our average ticket increase was negatively impacted by commodity price deflation, mainly from copper. Total impact to ticket growth from commodity price deflation was approximately negative 15 basis points. Tickets for transactions under $50, representing approximately 20% of our U.S. sales, were up 3.2% in the first quarter.

Transactions tickets over $900, also representing approximately 20% of our U.S. sales, were up 6.8% in the first quarter. The drivers behind the increase in big-ticket purchases were Riding Lawnmowers, Water Heaters, Appliances, Windows and Sheds. Now, let me turn our attention to second quarter.

We continue to be the leader in the marketplace for innovation and value that save our customers both time and money. Nowhere is this more apparent than in the exciting lineup of new products for our Pro customers. We are pleased to introduce a new lineup of DEWALT and Makita pneumatic nailers, both exclusively sold at The Home Depot.

These are strong national brands that our Pro customers know and trust. The new DEWALT nailers are compact, lightweight and feature innovative True Sight nose technology that allows for faster and more accurate nail placement, saving our Pros' time on the job site.

Utilizing our field merchants and our planning and assortment tools, we constantly refine our assortment. Some product categories are sourced nationally and some are sourced regionally. Based on customer preference and the output of our tools, we recently refined our assortment in Roofing.

We added an assortment of Owens Corning shingle products in select areas of the United States, including California where they are one of the top professional shingle brands. Pros are increasingly shifting to cordless platforms that offer the power and runtime of gas.

New from ECHO is a 58-volt lithium-ion battery platform featuring a string trimmer, hedge trimmer, blower, chainsaw and lawnmower. These tools feature a brushless motor for superior power and performance that rival and in some cases surpass corded and gas-powered counterparts.

In addition to all the great new products, we're excited about our upcoming events. The outdoor season is upon us and we will help our customers enjoy it with an incredible lineup of great values and special buys for our Thrill of the Grill, Memorial Day, Father's Day and 4 of July events. With that, I'd like to turn the call over to Carol..

Thank you, Ted, and hello, everyone. Before we discuss our first quarter results, I want to call out a change in our accounting policy for certain shipping and handling costs related to store deliveries and online sales.

In order to better align our costs across all selling channels, these shipping and handling costs are now included in cost of sales whereas they were previously included in operating expenses. We changed the policy this year and accordingly have reclassified 2013 and 2014 results.

The impact of the reclassification in the first quarter of 2014 was an increase of $128 million to cost of sales and a corresponding decrease of $128 million to operating expenses. For fiscal 2014, the impact of the reclassification was an increase of $565 million to cost of sales and a corresponding decrease of $565 million to operating expenses.

The reclassification has no effect on operating income or to net earnings. So with that, let's move on to our first quarter results. In the first quarter, sales were $20.9 billion, a 6.1% increase from last year. Versus last year, a stronger U.S. dollar negatively impacted total sales growth by approximately $234 million, or 1.2%.

Our total company comp or same store sales were positive 6.1% for the quarter with positive comps of 4.1% in February, 6.8% in March, and 6.8% in April. Comps for U.S. stores were positive 7.1% for the quarter with positive comps of 5% in February, 7.8% in March and 7.9% in April.

Our total company gross margin was 34.4% for the quarter, an increase of four basis points from last year. In the first quarter, we had 21 basis points of gross margin expansion in our supply-chain driven by lower fuel costs and increased productivity.

This expansion was offset by a change in the mix of products sold and slightly higher shrink than one year ago. For fiscal 2015, we continue to expect our gross margin rate to be about the same as what we reported in fiscal 2014, which after applying the change in our accounting policy, was 34.1%.

In the first quarter, operating expense as a percent of sales decreased by 83 basis points to 21.9%. Our expense leverage reflects the impact of positive comp sales growth. Total expenses were $15 million over our plan in the quarter due to $7 million of net expenses incurred as part of our data breach and higher late-season snow removal costs.

Given our strong sales performance however, we leveraged expenses to plan. For the year, we are now expecting our expenses to grow at approximately 35% of our sales growth rate. Our operating margin for the quarter was 12.4%.

Interest and other expense for the first quarter was $193 million, up $102 million from last year, reflecting for the most part a pre-tax gain of $97 million on the sale of HD Supply common stock, which was not repeated this year. In the first quarter, our effective tax rate was 34.3%, compared to 36.9% for the first quarter of fiscal 2014.

The reduction in our first quarter 2015 effective tax rate was due primarily to the settlement of a tax audit. We now expect our income tax provision rate to be approximately 36.4% for the year. Our diluted earnings per share for the first quarter were $1.21, an increase of 21% from last year.

Our diluted earnings per share for the first quarter included a $0.05 benefit related to the settlement of the tax audit I just mentioned. Moving on to some additional highlights, during the first quarter we opened one new store in Canada and ended the quarter with a store count of 2,270 and selling square footage of 236 million.

Total sales per square foot for the first quarter were $354, up 5.9% from last year. At the end of the quarter, inventory was $12.3 billion, virtually 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 $124 million from last year.

Inventory turns were 4.7 times, compared to 4.4 times in the first quarter of last year. Payables were up $331 million from last year, reflecting the seasonal nature of our business. Our payables were also distorted by the impact of a stronger U.S. dollar. On a currency-neutral basis, payables were up $416 million from the prior year.

In the first quarter, we repurchased $1.125 billion or approximately 9.9 million shares of outstanding stock. For the remainder of the fiscal year, we intend to repurchase approximately $3.4 billion of outstanding stock using excess cash, bringing total 2015 share repurchases to $4.5 billion.

Computed on the average of beginning and ending long-term debt and equity for the trailing four quarters, return on invested capital was 26.1%, 490 basis points higher than the first quarter of fiscal 2014. When we built our 2015 sales plan, it was based on U.S.

GDP growth forecasts of approximately 3% and about 150 basis points of growth coming from continued recovery in the housing market. While GDP was weaker than expected in the first quarter housing data, namely home price appreciation and household formation, were a little ahead of the assumptions we used to build our plan.

Even in the face of a stronger U.S. dollar, our sales in the first quarter were better than our internal sales plan. Further, our earnings per share were stronger than our internal plan, reflecting a lower tax rate and more expense productivity than we anticipated. As a result, we are raising our sales and earnings per share growth guidance.

On a currency-neutral basis, we now expect our 2015 sales to grow by approximately 4.8% with comps of approximately 4.6%. If the U.S. dollar remains at current foreign exchange rates, we would expect our fiscal 2015 sales growth rate to be 4.2% and comps to be approximately 4%. For earnings per share, remember that we guide off of GAAP.

On a currency-neutral basis, we now expect fiscal 2015 diluted earnings per share to grow by approximately 12% to $5.27, but if exchange rates remain where they are today, our projected fiscal 2015 diluted earnings per share would be approximately $5.24.

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

Thank you. We'll go first to Seth Basham at Wedbush Securities..

Good morning, and thank you for taking my question..

Morning..

My question is around the big ticket purchases by consumers.

Can you talk in more detail about trends you are seeing there, so trends in big ticket purchases not driven by the Pro?.

I would say that we're seeing really strength across many departments, water heaters, appliances, our tools, riding mowers, walks, all of our outdoor garden categories, grills, et cetera had just a terrific quarter and those wouldn't be Pro-focused items..

And I might jump in and just give you some demographic information. As we look at our customer base, we're seeing some interesting trends.

Since 2009 spending in high income households has grown faster than low income households, driven in part by higher end homes recovering faster than lower end homes, and when we say higher end homes, we are talking of homes of $200,000 and up.

Interestingly as we look at our consumer base, over 50% of our customers have homes of $200,000 or more, and you compare that to the national average, which is more like 40%, so we think just the nature of our customer base is helping drive this big ticket growth..

Seth, the other factor that I'd throw in that is our Services business was strong again in this quarter, outpacing our company average, and the average ticket there is north of $1,500..

That's helpful.

And just as a follow-up, does that imply based on the data that you talked about that we're seeing a broadening recovery here with even lower end and mid-income consumers doing more big ticket discretionary projects?.

I would say that if you look at the strength both in the small ticket as well as the big-ticket, we're seeing a broad sales pattern across the store and across the demographics..

Got it. Thank you very much..

We'll go next to Chris Horvers at JPMorgan..

Thanks. Good morning, everybody..

Good morning..

Morning..

You mentioned that this was a normal spring.

Do you think there was any pull forward from the second quarter in the spring business? And can you shed some metrics on the way to think about what the underlying trend in the business and where we are in the cycle, so perhaps what Outdoor Categories comped overall relative to what the comp in the core and the Pro was?.

I'll let Carol provide you, she has some details in terms of the numbers, but when we look at this business as it's playing out this year, it appears to be much more towards a 2010 type of scenario, which was a more normalized spring overall..

And here are some numbers. If we look at our garden department, our garden department in the United States made up 19% of our sales and 26% of our growth. If you compare that to last year, which wasn't a normal spring, our garden department made up about 18% of our sales but only 4% of our growth.

This ratio of 19% penetration and 26% of growth is more normal for us. So we don't believe that we have pulled forward sales, nor do we believe we will lose sales or grow sales more than our plan in the second quarter..

So you're one of the rare retailers that have reported an acceleration in comp in April. I think a lot of retailers are talking about weakness in April and essentially guiding down the second quarter. So can you shed some light on how you are thinking about the second quarter and what the business is telling you so far in May? Thanks..

Yes. We haven't changed our outlook for the second quarter. In fact, we haven't changed our outlook for the year and if there's a bias in our forecast, we believe the bias is to be up. We are pleased with our performance in May..

Thanks very much..

And we'll move next to Simeon Gutman at Morgan Stanley..

Thanks, good morning. It's Simeon. How are you? Carol and Craig you guys have done a nice job framing the outlook in terms of macro and housing with the various phases. I think buildup and steady growth, I'm not sure if I am naming them right.

Not sure how and if it's incorporated but rising interest rates, inevitable over time, a lot of debate in terms of what we are going to see in terms of magnitude.

But in general it should imply an improving macro but I'm curious how rising rates are factored into your outlook and into that longer term, any considerations there?.

Well, let's look at the Affordability Index because that's a big impact to how people feel about their homes, what kind of homes they can afford, et cetera. The analysis would suggest that interest rates, and these would be mortgage interest rates, could rise 200 basis points and the Affordability Index would still be north of 100%.

So even in the face of potentially higher rates and who knows when that might occur, but even in the face of potentially higher rates, we don't see any near-term pressure on our business. And in fact, to your point, that could suggest a little inflation in the economy and that would be a good thing..

Wouldn't be a bad thing..

Okay. And then my follow-up you mentioned in the script your AP ratio was up I think 300 bps, AP and inventory year-over-year which is quite solid.

Can you talk about where it's coming from and has anything, is anything changing in the way you are approaching the payables or your vendors in that regard?.

No. This is just a function of purchases and we're buying up to support the sales..

It's spring..

It's springtime, so nothing has changed in our payable terms..

Okay. Thanks..

And we'll take our next question from Michael Lasser at UBS..

Good morning, thanks for taking my question. It's on the nature of the first-quarter sales and how it relates to the rest of the year.

If you look at the idiosyncrasies of the quarter, how is it different? Because if we look on a multiyear stack basis not just last year but for the last five years the stack comps on a three- and four-year basis had been lower than you've seen for the rest of the year.

And I guess it's important because if we look what your outlook is implying that it's a nice acceleration on that basis, is there something different about the nature of demand as you move out of winter and into spring aside from just the weather?.

I think if you look at – we always look at the half first of all, because the quarters in the first half can play out very differently based on how the weather plays.

And you're right that the multi, when you look at multi-year stacks the first quarter has had a tendency to be a softer multi-year because for the past several years we've seen slower start to our spring selling season..

So other than weather, the only other anomaly I can think of was Superstorm Sandy and the impact that it had in terms of creating a real variation in our stacked comp. So those are really the drivers..

Okay. My second question is on the change to the accounting policy.

Do you expect that to have any impact on your e-commerce sales which continue to grow at a very impressive clip? For example do you think that the behavior of some of your merchants will change as they are now going to be essentially expend shipping charges? And so how will that manifest in the business mix?.

Well, this is all about driving interconnected retail at Home Depot. Our core merchants are responsible for the sales and margin dollars of all activity, all channels.

So they are really looking at two different P&Ls to drive an interconnected experience and give them visibility of their comprehensive profitability and performance of their categories merchandise. And they're very excited about this change to get aligned and have one P&L for the whole business..

And as Craig pointed out, our dotcom sales grew nearly 30%. In fact, they contributed 20% of our overall company growth in the first quarter. And we made the change at the beginning of the year..

Yeah, it's just important to be able to give our merchants common visibility. And we manage our business on a portfolio approach. And to be able to actually look at the businesses in a common way just gives them better information overall..

Okay. That's helpful. Thank you so much..

You bet..

And we'll go next to Aram Rubinson at Wolfe Research..

Hey, good morning. So you've got a merchant now as a CEO and I'm wondering what differences that makes throughout the organization when it comes to maybe pace of innovation on merchandising, speed to markets and even risk in terms of risk taking on the merchandising front.

Any perceptible differences there that we should expect?.

Well, Aram, I would say that first of all, we've been focused for a while now on trying to create excitement for our customers and our associates in the stores through product innovation and that will continue. It's something that's hugely important not only to, obviously our customers, but we know it's our job as a team to excite our associates.

And we firmly believe that when we do excite our associates, they drive it in the marketplace better than anybody out there. So that is our primary focus. I think Ted – what Ted actually brings to the party is he's taken it to a different level and looking at a much more end-to-end approach from supplier all the way through customer.

And I think that piece will be different than what actually I did when I sat in Ted's chair. I can assure you that product will remain a focus for our company..

Let me ask a second question. I know your execution in the stores continues to be excellent. I'm wondering if you can help us benchmark, you touch the customer in a number of different areas, stores, services, buy online, pick up in store, general dotcom.

Is there a way for you to handicap your voice of the customer's feedback and grade each of those so we have a sense as to where your execution falls relative to the other businesses?.

We actually do look at that under multiple facets and Marc Powers is here. I'll let Marc speak to that..

No. We look at our and survey our customers in many different ways through all the channels and pay very close attention to it whether it be our voice of the customer inside the store. We also work with ForeSee to see how we are doing on our execution, on our buy online, pick up in store or our buy online, ship to store.

And we also have a VOC for our Pro, how they are experiencing The Home Depot experience with our Pro Xtra program. So anywhere we are contacting and engaging our customer, we are asking them to provide us feedback on their experience and we pay very close attention to it..

And on a scale of 1 to 10, how do we rank in the store versus online versus buy online, pick up in store versus services?.

I would say in all of those they are trending up, continue to trend up and we are very pleased with the progress we're making in all channels with our customer experience..

Very vague, but thank you for that anyway..

And we'll go next to Mike Baker at Deutsche Bank..

Thanks. A couple of questions on the Pro. Last quarter you talked about a private label credit card, sorry extending terms for the Pro customer I meant to say.

Can you discuss how that's going? And then I think you had seen better items per basket for the pro customer which you saw as a positive sign, can you discuss trends there?.

Yes. On the private label pilot that we have been conducting, it's in about 260 stores. This is where we're offering terms as well as fuel rewards points and we're very pleased with the results thus far and we anticipate making a go/no-go decision soon. Everything got pushed back a bit because of the data breach but we hope to make a decision soon.

And on the Pro, I can just give one data point and that is just looking at what we know. We look at managed accounts as well as sales on our commercial private label card.

Both managed accounts and sales on our commercial private label card make up over 20% of our total sales and in the first quarter, we saw growth outperforming the average company growth. So we were very pleased with the Pro in total..

Okay. Helpful, great. If I could ask another follow-up, I think last quarter you said you expect the first-quarter comp to be the best of the year, I think because of the easier comparisons.

Is that still the case in your outlook?.

Yes. We still expect the first quarter to be the best quarter and that the halves to be similar..

Okay. I'm going to sneak in one more if I could. Sorry, everyone. I know that in your Garden business you actually do have some winter products in there, like I think the ice pellets, the ice melting pellets and the like.

So how much of that really strong growth in garden was due to winter product and how much is due to what I would refer to as true spring products?.

It's largely true spring. We had a particularly tough start in the Northeast in February with cold and ice, and certainly we sold some ice melt, but really the warming trends in a much more normal spring across the whole country, it really was a true Garden story..

Okay. Very helpful. Thank you..

And we'll take our next question from Seth Sigman at Credit Suisse..

Great, thanks very much. A question on the expense productivity. So, Carol, I think you said SG&A now expected to grow at 35% of sales growth, a little bit less than you had talked about previously despite what seemed like a couple of incremental costs in the first quarter.

Can you talk about were some of the savings are coming from? And then related I think you said that the expense growth factor would be higher in the first half.

What's the right way to be thinking about that as we move through this year?.

Yes. So nothing has really changed on the expense front, and as we called out, we had higher expenses in the first quarter than our plan. Why the expense growth factor is declining from our original guidance is all a factor of sales. We had a considerable beat to our plan in the first quarter and we're rolling that forward for the full year.

And this company defines operating leverage. So the more sales you get, the more leverage that you get. So it's just a function of our new sales outlook. And in terms of the expense growth factor broken down by half, we would expect the expense growth factor to be higher in the first half of the year than the second half of the year..

Okay. Great. And then just a specific category question. Related to the Flooring business obviously there has been a lot of noise in that category.

What are you guys hearing from consumers? And are you making any changes to your assortment? And I guess just in general I know you have a number of different tests going on, maybe you could just speak about the performance and what you are seeing that would be helpful?.

I would start with just a comment that we're really not hearing much from consumers at all, and I can let Ted explain growth in categories..

Yeah, so there's certainly a lot of noise, nothing that we've been able to quantify in an impact in our business. Flooring did comp below the company average, but we're seeing nice trends there and Tile is really the story for us. Tile continues to perform very well.

We did 600-odd stores where we put in the expanded hard set showroom, which is really about getting a lot more tile displayed and available for sale in bulk, and that continues to perform very well. It's all of the space optimization play to move in the Flooring categories where trends are seeing more in hard surface, than carpet.

We'll continue to look for those opportunities. We've been pleased with the results of those 600-odd stores..

Got it. Thanks very much..

We'll go next to Brian Nagel at Oppenheimer..

Hi. Good morning..

Good morning..

Morning..

Congrats on a nice quarter..

Thank you..

A couple of questions. First off, with respect to buybacks, it looks with the stock you bought back here in Q1 and then the guidance it seems like you're basically tracking along with your plan.

But as we think about the balance of the year is there any reason to believe or any shift in thinking with regard to taking on extra debt to buy back additional shares?.

Brian, our adjusted debt to EBITDAR ratio stands a little under 1.8 times, and you know our target is not to exceed 2 times. So we have the capacity right now to borrow about $3 billion to take us back up to target. It is not our intention to let our adjusted debt to EBITDAR ratio decline as it will with more earnings.

It's not our intention to let it decline. And as you've seen us act in the prior couple of years, we've taken advantage of market opportunities to bring in some incremental debt and use that for share repurchases. So nothing to announce today, but it certainly is not our intention to let the ratio decline..

And our board has authorized an $18 billion buyback program through 2017..

Got it. And that's very helpful.

My follow-up question I guess I will bounce this one, looking to your market model, and I think you guys do a very good job of kind of framing how Home Depot's business is tracking along the lines of the macro economy, but what we've seen lately is I think improving housing turn even with some of the data we got this morning.

As you look at your business and the drivers behind that business, are you starting to see a benefit of maybe a modestly more robust sales environment for homes helping Home Depot?.

I mean, certainly the housing trends that we see in the market are positive, and as Carol called out, in some cases above our assumptions overall. It's certainly when home values go up, it gives customer confidence to drive into the project business, and when we see home turnover, that generally drives activity as well..

Right. And so home price appreciation is a big driver. Home prices are up 5% year-over-year. That's higher than our plan. The other driver is household formation, and it looks like there'll be 1 million households formed this year, which should be awesome. In fact I'm always fascinated by this statistic.

If you look at people between the ages 18 and 34, nearly a third of them are at home with their parents. And if they were all to leave their home nest, like my nephew just did, thank goodness, that's 4 million households that would be created. So I'm just really excited about what the future may be for our business..

Yeah..

Thank you very much..

And we'll take our next question from Jaime Katz at Morningstar..

Good morning. Last quarter you guys commented on using merchandise planning tools to improve a number of different categories across the store.

I'm curious if there were any incremental lessons learned about how to improve the operating margin line across the board?.

I think that one of the principal lessons we're learning is that you're never done on the journey of continuing to optimize your assortments in your space. We used to have resets in PLRs and line reviews as an event.

It would be every one year, every two years, every three years, and then you wouldn't pay particularly as much attention to that category. What we're doing now is building the tools that you can have a much more fluid review process, and constantly be optimizing your assortments.

And that notion of never really being done and building tools that are flexible enough and easy enough to use to have a continuous productivity and improvement loop, is one of the key things on discovering..

And the most important piece of that is, that starts with sales. It's all about driving the productivity in sales, which then delivers the gross margin dollars..

Okay. And then do you have any additional commentary on the tightness in credit availability? I think last quarter you commented that it was still very tight.

Has there been any movement in the data that you guys have seen?.

There's slight movement. It seems to be thawing slowly like a glacier melt, but slowly. Interestingly, the number of mortgages that are being underwritten by FHA, these are insured mortgages, is up year-on-year.

That's actually pretty encouraging, because it means first-time home builders are finding – or homeowners, excuse me – are finding a way to get into a home. But this is, this is slow..

Okay. Thank you..

Thank you..

And we'll go next to Dan Binder at Jefferies..

Hi. Good morning. It's Dan Binder..

Good morning..

I had a few questions. I know you've commented on your gross margin outlook for the year. Just longer term before the reclassification you had a 35% longer-term gross margin outlook.

Has that changed as a result? Are we looking now at something closer to this 34.1% or 34.2% with the reclassification?.

Dan, we would say 34% is the new 35%. Now, we do have an Investor Conference coming up at the end of this year, and we'll give you a longer-term outlook on all of our margins..

Okay. And my second question was on the Pro. You, just in prior conversations, you've talked about different initiatives there. I'm just curious where we are on the scheduling systems I think you wanted to put in place to improve on the delivery windows..

Yeah. On the delivery, we are still in pilot on that delivery program, and it is about being able to more consistently drive delivery and narrow our windows as well as better utilization of our assets. And Mark Holifield is here, I don't know if you want to make an additional comment..

Yeah, we've got the program in pilot in a couple of markets, and we're learning how this works and working through the details so that we can provide the customer a flawless experience. We're offering two-hour windows, four-hour windows, and then next day that are just all-day delivery windows. The pilot is going well.

We're taking the learnings and continuing to improve the process..

And then just lastly on the deflation, you mentioned a little bit here in Q1, is there an expectation that will increase in Q2 in terms of the pressure on the comp?.

Well, we're not forecasting an improvement against commodities, copper prices and lumber prices are down meaningfully on next year and we're anticipating it staying as is..

Okay. Thanks..

And we'll go next to Matthew Fassler at Goldman Sachs..

Thanks a lot, and good morning..

Good morning..

My first question actually relates to the accounting change. If you think about the SG&A that you had previously or the expenses you had previously allocated to SG&A, those numbers were growing with your online sales which were growing at a pretty rapid pace.

And if you look at the numbers in 2014 versus 2013 for example, it seemed to be a decent piece of your SG&A growth.

So is the accounting change influencing the ratio of expense dollar growth to sales dollar growth that you're thinking about either for this year or on a go-forward basis?.

Matt, it is not. When we put forward guidance at the beginning of the year, I looked at it both pre what we call COGS alignment and post COGS alignment, just to make sure I wasn't going to give you some distortion on the guidance. It has no impact at all..

Got it. Thank you. And then you mentioned the port situation and clearly you put up very good numbers despite some pressure from it.

Can you talk about the categories where you think you saw impact and if it's feasible or material to quantify what it might have done to your inventory numbers, your in-stock, your sales, et cetera? Any quantification would be very helpful..

Sure.

Mark do you want to?.

Sure. Yeah, Matt, as we mentioned last quarter, the West Coast ports have been a very challenging situation for us. The team here has done a great job in terms of working together to mitigate the issues there.

Having said that, we have had negative impact on our in-stock, particularly for our direct import items, but we've also seen some hits to our fill rates from vendors, and that has led to lower in-stock than we would like to see.

So our inventory probably is a little lower than we would like it to be given where it's at, but that inventory is coming and it's recovering as the port has gotten a lot better..

Do you want me to quantify this for you. The impact to in-stocks was about 20 basis points..

That's it. Got it..

And it's very hard to measure sales impact because what our store associates do and they do a beautiful job of this. If you come into the store and you can't find what you're looking for, our store associate is going to take you to something out there..

Our best thinking is $60 million-ish..

Great. Thank you so much, guys. I appreciate it..

We'll go next to Scot Ciccarelli at RBC Capital Markets..

Good morning, guys. So the first quarter continues a trend that we've seen in terms of a lot of sales breadth across categories and geographies.

I guess what I'm wondering is of the 7% of the stores that did not qualify for Success Sharing or profit-sharing is there any common denominator there whether it's geography or pro or DIY mix or something you can put your finger on?.

It's weather. Plain and simple. If you look at the areas in New England very, very late start to the spring selling season..

Got you. Okay. And then the second question related to the geography is we have started to hear some sporadic data points from various retailers in terms of some weakness where they are operating in energy impacted markets.

Have you seen that play through whether it's in some of the Texas markets or the Midwestern markets where obviously there's been a big oil patch retraction?.

We have 178 stores in the State of Texas. We've seen no visible impact whatsoever in that State at this point. Matter of fact all our major markets in that State posted mid-single-digit comps. It's something that we're keeping our eyes on very closely and we'll adjust accordingly if need be, but have not seen it at this point..

Excellent. Thanks a lot, guys..

And we'll go next to Dennis McGill at Zelman & Associates..

Hi. Good morning. Thanks..

Good morning..

Carol just a quick one on the guidance.

Can you just tell us what you're assuming for the domestic side on same-store sales for the year?.

We don't breakout comp guidance by U.S. versus total. So, No..

Okay. Separately on the inventory side it seems when you adjust for FX the turns are very strong quarter-over-quarter.

Can you maybe just talk to where you are in the process of taking inventory out of channel and where you expect the cash flow and the inventory management to be this year?.

Yes. We want to do this the right way. We don't want to do it by going out of stock. This year, in fact, our targeted turns are 4.8 times. You'll recall two years ago we thought we'd get to five times by the end of this year. We're not going to get there, because we want to do it the right way.

The good news is that we've got a number of initiatives underway that once they are fully employed I think the five times turn will be something considerably higher. Now that won't be in 2015, but there's more to come on the inventory story at The Home Depot..

And can you put any context around where you are seeing the best management today as far as categories go?.

On inventory?.

Yeah..

You mean on the inventory turns within categories?.

Yeah, just on the management side, are there certain categories where you are seeing more opportunity than others?.

Yeah, I think when we actually go through our product line review process, this is something that we incorporate into those reviews.

So the merchants are looking at not only how they can drive more top line sales and productivity out of the product categories as well, but they're looking at how they optimize inventory productivity and first and foremost in-stock within that. So we've seen improvement in categories that we've actually run through our model..

Okay. Thank you..

And we'll take our next question from Greg Melich at Evercore ISI..

Hi. Thanks. Actually I have a couple of questions. The ticket decelerated, it seems, to 1.7% growth. Was that a U.S. or a global figure? And help us understand the deceleration, especially given the success of the March ticket..

The ticket we called out was a total company ticket. FX impacted ticket by $0.58 year-on-year, so that's a pretty big drag..

So the U.S.

ticket would've been 2%, 3%?.

Yes..

And then even in that U.S. there seemed to be a deceleration.

Was there something working behind that mix of products?.

It's the impact of our garden business being more normal than what it was a year ago..

Okay, that makes sense. And then my follow-up was I guess a little bit bigger picture. I think in the prepared comments you guys mentioned that you had the most transactions ever in the first quarter.

And I guess if you think about that longer term do you think you need to add capacity in any way, maybe not footage but more fulfillment centers? How do you think about that, Craig, longer-term in terms of allocating capital and being able to serve all of the customers?.

We're not – in most cases we're still operating a single shift, if you will, through our distribution network. So we have the ability to add a lot of capacity through the asset base we own..

Yeah. It's Mark Holifield here. We don't have any development plans right now on further distribution centers for the core side of the business. We have been of course improving our direct fulfillment capabilities and we will be bringing on the new direct fulfillment center in Troy, Ohio in the second part of this year..

Thanks..

And we'll go next to Jessica Mace at Nomura Securities..

Hi. Good morning..

Good morning..

I had a follow-up question on the market model, and just on the above plan sales with below consensus GDP.

I was wondering if there's anything you can point to outside of the better housing metric and the weather that accounted for the bridge to that performance perhaps in the competitive environment or market share shift?.

Well, it's very difficult for us to get a good measure on market share, but if you look at the census data, which is a good proxy for it, census data showed us growing our market share somewhere around 10 basis points to over 27%..

Okay, great. And then also with the strong sales result, I think last quarter you mentioned that there were 16 of your 40 categories which were still below peak and just wondering if this strong top-line momentum has taken any of those 16 categories out of the below peak status..

Not yet..

Not yet..

Working on it..

All right. Thank you so much for taking the questions..

Thank you..

You bet..

We'll go next to Peter Keith of Piper Jaffray..

Hey. Thank you very much. Good quarter. Kind of a follow-up to Jessica's question, I'm just wondering about the overall retail wallet share shift that seems to be occurring. Obviously home price appreciation helped, but you guys are comping high single-digit in $900 lowered water heaters.

I guess I'm wondering if you have a view on why the consumer is deallocating so much money to your industry relative to other parts of retail right now?.

I would say that's a tough one to call out. There is the theory of the case that in some cases there was a delayed spend. Clearly during the economic downturn and people focused strictly on maintenance of their homes. If you recall our maintenance categories were strong throughout the economic downturn.

And when a home moves to a positive growth in terms of value, what was once an expense now becomes potentially an investment..

It's pretty easy, if you look at your own personal balance sheet. It's easy to put a value on your home. It's easy to put a value on your stock investments or your bond investments or even just the cash that you have in the bank account. Harder to put value on softgoods. Harder to put value on other consumables.

So that could be one reason if you think about wealth creation putting money into where you want to create wealth..

Okay, well, that's helpful.

And I guess lastly or maybe on a related note, I'm curious on the use of HELOCs, if you guys are seeing any evidence that there's more borrowing with HELOCs and in turn coming into your stores?.

We're not current on the HELOC activity. Can't help you there..

Okay. Good enough. Thank you very much..

Yes..

Thank you..

Audra, we have time for one more question..

And we'll take that question from Eric Bosshard at Cleveland Research..

Good morning..

Good morning..

I was curious for Ted or Craig, as you think about mix and promotion and brand, what trends you are seeing and what you are doing either proactively or reactively in those areas in merchandising..

Eric, I'm sorry. I didn't catch the first comment..

Sure. Within product mix and with promotional activity and with brand..

Well, I don't think the general promotional activity in the marketplace in the first quarter I'd say was similar. We didn't really change our cadence. What we did and the events we did with things like the Spring Black Friday.

On mix we've seen the consumers, we've talked about this before, where we track all sales by various price points and we saw yet another quarter of where the consumer is buying up the continuum. And we are seeing higher comps in each price gradient as you go up the mix from OPP to good or best premium products.

On brands the consumer always is looking for value, the right product at the retail and I think we have a great mix of the right brands and our own private label product as well to satisfy that customer..

I'd like to say one other comment as it relates to the mix is with much of the country seeing a much more normal kind of spring, obviously just outdoor projects in general were stronger in the first quarter than they were a year ago..

Okay. And then within brands and the strategy on private label I know historically you've been – sell the customer what they want.

But is there anything that you're seeing different within there from the consumer or anything that you intentionally are focused on in regards to the private label or direct import penetration relative to national brands?.

No, we haven't. We still don't have a specific target on a private label penetration. We're over 15% and again we're letting the consumer choose the value proposition they want..

Great. Thank you..

All right..

Well thank you everyone for joining us today, and we look forward to speaking with you at our next quarterly earnings call..

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